U.P Civil Secretariat Primary Co-operative Bank Limited, Lucknow V. Commissioner of Income Tax -I, Lucknow

ITA 321/LKW/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2048 (ITAT-LUCKNOW)
• Duration Of Justice: 2 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 22-07-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 03-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: O P MEENA
• Assessee Lawyers: R C JAIN
• Keywords: Opportunity of being heard; Bad and doubtful debts; Revised return
• Section: 263

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B , LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO. 321 /LKW/201 3 ASSESSMENT YEAR: 2008 09 U. P. CIVIL SECRETARIAT PRIMARY CO - OPERATIVE BANK LTD. 7, VIDHAN BHAWAN , LUCKNOW - 226001 PAN:A AAJU0257B V S. C IT - 1 , LUCKNOW (APPELLANT) (RESPONDENT) APPELLANT BY SHRI R. C. JAIN, FCA RESPONDENT BY SHRI O. P. MEENA, CIT DR DATE OF HEARING 22/07/2015 DATE OF PRONOUNCEMENT 3 1 /08/2015 O R D E R PER A. K. GARODIA, A.M. T HIS IS ASSESSEE S APPEAL DIRECTED AGAINST THE ORDER OF LEARNED CIT I LUCKNOW DATED 11 . 0 3 .201 3 FOR A.Y. 2008 09 PASSED BY HIM U/S 263 . 2. THE ASSESSEE HAS RAISED AS MANY AS 5 GROUNDS BUT THERE IS ONLY ONE GRIEVANCE OF THE ASSESSEE IS ABOUT VALIDITY OF REVISIONARY ORDER PASSED BY CIT U/S 263. 3 . LEARNED AR OF THE ASSESSEE SUBMITTED WRITTEN SUBMISSIONS AND LEARNED DR OF THE REVENUE SUPPORTED THE ORDER OF THE CIT . 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS . THE WRITTEN SUBMISSIONS OF THE LEARNED AR OF THE ASSESSEE ARE REPRODUCED BELOW: - 1. THE LEARNED CIT - I HAS TREATED THE ASSESSMENT ORDER DATED 30 / 12 / 2010 PASSED BY THE ACIT, RANGE - 2, LUCKNOW AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE DUE TO FOLLOWING REASONS. 2 I . NO COPY OF REVISED BALANCE SHEET AND PROFIT & LOSS ACCOUNT WAS CALLED FOR BY THE ASSESSING OFFICER. II . THE ASSESSING OFFICER DID NOT EXAMINE THE CLAIM OF DEDUCTION IN ACCORDANCE WITH THE PROVISION OF SECTION 36 ( 1 )(VIIA) OF THE I.T. ACT, 19 61. III . ACCORDING TO LEARNED CIT, AS PER PROVISION OF SECTION 36 ( 1 )(VIIA) OF THE I.T. ACT, 1961 IN THE CASE OF THE BANK THE AMOUNT OF DEDUCTION SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR B AD AND DOUBTFUL DEBTS ACCOUNT. IV . THE AMOUNT OF RS.2,84,00,000/ - SHOULD HAVE BEEN ADJUSTED AGAINST THE STATUTORY RESERVE. 