Acceptance of cash during Demonetisation: How the contraventions of the notification issued by RBI would attract the provisions of sec. 68 of the Income tax Act?- Bangalore ITAT

 

 

In the case of Prathamika Krushi Pattina Versus Income Tax Officer, ITAT on the cash deposited during demonetisation observed as under:

1. The addition made under section 68 of the Income Tax Act was not justified.

2. The SBNs have been collected by the assessee prior to the appointed date of December 31, 2016, i.e., only from December 31, 2016.

3. The assessee was precluded from accepting SBNs from its members.

4. The reasoning relating to the contravention of RBI rules failed.

5. The ITAT relied on the decision of the ITAT in the case of Bhageeratha Pattina Sahakara Sangha Niyamitha vs. ITO in which it was ruled that the deposit of demonetized notes collected by the assessee from its members would not be hit by the provisions of section 68.

6. ITAT at Para 15 observed as under:

 

“The case of the A.O is that the assessee has collected the demonetized notes after 8.11.2016 in violation of the notifications issued by RBI. Accordingly, he has taken the view that the above said amounts represents unexplained money of the assessee. I am unable to understand the rationale in the view taken by A.O. I noticed that the AO has invoked the provisions of sec.68 of the Act for making this addition. I also noticed that the assessee has also complied with the requirements of sec.68 of the Act. The AO has also not stated that the assessee has not discharged the responsibility placed on it u/s 68 of the Act. Peculiarly, the AO is taking the view that the assessee was not entitled to collect the demonized notes and accordingly invoked sec.68 of the Act. I am unable to understand as to how the contraventions, if any, of the notification issued by RBI would attract the provisions of sec. 68 of the Income tax Act. In any case, I notice that the assessee has also explained as to why it has collected demonetized notes after the prescribed date of 8.11.2016. The assessee has explained that it has stopped collection after the receipt of notification dated 14.11.2016 issued by RBI, which has clearly clarified that the assessee society should not collect the demonetized notes. Accordingly, I am of the view that the deposit of demonetized notes collected by the assessee from its members would not be hit by the provisions of section 68 of the Act in the facts and circumstances of the case. Accordingly, I set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete this disallowance.”

7. The ITAT set aside the order passed by CIT (A) on the issue and directed the A.O. to delete the disallowance

 

 

IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “C” BENCH, BENGALURU

 

Before Shri B.R. Baskaran, Accountant Member

ITA No. 593/Bang/2021

(Assessment Year: 2017-18)

Prathamika Krushi Pattina Sahakari Sangha Niyamitha Itagi Pkpssn Itagi Post, Itagi Ranebennur Taluk

Haveri 581115

Vs.

The Income Tax Officer – 5 Shree Towers, Hadai Main Road, Opp. DRR Hospital Davanagere 577002

PAN – AABAP8450D

Appellant                                                                                                                      Respondent

 

Appellant by:         Shri Rajeev Nulvi, Advocate Respondent by:                                   Shri Ganesh R. Ghale

Standing Counsel for Revenue

Date of Hearing:                   30.05.2022

Date of Pronouncement: 01.06.2022

O R D E R

 

Per: B.R. Baskaran, A.M.

 

The assessee has filed this appeal challenging the order dated 24-09- 2021 passed by Ld CIT(A), National Faceless Appeal Centre, Delhi and  it relates to the assessment year 2017-18. The assessee is aggrieved by the decision of Ld CIT(A)  in  confirming  the  addition  of  Rs.36,16,262/-  u/s  68 of the Act, being the amount collected by the assessee  in  the  form  of Specified Bank Notes from is customers by way of deposits during demonetization period. In addition to  the  above,  the  assessee  has  also raised a legal ground questioning the jurisdiction of the assessing officer.

