2014 (5) TMI 844 - AT - Income Tax

Scope of section 68 of the Act Society included or not Business of banking KYC norms followed and systematic record maintained - Held that - Following Citizen Co-op. Society Ltd. Versus Additional Commissioner of Income-tax, Range-9, Hyderabad 2012 (9) TMI 756 - ITAT HYDERABAD - assessee is a Society carrying on the Banking business to its own members and the business is carried on with certain set of guidelines and procedures - Deposits were accepted by staff along with the application at the counters - To the extent of the maintenance of the records is concerned, it is already seen that a systematic record was maintained by the assessee with regard to the transactions by the Bank. It has accepted all the documents as required under KYC norms - the assesses has proved the identity of the depositor - amounts in the accounts maintained by the assessee are deposits of the customers and/or not under the control of the assessee - provisions of Section 68 are not applicable to the Bank - Society/Bank not required to go for detailed verification of address/whereabouts of the customers - addition u/s 68 cannot be made merely because the address of the customers are incomplete - CIT(A) rightly deleted the addition - the order of the CIT(A) is upheld with regard to deletion of addition u/s 68 of the Act on the deposits accepted by the assessee from public Decided against Revenue.

Summary

Issues Involved:
1. Whether the CIT(A) was correct in law in holding that the assessee followed KYC norms and maintained systematic records.
2. Whether the CIT(A) was correct in law in holding that the society is excluded from the purview of section 68 of the Act.

Issue-wise Detailed Analysis:

1. Whether the CIT(A) was correct in law in holding that the assessee followed KYC norms and maintained systematic records:

The Revenue challenged the CIT(A)'s decision that the assessee followed KYC norms and maintained systematic records. The assessee, engaged in banking, filed a return admitting 'nil' income after claiming a deduction under S.80P of the Act. During scrutiny, the AO requested the deposit register and full details of depositors to verify the genuineness of transactions. The assessee provided computerized sheets with limited details, lacking addresses. The AO added Rs. 38,53,72,794 to the income, representing the difference between closing and opening balances, as unexplained income under S.68 of the Act. The CIT(A) deleted this addition, relying on previous Tribunal orders for earlier years, where penalties under S.271D and S.271E were deleted under similar circumstances. The Tribunal noted that the CIT(A) did not perform the necessary verification for the current year and remitted the matter back to the CIT(A) for re-examination. The CIT(A) subsequently confirmed that the assessee maintained systematic records and followed KYC norms, supported by regulatory inspections.

2. Whether the CIT(A) was correct in law in holding that the society is excluded from the purview of section 68 of the Act:

The CIT(A) observed that the society is registered and recognized by the State Government, engaged in banking activities as approved by RBI, and governed by the Banking Regulation Act, 1949. The society maintained systematic records and followed KYC norms. The AO did not conduct specific inquiries for the current year and relied on findings from previous years. The CIT(A) noted the enormity of information related to 68,000 members and limitations in maintaining and furnishing depositor information. The Tribunal had previously held that the society followed KYC norms and could not be expected to verify the identity and creditworthiness of all depositors. The CIT(A) further stated that the society, engaged in banking activities, captured required information in prescribed formats and was excluded from the purview of Section 68 for member deposits. The Tribunal's earlier decisions supported that the society's onus was deemed discharged with systematic record maintenance and regulatory compliance, without needing to verify depositor creditworthiness. The CIT(A) concluded that the facts remained unchanged from earlier years, and the addition under S.68 was not sustainable. The Tribunal agreed, noting that the society complied with KYC norms and maintained systematic records, distinguishing it from other assessees. The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s deletion of the addition under S.68.

Conclusion:

The Tribunal upheld the CIT(A)'s decision that the assessee followed KYC norms and maintained systematic records, and that the society was excluded from the purview of section 68 of the Act for member deposits. The Tribunal dismissed the Revenue's appeal, confirming the deletion of the addition under S.68.