2. THE ISSUES RAISED BY THE LEARNED CIT ARE EXPLAINED IN THESE SUBMISSIONS BUT FOR READY REFERENCE ARE SUMMARIZED BELOW. S.NO. FINDINGS OF CIT IN SECTION 263 ORDER ASSESSEES EXPLANATION 1. NO COPY OF REVISED BALANCE SHEET AND PROFIT & LOSS ACCOUNT WAS CALLED FOR BY THE ASSESSING OFFICER. NOT REQUIRED AS DISCUSSED IN PARA 11, 12 AND 15 BELOW. 2. THE ASSESSING OFFICER DID NOT EXAMINE THE CLAIM OF DEDUCTION IN ACCORDANCE WITH THE PROVISION OF SECTION 36 (1)(VIIA) OF THE I. T. ACT, 1961 SECTION 36 (L)(VIIA) OF THE I. T. ACT, 1961 IS NOT APPLICABLE AS I. IT IS A CASE OF CLAIM OF BUSINESS LOSS AND NOT BAD DEBTS AS ENVISAGED IN SECTION 36 (1) (VIIA). II. FURTHER THE ASSESSEE IS NOT A BANK AS ENVISAGED IN SECTION 36 (1) (VIIA). THERE ARE NUMEROUS CASE LAWS ON THIS ISSUE AND REFERENCE MAY BE MADE TO ITAT, PANAJI BENCH DECISION IN ITO VS. SHIVA CREDIT NIYAMIT REPORTED IN (2014) 166 TTJ 174. 3. ACCORDING TO LEARNED CIT, AS PER PROVISION OF SECTION 36 (L)(VIIA) OF THE I. T. ACT, 1961 IN THE CASE OF THE BANK THE AMOUNT OF DEDUCTION SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN TH E PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT. SECTION 36 (L)(VIIA) OF THE I. T. ACT, 1961 IS NOT APPLICABLE. HOWEVER THE POSITION OF STATUTORY RESERVE HAS BEEN CLARIFIED IN PARA 9 AND 10 BELOW. 4. THE AMOUNT OF RS. 2,84,00,000/ - SHOULD HAVE BEEN ADJUS TED AGAINST THE STATUTORY RESERVE. DURING THE FINANCIAL YEAR 2007 - 08 RELEVANT TO AY 2008 - 09, ADJUSTMENT OF RS. 2,84,00,000/ - HAS BEEN DONE TO THE EXTENT OF RS.2,04,85,015.95 OUT OF STATUTORY RESERVE AND THE REMAINING 7 BALANCING AMOUNT OF RS.79,14,984.05 WAS ADJUSTED OUT OF THE OPENING CRED IT BALANCE OF 3 PROFIT & LOSS A/C F.Y.2005 - 06 AND 2006 - 07. 3. THE ORDER OF LEARNED CIT IS OBVIOUSLY ERRONEOUS AS THE LEARNED CIT HAS MISTAKEN THE CLAIM OF BUSINESS LOSS BY THE ASSESSEE AS BAD AND DOUBTFUL DEBTS COVERED UNDER THE PROVISIONS OF SECTION 36 ( 1 )(VIIA) OF THE I. T. ACT, 1961. 4. REFERENCE IS INVITED TO REVISED COMPUTATION OF INCOME ON PAGE 25 OF THE PAPER BOOK IN WHICH IT HAS BEEN CLEARLY MENTIONED THAT RS.2,84,00,000 / - IS LOSS INCURRED DURING THE PERFORMANCE OF THE BUSINESS. 5. AS SUCH THE PR OVISIONS OF SECTION 36 ( 1 )(VIIA) OF THE I.T. ACT, 1961 ARE NOT APPLICABLE TO THE CASE OF THE ASSESSEE AS THESE ARE APPLICABLE TO ADVANCES MADE BY A BANK AS ENVISAGED IN SECTION 36 (L)(VIIA) IN THE NORMAL COURSE OF OPERATION OF BANKING BUSINESS. AT THE COST OF THE REPETITION IT IS SUBMITTED THAT THE CLAIM OF RS.2,84,00,000 / - IS NOT COVERED BY THE PROVISIONS OF SECTION 36 ( 1 )(VIIA) OF THE I.T. ACT, 1961 AS IT IS NOT BAD AND DOUBTFUL DEBTS AS ENVISAGED IN THIS SECTION BUT IT IS A BUSINESS LOSS OCCASIONED IN TH E COURSE OF CARRYING ON ITS BUSINESS OF BANKING. 