Income Tax Appellate Tribunal - Mumbai
Bombay Mercantile Co-Operative Bank ... vs Deputy Commissioner Of Income Tax on 30 November, 2005
Equivalent citations: (2006)100TTJ(MUM)713
ORDER
Pramod Kumar, A.M.
1. These two appeals pertain to the same assessee, involve common issues and were heard together. As a matter of convenience, therefore, both of these appeals are being disposed of by this consolidated order.
2.We will first take up ITA No. 4128/Mumbai/2003, i.e., assessee's appeal for the asst. yr. 1990-91.
3. By way of this appeal, the assessee has raised the following grievances :
1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the additional ground raised is academic.
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that of the thirty odd banks, the appellant-bank also features as one where charges have been specified.
3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in rejecting the claim of deduction under Section 80P of the Act in respect of Rs. 37,79,100 being profit on sale of Government Securities.
4. Without prejudice to the above grounds, the learned CIT(A) erred in holding that the entire income of Rs. 37,79,100 being profit on sale of Government Securities as taxable without even allowing pro rate expenditure attributable for earning these incomes.
Additional ground of appeal
4. "In the alternative and without prejudice to the above grounds, the CIT(A) further erred in not directing the AO to allow full deduction of expenses in respect of all the incomes which are not eligible for deduction under Section 80P of the Act."
As all these grounds of appeal are interlinked, we will take up all the grounds of appeal together.
5. The material facts are as follows. The order impugned in appeal before us is the assessment order passed in the second round of proceedings, as a result of setting aside of the assessment by the CIT(A) vide order dt. 5th Oct., 1998. While so setting aside the assessment order, the CIT(A) has observed as follows :
On the facts and in the circumstances of the case as discussed above, I feel it will be unjust if the appellant is penalized by denying relief under Section 80P on the grounds mentioned by the AO in the assessment order. I strongly feel that the issue deserves reconsideration. I find that the earning on sale of Government Securities were being allowed to the appellant as permissible deduction under s, SOP in previous years. The same has been disallowed in the year under consideration because of the securities scam. The AO, therefore, should go through the final report of Jankiraman Committee on Security Transactions Scam 1992 and find out whether the contention of the appellant is correct that the assessee-bank has not been found involved in the securities scam. If it is so there is no reason to deny the appellant the relief that it was getting in earlier years under Section 80P on security transactions. Besides, if the AO wants to make any other enquiry with regard to the genuineness of the said transactions, he is free to do so. However, the natural justice demands that the appellant should be given an opportunity of being heard before deciding the issue afresh. The assessment is, therefore, set aside to be framed de novo.
It is as a result of these remanded proceedings that the impugned assessment was made by the AO. The assessee is a co-operative bank and is engaged in the business of banking. In the course of impugned assessment proceedings, the AO noticed that the assessee-bank claims to have purchased and sold securities, and, in the process, earned a profit of Rs. 37,79,100, This earning was also claimed to be a part and parcel of profit of the banking business, and, accordingly, entitled to deduction under Section 80P of the Act. The profit of Rs. 37,79,100 so made was out of 27 sale transactions which include State Government and Government of India loans. These transactions, according to the AO, were carried out by taking delivery of SGL form on purchase and handing over the SGL form on sale. The AO noted that SGL (Securities General Ledger) account is held by a bank with the Public Debt Office of the RBI, and that a bank or an institution which does not have the SGL account cannot do security transactions through the SGL account. The AO noted that the assessee-bank did not have any SGL account with the PDO, RBI. The AO also noticed that no brokerage was paid on these transactions of sale and purchase. The AO also noted that while, according to the assessee, the transactions were entered into with Andhra Bank and Bank of India, but these banks have not issued any confirmation letters acknowledging the transactions. He also noted that these transactions have been carried out in violation of RBI instructions and rules, which is evident from the fact that the assessee-bank is alleged to have purchased and sold securities through SGL form, without signing SGL form and without keeping any account with the RBI. It was also noted that the assessee failed to furnish any confirmation from the brokers, whereas, according to the AO, the brokerage was indeed paid as built in the prices at which transactions were entered. In the words of the AO, "the fact is that this brokerage has been adjusted in purchase and sale price fabricated in the contract notes". The AO further added that 'the genuineness of these transactions is not free from doubt, because, as observed by my predecessor, several transactions have not been reported to the stock exchange". It was in the backdrop of these observations that the AO came to the conclusion that the profit on sale of securities is treated to be non-genuine securities transactions, on which deduction under Section 80P cannot be allowed.