2. The facts relating to the case are stated in brief. The assessee is a primary agricultural credit co-operative society providing credit facilities to its members. The AO noticed that the assessee has deposited a sum of 36,36,000/- in the form of Specified Bank Notes (SBN), i.e.,demonetized notes of Rs.1000/- and Rs.500/- during the period from 09- 11-2016 to 31-12-2016.  The  assessee  explained  the  sources of  these  SBN as the deposits made by the  members  of  the  assessee  society,  whose identity is proved. The AO took the  view  that  the  assessee  was  not permitted by RBI to accept demonetized currency during demonetization period.  Since  the  demonetized currencies are  not legal tender, the  AO did not accept the  claim that the  sources of deposits made  by the assessee  into its bank account is out of the currency received from its  members. Accordingly,  the  AO  assessed  the  amount  of   Rs.36,16,262/-   as unexplained cash deposit u/s  68 of  the  Act.   The  ld CIT(A) also confirmed the said addition.

3. The ld. A.R submitted that an identical addition made in the hands of Sri Bhageeratha Pattina Sahakara Sangha Niyamitha ITO (ITA No.646/Bang/2021 dated 18-02-2022) on identical circumstances has been deleted by the SMC bench of Bangalore Tribunal.

4. The Ld D.R, on the contrary, submitted that the assessee was barred from collecting the demonetised notes and hence the AO has made the impugned

5. In the rejoinder, the Ld A.R submitted that the provisions of sec. 5 of Specified Bank Notes (Cessation of  liability)  Act,  2017  specifies  that  “on and from the appointed day, no person shall knowingly or voluntarily hold, transfer or receive any specified bank  note”.  He  submitted  that  the appointed day was fixed as 12.2016 and the  assessee  has  received  the SBN prior to 31.12.2016.

5. I heard the parties and perused the record. I notice that an identical issue has been decided in favour of the assessee in the case of Bhageeratha Pattina Sahakara Sangha Niyamitha (supra) as under:-

“12.    The last issue relates to addition made u/s 68 of the Act.   The A.O. noticed that the assessee society has deposited “Specified bank notes” (demonetized notes) in the account maintained by it with CDCC Bank, Hosadurga as detailed below:-

Date of deposit	No. of notes of Rs.1000	No. of old notes of Rs.500	SBN deposit
10.11.16	700	600	10,00,000
11.11.16	463	1150	10,38,000
12.11.16	38	137	1,06,500
13.11.16	138	330	3,03,000
Total	1339	2217	24,47,500

When enquired about the sources for making the above deposits, the assessee submitted that they represent cash received by it from its members towards repayment of loan, Pigmy collection, etc. The A.O. noticed that the Government has announced demonetization on 8.11.2016, whereby then existing Rs.1000/-  &  Rs.500/-  currency notes were declared not to be legal tender. The A.O. took the view that the assessee has collected the above said amount after 8.11.2016, which is not permitted. Accordingly, the A.O. took the view that the above said amount represents unexplained money of the assessee and assessed the same u/s 68 of the Act. The  A.O.  also charged income tax on the above said deposit as per provisions of section 115BBE of the Act. The Ld. CIT(A) also confirmed the same.

13. The Ld. A.R. submitted that, under the provisions of  section  68 of the Act, the assessee’s liability is to explain the nature and sources of the He submitted that the  assessee  has  explained  the nature as well as sources i.e. the above  said deposit  was made out of its collections in the ordinary course of carrying on business, i.e., it represented money deposited by its members towards repayment of loans, pigmy deposits, etc. Accordingly, he submitted that the assessee has discharged its responsibility u/s 68 of the Act.  Further, the collections and deposits have been duly recorded in the books of account and hence, there is no reason to treat the same as unexplained money of assessee. The Ld. A.R. further submitted that merely because demonetized notes ceased to be legal tender,  it does not mean that the amount collected by the assessee from its members would become unexplained money of the assessee. The Ld. A.R. also submitted that the Reserve Bank of India issued a series of notifications with regard to the deposit of demonetized notes from 8.11.2016 onwards. He submitted that  the  RBI,  vide  notification dated 14.11.2016, clarified that District Central Co-operative  Banks can allow their existing customers to withdraw money from their accounts up to Rs.24,000/- per week. It further clarified that no exchange facility against demonetized notes or deposit of such notes should be entertained by them. In view of the above said notification, the assessee has stopped collecting the demonetized notes from 14.11.2016 onwards. Accordingly, the Ld. A.R. submitted that the above said deposits were collected by the assessee prior to 14.11.2016 and it cannot be considered as violation of any of the Provisions of the Act. Accordingly, he submitted that the A.O. was not justified in invoking the provisions of section 68 of the Act.