6. FURTHER THE ASSESSEE WAS DOING BANKING BUSINESS ACTIVITIES BY TAKING DEPOSITS MAINLY FROM ITS MEMBERS AND GIVING LOANS ONLY TO ITS MEMBERS AS PER ITS BYE LAWS IT COULD GRANT LOAN ONLY TO ITS MEMBERS. THEREFORE THE ASSESSEE IS NOT A BANK AS ENVISAGED IN SECTION 36 (1) (VII A ) OF THE I.T. ACT, 1961. THERE ARE NUMEROUS CASE LAWS ON THIS ISSUE AND REFERENCE MAY BE MADE TO ITAT, PANAJI BENCH DECISION IN ITO VS. SHIVA CREDIT NIYAMIT REPORTED IN (2014) 166 TTJ 174. 7. THE NATURE OF LOSS IS ALSO DESCRIBED IN BRIEF. AS EXPLAINED ABOVE THE ASSESSEE PRIMARY COOPERATIVE BANK TAKES DEPOSITS MAINLY FROM ITS MEMBERS AND IT CAN GIVE LOANS ONLY TO ITS MEMBERS. THE NATURE OF BANKING BUSINESS ACTIVITIES CARRIED ON BY THE ASSESSEE I S SUCH THAT THE ASSESSEE BANK HAS TO KEEP ITS FUNDS IN OTHER BANKS SO THAT IT EARNS SUFFICIENT INCOME TO PAY INTEREST ON MEMBERS DEPOSITS BECAUSE LOANS AND ADVANCES CAN BE GIVEN ONLY TO MEMBERS AND DEPOSITS ARE MUCH MORE THAN ADVANCES. THE ASSESSEE BANK CA N KEEP ITS SURPLUS FUND IN DEPOSITS IN BANKS AND GOVERNMENT SECURITIES ONLY AND NOT IN ANY OTHER COMPANY OR INSTITUTION. AS SUCH THE ASSESSEE BANK HAD TO KEEP MONEY IN DEPOSITS IN OTHER BANKS. SUCH DEPOSITS WERE KEPT BY THE ASSESSEE IN U.P. COOPERATIVE BANK LIMITED 4 AND CITY CO - OPERATIVE BANK. THE CITY COOPERATIVE BANK UNFORTUNATELY FAILED AND WENT IN LIQUIDATION AND THE LOSS ASSESSED BY THE ASSESSEE WAS CLAIMED AS BUSINESS LOSS IN THE MANNER STATED IN THE REVISED COMPUTATION OF INCOME ON PAGE 25 OF THE PAPER BOOK. 8. IN VIEW OF THE LOSS THE RESERVE BANK OF INDIA HAD RESTRAINED THE ASSESSEE BANK FROM DECLARING ANY DIVIDEND. HOWEVER, THE SITUATION WAS EXPLAINED BY THE REGISTRAR OF THE COOPERATIVE SOCIETY TO THE RESERVE BANK OF INDIA VIDE LETTER DATED 23.07.2007 PLACED ON PAGES 41 AND 42 OF THE PAPER BOOK. SUBJECT TO CERTAIN RESTRICTIONS THE RESERVE BANK OF INDIA VIDE LETTER DATED 20.09.2007 PERMITTED THE ASSESSEE BANK FOR DIVIDEND DISTRIBUTION FOR F.Y. 2006 - 07 PROVIDED IT SHOULD NOT EXCEED 10%. 9. IT MAY BE STATED HERE THAT AS PER THE BY - LAWS OF THE ASSESSEE BANK, OUT OF THE NET PROFIT IN ANY COOPERATIVE YEAR, I.E., FINANCIAL YEAR AN AMOUNT NOT LESS THAN 25% THEREOF SHALL BE TRANSFERRED TO THE RESERVE FUND. THE RELEVANT PAGES OF THE BY - LAWS HAVE BEEN PLACED IN THE PAPER BOOK AND ON PAGE 38 IN REGULATION 68 (3)(A) THE REQUIREMENT OF 25% IS MENTIONED. THIS RESERVE FUND IS DESCRIBED IN BALANCE SHEET OF THE ASSESSEE AS STATUTORY RESERVE. 