6. Aggrieved by the action of the AO, assessee carried the matter in appeal before the CIT(A), but without any success. Before the CIT(A), it was contended that, in the remanded proceedings in which, the AO had passed the impugned order, to go beyond the Jankiraman Committee report. It was pointed out that the CIT(A) had specifically directed the AO to go through the final report of the Jankiraman Committee on Security Transactions appointed by the RBI and ascertain whether the contention of the appellant that it was not involved in the security scam are correct. The assessee also contended that since the assessee-bank has not been found to have been involved in the security scam, there was no reason for the AO to decline the exemption under Section 80P. It was also pointed that in the original assessment the assessee's claim for deduction under Section 80P was rejected on the grounds that (a) assessee was not having any SGL account with RBI, and, therefore, it could not have entered into securities transactions; (b) Bank of India, Andhra Bank and Bank of Karad, the parties to such transactions, have not confirmed transactions; (c) the sale prices at which transactions have taken place are more than the prices quoted at the Bombay Stock Exchange; (d) Jankiraman Committee's interim report has considered broker 'Bhupendra Devidas' as a tainted broker; (e) no brokerage is paid to broker; and (f) for all these reasons, the securities transactions in question are not part of banking business. The same things, according to the assessee, were reiterated by the AO in the remanded proceedings. It was also pointed out by the assessee that the two employees, against whom criminal proceedings were initiated, were discharged from charges under Section 120A of the Indian Penal Code. Copies of relevant documents and an affidavit setting out some material facts were also placed on record. This plea, however, did not impress the CIT(A). He rejected the same by observing as follows :
After considering the submissions of the Authorised Representative, I am of the view that the AO has indeed not placed any new evidence on record at the time of reassessment. The copy of the affidavit of the managing director, filed in the appeal proceedings, was also forwarded to him. Therefore, insofar as the directions of the CIT(A) remain uncomplied with, the proposition of the Authorised Representative that the AO was bound by the directions is legally correct to a substantial extent. However, a careful perusal of the directions would show that this legal proposition would not apply to the facts of this year as the direction was to complete the assessment de novo and after considering the final report of Jankiraman Committee. The AO has not considered the final report and proceeded to mechanically repeat the earlier findings, though for this year, the AO should have applied and followed the directions of the CIT(As) in framing the assessment de novo. However, be that as it may, the first appellate authority is not fettered by any such directions. This is the legal position laid down in the case of CIT v. Kanpur Coal Syndicate which was followed by Jute Corporation of India v. CIT and more recently in CIT v. Nirbheram Daluram .
Coming to the affidavit filed by the assessee, the CIT(A) observed that:
As regards the filing of the affidavit, the appellant-bank has reiterated its perception of the matter. The cases against two employees under Section 120A of the IPC are criminal cases. As the proceedings under the IT Act are not judicial proceedings in the sense in which 'judicial proceedings' is ordinarily used, the AO is not fettered or bound by technical use of evidence contained in the Indian Evidence Act and he is entitled to act on material which may not be accepted as evidence in a Court of law. An affidavit in a case like this, in my view, though affirms the stated position of facts, at the same time cannot be subjected to verification for controverting, because of stout denial or silence of parties acting in collusion. The importance of verification is to test genuineness and authenticity of the grounds for belief, which in a case like this, cannot be pinpointed with precision. Under such circumstances, the entire facts have to considered carefully.
7. The CIT(A) then dealt with the findings of the Jankiraman Committee report. He took note of the fact that, as per the contents of the said report, the assessee-bank entered into 13 ready forward transactions in securities for an aggregate contract value of Rs. 93.74 crores through broker Bhupen C. Devidas. The payments were made by orders issued in favour of Bank of India, and, in respect of these purchases, the assessee-bank had not deposited SGL transfer forms nor did it have an SGL account with the Public Debt Office. It was also noted that, as per the said report, BMCL claimed to have returned the SGL forms received from Bank of India, through the said broker. The report also mentioned that there was no record, in the assessee-bank or in the Bank of India, of the receipt and subsequent delivery of the SGL forms. The CIT(A) particularly took note of the Jankiraman Committee Report's observation, with reference of the above transactions, that "it appears that through these transactions, BMCL, (i.e., the assessee-bank) has made available the funds to the brokers though ostensibly the transactions were shown as being with Bank of India'. The GIT(A), having elaborately referred to the contents of the Jankiraman Committee Report, observed that the banks, to circumvent the RBI guidelines for funding the brokers, lent the funds to the brokers in the guise of ready forward transactions. It was also observed that ready forward transactions could only be entered into with bank and in respect of Government Securities. To circumvent the first stipulation, transactions were recorded as made with counter-party as bank, but the actual beneficiaries of these transactions were certain brokers while the banks merely acted as 'routing banks' for the brokers. When the securities were not available, these routing banks issued their own BRs. The CIT(A) also noted that the Bank of Karad, and its brokers Excel & Co. as well as Bhupen Champaklal Devidas, were specifically mentioned in the Jankiraman Committee Report. It was also noted that where a ready forward transaction is made, the sale rate reflected in agreed return on the use of funds and necessarily, therefore, either the sale or purchase was at a rate different from the real value of security. It was also noted that these transactions were de facto temporary finance transactions. It was in this backdrop that the CIT(A) came to the conclusion that unauthorized deployment of funds in breach of the guidelines could not be held to be income from banking, eligible for deduction under Section 80P, The CIT(A) was, after careful perusal of the Jankiraman Committee Report, of the view that "the activities engaged by the banks at p. 88 did not form part of the activities attributable to banking". The CIT(A) observed that funds being placed at the disposal of brokers, without issuing SGL's or not depositing them with the PDO in contravention of RBI rules, was a misapplication of funds contributing to scam. It was also observed that such irregularity had a further disadvantage that a broker was given bank funds without complying with margin requirements as would be the case when direct loans were given, only to fuel speculation. The CIT(A) then concluded.
In cases of such extreme nature, circumstantial evidence, not infrequently, indicates the truth more unerringly than direct evidence. The facts in such cases would be in the personal knowledge of the persons who have entered into the transaction, and, therefore, asking the AO to prove otherwise would be to expect an impossibility. From the standpoint of banking and the principles of cooperative bank business, such a contravention could not be said to be a normal banking activity. It also undermined the objectives for which the deduction is allowed to encourage co-operative movement in the banking sector, instead of jeopardizing capital mobilized from shareholders. In this case, in view of the finding of the final report of the Jankiraman Committee, I am of the view that profits made from ready forward deals cannot be said to have accrued in the normal course of banking business. Under such circumstances, the claim of deduction under Section 80P has to be rejected. Ground No. 1 and 2 have, therefore, to be dismissed, For the reasons stated in the order, the additional ground No. 1 which has also been considered in the assessment, order is of academic interest on the facts.
