ITAT Bangalore on Cash Deposits of Demonetised Notes by Co‑operative Credit Society: Section 68 Addition Remanded

This piece summarises and explains the decision of the Income Tax Appellate Tribunal, Bangalore Bench, in the case of Jadeya Shankarling Urbank Co-op. Credit Society Ltd. Vs ITO, where the dispute centred on whether cash deposits made in Specified Bank Notes (SBNs) during the demonetisation window could automatically be treated as unexplained cash credits under Section 68 of the Income Tax Act 1961.

The Tribunal ultimately concluded that demonetisation, by itself, does not convert otherwise explained and recorded business receipts into unexplained income under Section 68. However, as the Assessing Officer (AO) had not carried out proper verification of the evidences filed, the matter was restored to the AO for a de novo examination.

Background of the Dispute

Nature of the assessee and the assessment year

  • The assessee is a co‑operative credit society engaged in providing credit facilities and related financial services to its members.
  • The appeal before the ITAT arose from the order of the Commissioner of Income – Tax (Appeal), Addl/JCIT – 4, Chennai, dated 21.10.2025, relating to Assessment Year 2017‑18.

Core issue in appeal

The sole grievance raised by the assessee was the addition made under Section 68 in respect of cash deposits of ₹13,69,500 in demonetised notes (SBNs) during the demonetisation period. The revenue authorities had treated such deposits as unexplained cash credits, contending that the assessee was not legally permitted to accept SBNs.

Facts and Figures: Cash Deposits During Demonetisation

Cash deposited and composition of SBNs

  1. Between 9 November 2016 and 31 December 2016, the assessee deposited a total of ₹27,12,500 in cash into its bank accounts.
  2. Out of this total, ₹13,69,500 consisted of Specified Bank Notes (SBNs), i.e., demonetised currency notes of ₹500 and ₹1,000.

Assessee’s explanation for SBN deposits

The assessee maintained that:

  • The SBN deposits represented:

    • Amounts collected from members as savings deposits,
    • Loan repayments made by members, and
    • Pigmy collections and other small recurring deposits.

  • In support of this claim, the assessee furnished:

    • Member‑wise details of persons from whom SBNs were received,
    • Date-wise break-up of SBN deposits,
    • PAN and Aadhaar details of members, and
    • Relevant entries in the books of account and cash book.

According to the assessee, all these sums were recorded in the regular books, and the deposits were no more than usual business receipts from known members.

Findings of the Assessing Officer

AO’s view on illegality of accepting SBNs

The AO declined to accept the assessee’s explanation primarily on the following grounds:

  • Pursuant to Government Notifications and RBI circulars dated 08.11.2016, the legal tender status of ₹500 and ₹1,000 notes was withdrawn with effect from midnight of that date.
  • Those Notifications stipulated that demonetised notes could be deposited or exchanged only through authorised banks, and not through entities such as credit co‑operative societies.

The AO noted that:

  • The assessee was neither a public sector bank nor a State Co-operative Bank,
  • Therefore, it was not authorised to accept SBNs from its members during the demonetisation phase.

AO’s reasoning on treatment as unexplained

The AO further reasoned that:

  1. Members’ obligation to use authorised banks

    • Members who still held SBNs should first have deposited them into their own bank accounts with authorised banks.
    • Only after obtaining valid legal tender should they have made payments or deposits with the assessee society.
    • By directly accepting SBNs from members up to 30.12.2016, the assessee allegedly breached RBI instructions and the demonetisation scheme.

  2. Reliance on RBI FAQs and Notifications

    • The AO referred to RBI clarifications to state that:
      • Demonetised notes were not valid for normal business transactions after the specified date,
      • Such notes could not be treated as “money” for accounting purposes post‑08.11.2016, and
      • SBNs accepted after the cut‑off date effectively had zero value in law.

  3. Conclusion drawn by AO

    • As per the AO, since SBNs had no legal value and could not lawfully be accepted by the assessee, any cash deposits represented by such SBNs lacked a valid source in the eyes of law.
    • He therefore concluded that the assessee failed to provide a satisfactory explanation regarding the nature and source of the ₹13,69,500 in cash deposits.
    • Accordingly, he treated this amount as unexplained cash credit under Section 68 and brought it to tax, also applying the provisions of Section 115BBE.

Order of the CIT(A) and Reasoning