10. THUS STATUTORY RESERVE HAS NOTHING TO DO WITH ANY PROVISIO N ENVISAGED IN SECTION 36 ( 1 )(VIIA) OF THE L.T. ACT, 1961. 11. T HE LEARNED CIT - 1 STATES THAT NO COPY OF REVISED BALANCE SHEET AND PROFIT & LOSS ACCOUNT WAS CALLED FOR BY THE ASSESSING OFFICER. THIS FINDING IS ALSO WHOLLY ERRONEOUS. THE LEARNED CIT - 1 FAILE D TO APPRECIATE THAT THE ASSESSEE PREPARES ITS ACCOUNTS AS PER THE FORMAT PRESCRIBED UNDER THE BANKING COMPANIES ACT, 1949. 12. THE ADJUSTMENT OF R S.2,84.00,000 / - WAS DONE IN THE FINANCIAL STATEMENTS AND HENCE THE QUESTION OF REVISED FINANCIAL STATEMENTS, I.E., REVISED BALANCE SHEET AND PROFIT & LOSS ACCOUNT DOES NOT ARISE. THE LEARNED CIT - 1 FAILED TO APPRECIATE THAT THE AMOUNT UNDER THE HEAD 'NPA RESERVE' IN THE BALANCE SHEET AS ON 31 - 03 - 2007 WAS RS.70,71,707.75 WHEREAS ON 31 - 03 - 2008 IT WAS RS.3,54,71,707 .75. THUS THE AMOUNT OF NPA WAS CREDITED I.E. THERE WAS AN INCREASE OF RS.2,84,00,000/ - DURING THE FINANCIAL YEAR 2007 - 08 OUT OF STATUTORY RESERVE AMOUNTING TO RS.2,04,85,015.95 AND THE REMAINING / BALANCING AMOUNT OF RS.79,14,984.05 WAS ADJUSTED OUT OF TH E OPENING CREDIT BALANCE OF PROFIT & LOSS A/C F.Y.2005 - 06 AND 2006 - 07. 5 13. IT IS MANDATORY FOR THE ASSESSEE TO CREATE EVERY YEAR THE STATUTORY RESERVE OUT OF ITS PROFITS AS EXPLAINED IN POINT 7 ABOVE. THE PURPOSE OF THE STATUTORY RESERVE IS TO ENSURE THAT ENOUGH FUNDS ARE SET ASIDE FOR CONTINGENCIES LIKE UNFORESEEN LOSSES ETC. REFERENCE MAY KINDLY BE MADE TO RULE 167 OF THE U.P. CO - OPERATIVE SOCIETIES RULES, 1968 PLACED ON PAGE 34 OF THE PAPER BOOK. 14. THUS, THIS IS CLEAR THAT THE STATUTORY RESERVE HAS B EEN CREATED OUT OF THE PROFIT & LOSS ACCOUNT. HENCE THE ADJUSTMENT OF RS.2,04,85,015.95 OUT OF THE STATUTORY RESERVE IN RESPECT OF BUSINESS LOSS INCURRED BY THE ASSESSEE IN CARRYING OUT ITS BUSINESS IS IN REGARD TO THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE . FURTHER, THE ASSESSEE HAD BALANCES IN THE PROFIT & LOSS ACCOUNT FOR F.Y. 2005 - 06 AND F.Y. 2006 - 07 AND THE REMAINING AMOUNT OF BUSINESS LOSS, I.E., RS.79,14,984.05 HAS BEEN ADJUSTED FROM THESE BALANCES. 15. THE RESERVE CREATED OUT OF PROFIT & LOSS ACCOUN T AND BALANCES OF PROFIT & LOSS ACCOUNT WOULD BE REFLECTED IN THE BALANCE SHEET ONLY AND HENCE THE ADJUSTMENT CARRIED OUT BY THE ASSESSEE AS DESCRIBED ABOVE ARE OUT OF PROFIT & LOSS ACCOUNT OF THE ASSESSEE AND THE QUESTION OF PREPARING THE REVISED PROFIT & LOSS ACCOUNT FOR THE YEAR DOES NOT ARISE AS THE ASSESSEE CANNOT DO IT UNDER THE BANKING COMPANIES ACT AND AS DESCRIBED ABOVE THE ADJUSTMENTS ARE OUT OF PROFIT & LOSS ACCOUNT. 