Income Tax Appellate Tribunal - Hyderabad
The Citizen Co-Op. Society Ltd., ... vs Assessee on 19 October, 1997
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ' B ', HYDERABAD
BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND
SHRI CHANDRA POOJARI ACCOUNTANT MEMBER
ITA No:1156/Hyd./2009 Asstt. Year : 2006-07
ITA No:1157/Hyd /2009 2006-07
ITA No.:1158/Hyd/2009 2007-08
ITA No: 1159/Hyd/2009 2007-08
The Citizen Co-operative Society The Addl. Commissioner of
Limited, Hyderabad VS Income Tax, Range-9,
(AAAAT 3952 F) Hyderabad
(Appellant) (Respondent)
Appellant by : Shri/ S. Ravi & S. Rama Rao
Advocates.
Respondent by : Smt. Vasundhara Sinha, DR
ORDER
Per : Chandra Poojari, Accountant Member
These four appeals preferred by the assessee are directed against the different orders passed by the CIT(A) -VI and pertains to the assessment year 2006-07 and 2007-08. The grounds raised by the assessee in these four appeals are common in nature and hence these are, clubbed together, heard together, and disposed off vide these common orders for the sake of convenience.
2. The common grounds raised by the assessee in these appeals are as follows:-
1. The order of the CIT(A) is erroneous both on facts and in law.
2. The CIT(A) erred in holding that the provisions of Section 269SS and S.269T of the IT Act.
3. The CIT(A) erred in holding that the appellant society facilitated deposits and repayments of unaccounted money of its members without considering the fact that the assessee is recording each and every receipt and payment 2 and the assessing officer did not find any omission on the part of the assessee herein.
4. The CIT(A) failed to consider that the assessee carried on the business of banking and in the process of its business activity it is necessary to accept the deposits in cash.
5. The CIT(A) also failed to appreciate the fact that the assessee is a Cooperative Bank within the meaning of the provisions of the Multi State Cooperative Societies Act 2002 and also is governed by the provisions of the Banking Regulation Act as applicable to the Cooperative Societies as it is a cooperative society carrying on banking business.
6. The CIT(A) failed to appreciate the fact that in so far as the amounts received by it and paid by it are only to its members and not to any outsiders and accordingly, ought to have held that the provisions of Section 269SS and S,269T have no application.
7. The CIT(A) erred in confirming levy of penalty u/s 271D of Rs.6,75,16,398 and u/s 271E of Rs.53,84,815 for the assessment years 2006-07 and u/s 271D of Rs.8,23,03,665 and u/s 271E of Rs.3,54,54,830/- for the assessment years 2007-2008.
3. Brief facts of the case are that the assessee is a multi state Cooperative Society engaged in the activity of accepting deposits from its members and redeploying the funds by way of advancing loans to the members and investing surplus funds. The assessee filed its return of income in the status of AOP. During the proceedings, the assessing officer has noticed that in certain cases the assessee is receiving deposits of Rs.20,000/- above in cash and also repaying the loans in cash in violation of S.269SS and 269T of the IT Act. The assessing officer issued notice u/s 271D and 271E on 25.11.2008. The assessing officer also called the full list of depositors from who deposits were taken in cash and repaid in cash of Rs.20,000 and above by the assessee company. After considering the various objections of the assessee, the assessing officer levied penalty u/s 271D and 271E as below:
Assessment year Penalty u/s 271D Penalty u/s 271E (in Rs.) (in Rs.) 2006 -07 6,75,16,398 53,84,815 2007-08 8,23,03,665 3,54,54,830 3
4. The CIT(A) also upheld the order of the assessing officer. Further aggrieved the assessee is in appeal before us.
5. Submissions made by Authorized Representative of the assessee :
5.1 The assessee is a cooperative society, originally registered under the Andhra Pradesh Mutually Aided Cooperative Societies Act on 31.5.1997. Thereafter, the society on 26.7.2005, was registered in pursuance of the Multi State Cooperative Societies Act, 2002 and extended its operations to the State of Maharashtra and Karnataka. He drew our attention to the bye-laws as modified and as registered with the Multi State Cooperative Society Act. He submitted that all the clauses of the Bye-laws are in accordance with the provisions of the Multi State Cooperative Society Act, 2002. Clause 5 deals with the objects of the society. The same are extracted hereunder:
5.2. Objects:
1. The principal object of the society will be to promote the interest of all its members to attain their social and economic betterment through self help and mutual aid in accordance with the cooperative principles.