The assessee is aggrieved of the stand so taken by the CIT(A) and is in second appeal, in this second round of proceedings, before us.
8. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
9. The short issue that we are required to adjudicate really is whether or not the profits earned, in ready forward transactions, by the assessee-bank can be said to be a part of profits from "carrying on the business of banking" eligible for deduction under Section 80P(2)(a)(i) of the IT Act, 1961. Our examination of facts of the case and the legal position has to be confined to this point of view only.
10. Section 80P(2)(a)(i), Inter alia, lays down that where in the case of a co-operative society assessee, gross total income includes profits and gains attributable to 'carrying on the business of banking or providing credit facilities to its members', the whole of such profits will be eligible for deduction. The decisive test for eligibility for deduction under Section 80P(2)(a)(i) is whether or not the profits and gains are attributable to 'carrying on the business of banking' so far as the case before us is concerned.
11. To decide whether or not the profits in question are profits attributable to the banking business, in turn, we have to understand the nature of these transactions particularly in the light of the Jankiraman Committee findings which have been extensively referred to by both the parties before us. The relevant extracts of the Jankiraman Committee, so far as transactions entered into by the assessee-bank are 'concerned, are as follows :
Third Interim Report - pp. 88 and 89 X : Bombay Mercantile Co-operative Bank Ltd.
1. Between 2nd Aug., 1991 and 8th April, 1992, Bombay Mercantile Co-operative Bank Ltd. (BMCBL) entered into 13 ready forward transactions in securities for an aggregate value of 97.34 crores through broker Bhupen C. Devidas. The payments were made by pay orders issued in favour of Bank of India. In respect of purchases, BMCBL has not deposited any SGL transfer form nor does it have an SGL account with the PDO.
2. The details of these transactions are as under :
(Rs. in crores) ______________________________________________________________________________ (1) (2) (3) (4) (5) ______________________________________________________________________________ Security Face value unit Date of Date of resale purchases ______________________________________________________________________________ 11.5% GDI Loan 2007 5.00 5.19 2-8-1991 10-9-1991 ______________________________________________________________________________ 11.5% GDI Loan 2007 10.00 10.39 8-8-1991 10-9-1991 ______________________________________________________________________________ 11.5% GOI Loan 2007 3.00 3.12 12-8-1991 17-9-1991 ______________________________________________________________________________ 11.5% GOI Loan 2010 5.00 5.11 19-8-1991 4-11-1991 ______________________________________________________________________________ 11.5% GOI Loan 2010 10.00 10.31 18-9-1991 22-10-1991 ______________________________________________________________________________ 11.5% GOI Loan 2010 10.00 10.46 4-11-1991 28-12-1991 ______________________________________________________________________________ 11.5% GOI Loan 2011 5.00 5.23 8-11-1991 19-12-1991 ______________________________________________________________________________ 12% GOI Loan 2011 10.00 10.24 3-1-1992 17-2-1992 ______________________________________________________________________________ 12% GOI Loan 2011 4.95 5.08 8-1-1992 28-2-1992 ______________________________________________________________________________ 12% GOI Loan 2011 2.97 3.05 13-1-1992 24-3-1992 ______________________________________________________________________________ 12% GOI Loan 2011 4.45 4.62 12-2-1992 28-2-1992 ______________________________________________________________________________ 12% GOI Loan 2011 10.10 10.49 17-2-1992 24-3-1992 ______________________________________________________________________________ 12.5% GOI Loan 2007 14.00 14.05 8-4-1992 5-5-1992 ______________________________________________________________________________
3. On resale, BMCBL received payment through pay orders issued by Bank of Karad (BoK). BMCBL claims that it has returned to Bank of India, through the broker M/s Bhupen C. Devidas, the SGL forms received from the Bank of India. There is no record in BMCBL of the receipt or subsequent delivery of the SGL forms.
4. In the books of Bank of India, there is no record of sale or purchase, or the issue of SGL transfer forms. The pay orders issued by BMCBL were credited in the current account of broker Haresh K. Dalai maintained with the Bombay Stock Exchange branch of the Bank of India, on the basis of instructions received from the BMCBL. These instructions are recorded in a letter which is not on BMCBL letterhead but on a cyclostyled sheet. There is also no request in that letter to send SGL form along with the contract note though such a request is included in other letters forwarding cheques.
5. In respect of 11 out of 13 transactions, the payment made by the BoK are debited to the current account of broker M/s Excel & Co. In respect of the other two transactions, the account to which such payments were debited are still to be ascertained.
6. It appears that through these transactions, BMCBL has made available the funds to the brokers though ostensibly the transactions were shown as being with Bank of India.
12. In our considered view, following extracts from the final report submitted by the Jankiraman Committee (relevant portions at pp. 271 and 272 of the report) dealing with ready forward transactions, which needs to be read along with the above findings, are also relevant:
Final Report - pp. 271 and 272 9 (a) The funds collected by the banks as also their own funds could be lent to the brokers only in accordance with RBI guidelines. To circumvent these guidelines, the funds were lent in the guise of ready forward transactions. As mentioned above, ready forward transactions could be entered only with banks and only in respect of Government Securities. To circumvent the first stipulation, transactions were recorded as made with counter-party banks but the beneficiaries of these transactions were certain brokers. To accomplish this, certain banks acted as 'routing' banks for the brokers.
(b) The-routing banks purchased securities in their own name and sold their securities in their own name without indicating that they were acting for the brokers. Where securities were not readily available, they even issued their own BRs. The cost of purchase was debited to the broker's account and the sale proceeds were credited to the broker's account. The major routing banks and the brokers for whom they acted are as under:
Andhra Bank Hiten P. Dalai
Batliwala & Karnani
V.B. Desai
N.K. Aggarwala & Co.