5. THIS IS BY NOW A SETTLED POSITION OF LAW THAT IF THE ASSESSMENT ORDER IS P ASS ED BY THE A.O. WITHOUT ENQUIRY OR WITHOUT APPLICATION OF MIND, THE ASSESSMENT ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE AND IN THAT SITUATION; THE CIT GETS THE JURISDICTION TO PASS REVISIONARY ORDER U/S 263. LEARNED CIT HAS OBSERVED IN PARA 3.1 OF HIS ORDER THAT IT WOULD BE FACTUALLY INCORRECT TO HOLD THAT THE AO MADE THE ASSESSMENT AFTER ENQUIRY AND THE ORDER OF T HE AO IS FOUND TO HAVE BEEN PASSED WITHOUT ENQUIRY. IN THE WRITTEN SUBMISSIONS OF THE LEARNED AR OF THE ASSESSEE AS REPRODUCED ABOVE, THERE IS NO OBJECTION RAISED REGARDING THIS SPECIFIC FINDING OF CIT AND HENCE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT BECAUSE IF THE ASSESSMENT O RDER HAS BEEN PASSED BY THE A.O. WITHOUT ENQUIRY, THE SAME IS ERRONEOUS. REGARDING T HIS ASPECT THAT IT IS PREJUDICIAL TO THE INTEREST OF 6 REVENUE OR NOT, WE FIND THAT THE AO HAS ALLOWED DEDUCTION OF RS.2.84 CRORES CLAIMED BY THE ASSESSEE IN THE REVISED RETURN OF INCOME AS BUSINESS LOSS AND AS PER WRITTEN SUBMISSIONS OF THE LEARNED AR OF TH E ASSESSEE AS REPRODUCED ABOVE, THE ASSESSEE HAS NOT DEBITED THE SAME IN THE PROFIT & LOSS ACCOUNT BUT THE SAME WAS PARTLY OUT OF STATUTORY RESERVES AND PARTLY OUT OF OPENING CREDIT BALANCE OF PROFIT & LOSS ACCOUNT. GENERALLY BUSINESS LOSS IS ADJUSTED AGAI NST PROFIT OF THE PRESENT YEAR AND CAPITAL LOSS IS ADJUSTED AGAINST RESERVES AND/OR OPENING BALANCE OF PROFIT & LOSS ACCOUNT. WHEN THIS POSITION IS SEEN IN THE LIGHT OF THIS FACT THAT NO ENQUIRY WAS MADE BY THE A.O., THERE REMAINS NO DOUBT THAT THE ACTION OF THE A.O. IN ALLOWING DEDUCTION IS PREJUDICIAL TO THE INTEREST OF REVENUE ALSO. LEARNED CIT HAS NOT DECIDED THE ISSUE EITHER WAY AND HE HAS DIRECTED THE A.O. TO PASS THE ASSESSMENT ORDER DE NOVO AFTER PROPER EXAMINATION OF THE ISSUE AND AFTER AFFORDING A FAIR AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE LIGHT OF FACTS NOTED IN THE ABOVE DISCUSSION, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE CIT AND HENCE, WE DECLINE TO INTERFERE THEREIN. 6 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMISSED . (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KU MAR YADAV) ( A. K. GARODIA ) JUDI CIAL MEMBER ACCOUNTANT MEMBER DATED: 3 1 / 0 8 /201 5 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A) 5. D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR