Charotar Nagrik Sahakari Bank Ltd. vs Deputy Commissioner of Income Tax

Akil Kureshi, J.—Heard learned counsel for the parties for final disposal of the petition. The petitioner has challenged a notice dated March 15, 2012, issued by the respondent-Assessing Officer u/s 148 of the income tax Act, 1961 ("the Act" for short). The petition arises in the following background:

The petitioner is a co-operative bank in liquidation. For the assessment year 2005-06, the petitioner had filed its return of income on October 31, 2005, declaring a total loss of Rs. 7,95,82,108. Such return was taken in scrutiny. The Assessing Officer on December 27, 2007, framed scrutiny assessment u/s 143(3) of the Act and accepted the return of the assessee. It is this assessment which the respondent desired to reopen and for which a notice, beyond the period of four years from the end of relevant assessment year came to be issued. The petitioner was supplied the reasons for issuing such notice, which read as under:

The assessee is an association of persons (co-operative bank) engaged in the business of banking, had filed its return of income for the assessment year 2005-06 on October 30, 2005, declaring total loss at Rs. 7,95,82,108.

On verification of the case records, it was found that the assessee''s banking licence was cancelled by the Reserve Bank of India on July 30, 2003. Since then, the assessee was in the process of winding up by the official liquidator. Thus, the assessee was not engaged in the banking business or any other business activity after the assessment year 2004-05. Therefore, the receipts of the assessee during the previous year relevant to the assessment year 2005-06 were not on account of the assessee''s engagement in any business or profession. The assessee had not carried out on any business during the previous year, as per the provisions of section 28(i) of the Act and, therefore, its income could not be computed under the head ''Profits and gains of business or profession''. Therefore, the loss incurred of Rs. 7,95,82,108 in the assessment year 2005-06 was chargeable to income tax under the head ''Income from other sources'' and not under the head ''Profits and gains of business or profession''. And such, the assessee was not entitled to carry forward such loss as business loss for set off the same in the subsequent assessment years as per the provisions of the income tax Act, 1961.

The facts that its banking licence had been cancelled by the Reserve Bank of India on July 30, 2003, and its business had been in the process of winding up by the official liquidator were in the knowledge of the assessee. The assessee was not engaged in the banking business or any other business activity after the assessment year 2004-05 as such it should have declared the loss of Rs. 7,95,82,108 under the head ''Income from other sources'' and not under the head ''Profits and gains of business or profession''. Thus, by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, the income has escaped assessment within the meaning of section 147 of the Act.

In view of the above facts, I have reason to believe that the income of Rs. 7,95,82,108 assessed as loss under the head ''Profits and gains of business or profession'' as against the head ''Income from other sources'' has escaped assessment for the assessment year 2005-06 within the meaning of section 147 of the income tax Act, 1961. I, therefore, issue notice u/s 148 of the Act for the assessment year 2005-06 to the assessee after obtaining necessary approval of the higher authority.

A short question as to whether beyond the period of four years from the end of the relevant assessment year attempt on the part of the respondent to reopen the assessment is permissible. From the reasons, one gathers that the Assessing Officer''s objection to the petitioner treating its loss of Rs. 7,95,82,108 as a "business loss" is that the petitioner''s banking licence was cancelled by the Reserve Bank of India on July 30, 2003. As per the Assessing Officer, therefore, the petitioner no longer was in the business of banking. Any such loss suffered by the petitioner, therefore, cannot be treated as a loss arising out of the business or profession to be able to carry forward the same for set off against the future years'' profit. We are for the present not concerned with the validity of such a stand taken by the Assessing Officer. What we are examining is whether from the material on record, it could be stated that income chargeable to tax has escaped assessment due to failure on the part of the assessee to disclose truly and fully all material facts.

In this context, as pointed out by learned counsel for the petitioner in the return filed by the petitioner itself, the notes forming part of the accounts contain the following declaration:

The bank is liquidated with effect from July 30, 2003, as per the provisions of NSB/01/2-7/1820/03, dated July 28, 2003. The banking licence issued by the Reserve Bank of India is cancelled with effect from July 30, 2003, and, accordingly, the activities of the banking society is carried out only for recovery of advance and payment to depositors.

Keeping in view the liquidation order of the banking society, the profit and loss account is prepared on the following conditions and guidelines.

The fact that the petitioner''s licence for banking was cancelled by the Reserve Bank of India was thus clearly and in no uncertain terms was brought on record in the return filed by the petitioner. The petitioner in fact asserted that in view of such cancellation of licence, the banking activities of the petitioner society was carried out only for the purpose of recovery of advances and payment to the depositors. It was further conveyed that in view of such facts, profit and loss account was prepared on certain conditions and guidelines indicated therein.

Apart from this declaration and disclosure on the part of the petitioner, in the reasons recorded by the Assessing Officer also, he started with the narration, "on verification of the case records, it was found that the assessee''s banking licence was cancelled by the Reserve Bank of India on July 30, 2003". This fact, the Assessing Officer thus gathered from the verification of the case record and not from any other sources. This aspect gets further amplified when one peruses the draft assessment order prepared by the Assessing Officer; a copy of which is produced at R1. In such draft order also, he has recorded as under:

Nature of business

The assessee in column 8(a) of the audit report in Form No. 3CD has stated its business as ''co-operative banking business''. It is also stated in column 24(a)(i) of the audit report in Form No. 3CD that the banking licence is cancelled with effect from July 30, 2013. No new deposits received during the year.

Thus, there was no failure oh the part of the assessee to disclose truly and fully all material facts. The crucial fact that the banking licence of the petitioner has been cancelled by the Reserve Bank of India was disclosed in the original return itself. The averment of the counsel for the Revenue that despite such cancellation of the banking licence, the petitioner lodged a false claim, even if it were to be corrected, would not per se indicate that there was any failure on the part of the assessee to disclose truly and fully all material facts. As long as this requirement is satisfied, it was simply not open for the Assessing Officer to reopen the assessment beyond the period of four years from the end of the relevant assessment year. In the result, impugned notice dated March 15, 2012, is quashed and set aside. The petition is allowed.