Mukesh Babu
Bank of Karad Ltd. A.D. Narottam
Excel & Co.
Bhupen C. Devidas
Darashaw & Co.
State Bank of India Harshad S. Mehta
UCO Bank Harshad S. Mehta
State Bank of Saurashtra Harshad S. Mehta
Bank of Madura Chandrakala & Co.
Karnataka Bank Fairgrowth Financial Services Ltd.
Syndicate Bank and Fairgrowth Investment Ltd.
Vijaya Bank Kotak Mahindra Finance Ltd., and
Komaf Financial Services Ltd.
10. Brokers also arranged contracts with banks where the name of a bank was given as counter-party selling bank without the knowledge of the bank concerned. The proceeds received from a purchasing bank in the form of banker's cheeses in the name of alleged counter-party bank was credited by that bank to the broker's account by the virtue of an existing arrangement. Thus the purchasing bank was unaware that it was in fact dealing with a broker and not with a counter-party bank. When delivery was not effecied for the securities for which payment has been made, liability was denied by the bank whose name was shown as the counter-party bank. A significant part of the problem exposure had arisen on this account, (emphasis, italicised in print, supplied by us) Some of the brokers and the banks with whom they had such arrangements were-as under :
Harshad S. Mehta State Bank of India
State Bank of Saurashtra
UCO Bank
ANZ Grindlays Bank
Hiten P. Dalal Andhra Bank
N.K. Aggrawala & Co. Hong Kong and Shanghai Banking
Corporation Ltd.
13. Dealing with such transactions, at p. 273, this report further observes as follows :
15 (a) A very large proportion of the transactions entered into by the banks have been ready forward and double ready forward transactions. In a ready forward transaction, there is a present purchase or a present sale of a security tied with a forward sale or forward purchase of the same security with the same counter-party. The purpose behind the transaction is not to buy or sell the security but temporarily create finance by selling the security which finance is repaid when the sale is reversed in the second leg of the transaction. In a double ready forward transaction, two securities are simultaneously bought and sold on a ready forward basis. The purpose behind such a transaction is not to create liquidity but rather to temporarily exchange the investment portfolios and in the process alter the holding rate of securities.
(b) It is believed that some leading brokers were speculating heavily on the possibility of a hike in the coupon rate on Government Securities. As such a hike would lead to a reduction in the market rate of the securities, they had short-sold the securities, mainly GOI Loan 2010: When the hike did not materialise for some time, the brokers were unable to liquidate their positions. It is possible that a number of ready forward and double ready forward deals in such securities were designed to enable the brokers to carry forward their positions till the hike materialised.
(c) As mentioned earlier, banks were permitted to enter into ready forward transactions only in SLR securities, (i.e., investments in which SLR requirements had to be maintained) and secondly, such transactions could be entered only with other banks. In almost all cases, banks have violated the first regulation and have entered into ready forward transactions like units and PSU Bonds. Some of the banks have violated the second regulation and sought to camouflage this violation by ingenious means. Thus in the case of Bank of America (BoA), there were number of transactions known as "Off the Books" deals. Under these deals, BoA accepted funds from customers at predetermined rates of return for specific periods. These were recorded as spot sales of securities, mainly as PSU Bonds and Units, to the customers. Simultaneously, a forward purchase of the same security and for the same amount was recorded with a counter-party bank, in most cases, Canbank Financial Services Ltd. (Canfina) or UCO Bank. These were in fact dummy deals. On the maturity of deposit, the funds were returned to the customer by recording a repurchase of the security and dummy forward purchase was reversed.
(d) Normally, even in a ready forward transaction, each leg of the transaction should be accompanied by actual delivery of securities or SGL transfer forms. However, in most of the cases', there is no evidence to show that actual delivery of securities or SGL transfer form was effected, but, on the contrary, there is evidence to suggest that BRs were issued and the same BRs were returned on reversal of the transaction. In many cases, where SGL forms were issued, there was apparently a tactic understanding between the parties not to present the SGL transfer forms at the PDO but to return them to the seller on the reversal of ready forward deal. In a number of cases this raises doubts whether underlying securities for the transactions existed at all. It will be appreciated that the ready forward transaction was in essence a financing transaction and if this transaction was not supported by underlying securities, the transaction was no more than an unsecured loan of funds.
(emphasis, italicised in print, supplied by us) 16 (a) The BR is intended to be a document which acknowledges receipt of funds for the sale of a security and which confirms that the issuer has undertaken to deliver the specified securities to the purchaser and, pending such delivery, is holding the securities in trust for the purchaser. Indian Banks Association (ISA) had prescribed a standard format for the BR and had also prescribed BR rules and a format for the monthly statements of BRs held and issued. These formats and rules were notified to the chief executives of all member banks vide IBA letter dt. 6th May, 1991. A copy of this letter and its enclosures are given in the Annexure to the first report of the Committee issued in May, 1992.
(b) These rules, inter alia, provided that:
(i) The BR should be issued only in the prescribed form.
(ii) Normally, no BR should be issued when SGL facility is available.
(iii) A separate BR should be issued for each type of security.
(iv) The BR is non transferable
(v) BRs should be issued serially numbered on security paper.
(vi) BRs must be exchanged with actual scrips as early as possible and in any case within 90 days of issue.
(vii) BRs should be signed by two authorized signatories whose signatures should be registered with the buyer bank to verify the signatures.
