NBFC Loan Repayments in Demonetised Currency Cannot Be Treated as Unexplained Cash Credits Under Section 68: ITAT Mumbai

Background and Context

The Mumbai Bench of the Income Tax Appellate Tribunal delivered a significant ruling in the case of Agora Microfinance India Ltd. Vs ITO (ITAT Mumbai) concerning Assessment Year 2017-18. The core issue before the Tribunal was whether repayments of existing micro-finance loans — received in Specified Bank Notes (SBNs) during the demonetisation window — could legitimately be characterised as unexplained cash credits and taxed accordingly under Section 68 read with Section 115BBE of the Income-tax Act, 1961.

The decision has important implications for NBFCs and micro-finance institutions that accepted SBN repayments from borrowers during the November–December 2016 demonetisation period and subsequently faced additions under Section 68 during scrutiny assessments.

Profile of the Assessee and Nature of Business

Agora Microfinance India Ltd. is a Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India and engaged in extending micro-credit to borrowers from economically weaker sections of society. Its lending model involves disbursing small-value loans and collecting periodic instalments from a large borrower base. All loans were sanctioned in compliance with Know Your Customer (KYC) norms stipulated by the Reserve Bank of India.

For Assessment Year 2017-18, the assessee filed its return of income declaring Nil income, after setting off accumulated brought-forward losses against the income of the year.

How the Assessment Proceedings Unfolded

The return was flagged for scrutiny through CASS, primarily to examine cash deposits — particularly those made during the demonetisation period following the Government's notification dated 08.11.2016.

Cash Deposit Analysis by the Assessing Officer

The Assessing Officer observed that the assessee had deposited ₹23.35 crore in total cash during the relevant previous year. Of this amount, ₹3,88,90,827 pertained specifically to the post-demonetisation period beginning 09.11.2016.

From the assessee's audited financial statements, the Assessing Officer noted that the assessee had disclosed receipt of ₹1,38,84,000 in Specified Bank Notes from its loan borrowers during the period from 09.11.2016 to 30.12.2016. Bank-level information further revealed SBN deposits as follows:

The cash book of the assessee disclosed a closing balance as on 08.11.2016 comprising SBNs of ₹2,56,000 and other denomination notes of ₹47,474.

After allowing credit for the opening SBN balance of ₹2,56,000, the Assessing Officer treated the remaining ₹1,53,91,500 as an unexplained cash credit under Section 68 of the Income-tax Act, 1961, and brought it to tax at the enhanced rate prescribed under Section 115BBE.

The Assessee's Explanation and Evidence

Position Before the Assessing Officer

The assessee consistently maintained that the receipts in question were not fresh or unexplained credits but represented recoveries of outstanding loan instalments from existing borrowers. It explained that:

• Borrowers belonged to economically weaker sections who were unable to access new currency immediately after demonetisation.
• The assessee accepted SBN repayments to prevent further interest burden from accruing on the borrowers' accounts.
• Every underlying loan had been sanctioned after full KYC compliance, establishing borrower identity at the time of disbursal itself.
• The receipts merely reduced outstanding loan receivables already recorded in the books — they did not represent introduction of fresh, unaccounted funds.
• The position regarding SBN holdings and receipts had been duly reported to the Reserve Bank of India.

Section 133(6) Notices and Borrower Confirmations

To test the assessee's explanation, the Assessing Officer issued notices under Section 133(6) of the Income-tax Act, 1961 to seventeen randomly selected borrowers. Some notices were returned unserved; others did not receive direct replies.