2. The objectives of the society shall be engaged and carry in any one or more of the following forms and business.
i) to serve the interests of members of the society residing in the state of AP and Maharashtra and Karnataka.
ii) To encourage thrift, self help and cooperative among members
iii) To accept deposits of money from the members for the purpose of lending to its members of investment, repayable on demand or otherwise
iv) To borrow or raise money 4
v) To lend or to advance money to members
vi) To receive all kinds of bonds, scripts, valuables of deposits
vii) To provide safe deposit vaults
viii) To collect and transmit money and securities from constituents.
ix) To carry on and to transact every kind of guarantee and indemnity business on behalf of constituents.
x) To carry on and to transact every kind of guarantee and indemnity business on behalf of constituents
xi) To prepare and to finance schemes for amelioration of the financial condition on constituents
xii) To do all such other acts, deeds and things as are incidental and conducive to the promotion or advancement of the members
xiii) To acquire, to construct, to maintain and to alter any building or works necessary or convenient for the purpose of the society
xiv) To manage to sell and to realize any movable or immovable property those may come into the possession of the society in satisfaction or part satisfaction of any of its claims
xv) To open branches and pay offices, with the permission of Central Registrar within the area of operation of the society so as to provide services to the members and the public xvi) To establish, to support, or to aid in establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit members, employees, ex employees of the society or the dependents or connections of such persons xvii) To obtain funds from Andhra Pradesh Housefed or other financial institutions and to advance loan to the members for construction of houses, purchases of ready build houses for purchase of flats and extension of existing houses xviii) To grant loans to members for acquire, to construct new houses or to maintain and alter building against the mortgage 5 of such proposed building to be acquired existing building to be alter or maintained.
xix) To provide financial and technical assistance to self employed persons for setting up their own business and finance the small scale and other industries as are permitted bye-laws xx) To enter into participation arrangement/arrangements with any other banks or financial institutions with the object of making loans and advances xxi) To undertake any other form of business which the central govt. may specify as a form of business in which it is lawful for cooperative institutions to engage.
5.3 The principal object is to promote the interest of its members by providing mutual aid. In the process, it (a) receives the amounts from its members (b) borrows the funds required from the specified sources (c ) provides the same to its members and (d) depositing the amounts with permissible institutions.
5.4. The provisions of the above mentioned act permit admission of Members who are entitled for dividend and Nominal Associate Members who are not entitled for Dividend. Even the Nominal Members are defined to be the members of the society and even for the purpose of IT Act , they are to be treated as Members. He submitted that the Bombay High Court in the case of Jalgaon District Central Cooperative Bank Ltd. And another Vs. UOI (265 ITR 423) held that even a Nominal member is a member for the purpose of IT. The assessee admitted the normal members and nominal members. Though the nominal members are not entitled to be the share holders and are not entitled for the dividends, they are permitted to utilize the services of the society as any other member can. The Nominal member is not entitled to participate in the management of the Society nor he can acquire the voting rights.
65.5. He drew our attention to the funds flow statement for the financial years ending on 31.3.2005 to 31.3.2009 to show that its activity involves receiving the amount from its members and providing the funds to the members:
Details Year ended on
31.3.2005 31.3.2006 31.3.2007 31.3.2008 31.3.2009
No. of members 19732 25664 32361 38765 50446
including nominal
members
Rupees in Lakhs
Subscribed capital 117.15 187.21 279.86 398.10 535.59
Reserves and 232.61 324.59 544.45 863.34 1259.67
surpluses
Deposits from 3338.96 5564.77 6660.40 12170.76 16024.49
members
Borrowings 34.56 Nil Nil 100.00 Nil
Cash and bank 199.41 430.62 692.04 1299.77 704.91
Investments 241.09 922.55 1074.55 1764.45 2287.70
Advances to 3183.90 4604.14 7230.09 10467.75 14971.38
members
others 112.01 133.34 166.38 192.81 233.23
5.6. He submitted that it can be seen from the above data that there was a constituent growth in the activities of the society. The Society is extending its operations by opening more number of branches, by admitting more number of members and by extending financial support to its members. He submitted that when majority of financial institutions were closing down, the activities of the assessee society improved substantially.