(viii) BRs should be accepted by the purchasing bank only if they were issued by the following institutions:
All member banks of IBA All India Financial Institutions like IDBI, IFCI, ICCI, NABARD, UTI, GIC, LIC Public Sector Undertakings Other Institutions specified by IBA/RBI
(c) In most banks, IBA guidelines were observed only in their breach. In particular, BRs were not issued on the security paper or in the prescribed form, and more significantly were not exchanged with the actual scrip but were returned for cancellation on reversal of original transaction or even against independent transaction of equivalent value. There were several instances where BRs were treated as negotiable instruments and transferred by endorsement and even instances where in support of purchases, BRs issued not by counter-party bank but by third parties were accepted.
14. Having taken note of these factors and the 'shortcomings in the system then prevalent in the banks, the Jankiraman Committee further observed as follows :
25. (a) As a consequence of various features mentioned earlier, 'holes' had developed in the investment portfolios of banks. These holes remained undetected because presumably the portfolio was supported by SGL transfer forms or BRs which were not backed by securities. In effect, a huge 'teeming and lading' operation had developed, the deliveries to be effected and payments to be made under one set of transactions being met by creation of a new set of transactions again supported by SGL transfer forms and BRs and not backed by securities. Thus, like a game of musical chairs, the 'hole' in the overall investment portfolio of the banks was transferred from bank to bank and was detected only when the music stopped.
15. We may also usefully refer to the Circular No. FSC 46/C 469-91/92 dt. 26th July, 1991 marked "Secret", issued by the Dy. Governor of the RBI to chief executives of all commercial banks (copy reproduced at p, 30 of the Jankiraman Committee's Report). This circular, inter alia, observed as follows :
1. It is a matter of great concern for us that certain banks are engaged in the types of transactions in securities which they should not be undertaking. A list of such transactions is appended.
(i) Ready forward (buy back) deals at rates which have no relevance to the market rates, rater alia, with a view to window-dressing their balance sheet/compliance of SLR requirements.
(ii) Double ready forward deals with a view to covering their oversold position in a specific security,
(iii) Sale transactions by issue of bank receipts (BRs)/SGL forms without actually holding the securities/without having sufficient balance in their SGLM account.
(iv) Issuing BRs/SGL forms on behalf of their broker clients without safeguarding banks' interest.
2. You may be aware that with a view to helping the banks to overcome various deficiencies in their long-term securities market and to enable them to manage their short-term cash deficiencies/surpluses more efficiently, we have permitted banks to enter into buy back deals in Government Securities among themselves (and not with their non-bank clients). It was our expectation that such deals will be undertaken by the selling bank only if it holds sufficient securities (either in the physical form or in the SGL account) at market related rates and such deals will be properly reflected in their books of account. However, we observe that certain banks have been resorting to this type of transaction without actually holding sufficient securities either in physical form or in their SGL account (resulting in substitution of BRs/return of SGL form for want of sufficient balance) at rates which have no relevance to the markets, with a view to window-dressing their profitability/maintenance of their SLR requirement with tactic understanding with counter-party banks. Some of the banks appear to be taking outright oversold position in securities and in their desperate bid to cover the oversold position in a particular security/ies enter into double ready forward deals and other banks oblige them in the manner.
3. Another disquieting feature observed is the extensive use of BRs by the banks. It has been our intention to ensure that the banks do not undertake sale transaction in the securities without actually holding them and unless they are in a position to deliver the securities within a reasonable time. Contrary to our above expectations, banks have been issuing BRs 'freely (without regard to whether they will be in a position to deliver the securities thereagainst in a reasonable time) and against an initial outstanding BR, a series of BR transaction are put through by further issue of BRs and in the final analysis only BRs are exchanged and no security is delivered. Some of the banks have also been issuing BRs on behalf of their broker clients, without verifying whether broker clients hold the security covered by the relative BRs.
16. The aforesaid circular, however, did not concern the appellant-bank before us because it was issued by the DBOD, i.e., Department of Banking Operations and Development which does not deal with the co-operative banks that the appellant before us. Vide Circular UBD. 51/Adm/(5)/83-84 dt. 28th Feb., 1984, a copy of which was filed before us as well, the RBI advised all the Registrar of Co-operative Societies/State Co-operative Bank Federations/Association of Urban Co-operative Banks that they "are pleased to advise that with effect from (sic) Urban Banks Division, Department of the Banking Operations and Development has been constituted as a separate Department named Urban Banks Department under a chief officer" and that henceforth all the future correspondence by them is to be addressed to this Urban Banks Department. The assessee-bank, therefore, did not come in the jurisdiction of the DBOD which had issued the secret circular on which so much reliance has been placed by the Revenue. As for the co-operative banks, that the assessee-bank is, a Circular No. UBD No. Plan 12/UB-81/92-93 was issued on 15th Sept., 1992. This circular, inter alia, stated as follows :
15th Sept., 1992 The Chairman/Chief Executives of all the primary co-operative banks Dear Sir, Investment portfolio of banks-Transactions in securities As you are aware, Governor of the RBI had appointed a committee to enquire into the securities transactions of banks and financial institutions. The .committee had made a number of recommendations in its interim report submitted recently. RBI has examined these recommendations and accepted them generally.
2. In relation to the primary (urban) co-operative banks, the following instructions,- which will come into force with immediate effect (emphasis, italicised in print, supplied by us), are issued in accordance with these recommendations :
Investment policy ...Keeping in view the fact that funds of urban co-operative banks are essentially meant for members' requirements for productive and other purposes and also the special provisions for meeting Statutory Liquidity Ratio and Cash Reserve Ratio requirement applicable to urban co-operative banks, the need for dealing in Government Securities does not arise. However, there is no prohibition to deal in such securities in case bank has large surpluses which it will like to profitably invest. In this context, we have to issue following instructions :
(i) to (iii) ...
