ITAT Deletes ₹4.67 Crore Addition Under Section 68: Major Relief for Cooperative Credit Societies

In a significant relief to cooperative credit societies, the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹4.67 crore made under Section 68 of the Income Tax Act against Sree Narayana Guru Cooperative and Credit Society Ltd. The ruling reaffirms the principle of mutuality and recognizes the unique operational structure of cooperative institutions.

This decision carries substantial importance for thrift and credit societies across India, especially those facing scrutiny under Section 68 for member-based deposits.

Background of the Case

Sree Narayana Guru Cooperative and Credit Society Ltd. is a thrift and credit society engaged in:

1. Accepting deposits from its members
2. Extending loans to its members

For Assessment Year (AY) 2012–13, the case was reopened under Section 147 based on AIR information indicating cash deposits of ₹1.51 crore in the society’s bank account.

During reassessment proceedings, the Assessing Officer (AO) examined:

1. Term deposit liabilities: ₹3.16 crore
2. Cash deposits: ₹1.51 crore

The society furnished detailed documentation, including:

1. Member-wise deposit details
2. Books of account
3. Deposit registers
4. Confirmations
5. Cash books

The explanation was clear: these amounts represented deposits collected from members under various schemes in the normal course of business.

Addition Under Section 68

Despite the documentation, the AO concluded:

1. The identity and creditworthiness of depositors were not satisfactorily proved.
2. The deposits were liable to be treated as unexplained cash credits under Section 68.

Accordingly:

1. ₹3.16 crore was treated as unexplained term deposits.
2. ₹1.51 crore was treated as unexplained cash credits.

This resulted in a total addition of ₹4.67 crore. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition.

Core Issue Before the Tribunal

The central question before the ITAT was:

Can deposits received from members of a cooperative credit society, along with corresponding bank deposits, be treated as unexplained credits under Section 68?

ITAT’s Key Observations

1. Nature of Cooperative Societies Overlooked

The Tribunal observed that the AO failed to appreciate the functioning of a mutual cooperative society, where:

1. Members contribute deposits
2. Loans are granted within the same closed group

Such societies operate on the principle of mutuality, fundamentally different from commercial entities dealing with the general public.

2. Incorrect Treatment of Deposits

The Tribunal noted:

1. Opening deposit balance: ₹2.24 crore
2. Fresh deposits during the year: ₹94.78 lakh

Treating the entire closing balance of ₹3.16 crore as unexplained was factually incorrect and unjustified.

3. Adequate Documentation Was Provided

The society had produced:

1. Detailed member-wise records
2. Properly maintained books of account
3. Cash books
4. Deposit registers

Many deposits were small in amount. The Tribunal held that insisting on income-tax returns or separate confirmations from each depositor was unreasonable in the context of a member-driven cooperative structure.

4. Cash Deposits from Regular Business Activity

The ITAT found that the cash deposited in the bank account was sourced from routine member collections in the ordinary course of business. There was no evidence of unexplained or non-genuine transactions.

Tribunal’s Decision

The ITAT deleted the entire addition of ₹4.67 crore, holding that:

1. Section 68 was incorrectly applied.
2. The mutual character and operational structure of the cooperative society were not properly examined.
3. The deposits were genuine and arose from member contributions.

The same reasoning was also applied for AY 2017–18.

Legal Significance of the Ruling

This judgment reinforces several important principles:

1. Section 68 Cannot Be Applied Mechanically

Tax authorities must consider the nature of the entity and its operational framework before invoking Section 68.

2. Principle of Mutuality Matters

In a cooperative credit society:

                    i.            Members contribute deposits

                  ii.            Funds circulate within the same group

               iii.            The relationship is not that of a commercial lender and the general public

Ignoring this structure can lead to legally unsustainable additions.

3. Proper Records Protect Taxpayers

Where:

1. Member-wise records are maintained
2. Books of account are produced
3. Transactions are duly recorded

Deposits cannot automatically be treated as unexplained credits.

Broader Impact on Cooperative Societies

This ruling provides significant clarity and reassurance to cooperative credit societies across India. It highlights that:

1. Genuine member-based transactions cannot be arbitrarily treated as unexplained.
2. Documentation and transparency remain the strongest safeguards.
3. Substance of transactions must prevail over mechanical application of statutory provisions.

For tax professionals advising cooperative institutions, this judgment serves as a valuable precedent in defending additions under Section 68.

Conclusion

The ITAT’s decision in favor of Sree Narayana Guru Cooperative and Credit Society Ltd. marks an important reaffirmation of the principle of mutuality and the distinctive nature of cooperative institutions.

It underscores a crucial message:

Before invoking stringent provisions like Section 68, tax authorities must carefully evaluate the nature of the entity, its operational model, and the supporting records.

For cooperative institutions and tax professionals alike, this ruling is a reminder that fairness, factual examination, and contextual understanding must guide tax assessments.

If your cooperative society is facing scrutiny under Section 68 or reassessment proceedings, proper documentation and a clear articulation of the mutuality principle can make all the difference.