The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) consisting of B.R. Baskaran (Accountant Member) held that violation of the RBI notification prohibiting deposit of demonetized notes does not attract addition on account of unexplained cash credits.
The appellant/assessee is a primary agricultural credit co-operative society providing credit facilities to its members. The AO noticed that the assessee had deposited a sum of Rs. 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 November 09, 2016 to December 31, 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 the RBI to accept demonetized currency during the demonetization period. The AO rejected the assessee’s claim that deposits made into its bank account were made with currency received from its members. Accordingly, the AO assessed the amount of Rs. 36,16,262 as an unexplained cash deposit under section 68 of the Income Tax Act. The CIT (A) confirmed the addition under section 68 of the Income Tax Act.
The department contended that the assessee was barred from collecting the demonetised notes and hence the AO made the addition.
The assessee submitted that the provisions of Section 5 of the, 2017 specify that “on and from the appointed day, no person shall knowingly or voluntarily hold, transfer, or receive any specified bank note”. The appointed day was fixed as December 31, 2016 and the assessee received the SBN prior to December 31, 2016.
The ITAT observed that the addition made under section 68 of the Income Tax Act was not justified. The SBNs have been collected by the assessee prior to the appointed date of December 31, 2016, i.e., only from December 31, 2016. The assessee was precluded from accepting SBNs from its members. The reasoning relating to the contravention of RBI rules failed.
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. The ITAT set aside the order passed by CIT (A) on the issue and directed the A.O. to delete the disallowance.
Case Title: Prathamika Krushi Pattina Versus Income Tax Officer
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