(iv) The bank are prohibited with immediate effect from undertaking ready forward and double ready forward deals in dated Government and approved/trustee securities or in any other securities such as public sector undertaking (PSU) bonds and units, (emphasis, italicised in print, supplied by us) Inter-bank ready forward transactions in treasury bills are, however, permitted. The banks should scrupulously comply with the following :
Subsidiary General Ledger facility
(v) Transfers through SGL accounts by such banks as jabe SGL facility can be made only if they maintain regular current account with RBI, All transactions in Government Securities for which SGL facility should be available should be put through the SGL account only.
(vi) Before issue of SGL forms covering their sale transactions, banks should ensure that they have sufficient balances in their respective SGL accounts. Accordingly, under no circumstances, a SGL transfer form submitted by a bank in favour of another bank should bounce for want of sufficient balance in SGL account. The purchasing bank should issue cheque only after receipt of SGL form from the selling bank.
(vii) The SGL transfer form received by purchasing banks should be deposited in their SGL account immediately. No sale should be effected by return of SGL form held by the bank.
(viii) SGL transfer form should be signed by two authorized officials of the bank whose signatures should be recorded with the respective Public Debt Office (PDQ) of the RBI and other banks.
(ix) The SGL transfer forms should be in the standard format prescribed by the RBI and printed on serni security paper of uniform size. They should be serially numbered and there should be a control system in place to account for each SGL form.
...
17. One thing which is immediately clear from the above circular issued to the co-operative banks is that it was only with effect from the date of this circular, i.e., 15th Sept., 1992 that the co-operative banks were "prohibited with immediate effect from undertaking ready forward and double ready forward deals in dated Government and approved/trustee securities etc.". The fact that the circular uses the expression "with immediate effect" only indicates that there was no such prohibition prior to these instructions coming to force.
18. Let us now go back to the nature of transactions entered into by the assessee-bank and the import of Jankiraman Committee report thereon. The transactions entered into by the assessee-bank are ready forward transactions in the Government Securities but then at the material point of time the ready forward transactions in the Government Securities were not at all prohibited. It was only on 15th Sept., 1992 that Executive Director of the RBI issued a circular to chief executives of all co-operative banks and advised them that "The banks are prohibited with immediate effect, (i.e., from 15th Sept., 1992) from undertaking ready forward and double ready forward deals in dated Government and approved/trustee securities, etc." Of course there was a secret circular dt. 26th July, 1991 expressing concern on certain ready forward transactions but then this circular did acknowledge the fact that the RBI had in fact "permitted banks to enter into buy back deals in Government Securities among themselves (and not with their non-bank clients)" and this circular also made it clear that the RBI was concerned about certain practices with regard to the ready forward transactions. By no stretch of logic, it could be said that by issuance of this circular, the RBI put an embargo on the ready forward transactions in the Government Securities being entered into by the banks. In any event, there is no dispute that this was a secret circular and the assessee's uncontroverted claim is that being a co-operative bank, not under the jurisdiction of Department of Banking Operations and Development, it did not receive this DBOD circular. Infact, when during the course of hearing when we asked learned special counsel as to which RBI guideline was violated by the assessee-bank in entering into the ready forward deals, all that he pointed out was this DBOD circular which appears at p. 23 of the Jankiraman Committee Report. Learned Counsel for the assessee, on the other hand, made a statement at the bar that the assessee was never issued this letter, and that, in any event, it did not prohibit the ready forward transactions per se in the Government Securities. We agree with the learned Counsel that at the material point, of time there was no restriction on the assessee-bank entering into ready forward transactions, and this restriction, which was imposed vide letter dt 15th Sept,, 1992, was much after the end of the relevant previous year, Therefore, in principle, the ready forward transactions were part of the normal banking business which the, assessee-bank was allowed to enter into. The only restriction in place at that point of time was that these ready forward, or buy back, deals could be entered into among the banks and not with their non-bank clients.
19. The Jankiraman Committee does mention that the assessee-bank entered into certain ready forward transactions through one broker by the name of Bhupen C. Devldas. The payments in respect of these transactions were made by way of pay orders in the name of Bank of India. It was also noted that the assessee-bank did not have an SGL account with the Public Debt Office and that it did not deposit any SGL transfer forms. The committee also took note of assessee-bank's contention that SGL forms received from Bank of India were returned to Bank of India through the broker Bhupen C. Devidas. It is also noted that the payments were received by the assessee-bank through the pay orders issued by the Bank of Karad. Jankiraman Committee also placed on record the fact that the pay orders issued by the assessee-bank were found credited to the account of Bhupen C. Devidas, the broker involved, arid that the pay orders issued by the Bank of Karad were mostly issued by way of debit to a broker by the name of Excel & Co. It was based on these facts that the Jankiraman Committee expressed the apprehension that "it appears that through these transactions, BMCBL has made available the funds to the brokers though ostensibly the transactions were shown as being with Bank of India". These observations were made in the interim report dt. 23rd Aug., 1992. In the final report submitted by the Jankiraman Committee on 29th April, 1993, some interesting observations were made which will throw some light on the nature of these transactions. The committee observed that, "Brokers also arranged contracts with banks where the name of a bank was given as counter-party selling bank without the knowledge of the bank concerned. The proceeds