Violation of RBI notification prohibiting deposit of demonetized notes does not attract addition due to unexplained cash credits: ITAT

The Bangalore Bank of Income Tax Appeal Tribunal (ITAT) composed of BR Baskaran (accounting member) argued that violation of RBI notice prohibiting deposit of demonetized notes does not attract bill due to unexplained cash credits.

The appellant/appraiser is a primary agricultural credit cooperative society providing credit facilities to its members. The AO noticed that the assessee had deposited an amount 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 09-11-2016 to 31-12-2016. The assessee explained the sources of these SBNs as deposits made by members of the assessed company, whose identity is proven.

The AO found that the assessee was not authorized by the RBI to accept demonetized currency during the demonetization period. The AO rejected the assessee’s claim that deposits to its bank account were made with currencies 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 argued that the assessee did not have the right to collect the demonetized scores and so the AO made the addition.

The assessee argued that the provisions of Section 5 of the 2017 Act state that “as of the day fixed, no one shall, knowingly or voluntarily, hold, transfer or receive a specified banknote”. The designated day was set for December 31, 2016 and the assessee received the SBN by 31.12.2016.

The ITA observed that the addition made under Section 68 of the Income Tax Act was not justified. The SBNs were collected by the person evaluated before the fixed date of 31.12.2016, that is to say only from 31.12.2016. The assessee was not authorized to accept SBNs from its members. The reasoning relating to breach of RBI rules failed.

ITAT relied on ITAT’s decision in the case Bhageeratha Pattina Sahakara Sangha Niyamitha vs ITO in which it was determined that the deposit of demonetized notes collected by the assessee from its members would not be affected by the provisions of Article 68. ITAT rescinded the order made by CIT(A) on the question and ordered the AO to remove the disavowal.

Case title: Prathamika Krushi Pattina v Income Tax Officer

Quote: ITA No. 593/Bang/2021

Date: 01.06.2022

Counsel for the Appellant: Lawyer Rajeev Nulvi

Counsel for the Respondent: Permanent tax attorney Ganesh R. Ghale

Click here to read/download the order

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