4. For brevity, we consider the facts relating to of assessment year 2006-07. Brief facts of the case are that the Assessing Officer treated the deposits accepted by the assessee as the income of the assessee u/s 68 of the IT Act. According to the Assessing Officer the assessee has not furnished the address of such depositors except in a few numbers of cases. The assessee neither produced the depositors nor submitted the depositors register. The Assessing Officer stated that some of the depositors could not be contacted at the given address. Since the detailed addresses were not provided by the assessee, the Assessing Officer was of the view that the provisions of Sec. 68 were applicable to such deposits and accordingly he treated the deposits as the income of the assessee in all these assessment years. The Assessing Officer relied on various judicial decisions and mentioned the same in the assessment order. On appeal, the CIT(A) deleted the addition made u/s. 68 of the IT Act by holding as follows:
“6.2 (a) The assessee is a Cooperative Society carrying on banking business. It is operating its activities through 23 branches consisting of about 63,000 members at various places and the activities are carried on only by the paid managers of the banks.
(b) There are specific rules and regulations governing the acceptance and repayment of the deposits from its members.
(c)The Society does not accept any deposit from outsiders and accepts deposits only from its members.
(d) At the time of repayment of the deposit the amounts are transferred to the SB account and thereafter payments were made to the member.
(e) There is no possibility to earn income outside the books of account as the entire activity carried on by the Society is known to the public, depositors, members and the Directors. The accounts are finally placed before the members and the Directors, who are either paying interest to the bank, or receiving interest from the bank.
(f) The Accounts of the Society are periodically inspected by the Cooperative Department and also by the auditors. Such accounts are approved by the members of the Society and also by the Directors of the Society.
(g) The assessee also relied on various decisions of the I.T.A.T. and High Court with particular reference to the decision of the Honourable ITAT in its own case for the assessment year 2007-08 rendered in connection with levy of penalties under sec. 271D and 271E of the Act.
In view of the above factual position and other legal propositions mentioned in various case laws, the AR of the assessee argued that provisions of Sec. 68 should not have been applied by the Assessing Officer.
6.3 With reference to the submissions made by the assessee, the ld. CIT(A) perused the records and the observations of the Assessing Officer and put forth his views on these issues as under:
(i) It is evident from the record that the society is maintaining a systematic record in accepting the deposit. The Society is a Banking institution. It has 23 branches all and a few in other states. Each branch is headed by a Branch Manager. To regulate the transactions, it is seen that the Staff accepts cash at the counter and on verification of the receipt of the amount, the Manager issues a Certificate. The amount so received is recorded in the regular cash book; the deposit register of the bank and also a report is submitted to the Head Office about the receipts periodically. The acceptance of the deposit is preceded by an application being submitted by the Member who is depositing the amount with the bank. Each application contains the name and address of the Member, the Membership number, amount being deposited, the vocation of the Member who is depositing the amount and the period for which such deposit is made. Therefore, complete details are gathered by the Manager while accepting the deposit. Pertaining to this methodology, it is seen that the A.O did not intervene with adverse material/evidence to show that there is contravention and violation of procedure while receiving the deposits by the assessee. Similarly, the assessee is subjected to periodical inspections by various Government Authorities and there is no instance mentioned by the A.O regarding any identified adversity copy of the same sentence which is corrected for the Asst. Year 2008-09.
(ii) It is seen that the Cooperative Society issues a Deposit certificate to the depositor. The interest payable to the depositor is credited to his SB account regularly. There is a facility for the Depositor to withdraw interest portion of the amount. Such interest is credited to the account of the member periodically as required by him. There is no dispute with regard to payment of interest to the depositors. This also clearly indicates that the amount deposited belongs to the depositors and not that of the assessee.
The Society also is systematically maintaining the record while refunding the amount. The Deposit Certificate issued by the Society is taken back duly discharged by the depositor. The amount is credited to the SB Account of the depositor. The assessee does not pay the realization of the FDRs direct to the member and the same is credited to his SB account. A debit voucher is prepared by the Branch Manager, and the signature of the depositor is obtained both on the debit voucher and the Deposit Certificate. All the said material is bundled and kept in the debit vouchers file.
As mentioned earlier, ld CIT(A) called for the above records and perused the same and found that the assessee is maintaining a systematic record of both the receipt and repayment of the loan and observed that the Society is acting with due diligence and caution both in accepting the deposit and in repaying the amount. Therefore, ld CIT(A) is of the opinion that the decisions of the ITAT Pune Bench in the case of Sri Mahavir Nilgari Sahakari Pat Sanstha Ltd. v. DCIT reported in 74 TTJ 793 and the decision of the Gujarat High Court in the case of CIT v. Pragathi Cooperative Bank Ltd., reported in 278 ITR 170 are applicable to the facts of the case and therefore, the onus on the assessee to prove the credit is limited to the maintenance of systematic record with due diligence and caution. Therefore, ld CIT(A) held that the assessee discharged the onus caste on him in this regard.
It is also seen that the Hon’ble ITAT, Bench-B, Hyderabad in its consolidated order in ITA No. 1156-1159/Hyd/09 dated 26-02-2010 while deciding the issue for levy of penalty u/s 271D and 271E of the I.T. Act for the assessment years 2006-07 and 2007-08 had an occasion to go into the facts with reference to the deposits made by the members of the society. The Hon’ble ITAT found that the assessee is maintaining a systematic record of collecting the deposits from its members and also advancing the loan to the members.
The transactions are books of account regularly payments are open and transparent coupled with well established accounting system. Therefore, ld. CIT(A) is of the view that there can not be any unexplained deposits which would be governed by the provisions of Sec. 68 of the I.T. Act .
It is also seen that the number of depositors are about 63,500 and all the information was fed in to the computers. Each Branch being managed by a Branch Manager records the names and addresses of the depositors and the amounts received from them. The said Branch Manager while collecting the deposits are usually not required to go for a detailed verification of the addresses, whereabouts of its members and the assessee is not bound by any obligation found to make enquiries about the depositors particularly in a banking concern having about 63,500 members. It is also found by the Hon’ble ITAT in the judgement referred to above. There is no instance found from the records that there was a deliberate attempt on the part of the assessee to accommodate any tax dodgers. There was neither any incident or example cited by the A.O on this issue from the records nor brought any material to substantiate with evidence that the assessee accommodated tax evaders. It is seen that the Assessing Officer could identify 30 depositors and all of them have accepted the deposits made by them into the bank account. The department issued notices and it is on record that all of them filed the returns of income and paid the taxes. There is no data with the Assessing Officer to prove that any of the deposit made by the members into the Bank represents the income of the assessee, nor the A.O could establish such an opinion with clinching evidence.