received from a purchasing bank in the form of banker's cheques in the name of alleged counter-party bank was credited by that bank to the broker's account by virtue of an existing arrangement. Thus the purchasing bank was unaware that it was in fact dealing with a broker and not with a counter-party bank." The Jankiraman Committee observed that it was only "when delivery was not effected for the securities for which payment has been made, liability was denied by the bank whose name was shown as the counter-party bank". Jankiraman Committee at pp. 271-2 of its final report, also noted that Bank of Karad Ltd. was one of the routing banks (which purchased and sold securities in their own name without indicating that they were acting for the brokers) for, amongst others, M/s Excel & Co. and M/s Bhupen C, Devidas. The unfortunate prevalent practice at that point of time was, as noted by the Jankiraman Committee, that even as the banks were under the impression that they are entering into genuine ready forward transactions with other banks, through the established brokers, some of these unscrupulous brokers, were actually manoeuvring so as to have these transactions on their own account without informing the banks in whose names these transactions were entered into. The brokers were also able to get payments for these accounts credited to their own account maintained in the bank in whose name the pay order or bank draft is made out. These were realities of life. Now, when we are to consider the observations made by the Jankiraman Committee in the interim report with regard to the transactions entered into by the assessee-bank, in the light of what the Jankiraman Committee had to conclude in its final report, it would be clear that there is indeed a possibility that the assessee-bank was under a bona fide impression that it was buying securities from the Bank of India and selling the same to Bank of Karad, through Bhupen C. Devidas, the broker. The pay orders for payments of these purchases were issued in favour of the counterparty bank but because of the loopholes in the system, the broker was able to get the same credited to his account in the alleged counter-party bank. As for the sale transactions, the assessee again got the pay orders from Bank of Karad which, as a routing bank, was acting for the same broker. Since there was no occasion for delivery of security to be effected, as was the common practice at the material point of time, there was no way for the assessee-bank to discover that the Bank of India is not actually involved. In such circumstances, there cannot be any occasion for the entries in the books of account of Bank of India or of confirmation of transaction by the Bank of India. Similarly, as far as Bank of Karad. was concerned, as the Jankiraman Committee has noted it was a 'routing bank' which was in fact purchasing and selling the securities in its own name without indicating that it was acting for the brokers, and, therefore, it was deeply involved in the scam. No entries for these entries could be found in the books of the Bank of Karad because though it was buying and selling securities in its own name, the transactions actually belonged to the brokers for whom the Bank of Karad was acting as a routing bank. Under these circumstances, non-confirrnation by the respective counter-party banks does not make it a transaction not entered into the normal course of banking business. As for non-deposit of the SGL forms, it was also a common practice, duly taken cognizance of by the Jankiraman Committee, that "in particular, BRs were not issued on the security paper or in the prescribed form, and more significantly were not exchanged with the actual scrip but were returned for cancellation on reversal of original transaction" and that "in the final analysis only BRs are exchanged and no security is delivered". The other objections raised by the Revenue are that the sale price is higher than the price quoted by the BSE, that the transactions were hot reported to the BSE, and that the brokerage was not paid. None of these objections are, however, sustainable in law. If the sale price realized by the assessee-bank is higher than the BSE day end price, that by itself does not indicate anything. In any event, it is a known fact that prices vary within a date as well and there is noting on record to substantiate this assertion of the Revenue. As for non-reporting to the BSE, there has to be a reporting requirement in the first place. It could not be established before us that the assessee was under some kind of an obligation to report these transactions to the BSE. As regards non-charging of separate brokerage, we are of the view that when prices quoted by the broker are net prices, brokerage element is inbuilt therein and no separate charges are necessary for the brokerage. It is a common practice that the brokerage is inbuilt in the prices itself. A common example of such a practice is even day-to-day retail foreign exchange transaction where brokerage is in-built in the rates offered by the foreign exchange dealer. None of these objections have any legally sustainable merits. It is also important to bear in mind the fact that except for the reference of the ready forward transactions entered into by the assessee-bank, that we have extracted earlier in this order, there is no adverse mention of the assessee-bank in the Jankiraman Committee report. There are no observations of the committee about any irregularity having been done by the assessee-bank. At p. 271 of the report, the committee has named several banks for irregularities but the assessee-bank's name certainly does not figure there. At p. 272, names of routing banks have been specified and the assessee-bank does not appear there as well. It has to be noted that the impugned assessment order has been passed by the AO in the remanded proceedings and the remand directions were that the AO should "go through the final report of Jankiraman Committee on security transactions scam, 1992 and find out whether the contention of the appellant is correct that the assessee-bank has not been found involved in the securities scam. If it is so, there is no reason to deny the appellant the relief that it was getting in earlier years under Section 80P on security transactions". There is nothing in the Jankiraman Committee's final report which calls assessee's conduct into question and yet it is held that the transactions entered into by the assessee were riot in the nature of banking business transactions and, therefore, the assessee is not entitled to deduction under Section 80P in respect of profits from such transactions. The Revenue never filed an appeal against these directions of the CIT(A) and yet these directions have not been implemented.
