Deduction u/s 80P(2) not allowed for unexplained income assessed u/s 68 of the Act. The addition u/s 68 did not increases income allowable for deduction u/s 80P
ABCAUS Case Law Citation:
ABCAUS 2973 (2019) (05) ITAT
Important Case Laws Cited/relied upon by the parties:
A. Govindarajalu Mudaliar vs. CIT
Kale Khan Mohammed Hanif vs. CIT
CIT vs Universal Empire Educational Society (393 1TR 502)
Khandelwal Constructions vs. CIT (227 ITR 900)
The assessee was a Primary Agricultural Co-operative Society engaged in the business of providing credit facilities to its members apart from accepting loan from members as well as non members.
On verifying the financial statement audited by the Co-operative Department, the Assessing Officer (AO) found that there was an increase in fixed deposits received by the assessee in cash during year under consideration.
The assessee was requested to furnish the details of such deposits received in cash to examine the correctness of the claim of interest paid. Instead of filing the requisite details, the assessee preferred to file a letter stating that the income is exempted from tax since they are a society registered under the State Co-operative Societies Act as Primary Agricultural Credit Society and are eligible for the deduction u/s. 80P as per the judgment of the Jurisdictional High Court and other connected cases.
However, in the absence of satisfactory explanation and details filed by the assessee, the Assessing Officer relying on the decisions of the Supreme Court brought to tax the said amount u/s 68 of the Income Tax Act, 1961 (the Act) as unexplained credits.
According to the CIT(A), opportunities were given to the assessee to establish the identity of the creditors, genuineness of the transactions and the credit worthiness of the creditors several times. However, Instead of establishing the above mentioned conditions, the assessee stated that the addition would result in income which in turn is to be exempted from tax u/s 80P(2)(a)(i) of the Act.
The CIT(A) rejected the argument of the assessee that its books of account were audited as per State Cooperative Societies Act as the assessee was directed to explain source for the cash deposits made during the year under consideration under the extant provisions of the Income Tax Act, the responsibility of which was not at all discharged by the assessee.
The CIT(A) observed that without establishing the identity of the creditors, genuineness of the transactions and the credit worthiness of the creditors, the assessee cannot claim that the cash deposits cannot be brought to tax.
Hence, the income which was brought to tax u/s 68 of the Act was justified. Similarly, the CIT(A) was of the view that once the income is not brought to tax as earned from regular business activities then, the said income is not entitled to the benefit of deduction u/s 80P(2)(a)(i) of the Act.
According to the CIT(A) cash deposits received by the assessee during the year under consideration had nothing to do with the business income which alone can be considered for the exemption to be claimed u/s 80P(2)(a)(i) of the Act.
It was observed that the unexplained cash credits which was brought to tax u/s 68 should necessarily be treated as income to be taxed but not as business income to be exempted u/s 80P(2)(a)(i). In view of all the above, the CIT(A) confirmed the decision of the Assessing Officer to tax it as unexplained cash credit u/s 68 of the Act in the absence of assessee’s explanation about the nature and source of the cash deposits received during the year under consideration.
Before the Tribunal, the assessee relied upon several judgments and submitted that in all these decisions, the addition u/s 68 resulted in increase in income which was to be treated as business income for deduction u/s 80P of the Act.
The assessee also relied on the CBDT Circular No. 37/2016 wherein it was stated that disallowance which will increase the total income of the assessee is eligible for deduction under various provisions of Chapter VI-A does not affect taxable income.
Therefore, it was contended that addition u/s 68 of the Act only increases the total income which is allowable for deduction u/s 80P of the Act.
The Tribunal observed that a similar issue was considered by the CIT(A) for un preceding assessment years wherein he had remitted the issue to the file of the Assessing Officer. Following the principle of consistency , the Tribunal remitted the issue to the file of the AO with direction to the assessee to provide details of the depositors along with the proof of identity to the Assessing Officer. The Assessing Officer was directed to verify the identity of the depositors and if the assessee proves the identity of the parties, then the addition is to be deleted.
With regard to non granting of deduction u/s 80P(2) of the Act, treating the unexplained credits as ‘income from other sources’, the Tribunal noted that this issue was considered by the Jurisdictional High Court wherein it was held that the income once treated as unexplained cash credit under section 68, it could not be treated as business income.
In view of this, the Tribunal opined that deduction under section 80P(2) of the Act cannot be allowed for the unexplained income assessed as under section 68 of the Act and the said income cannot be treated as business income.
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