ITAT Kolkata on Demonetisation Cash Deposits: Section 69A Addition Deleted for Cooperative Credit Society

1. Background of the Dispute

The Kolkata Bench of the Income Tax Appellate Tribunal in Vidyasagar Samabay Krishi Unnayan Samity Ltd Vs ACIT (ITAT Kolkata), ITA. No.06/Kol/2024, order dated 03/07/2024, dealt with an important issue relating to cash deposits of Specified Bank Notes during the demonetisation phase and their taxability under Section 69A of the Income Tax Act 1961.

The appeal arose from an order dated 18.12.2023 passed by the National Faceless Appeal Centre (CIT(A)) under Section 250 for Assessment Year 2017-18, wherein an addition of Rs.91,87,680/- was sustained as unexplained money under Section 69A.

The assessee, Vidyasagar Samabay Krishi Unnayan Samity Ltd, is a cooperative credit society. Its primary activities consist of:

  • Providing credit facilities in the form of loans and advances to its members; and
  • Engaging in trading of fertilizers and other allied agricultural inputs.

During the demonetisation window, the society deposited total cash of Rs.2,20,97,000/- into its bank accounts. The controversy focused specifically on a portion of this amount, i.e. Rs.91,87,680/-, which the Assessing Officer (AO) regarded as unexplained for purposes of Section 69A.

2. Proceedings Before the Assessing Officer

2.1 Assessee’s explanation during assessment

In the course of scrutiny, the assessee explained that:

  • The entire cash deposited, including the impugned Rs.2,20,97,000/-, represented loan repayments obtained from its own members.
  • Detailed break-ups of deposits were submitted.
  • Books of account, supporting ledgers, and additional documents were produced as called for by the AO.
  • A written submission was filed clarifying the nature and source of cash deposits during the demonetisation period.

2.2 AO’s inference of cash sales in demonetised currency

On examination of records, the AO formed the view that:

  • The assessee had allegedly effected cash sales of Rs.91,87,680/- during the demonetisation period.
  • These sales, according to the AO, were made against Specified Bank Notes which had ceased to be legal tender from 09.11.2016, in terms of Central Government Gazette Notification No.2652 dated 08.11.2016 issued under Section 26(2) of the Reserve Bank of India Act, 1934.

The AO took the position that:

  • As the specified notes were no longer valid legal tender with effect from 09.11.2016, acceptance of such notes for cash sales amounted to an irregular act.
  • Consequently, the portion of the cash deposit of Rs.91,87,680/-—treated as having arisen from such alleged cash sales—was to be classified as unexplained money under Section 69A.

Accordingly, the AO added Rs.91,87,680/- to the income of the assessee under Section 69A.

3. Order of the CIT(A)

The National Faceless Appeal Centre (CIT(A)) upheld the assessment order.

  • The CIT(A) agreed with the AO’s conclusion that the assessee had accepted Specified Bank Notes towards cash sales during demonetisation.
  • The addition of Rs.91,87,680/- under Section 69A was therefore confirmed.

Aggrieved by this, the assessee approached the ITAT Kolkata.

4. Assessee’s Contentions Before the Tribunal

4.1 Nature of business and credit-based supplies

Before the Tribunal, the learned counsel for the assessee clarified the operational pattern of the cooperative society:

  • Fertilizers and allied products were supplied predominantly to member-farmers on credit basis, not on cash terms.
  • Amounts due from these members were recovered subsequently through field agents of the society.

4.2 Source and timing of the cash deposits

The assessee’s stand was that:

  1. No cash sales of fertilizers or allied products were carried out during the demonetisation period.
  2. The Specified Bank Notes in question had been collected by agents from member-farmers prior to the demonetisation announcement, i.e. before 08.11.2016.
  3. After the Government notified demonetisation:
    • The society immediately instructed its agents to remit back the collections that were already in their custody.
    • These amounts were then brought to the society and deposited into its bank account.