5.7. He submitted that as seen from the above funds flow statement that the borrowings from other permissible sources are the most minimum compared to the total funds dealt in during the activity of the society. It can also be seen that the amounts deposited by the members of the society are utilized only for the sake of the members of the society and for maintaining the minimum cash and bank balances. The capital of the society is utilized for the fixed assets. The details of 7 utilization of the funds would clearly indicate that the assessee is acting strictly within the objects of the society. It is working for the mutual benefit of the members of the society. In the process of its working, the society has several controls. There is an internal audit system and each branch will be inspected and the books of account of each branch will be audited. The Branches are managed by the Managers appointed for the purpose in accordance with the bye laws of the society. The General Body examines the activity of the society vis-a-vis the bye laws of the Society and the provisions of various Acts governing the activity of the Society.
5.8. The entire processes of the activities of the society are controlled by the board of directors and the general body. All the members excepting the nominal members are entitled to participate in the general body and decide whether the society is running it's activity on the Principles of Mutuality. From the date of inception till to day the members of the society never felt that the society deviated from the principles of mutuality. Similarly, the society is also under the control of the Government. authorities. The very aims and objects of the society are to promote the mutual help among the members and the society is able to carry out the activity strictly in accordance with the bye laws and the provisions of various acts governing the society. The entire activity of collecting the amounts from the members, utilization of the said amount, payment of interest to the members, collection of interest from the members, depositing the amounts with others and declaration of dividends were all done in accordance with the bye laws of the society which in turn are in accordance with the provisions of the act. The Authorized Representative, therefore, submitted that the society is running its activity in the direction of fulfilling the objects of the society strictly in accordance with the bye laws of the society.
85.9. The assessee is claming the income to be exempt under the provisions of sec. 80P of the Act and the said claim is being accepted by the assessing officer. The assessee was filing the returns of income upto and including the assessment year 2005-06 and the assessments were completed. There was no occasion for the assessee to receive any such penalty notice. The final accounts were being examined by the Government. None of the authorities pointed out that there is any omission on the part of the assessee herein accepting cash deposits and repayment of such deposits.
5.10. According to the assessee society, the provisions of sec. 269SS and 269T have no application, According to Authorized Representative the principal object of the society to i) promote interest of its members in attaining social and economic betterment through self help and mutual aid.
ii)All the deposits are genuine and are from members of the society.
iii) Some of the members have filed letters of confirmation before the assessing officer when the assessing officer summoned them on confirming the fact that they deposited the amounts The amount received does not represent either loan or a deposit made but is an amount kept by a member of the mutual benefit.
iv) According to the provisions of sec. 269SS any person governed by the Banking Regulation Act would be exempted from its operation. It was submitted that a harmonious reading of section 5(1) and Se.56 of the Banking Regulation Act 1949 would indicate that the cooperative society carrying on the banking activity is governed by the Banking Regulation Act.
v) There was under the bona fide impression that the provisions of sec,. 269SS and 269T have no application in view of the following:
i) the provisions of section 269SS have no application (a) in view of the purpose for which section 269SS is introduced in the act 9 and (b) the petitioner is governed by the Banking Regulation Act and is a deemed Banking Company for the purpose of Banking Regulation Act 1949.
ii) The deposits are made voluntarily by its own members and they do not represent the loans taken or the borrowings. The amounts are kept only for the mutual benefit of the members.
iii) From the details furnished above, it is clear that it is a mutually aided society for the benefit of the members of the society.
iv) It is facilitating its members to keep their money and get utilized for the members of the same society, particularly in view of the bye laws no.5(1) and (2) (ii) and (iii) of the Bye laws of the society.