In this regard a reference is made to the decision of the Hon’ble Supreme Court in the case of CIT v.P.K. Noorjahan reported in 237 ITR 576. It is categorically mentioned that the word used may leaves it to the discretion of the Assessing Officer whether an addition under the deeming provisions could be made or not. In each of the case the Assessing Officer has to analyse the circumstances and proceed to apply the provisions of 68 of the IT Act.
In the present case, the assessee is a banking institution whose main activity is to accept the deposits and such deposits were accepted by the Manager of the branches. To the extent of the maintenance of the records is concerned, it is already seen and held that a systematic record was maintained by the assessee with regard to the transactions by the Bank. In such circumstances, I am of the view that the decision of the Supreme Court would apply to the facts and circumstances of the present case and the provisions of Sec. 68 are not applicable.
Ld. CIT(A) referred to the decision of the Hon’ble ITAT, Amritsar Bench in the case of ACIT v.Citizen Urban Co-operative Society Ltd., reported in 314 ITR 91 (AT) wherein it was held that deposits accepted by the bank are not covered u/s 68 of the LT. Act as the bank is not obliged to question the source of the deposits of the customers where deposits have been properly introduced. The methodology of accepting the deposits matters and it is not the duty of the assessee to ask the depositor to establish the source. The source of the deposit for the assessee is the depositor but it is irrelevant for the assessee to check/inquire the source of the depositor. It may not be out of place say that the A.O. examined the depositors but he could not establish that the source of extending the money by the depositor was originated and routed back to the assessee in a circular motion. Without establishing any such modus operandi being adopted by the assessee, it is incorrect to say that all the money deposited by the members belong to the assessee. Moreover, the AO did not find a source from where such unaccounted money is generated by the assessee to bring back such amount as deposits by unknown depositors. The systematic method followed by the assessee is crystal clear and transparent. If any deposit is unexplained, it is the duty of the Assessing Officer to examine the depositor for such a source and assess in the hands of such depositor. But such a source does not become the income of the assessee in any way.
While dealing with the bank one has to see whether a systematic record required by the bank was maintained or not. The principle in Sec. 68 is a statutory recognition of what was always understood in law based upon the evidence that it is for a tax payer to prove the genuineness of the credits in his books of accounts since the relevant facts are exclusively in its knowledge. Though, once the burden of proof lies with the assessee yet once he furnishes the identity of the depositor and showed the genuineness by such depositor being recorded in the books of accounts, the onus to prove to the contrary shifts to the Assessing Officer. The assessee can be asked to prove the source of the credit but not the source of the source as held in CIT v. Orissa Corporation Pvt. Ltd.[1986] 159 ITR 79 (SC). In the present case, the AO examined the material submitted by the assessee for almost 1 year 9 months and from the record it is seen that he never attempted to investigate or examine and bring out any independent conclusive evidence to support his views.
Even if he had examined a source to source and found anything adverse he is duty bound to inform the A.O who is vested with the jurisdiction of such depositor pertaining to such an amount but the assessee cannot be held for what he is not liable. The assessee society identified its members and gave the details as required by the AO. For its operations, the assessee society accepts deposits from the depositors who are members and it is not the duty of the assessee to probe the source of money deposited by its members.
6.4 The assessee also pleaded the doctrine of mutuality. A cooperative institution is an institution formed for the benefit of its members. The members of the society deposit the amount with the bank and the same members would be utilising the amount for their own purposes. There are the depositors and debtors among the members. The members of the society are the beneficiaries of the society. They verify the books of account. They form the General Body which would examine the accounts of the society. They elect the Directors and the Directors will be managing the affairs of the society. Taking all these factors into account, there is no possibility or probable negligence for the management to make any wrong entry in the books of account. Further, the accounts showing the deposit receipts, repayments and the loans provided are all approved by the members in the General Body meeting who are the persons who would deposit or take the loans. Therefore, it can be said that it is a mutual society and the doctrine of mutuality is applicable and therefore, it can be held that the provisions of Sec. 68 have no application.
Considering all the circumstances and the facts ascertained, ld CIT(A) is of the earnest view that the provisions of Sec. 68 of the LT. Act, 1961 would not apply to the assessee society and the Assessing Officer is not justified in making addition u/s 68 of the IT Act. Accordingly the addition made by the Assessing Officer under sec. 68 was deleted by CIT(A) and directed the Assessing Officer to pass an order accordingly.”
5. Against the above findings of the CIT(A), the Revenue is in appeal before us.
6. The ld. DR strongly relied on the Order of the assessing officer and submitted that the provisions of s. 68 of the Act is very much applicable to the assessee as the assessee failed to prove the genuineness of the deposits, it is to be considered as deemed income of the assessee u/s 68 of the I.T. Act.
7. On the other hand, the Ld. AR reiterated the same submissions as made before the CIT(A), as follows:
“(a) The assessee is a co-operative society carrying on banking business. It is operating through 23 branches at present. Each of the branches is headed by Manager and assisted by staff. The members of the society operate through the counters opened at each of the branch. Cash is accepted along with applications at the counters. The staff makes sure that all the columns of the application are properly filled in and accepts the deposit.
(b) Any person who wishes to deposit the amount with the assessee has to become member of the society, for this purpose an application has to be made to the Managing Director of the Society. A specimen copy of the application for admission to the membership is submitted. Such applications were obtained in respect of all the depositors. The assessee produced some of such applications for perusal of the Assessing Officer. It can be seen from the said applications that the details about each of the person is available in the said application. The name and address is available in the said application. Each of the new member is introduced by either the staff members/Manager or any other member of the society.
