The Ahmedabad bench of Income Tax Appellate Tribunal (ITAT) allowed the appeal,deleted the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961 and noted that the co-operative bank in liquidation, had disclosed all relevant facts including the RBI’s cancellation of its banking license and the diversion of interest income to the Deposit Insurance and Credit Guarantee Corporation (DICGC) due to an overriding title.
Swaminarayan Co-op.Bank Ltd.,the appellant-assessee, a Co-operative Bank in liquidation, subject to restrictions under Section 35A of the Banking Regulation Act, 1949. These restrictions prohibited the bank from granting or renewing loans, making investments, incurring liabilities, borrowing funds, or accepting new deposits without prior RBI approval. On 02/06/2005, the RBI cancelled the bank’s license to conduct banking business in India.
The assessee filed its income tax return for the assessment year (AY) 2003-04 on 07/10/2010, declaring an income of Rs. 1,21,94,779 under “income from business or profession.” After offsetting the carried forward business losses from AY 2003-04, the gross total income was reduced to Rs. NIL.
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The case was scrutinized with notices under section 143(2) and 142(1) of the act. The Assessing Officer(AO) observed that the assessee had not filed returns for AY 2003-04 to AY 2008-09, only providing proof for AY 2003-04. The AO questioned the set-off of brought forward losses. The assessee argued that the bank was under liquidation but still operational, earning interest, and thus the losses and depreciation should be allowed.
The AO, unsatisfied by the assessee reply, rejected the claim for set-off of brought forward business losses of AY 2003-04 against the income of Rs. 1,21,94,779. The AO also initiated penalty proceedings under Section 271(1)(c) for providing inaccurate particulars and concealing income.
The AO had issued a show cause notice under Section 274 read with Section 271(1)(c) on 17-12-2018 and imposed a 100% penalty on the tax evaded, as the assessee’s explanation was not accepted.
The assessee appealed the penalty order to the CIT(A), arguing that the deduction under Section 80P(2)(i) should have been allowed in the quantum appeal, citing the State Bank of India case and the Reliance Petroproducts Ltd. case.
The CIT(A) rejected the appeal, confirming the penalty and stating that the set-off of brought forward losses was incorrect due to missing returns for AY 2004-05 to AY 2008-09. The CIT(A) stated that the decision in Reliance Petroproducts Ltd. case is inapplicable. The assessee being aggrieved by the decision of the CIT(A) appealed before the tribunal.
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The tribunal on considering the contentions made noted that there was no failure to disclose material facts, as the RBI’s cancellation of the banking license was disclosed in the original return. The bank, despite being in liquidation, maintained its cooperative status and continued earning interest.
The tribunal observed that the penalty was based on a technical disallowance of the set-off claim, rather than on concealment or inaccurate particulars of income. The Tribunal also noted the AO’s notice under Section 274 read with Section 271(1)(c) did not specify the basis for the penalty.
The bench noted that the assessee argued the interest income was not taxable because it was diverted to the Deposit Insurance and Credit Guarantee Corporation (DICGC) due to an overriding title, and this argument was supported by the decision in The Visnagar Nagrik Sahakari Bank Ltd. case, which held that such income is not taxable for a bank in liquidation.
The division bench comprising Suchitra Kamble (Judicial Officer) and Makarand V. Mahadeokar (Accountant Member)ound the penalty under Section 271(1)(c) unjustified, as the assessee had disclosed all material facts without intent to conceal income. The appeal was allowed, and the penalty of Rs. 36,58,434 was deleted.
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