5.11. The learned Authorized Representative further submitted as follows:
i) it is a Multi State Cooperative society and according to the said act any cooperative society which is undertaking banking business is a cooperative bank. The definition provided under the said act is reproduced below:
Cooperative Bank means 'a Multi State Cooperative Society which undertakes banking business". Therefore, under the said at it is a cooperative bank.
ii) According to part V Banking Regulations Act, the provisions of banking regulation act would apply to the cooperative society as they apply to or in relation to, banking companies with certain modifications. It is also mentioned in clause (a) of the said section 56 with reference to a banking company as under:
"The provisions of this Act, as in force from the time being, shall apply to, or in relation to cooperative society as they apply to, or in relation to banking companies subject to the following modifications namely:10
a) Throughout this Act, unless the context otherwise requires
i) references to a 'banking company' or 'the company' or 'such company' shall be construed as reference to a Cooperative Bank
ii) references to 'commencement of this Act' shall be construed as references to commencement of the banking laws (application to cooperative society ) Act, 1965 (23 of 1965).
5.12. Therefore, according to sec.56 of Banking Regulation Act 1949, a cooperative society is to be termed as a banking company for the purpose of the said act and the provisions of the said act apply to a cooperative society as they apply to a banking company. Therefore, the provisions of the Banking Regulation Act apply to the assessee society.
5.13. Further, the learned AR submitted that vide its letter dated 19-10-1997 addressed the Reserve Bank of India, Bombay requesting for conversion of the cooperative society into an Urban Bank. A copy of the said letter along with a copy of the resolution and copy of acknowledgement are placed in the paper book. The said application filed is pending before Reserve Bank of India. He drew our attention to the Marathe Committee report on licensing of new Urban Co-operative Banks, 1992. The relevant extract is placed at Page No.37 to 43 of the Paper Book. He submitted that once an application is made, the society can carry on the banking business till such time the said application for recognition has been rejected by the appropriate authority. The assessee herein did not receive any communication from the appropriate authority rejecting such an application. The assessing officer relied on a clarificatory of the Reserve Bank of India copy of which was not given to the assessee herein. The assessee counsel further submitted that when the provisions of the Act and the clarifications are so clear any such 11 clarificatory letter from Reserve Bank of India may not be relevant for the purpose. He relied on the judgement of Supreme Court in the case of Padmasundara Rao & Others Vs. State of Tamil Nadu reported in 225 ITR 147 wherein observed that 'it is well settled principle in law that the court cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent. The first and the primary rule of construction is that the intention of the legislation must be found in the words used by the legislature itself. The question is not what may be supposed and has been intended but what has been said.' 5.14. According to him, therefore it is not correct in placing reliance on the letter from the Reserve Bank of India when the provisions of the act are so clear and unambiguous. He submitted that the assessing officer mentioned that the assessee is engaged in large scale organized activity of providing shelter to activities of tax evasion. According to the assessing officer such a conclusion is drawn based on the information gathered by him from some of the people. Further he submitted that the said observation is neither correct nor justified for the following reasons:
i) even according to the assessing officer, he is able to verify the correctness of the returns of income filed by such persons and is able to bring to tax the income that escaped assessment
ii) based on the information by the assessee the assessing officer is able to issue notices to the members and bring to tax the incomes which escaped assessment. This would indicate that the assessee did not help any of its members in avoiding tax.
iii) From the details provided by the assessing officer in the order that the persons who have invested did not disclose the income 12 correctly in their returns of income and that some claims for relief made by them were rejected.
5.15. He submitted that the observations of the assessing officer that the assessee is providing shelter to the activities of tax evasion are not correct and the assessing officer is not justified. The assessing officer is of the view that in eleven cases, full addresses of the members could not be provided and in case of five members, notices could not be served. The assessee maintains the application forms, addresses of its members which were provided from records. If there is any change in the address of any of the members, which is not intimated to the society, the assessee may not be able to provide present address of the members. The assessee counsel submitted that some of the members may not be responding to the request of the assessee herein in providing any change in the address. Therefore, there is a possibility of the letters sent to some of the members returned unserved. It was contended that the view of the assessing officer that there is no mutuality among the members in the activities carried on by the assessee is incorrect. It is submitted that the assessing officer is not justified in mentioning that there is no mutuality. The assessee herein is a cooperative society carrying on the banking activity. The very object of its activity is to receive the amount from its members for being utilized for mutual benefit. The assessing officer is not justified in mentioning that is for mutual benefit of tax evasion. All its transactions have been recorded in the books of account of the assessee. The details of amount received, advanced to the members have been provided. From the inflow of the funds it is clear that the society is holding the capital fund, reserves and the deposits, all of which represent the amounts belonging to the members of the society. If the outflow of the funds is considered, most of the amount was advanced as loans to the members of the society besides keeping the required cash and bank 13 balances to regulate the banking transactions. Therefore the society is purely mutually aided society working only for the benefit of its members.
5.16. The assessee's counsel submitted that its only business is with its members. The receipt and payments also are with them. The activities are carried on as per the bye laws accepted by the members. The very objective of the cooperative movement is to provide service through self help. He placed reliance on the following judgements:
1. CIT Vs. Merchant Navy Club (96 ITR 261) (AP) wherein it was held that there was identity between the contributors to the common fund and the participators in the surplus and that such an institution is held to be a mutual benefit association.
2. CIT Vs. Natraj Finance Corporation (139 ITR 732) (AP)
3. Addl. CIT, AP, Hyd. Vs. Secunderabad Club (150 ITR 401) (AP).
5.17. He submitted that in all the cases the Hon'ble High Court observed that where the contributors to the fund are beneficiaries, it is a mutual benefit society. In the case of assessee the members deposit the money, receive interest, the members take loan, pay interest and if there is any balance, the dividend is collected by members. Therefore, the contributors and the beneficiaries of the fund are the same members. Though the income of the society is taxable in view of the specific provisions contained in the act, it is mutual benefit society. In such circumstances, it is not known how such transactions, which are recorded in the books of account of the assessee, help mutual benefit of tax evasion. It is not correct to make such a comment particularly when the assessee herein is systematically recording the transactions.
5.18. He submitted that the assessing officer mentioned that some of the deposits are in the names of minors, firms and societies who 14 cannot be the members of the society. If any deposit is made by a minor, the name and address of the parent is available and such parent who is the member deposits the amount with the assessee herein in the name is his minor child. The deposits made by minors are accepted only when either of their parent is a member of the society. Any cooperative society can be a member of our society and it is permissible according to the provisions of the act. The partnership firms are also represented by individuals who are the members of the society. The assessee does not accept the deposits from non members. The assessee submitted such members list for example as follows:
Minor represented by members:
1. M. Eshita (M.V. Satyanarayana) Grand father
2. D. Haritha (V.N. Muneswar Rao) Mother Leelavathi
3. VV Swetha (VN Muneswar Rao) Grand father
4. K. Surya Varshith Laxmi Grand mother (Vijaya) Firms associations, societies represented by Members:
1. Sri Sai cioioperative society ltd. Rao MD A.L.N.S. Prakash
2. Maruthi Mutually aided cooperative Chairman (Credit society) G. Venkat Rao
3. State Government. Pensioners family Welfare association (Secretary) N. Laxminarayana
4. Sri Venkateswara Constructions Y. Jeevan Kumar, Managing (Partners) 5.19. He submitted that the reliance placed by the assessing officer on the judgement in the case of ADI (Inv.) Vs. AB Shanthi (255 ITR 258) is misplaced. The said decision was rendered by the Apex Court with regard to the constitutional validity of setion 269SS. The Apex Court observed that the provisions of sec. 269SS are to ensure 15 that a tax payer is not allowed to give false explanation for his uncounted money. The income from its business is exempt from tax.
There is no requirement for the assessee herein to introduce its own funds as cash credits. The money belongs to the members and the accounts are to be approved after audit by the general body. The assessee's counsel submitted that the transactions are genuine and if the purpose for which chapter XXB was introduced is analyzed it would be clear that such chapter has no application to the facts of the assessee's case.
5.20. The contention of the assessee's counsel is that the provisions of sec.269SS and 269T have no application to the facts of the case. The society is under bona fide belief that the provisions of the said sections have no application.
Sec. 269SS provides that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by:
a) Government.
b) Any banking company, post office savings bank or cooperative bank
c) Any corporation established by central, state or provincial act.
d) Any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956).
e) Such other institution, association or body or class of institutions, associations or bodies which the central Government may for reasons to be recorded in writing notify in this behalf in the official gazette.