(c) Once the person is admitted as a member of the society, he would be permitted to deposit the amounts either in the SB account or any other account based on his convenience. For this purpose, the society prescribed an application form. A copy of the said application form is submitted for perusal. The member of the society who is desirous of depositing the amount has to submit the application form duly filled and pay the amount in respective branches. The Manager of the said branch accepts the deposit after due consideration of the application. A copy of the blank application form and some of the applications filled in are submitted for perusal of the Assessing Officer. The assessee is submitting blank application forms meant for each of the deposit separately. It can be seen from the above that the society collects all the details concerning the depositor through the application forms. It is submitted that all such details are available.
(d) The said application forms are kept as long as the deposits are held by the bank. The member may withdraw the deposit after completion of the term or at any time. Most of the deposits are for very short term. When the deposit was being withdrawn, the depositor makes an application to the bank and retains the deposit certificate duly discharged. The said application is considered and the refund of the deposit was allowed. When the refund was being allowed, the application form; the application for withdrawal and the discharged certificates are all kept along with the debit vouchers and would form part of the (paid) debit vouchers. Such of the applications where the deposits were withdrawn will be available in such bundles. Some of such vouchers were produced for perusal of the Assessing Officer. The assessee submits that most of the deposits are for short term and were withdrawn. However, it is submitted that none of the deposits are paid directly. The said amounts are invariably transferred to their S.B. Account and the member is allowed to withdraw or retain the deposit.
(e) If any of the members likes to redeposit the amount, the society will receive application; cancel the earlier deposit; prepares a debit voucher and issues a fresh deposit certificate. It will not be the same number and a new number for the redeposit will be issued to the member. Even when there is renewal, the discharged deposit certificate by the member and the application form are bundled along with the debit vouchers. They will not be available along with other applications.
(f) Registers are maintained separately for each of the branch. The deposit register can be produced for perusal. It can be seen that all the deposits made are entered in the deposits register. It is clear that the assessee is making any effort to systematically record the transactions.
(g) Further, when the amounts are collected by the branch, the said amount is received at the counter of the society opened at the bank and even when it is paid the same was paid through the SB Account which is drawn later. The banking operations are run by the society through its the paid managers and paid staff They enter the transactions in the regular books of account maintained by the society.
(h) The entries are made during the course of normal business activity by the paid managers and the paid staff at branches. The said transactions are periodically certified by the head office; auditors and the co-op department.
(i) From the above facts it is clear that all the details with regard to the depositors are available with the bank. However, it is submitted that the present number of members of the bank are more than 65,000 who are the depositors of the bank. Therefore, it is not practicable to provide copies of all the applications received from the depositors in view of the above process adopted by the society. However, as mentioned in the earlier paragraphs, the assessee is submitting some of such applications for admission to the membership and some such applications for acceptance of the deposits. The assessee is also submitting some of the debit vouchers to show that the applications will be with the debit vouchers and are not separately bundled. The evidence produced before the Assessing Officer would clearly indicate that all the deposits were received by the assessee herein during the course of its regular business activity of banking and cannot be considered as the assessee’s income. There is no possibility for the society to earn any income in addition to who is recorded in the books of account. The assessee may be permitted to submit the following explanation in this regard.
(j) The only income derived is interest, locker charges and other charges collected from the members of the society. The rates at which interest is collected on each type of loan is prescribed. The society cannot collect either excess or lesser from any members.
(k) The society deals with its members alone and all the members are well aware of the rules governing the acceptance of deposits and advancing amounts. Both the receipts and payments are through its members alone.
(l) As submitted earlier, the activity is carried on by the paid employees of the society and they are bound by Bye-laws of the society. The management of the society would not have any say in the day-to-day activity of the society.
(m) The accounts submitted by each branch are consolidated at the Head Office. The Head Office does not accept any deposit and only its branches accept the deposits. The consolidated accounts duly approved by the Board are placed before the General Body consisting of the members of the society with whom the transactions are undertaken. After scrutiny of accounts by the members, the accounts are passed.
(n) The society is subject to inspection periodically by the Co-operative Registrar and other concerned authorities. The accounts are audited by the Co-operative authorities with reference to the application for acceptance and disbursement of deposits. The final accounts duly approved by the General Body are submitted to the Registrar of Cooperative Societies.
(o) From the above facts it is clear that the assessee has no scope to either enhance or reduce the income derived. The society can not generate any income outside the books of account. There is no scope at all. The assessee humbly submits that the details available with the society prove clearly that the deposits made into the bank by all the members of the society are genuine. It is submitted that the addresses of all the members are available with the society and only such members deposit the amounts. While depositing the amounts, the members sign the application form containing the data that they are introducing their own amount. The data obtained from the applications would prove the following:
(a) the name and address of the each of the person and in addition the names and addresses of the introducers are available in the application form;
(b) the said person also provides proof for the address provided by filing voter’s identity, driving license; pan card etc.,
(c) each and every deposit is accompanied by an application. In the application, the said person confirms the fact that he is depositing the amount for a certain period and he receives the deposit certificate;
(d) the deposit is entered in the books of account regularly maintained. The auditors of the cooperative department and the auditors appointed inspects the entries made with reference to the regular books of account and the certificates and the applications;
(p) From the above it is clear that there cannot be any doubt about the genuineness of the credit. It is also clear that the assessee society is taking all the required data from the persons introducing the amounts.
(q) In view of the above facts the assessee requests to analyse the provisions of Sec. 68 of the I.T. Act. Sec. 68 makes it clear that where any sum is found credited in the books of an assessee maintained for any previous year and no explanation is offered by the assessee for the nature and source thereof, the sum so credited may be charged to Income-Tax as the income of the assessee of that previous year. According to the provisions of Sec.68 what is required by the assessee is (a) explanation has to be offered and (b) the source has to be explained. The assessee submitted detailed explanation as to how the amount is deposited in the bank account. The source of the deposit is from its members. The assessee in this regard has already submitted a detailed explanation which makes it clear that the assessee explained the source of the deposit. Further, a reading of Sec. 68 would make it clear that an addition u/s 68 is always discretionary on the part of the Assessing Officer and for this purpose the Assessing Officer has to consider all the circumstances of the case before he comes to the conclusion whether the assessee, in the circumstances submitted explanation or not. The addition may either be made or may not be made after duly considering the circumstances of each case. The Supreme Court had an occasion to consider the meaning of the word “may” used in Sec. 69 (which is akin to Sec. 68) in the case of CIT v. P.K. Noorjehan 237 ITR 570. It is held by the Supreme Court that the word “may” mentioned in Sec. 69 cannot be interpreted to mean “shall”. It is held that even when the explanation offered by the assessee is not found satisfactory, the Assessing Officer should use the discretion keeping in view the facts and circumstances of the particular case. In the said case, the apex court found that there was no possibility for the assessee to earn any income outside the books and therefore, deleted the addition. In the light of the observations made by the apex court, the provisions of sec. 68 have no application to the case of the assessee.
(r) The assessee also relies on the decision of the Pune Bench of the ITAT in the case of Sri Mahavir Nigari Sahakari Pat Sanstha Ltd. v. DCIT 74 TTJ 793. A copy of the said decision was submitted for kind perusal of the Assessing Officer. It can be seen that in the said decision, the Hon’ble Tribunal have categorized the cases based on the nature of onus and observed that such onus would depend upon the facts of each case. It is also mentioned that in the case of banking concerns, it can be said that the onus on the assessee would be treated as discharged if it is established that such assessee has acted with due diligence and caution while accepting the deposit. As submitted in the earlier paragraphs, the society has been adopting a systematic method in maintaining the records for the deposits received.
(s) The Hon’ble Tribunal in the same case has also mentioned that even if the cash credits were to be taxed and were to be considered as the income of the society, it would be the income from business and the provisions of Sec. 80P (2) would apply even in respect of such items added by the Assessing Officer and in that view also, the Hon’ble Tribunal found that no addition u/ s 68 need be made.
(t) The Gujarat High Court in the case of CIT v. Pragathi Co-op. Bank Ltd. 278 ITR 170 observed that the amounts representing fixed deposits made by the deposit holders cannot be termed as the income of the assessee. The Hon’ble Gujarat High Court relied also on the decision of the Supreme Court in the case of CIT v. Smt. P.K. Noorjehan referred to above.
(u) The Hon’ble ITAT, Hyderabad in the case of the assessee while deciding the question of penalty u/s 271D and 271E of the I.T. Act for the assessment years 2006-07 and 2007-08 observed as follows:
(1) The assessee has been carrying on the banking operations which are under audit of various authorities and, therefore, the assessee could not be put on par with other cases of other concerns since the assessee have no control in respect of the amounts received from the customers in the form of deposits.
(2) There is no dispute in these assessment years that the assessee has been carrying on the banking transactions which may be with or without approval of the RBI. If the carrying of the operations of the banking activities is not at all approved by the RBI or the assessee is having no requisite licence, the concerned authorities could have stopped the same or taken action against the assessee, which was not done.
(3) The society for all these banking activities is strictly governed by the Banking Regulation Act 1949. The banking is described as accepting for the purpose of lending, or investment of money, due from the public repayable on demand.
(4) The deposits held by the assessee are its stock-in-trade. (This view is also supported by the decision of the Supreme Court in the case of CIT v. Nainital Bank Ltd. 55 ITR 707.
(5) In case of banks like the present assessee, the customer identity is required to be taken with proper introduction and address, etc. This is so because any person from general public can come and open a deposit account with the bank. Acceptance of deposits by this assessee cannot be equated with other kinds of appellants.
(6) The assessee like the present is not obliged to question the source of deposit made by its customers. Also the customer can keep the deposit for a period; which is according to their convenience. The amount has to be repaid by the assessee to its customer immediately on demand.
(7) The assessee is subject to periodical inspections and audit by various statutory authorities and in case of any default, the assessee is liable for penalty besides cancellation of its licence. There are so such circumstances in the case of the assessee.
(8) Usually the bank was not required to go for detailed verification of address and whereabouts of its customers. There is no absolute obligation to assessee to make enquiries about the customers so as to examine the genuineness/source of deposits.
(v) The above observations by Hon’ble ITAT with regard to the assessee herein would make it clear that the deposits made by the members can not be termed as income of the assessee. In the facts and circumstances as explained in the above paragraphs and based on the facts as ascertained by the Hon’ble Tribunal as narrated by the Hon’ble Tribunal in its order, the assessee humbly submits that the proof required of the assessee for the purpose of Sec.68 is furnished as mentioned by the Hon’ble ITAT, Pune Bench referred to above, it can be said that the onus on the assessee be discharged if it is established that such assessee has acted with due diligence and caution while accepting the deposits. Therefore, the assessee humbly submits that the provisions of Sec. 68 are not applicable and the Assessing Officer is not justified in making any addition under the said provision. The assessee further submits that the repayment of deposits were made through their S.B. Accounts and not directly”.
8. We have heard both the parties and perused the materials on record. We have considered the assessment order, CIT(A) order and submission of both the parties. The assessee is a co-operative society registered under the Co-operative societies Act. It is governed by its by -laws, Rules and Regulations under the supervision and control of Registrar of Societies. The Society is carrying on the banking business for its members. It is operating through 23 branches and each of the branches is headed by a Branch Manager and other staff. The Society is carrying on the Banking business to its own members and the business is carried on with certain set of guidelines and procedures. As per the By – Laws of the Society only members either permanent or Nominal shall transact in the Society. The staff employed in the branch accepts the cash deposits along with the application at the counters. The staffs makes sure that all the columns of the application are filled and requisite supporting documents i.e. proof of address, proof of identity and photographs of the applicant as stipulated by RBI in KYC (Know Your Customer) norms. To regulate the transactions the staff accepts the cash at the counter and on verification the branch manager issues the Certificate. The amount so received is recorded in the cash book as well as deposit register maintained for this purpose. The application is containing the details of name and address along with proof of address given at the time of opening account. From the above facts it is proved that the assesses has proved the identity of the depositor. Pertaining to this the assessing officer did not bring any positive material evidence to show that there is contravention and violation of KYC norms prescribed by the banking Regulation Act, while opening account with any banking institution. More over it is the duty of the assessee to collected proper proof of address at the time of opening accounts. It is common practice that all are having permanent address proof with them. The persons residing in rented house will change the residence frequently and not informed bank. Such being the case, it is the duty of the depositor to inform the change of address to the bank. In such cases the bank will not have present address of the depositor. There may be few instances where the letters sent by the AO returned for the reason no such address. When the Society is having members of 63,000, you cannot come to a conclusion that the bank does not have furnished identity and proof of depositor by verifying few numbers.
9. It is further observed that the Society has opened a SB account wherever it has accepted deposit from its members to credit interest periodically. There is facility for the depositor to withdraw interest. There is no dispute with regard to payment of interest. The customers have regularly withdrawn the amount from their SB accounts which are proved that the amount deposited belongs to the depositor and not belongs to the assessee.
10. The society has maintained systematic records and books of accounts for its business. It has accepted all the documents as required under KYC norms. It has issued a proper deposit certificate and credited the interest as well as the maturity proceeds directly credited its depositor savings bank account. In no occasion it has directly paid the deposits directly to the depositor. In the present case the assessee Society is subjected to rules laid down by multi-state Co-operative society Act and Rules. The society books of accounts are subjected to audit by the regulatory bodies every year. Therefore, the assessee cannot be equated with other normal business concerns. Since the assessee has no control over the deposits as it is the property of the depositors and the Society required to pay on demand. The customers usually go the bank for making deposit to earn better interest. The customers will go the banks where they get more interest. There is no dispute in these assessment years the assessee has been carrying out the Banking business. Whether or not the business is carried out with or without permission, it is bound by the Banking Regulations Act, 1949. The deposits and loans are just buying and selling activity for the assessee. The amounts maintained at the customers account is not in the control of the society as it is required to pay the deposits on demand. In the present case what is required to be done before accepting the deposit is to take proper proof of address, identity, photograph and introduction for opening and accepting the deposits. Once the assessee complied with the requirement it is not the assessee Society duty to question about the source of depositor and it is not its duty to seek any other particulars. Only the requirement is, to report to the controlling authorities wherever suspicious transactions are reported or doubt about the Anti-Money Laundering Act. Therefore these features distinguish the case of the assessee from other normal assessee. Further the assessee has to maintain the confidentiality in respect of information collected from its customers, such information cannot be divulged to outsiders. There is no findings from the assessing officer that the assessee violated the regulatory authorities. Usually the banks are not required to go for verifying the correctness of the details furnished by the depositor and sources of the amount deposits. The deposits accepted and repaid is part of the assessee business, if it put hard rules and conditions its business may not be as usual. Therefore it cannot be said that it has violated the provisions and did commit any infringement or it is incorrect to say that there was any deliberate attempt to accommodate block money. The society is acted in bona fide manner and complied with the KYC norms as prescribed for banking institutions and due diligence. Therefore, in our opinion the Society discharged the onus of proof in respect of identity and genuineness of the transactions as for as a banking is concerned. The facts of the case are similar to that of ITAT Pune Bench in the case of Shri Mahavir Nagari Sahakari Pat Sanstha Ltd. v. Dy. CIT [2002] 74 TTJ (Pune) 793 and the decision of the Hon’ble Gujarat High Court in the case of CIT v. Pragathi Co-operative Bank Ltd. [2005] 278 ITR 170. Therefore the onus on the assessee to prove the credit is limited to the maintenance of systematic records comply the KYC norms. It is not obligatory on the part of the assessee to verify the credit worthiness of the depositor. Therefore, we hold that the assessee discharged the onus caste on him in this regard.
11. It is seen from order of the Tribunal B Bench Hyderabad [ITA No. 1156-1159/Hyd/ 09 dated 26.02.2010] in assessee own case while deciding the issue for levy of penalty u/s 271D and 271E and it had an occasion to go into the facts with reference to the deposits made by the members of the Society. The ITAT observed that the assessee is maintained proper books of accounts pertaining to accepting deposits from its members and advancing loans. Therefore we are of the opinion that there cannot be any unexplained deposits within the meaning of section 68 of the Income Tax Act, 196, if the assessee proves to the satisfaction of the assessing officer its depositors identity by furnishing proof of address, proof of identity and PAN numbers.
12. It is further observed that the membership of the Society is huge and the number of members of the Society is about 63,000. The Society has computerized its operations and all the business of the Society is available in the computer software. The Society has collected all the information from its deposits as a normal banking institution and complied the KYC norms. It is not obligatory on the part of the assessee to go in checking the address and other proof of identity given by the depositors. What is required to be done as per the normal banking system is to report the controlling authorities in case any suspicious transactions are reported. The present case the assessee has complied with all the elements as a banking institution thus discharged onus of proof of identity of the depositor. There is no single instance found out by the assessing Officer that the assessee is making deliberate attempt to accommodate tax dodgers. It is seen from the assessment order that out of 30 depositors examined by the assessing officer all the depositors are identified and accepted the deposits made by them with the society. The department examined them, all are disclosed the deposits in their income tax returns. There is no evidence with the assessing officer that, the deposits made by the depositors represent the income of the Society. In this regard the reference is made to the decision of the Hon’ble Supreme court in the case of CIT v.Smt. P.K. Noorjahan [1999] 237 ITR 570/103 Taxman 382 wherein it was held that the word may leaves it to the discretion of the assessing Officer whether an addition under the deeming provisions could be made or not. In each case the assessing Officer has to analyze the circumstances and proceed to apply the provisions of section 68.
13. It is further observed that, in the present case, the assessee is a co-operative society carrying on banking business for its members and its main business it to accept deposits from its members and lend loan to its members. While accepting the deposits it has complied the requirements as a banking institution by collecting documents specified by the RBI in KYC norms. It is not obligatory on the part of the assessee to verify the correctness of the details given by the depositors, verifying the genuineness of the transaction and credit worthiness of the depositor. But certainly it is required to have proper proof of identity of the depositor. Undoubtedly the assessee being co-operative society providing credit facilities to its bank need not to prove the credit worthiness and the genuineness of the transaction relating to acceptance of deposits, but it should prove the identity of depositor by furnishing the proper proof of address and identity to the satisfaction to the assessing Officer, which has been complied with by the assessee.