14. I heard Ld. D.R. on this issue and perused the record. I notice that the O. has not doubted  the  submissions of  the  assessee  that the above said amount of Rs.24,47,500/- represents collection  of money in the normal course of carrying on  of  business  of  the assessee, i.e., it represents money remitted by the members of the assessee society towards repayment of the loan  taken  by them and also towards pigmy deposits, etc. The Ld A.R submitted that the assessee has duly recorded in its books of account the transactions of collections of money as well as deposits made  into  bank  account. Thus,  I notice  that the assessee has explained  the nature  and source of the above said amount of Rs.24,47,500/-, which was in-turn deposited by the assessee society in its bank account and further, all these transactions have been duly recorded in the books of account. Hence, the above said deposits cannot be considered as “unexplained money” in the hands of the assessee.
15. The case of the O is that the assessee has collected the demonetized notes after 8.11.2016 in violation of the notifications issued by RBI. Accordingly, he has  taken  the  view  that  the  above said amounts represents unexplained money of the assessee. I am unable to understand the rationale in the view taken by A.O. I noticed that the AO has invoked the provisions of sec.68 of the Act for making this addition.  I also noticed that the assessee has also complied with the requirements of sec.68 of the Act. The AO has also not stated that the assessee has not discharged  the responsibility  placed on it u/s 68 of the Act. Peculiarly, the  AO  is  taking  the  view that  the  assessee was not entitled to collect the demonized notes and accordingly invoked sec.68 of the Act. I am unable to understand as to how the contraventions, if any, of the notification issued by RBI would attract the provisions of sec. 68 of the Income tax Act.  In any case, I notice that the assessee has also explained as to why it has collected demonetized notes after the prescribed date  of  8.11.2016. The assessee has explained that it has stopped collection  after  the receipt of notification dated 14.11.2016 issued by RBI, which has clearly clarified that the assessee society should not collect the demonetized notes. Accordingly, I am of the view that the deposit of demonetized notes collected by the assessee from its members would not be hit by the provisions of section 68 of  the Act in  the facts and  circumstances of the case. Accordingly, I set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete this disallowance.”

6. In the instant case, there is no dispute with regard to the fact that sources for making deposit of 36.36 lakhs by the assessee into its bank account are the money collected from its members. The AO is also  not doubting that all the SBNs have been collected by the assessee from its members. Accordingly, following the above said decision, I hold that the addition made  u/s  68  of  the  Act  is  not  justified.  The  Ld  A.R  also submitted that the SBNs have been collected by the assessee prior to the appointed date of 31.12.2016, i.e., only from 31.12.2016, the assessee is precluded from accepting SBNs from its  members.  In  this  view  of  the matter, the reasoning relating to contravention of rules of RBI also fails.

7. Accordingly, I set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned
8. Since I have decided the issue urged on merits in favour of the assessee, the legal issue urged by the assessee shall become Hence I do not find it necessary to adjudicate it.
9. In the result, the appeal filed by the assessee is

Order pronounced in the open Court on 1st June, 2022.

Sd/-

(B.R. Baskaran) Accountant Member

 

Bengaluru, Dated: 1st June, 2022

Copy to:

1. The Appellant
2. The Respondent
3. The CIT(A) -NFAC, Delhi
4. The CIT
5. The DR, ITAT, Bengaluru
6. Guard File

//True Copy//

n.p.

By Order Assistant Registrar

ITAT, Bengaluru