20. Let us consider another aspect of the matter. If this transaction, as is vehemently contended by the learned special counsel, is not a transaction in the course of normal banking business, then what is the nature of this transaction ? Revenue's contention is that it is not a normal banking transaction because actually there was no security and transactions were actually with the broker and not the bank. The "profit on sale of securities is treated to be non-genuine securities transactions" by the AO. Just because it is treated as not a 'genuine security transaction', does it cease to be a part of the banking business transaction.? On this issue also we find guidance from the Jankiraman Committee. At p. 274 of the Jankiraman committee's final report, it is stated that. "It will be appreciated that the ready forward transaction was in essence a financing transaction and if this transaction was not supported by underlying securities, the transaction was no more than an unsecured loan of funds". Now, if the transactions in question are treated as not backed by any securities, as has been the case of the Revenue all along, it is nothing but a case of unsecured loan which is very much integral part of the banking business. By no stretch of logic, a transaction in the nature of financing transaction can be said, to be outside the scope of the banking business. This financing may be contrary to the guidelines of the RBI, but it is part of banking business nevertheless. So far as the mandate of Section 80P(2)(a)(i) is concerned, all that is to be seen is whether profits are attributable to the 'carrying on the business of banking' or not. If the profits arise from carrying on the business of banking, as even lending an unsecured advance is, the same is eligible for deduction under Section 80P. In our humble understanding, the advances having been made in violation of the RBI guidelines, even if that be so, does not affect the deduction under Section 80P(2)(a)(i), as long as these advances, in principle, are part of the banking business. It is altogether a different matter that there is nothing to establish that the assessee-bank entered into this transaction as with the intention of lending an unsecured loan, and not as a bona fide ready forward transaction in Government Securities which was'not prohibited for the assessee-bank till 15th Sept., 1992. The CIT(A) has confirmed the action of the AO by observing that in such cases "circumstantial evidence, not infrequently, indicates the truth more unerringly than direct evidence" and that "the facts in such cases would be in the personal knowledge of the persons who have entered into the transaction and, therefore, asking the AO to prove otherwise would be to expect an impossibility". It is difficult to understand as to what is the circumstantial evidence that the CIT(A) is referring to. The CIT(A) is at best referring to the Jankiraman Committee's finding that many banks were actually involved in funding the brokers knowing fully well that the securities did not exist and that the brokers were operating on their own accounts and not the account of the banks they claimed to be representing. It would be impossible for anyone to come out of this circumstantial evidence because that would put the impossible onus of proving a negative on the assessee, i.e., the assessee was not aware of the possibility that the transactions entered into by the assessee-bank with Bhupen C. Devidas were transactions in brokers account and the bank he claimed to be representing had nothing to do with those transactions. When CIT(A) states that "the facts in such cases would be in the personal knowledge of the persons who have entered into the transactions and, therefore, asking the AO to prove otherwise would be to expect an impossibility", he does not appreciate the fact that to prove that such alleged facts were not in their knowledge of those persons is also an impossibility. The burden which is cast on the assessee-bank by the CIT(A) cannot be discharged. When the AO cannot prove that the facts stated by the assessee are correct, it is not open to him to disregard the stand of the assessee only on the basis that such a stand does not stand the test of, what the AO perceives as, preponderance of probabilities. That is a typical case of rejection of an assertion by the assessee on the basis of surmises and conjectures. The CIT(A) has also observed that "profits made from ready forward deals cannot be said to have accrued in the normal course of banking business" but then, as we have taken note earlier in this order, ready forward deals in Government Securities were very much part of the permissible banking business for the co-operative banks till 15th Sept., 1992, i.e., till the time RBI specifically prohibited the co-operative banks from entering into such transactions and confined the scope of permissible ready forward transactions to transactions in treasury bills. The CIT(A) proceeds on the basis that ready forward deals per se are banned but even after the issuance of circular implementing Jankiraman Committee report, ready forward deals in treasury bills are permitted and are very much part of the permissible banking business. The very foundation of the case of the Revenue is devoid of sustainable merits.
21. For the reasons set out above, we are of the view that the profit from ready forward transactions that the assessee-bank entered into on the facts of this case is a part of the profits attributable to 'carrying on the business of banking' and is, accordingly, eligible for deduction under Section 80P of the IT Act. The plea of the assessee meets our approval. We, therefore, direct the AO to delete the disallowance of deduction under Section 80P(2)(a)(i). The assessee gets relief accordingly.
22. In the result. ITA No. 4128/Mum/2003, i.e., assessee's appeal for the asst. yr. 1990-91, is allowed in the terms indicated above.
23. We now take up the ITA No. 4129/Mum/2003, i.e., assessee's appeal for the asst. yr. 1991-92.
24. In this appeal, following grievances are raised by the assessee:
1. On the facts of the case and in law, the learned CIT(A) erred in holding that the additional ground is academic.
2. On the facts of the case and in law, the learned CIT(A) erred in holding that of the thirty odd banks, the appellant-bank also features as one where charges have been specified.
3. On the facts of the case and in law, the learned CIT(A) erred in rejecting the claim of deduction under Section 80P of the Act in respect of Rs. 32,88,395 being profit on sale of Government Securities.
4. On the facts of the case and in law, the learned CIT(A) erred in rejecting the claim of deduction under Section 80P of the Act in respect of Rs. 24,72,896 being broken period interest received on sale of Government Securities.
5. Without prejudice to the above grounds, the learned CIT(A) erred in holding the entire income of Rs. 32,88,395 and Rs. 24,72,896 being profit on sale of Government Securities and broken period interest on sale of securities as taxable without allowing pro rata expenditure attributable to earning these incomes.
25. Learned representatives fairly agree that the outcome of this appeal will depend on the outcome of the appeal for the asst. yr. 1990-91 which has been argued in detail and dealt with in our order in the foregoing paragraphs. The only point of difference in the facts of these two cases is that in the asst. yr. 1991 92, i.e., the present appeal before us, broken period interest (net) in respect of the above transactions has also been declined deduction under Section 80P. The ground of declining the deduction is the same, i.e., dealing in Government Securities in ready forward deals does not form part of 'carrying on business of banking' which is eligible for deduction under Section 80P, but then this plea for the detailed reasons set out earlier in this order has already been rejected by us, Following our order for the asst. yr. 1990-91, we hold that the profits in ready forward transactions in respect of the Government Securities amounting to Rs. 32,88,395, as also broken period interest (net) of Rs. 24,72,897 in respect of the above transactions, is eligible for deduction under Section 80P. The assessee gets relief accordingly. The alternative ground raised by the assess.ee, however, is rendered infructuous and does not call for any adjudication at present.
26. In the result. ITA No. 4129/Mum/2003, i.e., assessee's appeal for the asst. yr. 1991-92 is allowed in the terms indicated above.
27. To sum up, both the appeals are allowed in the terms indicated above.