14. Similar issue came for consideration before Amritsar Bench in the case of Asstt. CIT v. Citizen Urban Co-op. Bank Ltd. [2009] 120 ITD 513 (Amritsar). After recording the entire facts it was held as follows:
“26. We have heard the parties and have perused the material on record. The facts are not in dispute. The issue is as to whether the provisions of s. 68 of the Act are applicable and whether it has rightly been applied to the assessee bank ? The learned CIT(A), while deleting the addition made has observed that the assessee’s case was subject to rules laid down under the Banking Regulations Act, as also the regulations of the RBI; that all the banking operations are under audit and report in this regard goes to the RBI; that therefore, the case of the assessee bank could not be put at par with the cases of other persons, since the bank does not have any control in respect of the amounts credited in its accounts; that the bank is to maintain accounts of its customers, which accounts can be operated only by those customers and the bank does not have any control over the mounts in the accounts. While holding in favour of the assessee, the learned CIT(A) has duly taken into consideration the provisions under s. 68 of the Act, which are explicit.
27. As per s. 68 of the Act, where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof, or the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The business of the assessee bank is to carry on banking transactions. The bank, for all its banking activities, is strictly governed by the Banking Regulations Act, 1949. The said Act defines a banking company as a company which transacts the business of banking. ‘Banking’ is described as accepting, for the purpose of lending or investment of money, due from the public repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise. Thus, the deposits held by the assessee are its stock-in-trade. The amounts in the accounts maintained by the assessee bank were not in the control of the assessee bank. They are the deposits in the savings accounts of the customers of the assessee bank. To these deposits, s. 68 of the Act is not attracted. In the cases of banking companies like the assessee, the customer’s identity is required to be taken by the bank with proper introduction, photographs and address, etc. This is so, because any person from the general public can open the account with the bank. The other cases of acceptance of deposits cannot be equated with that of the bank. In those cases, normally, deposits are accepted from the people connected with or known to the depositees. It is in accordance with the terms of s. 131 of the Negotiable Instruments Act that this requirement is there. As such, if introduction of the customer had been duly taken by the bank, the bank would not be liable in case of a fraud. Moreover, pertinently, if the customer seeks to operate the account with cash only, the bank can open an account without introduction and without proper identification. Further, the bank is not obliged to question the source of deposits made by its customers. Also, the customers can retain the amount in his savings bank account with the assessee bank for any period. The amount has to be repaid by the bank to its customers immediately on demand. These features distinguish the case of the bank from other ordinary assessees. Therefore, the provisions of s. 68 of the Act are not applicable to the bank as they are in the cases of the other assessees. Still further, under s. 35 of the Banking Regulations Act, 1949, a banking company is subject to periodical inspections and audit by the RBI and in case any default is found, the bank is liable for heavy monetary penalty, besides cancellation of its license. This is not the case with other assessees. A bank, under the RBI guidelines, in order to maintain confidentiality in respect of the information collected by a bank relating to its customers, such information is not to be divulged to outsiders. There is no such obligation with other assessees.
28. Despite the RBI guidelines providing maintenance of secrecy with regard to the information regarding the customers of the bank, the assessee furnished to the AO whatever information it had in its possession. The addresses of the account holders, as mentioned in the bank ledgers, as also the addresses of the introducers of the accounts were furnished to the AO. Now if the addresses of the customers of the assessee bank were found to be incomplete, this cannot form the basis for making the addition in question. Undisputedly, the assessee bank did not violate any of the relevant guidelines of the RBI. In the Master Circular of the RBI, (copy at p. 75 of the assessee’s paper book), introduction by an existing account holder by the bank has been held to be one of the proper methods of introduction of a customer to the bank for opening an account. The bank was not required to go for detailed verification of the addresses/whereabouts of its customers, though this position has now changed and at present the requirement in this regard calls for a much more stringent compliance. In Bapulal Premchand v. Nath Bank Ltd. AIR 1946 Bom. 483, as pointed out, it has been held, inter alia, that there is no absolute obligation on a bank to make inquiries about a proposed customer, so as to avail of the protection under s. 131 of the Negotiable Instruments Act. In Union of India v. National Overseas & Grindlays Bank Ltd. [1978] 48 Comp. Cases 277 (Del.) referring to the Bapulal Premchand (supra), it was held that the bank could rely on the introduction of any old customer and that if the bank bona fide acted on the reference of a customer, it can avail of the protection under s. 131 of the Negotiable Instruments Act. So far as regards non-obtaining of photographs of the account holders, it is true that the same were not obtained in the normal course. Pertinently, in savings bank accounts where cheque facilities were not provided, RBI guidelines (p. 76 of the assessee’s paper book) provided exemption. Thus, in respect of accounts with only cash transactions, even the rule of proper introduction did not operate strictly. All this shows that the assessee bank did not commit any infringement in taking proper introduction and, therefore, it is incorrect that there was any deliberate attempt on the part of the assessee to accommodate tax dodgers.
29. In CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC), the Hon’ble Supreme Court, vide its order dt. 25th Sept., 1964 (copy at p. 110 of the assessee’s paper book), held that cash is stock-in-trade of a banking business and that loss in the course of its business by way of dacoity is deductible as a trading loss in computing the total income of the business. This strengthens the assessee’s contention that the deposits accepted by it were part of its trading activity and that its clients were its customers.
30. In CIT v. Pragati Co-operative Bank Ltd. [2005] 197 CTR (Guj.) 505 : [2005] 278 ITR 170 (Guj.), it was held that the provisions of s. 68 of the IT Act would not apply to the case of a banking company working under the control of the RBI, particularly when the deposits were not stated to have been made either by the directors of the bank or by any relative of the directors.
31. In Shri Mahavir Nagari Sahakari Pat Sanstha Ltd. v. Dy. CIT [2002] 74 TTJ (Pune) 793 (copy at pp. 95 to 104 of the assessee’s paper book), it was held that addition could not be made under s. 68, even though the minimum onus of proving the identity of depositors had not been discharged by the assessee.
32. In Dy. CIT v. Sahara India Financial Corpn. Ltd. [2003] 81 TTJ (Luck) 389 : [2004] 2 SOT 733 (Luck) (copy at pp. 105 to 109 of the assessee’s paper book), it was held that the deposits received by the assessee, which was a non-banking financial institution, recognised by the RBI, were not in the nature of taking of any loan or deposit for the purposes of its business, that rather, it was in the business of accepting deposits and that in view of the nature of such business, the scrutiny of the deposits could not be the same as in the case of an assessee making entries of deposits on account of loan etc.
33. In CIT v. Steller Investment Ltd. [1991] 99 CTR (Del.) 40 : [1991] 192 ITR 287 (Del.), it was held that even if the subscriber to capital was not genuine, the amount of share capital could not, under any circumstance, be regarded as the undisclosed income of the company. This decision was upheld by the Hon’ble Supreme Court in the case of CIT v. Steller Investment Ltd. [2000] 164 CTR (SC) 287 : [2001] 251 ITR 263 (SC).
34. Further, even on merits, the addition was uncalled for. Concerning account Nos. 8211, 8212 and 8213, the introducer was Shri Vijay Sethi, the deceased managing director of the assessee bank itself. The original investments were made in RMRD accounts or savings bank accounts with the Mithapur Branch of the assessee. These investments were made way back in 1992. It was only on maturity that they were transferred to the accounts under consideration. It has rightly been contended that the origin of these amounts falling in the earlier years, which fact has also been admitted by the AO, they could not be brought to tax in the year under appeal, in the hands of the assessee. The learned CIT(A) thus rightly deleted the addition in this regard.
35. The introducer of account Nos. 954, 955 and 956 was Shri Parmod Sharma, accountant of the assessee bank. He appeared before the AO in response to summons under s. 131 of the Act. He admitted knowing the account holders personally. The onus with regard to these accounts thus stood amply discharged.
36. S. Swaran Singh was the account holder of account No. 1108. He was one of the directors of the bank and so he needed no independent introduction to open his account with the assessee firm. His independent existence also stands proved by the entries through clearing in his account.
37. Shri Pawan Sharma was the introducer to account No. 1658. His statement was recorded by the AO under s. 131 of the Act. He also confirmed knowing the account holder.
38. Smt. Harsimranjit Kaur, Prop. M/s H.S. Gas Service owned up account No. 8268 of Shri J.P. Singh, which fact was got confirmed by the learned CIT(A) through the AO assessing the said lady.
39. The above facts were duly taken into consideration by the learned CIT(A) while admitting the appeal. We do not find anything erroneous with the order of the learned CIT(A).
40. Not only this, in pursuance to the directions issued by the learned CIT(A), the assessee located further details/addresses of account holders. These details were furnished to the AO vide letter dt. 4th Oct., 2005. A copy of this letter had been placed at pp. 90-91 of the assessee’s paper book. This also boosts the stand taken by the assessee.
41. In view of the above, we find ourselves to be in agreement with the observations recorded by the learned CIT(A) while allowing the appeal of the assessee. The grievance of the Department in this regard is found to carry no force whatsoever and is, as such, rejected.
42. Apropos the objection of the Department that the learned CIT(A) erroneously admitted additional documentary evidence when before the AO, the assessee had denied producing the bank account holders on the plea that this would adversely affect its banking business. Here also, we find no case made out by the Department.
43. Before the learned CIT(A), the assessee, inter alia, filed copies of accounts of various account holders and other supporting documents, as additional evidence. The AO objected to the same. The learned CIT(A), however, allowed such evidence to be produced as additional evidence. In this regard, the assessee did not produce such evidence before the AO under the bona fide belief that it was not obliged to do so, as it would adversely affect its business. The learned CIT(A) found that the documents produced as additional evidence were in regard to the additions made and could not be produced at the time of assessment proceedings, in the bona fide belief which was, as aforesaid, nurtured by the assessee.
44. We do not find any error in the order of the learned CIT(A). In this regard, it has not been made out that the plea of the assessee of not being obliged to file such documents in respect of its depositors, who had been introduced either by the bank’s own staff members or by someone already having a bank account with the assessee bank, was mala fide.
45. Further, undisputedly, the documents so produced were directly related to the additions made. In this view of the matter, the Department’s grievance in this regard also stands rejected.”
15. Further, the Tribunal, assessee’s in its own case vide Order dated 26.02.2010 in ITA No. 1156 to 1159/Hyd/2009 for the assessment years 2006-07 to 2007-08 while deleting the penalty levied u/s 271D & 271E held that money received by assessee cooperatives society from its members and their relatives by way of deposits and the sums repaid to them as part of its banking activities cannot be considered as ‘loan’ or ‘deposit’ so as to attract s. 269SS or s. 269T as the assessee is working on the concept of mutuality and its director or member is not covered by the expression ‘any other person’ occurring in s. 269SS and, therefore, penalty under s. 271D or S. 271E is not leviable, more so, when the AO has accepted the genuineness of such deposits and the assessee was under bona fide belief that the provisions of s. 269SS and 269T are not applicable to it.
16. Further, it was held by the Tribunal that the Society is dealing like a bank while accepting deposits from its members. If the carrying on banking business is not approved by the RBI or the assessee is not having requisite license to carry out the banking business, the authorities could have taken action against the society or stop the Society activity. Once the assessee is allowed to carry on the banking business, then the assessee is bound by the relevant provisions of the Banking Regulations Act. The bank for all its banking activities is strictly governed by the Banking Regulations Act, 1949.
17. Being so, in our humble opinion, amounts in the accounts maintained by the assessee are deposits of the customers and/or not under the control of the assessee, and therefore, provisions of S. 68 are not applicable to the Bank. Further, Society/Bank not required to go for detailed verification of address/whereabouts of the customers and therefore, addition u/s 68 cannot be made merely because the address of the customers are incomplete. In view of this, we are in agreement with the findings of the CIT(A) on this issue. Hence, this ground raised by the revenue in all its appeals is dismissed.
18. The next common ground for consideration in assessee’s appeals in ITA No. 1003 & 1004/Hyd/2011 and revenue appeals in ITA No. 1200 /Hyd/2011 & 1049/Hyd/2011 with regard to allowability of deduction u/s 80P(2)(a)(i) of the Income tax Act, 1961.
19. The authorized representative appeared for assessee submitted that the assessee is co-operative society proving credit facilities to its members only. He further submits that, none of the activities of society is violating any provisions of co-operative principles. The credit facilities provided solely for the members only and in no case it was extended to non-members. The amounts deposited by depositors were advanced to members on interest. Thus the society is clearly providing credit facilities to its members in so as its activities is concerned. He further relied on the following judgments:
(i) The Hon’ble ITAT, Nagpur bench in the case of Hinganghat Tahsil Sahakari Shetki Kharedi Vikri Sanstha Ltd. v. ITO [1983] 3 ITD 410 (Nag.), wherein it was held that all categories of members including the nominal members are members of the Society and no distinction can be drawn between the members.
(ii) Similarly the Hon’ble Punjab & Haryana High Court in the case of CIT v. Punjab State Co-operative Bank Ltd. [2008] 300 ITR 24/169 Taxman 290, nominal members even they do not contribute to the capital would be members of the Society.
(iii) The AR further relied on the order of the CIT(A) and requested to upheld the CIT(A) order.
19.1 The DR relied on the order of the Assessing Officer.
20. We have heard both the parties and perused the materials on record. The assessee is a co-operative society providing banking or credit facilities to its members. The provisions of section 80P(2)(i)(a) makes provision for exemption of income from tax for Co-operative Societies providing credit facilities to members for better understanding we reproduce the provisions of section 80P. Section 80P(1) where, in the case of assessee being co-operative society, the gross total income includes any income referred to in sub-section(2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2) in computing the total income of the assessee.
Sub section (2) – the sums referred to in sub-section (1) shall be the following: -
(a) In the case of Co-op society engaged in
(i) Carrying on the business of banking or providing credit facilities to its members or
21. Section 80P(2)(a)(i) provides for deduction from gross total income for co-operative societies providing banking or credit facilities to its members. In the present case the assessee is a Co-operative Society providing credit facilities to its members. The Society is having 63,000 members spread over 23 branches mainly its activity is doing banking business for its members. The observations made by the assessing Officer in his order are that the beneficiaries and the contributors are different. It is not necessarily the contributors and beneficiaries are same in the case of co-operative society. What is required to be observed is that the depositors as well as the borrowers shall be the members of the Society. In the present case all the depositors and borrowers are member of the society. However, it is the fact that certain activities carried on by the assessee not complying with the requirements of the principles of Cooperative Society, more so, the assessee also engaged in the activity of bill discounting, providing accommodation cheques by taking cash from the member, being so, for the assessment year 2006-07 the claim of the assessee u/s 80P(2)(a)(i) cannot be allowed.
22. For assessment year 2007-08 & 2008-09, we have to consider the amendment brought out to the section with effect from 01/04/2007 by Finance Act, 2006 whereby section 80P(4) was inserted. The amendment clearly barred all the co-operative banks other than primary agricultural credit society or a primary co-operative agricultural and rural development banks from claiming exemption under the section. The primary activity of the society is to provide banking facilities to its members. The Society is dealing like a bank while accepting deposits from its members. This issue was examined by the Hon’ble ITAT in the assessee own case while deleting the penalty u/s 271D and 271E. The Hon’ble ITAT held as under:
“If the carrying on banking business is not approved by the RBI or the assessee is not having requisite license to carry out the banking business, the authorities could have taken action against the society or stop the Society activity. Once the assessee is allowed to carry on the banking business, then the assessee is bound by the relevant provisions of the Banking Regulations Act. The bank for all its banking activities is strictly governed by the Banking Regulations Act 1949″
23. The Society is carrying on the Banking business and for all practical purpose it acts like a co-op bank. The ITAT observed that the society is governed by the Banking Regulations Act. Therefore the Society being a co-op bank providing banking facilities to members is not eligible to claim the deduction u/s 80P(2)(i)(a) after the introduction of sub-section (4) to section 80P.
24. In view of the above we are of the opinion that the society is not eligible to claim deduction u/s 80P(2)(a)
(i). Therefore we are of the opinion that the assessee is not entitled for deduction u/s 80P(2)(a)(i) for assessment year 2006-07, 2007-08 & 2008-09 and allowed the ground raised by the revenue and dismiss the ground taken by the assessee on this issue.
25. Thus, the issue relating to the disallowances of deduction u/s 80P(2)(a)(i), is decided in favour of the revenue.
26. The next issue raised by the assessee regarding confirmation of additions of Rs. 5,93,756/- being disallowances of advertisement expenditure u/s 40a(i)(a) for no deduction of TDS. The CIT(A) in his order observed that even in the appellate proceedings the assessee not furnished the details for deduction of TDS on advertisement charges. Considering the facts of the case and order of the Special Bench dated 29th, March, 2012 in the case of M/s Merilyn Shipping & Transports, Visakhapatnam in ITA No. 477/Viz/2008 for the assessment year 2005-06 wherein held that section 40(a)(ia) of the Act is applicable only to the expenditure which is payable on 31st March of every year and cannot be invoked to disallow the amounts which are already been paid during the previous year, without deducting tax at sources. In view of the above, we direct the assessing officer to examine the issue in the light of the order of the Special Bench. Accordingly, this issue set aside to the file of the assessing officer for reconsideration.
27. The last ground for consideration in assessee’s appeal in ITA No. 1003/Hyd/2011 is with regard to direction given by the CIT(A) to verify the interest on NPAs.
28. The assessee claimed an interest of Rs. 1,26,29,963/- on account of interest receivable on the loans advanced which are pending recovery for more than 6 months. According the judgment of Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 wherein held that interest credited to the suspense account and NPAs is to be excluded from the income. The CIT(A) while adjudicating this issue, given a direction to the assessing officer to verify the said expenditure incurred by the assessee and decide thereupon. Against this the assessee is in appeal before us.
29. We have heard both the parties on this issue and we have gone through the order of the CIT(A) in para 6.12(b) at page 34 of the order. In our opinion, the CIT(A) given a direction to verify the nature of interest whether it is on non performing assets or not and decide thereupon. In this finding, we don’t find any infirmities and inclined to confirm the same. This ground of assessee dismissed.
30. In the result, assessee appeal in ITA No. 1003/Hyd/2011 is partly allowed and appeal in ITA No. 1004/Hyd/2011 is dismissed. The revenue appeal in ITA No. 1200/Hyd/2011 & 1049/Hyd/2011 are partly allowed and revenue appeal in ITA No. 1201/Hyd/2011 is dismissed.
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