According to clause (b) of the proviso, a banking company is exempt from operation of the provisions of sec.269SS of the IT Act. The meaning of the word 'banking company' is explained in explanation 1 to 16 the said section. According to the explanation (1) any company to which the Banking Regulation Act 1949 applies. Sub section (1) of section 5 defines the work 'banking company' to mean 'any company which transacts business of bank in India'. Sec.56 of the Act substitutes the word 'company' by the 'Cooperative society'. Therefore, even a cooperative society for which the provisions of section 56 apply shall be a banking company. Further, section 9 of the Multi State Cooperative Act 2002 mentions that any society registered under the multi state cooperative act shall be a body corporate by its name. Therefore it is a body corporate by its name. Therefore it is a body corporate within the meaning of the provisions of Multi State Cooperative Societies Act 2002. In view of the above, the assessee is a banking company for the purposes of the Banking Regulation Act 1949 and hence the provisions of section 269SS have no application.
6. The assessing officer mentioned that apparently some of the persons who have kept the amount are depositing their unaccounted money with the assessee. It is submitted that from the list of cases referred to by the additions were made on annexure-I to assessment order, it can be seen that the additions were made on the ground that the members did not admit interest and in some cases the exemptions claimed are not allowable. All the persons who are contacted by the department accepted the fact that they made deposits with the assessee which clearly shows that the deposits are genuine. It may be necessary to mention that the deposits are accepted by the Managers at various branches. The entire activity is taken care by the said Managers.
6.1. The assessing officer is of the view that the assessee herein is not covered by any regulations Banking Regulation Act. The assessee 's counsel submitted in the above is governed by the Banking Regulation Act and the provisions of sec.269SS and 269T have no application.
176.2. The assessing officer mentions that the assessee did not stop the activity of receiving the deposits in cash. In this regard, the assessee 's counsel submitted that the society is still under the bona fide belief that it is covered by the provisions of Banking Regulation Act and is not covered by the provisions of the above mentioned sections.
6.3. He relied on the following judgements:
1. Chandra Cement Ltd. Vs. Dy.CIT (68 TTJ 35) ITAT, Jaipur Bench wherein it was held that the unilateral transactions are not covered by the provisions of section 269SS or 269T of the Act. In the case of assessee the transactions are unilateral in nature as the depositors voluntarily deposit the amount with the bank.
2. Shrepak Enterprises Vs. Dy. CIT (64 ITD 300) held that payment of amount made by a partner to a firm is payment to self and does not partake character of loan or deposit. In the case of the society, it is mutually aided cooperative society and the deposits were made by the members of the society.
Therefore, such deposits are not ,loan or deposit for the purpose of sec.269SS or Sec.269T of the Act.
3. Farriljanad Investment (I) Ltd. Vs. JCIT (85 ITD 230) held that keeping in view the intent of legislature behind enacting above provisions, loans/deposits brought in by assessee were not to explain its unaccounted cash, and therefore, question of violating provisions of sec.269SS or 269T does not arise. It is observed that Hon'ble ITAT that for the 18 earlier years, the assessments were completed without initiating penalty proceedings though similar acceptance of the deposits were there in the earlier years. The ITAT held that penalty is not leviable. In the case of the assessee also, the amounts were deposited voluntarily by the members of the society and the assessments for the earlier years were completed u/s 143(3) and no such notices were issued. Therefore, there is every reason for the assessee herein to entertain a bona fide belief that there is no violation of the provisions of 269SS or 269T.
4. Hindustan Steels Ltd. Vs. State of Orissa in (83 ITR
26) held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately is defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merey because it is lawful to do so.
Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances.
6.4. Thus, it was submitted that the provisions of 269SS or 269T have no application to the facts of its and case and even otherwise, the assessee was under the bona fide impression that such provisions are not applicable to the society.
196.5. Finally, he drew our attention to the following documents:
1. Letter dated 10.10.1997 addressed to the Chief General Manager, Urban Bank Department, Reserve Bank of India, Mumbai.
2. Postal acknowledgement indicating that the letter was received by the Chief General Manager, Urban Banks Department. Reserve Bank of India, Mumbai on 24.10.1997.
3. Copy of Resolution No.9 of the meeting of the board of directors of the assessee society dated 16.10.1997 wherein the board resolved to convert the existing cooperative society into Urban Cooperative Bank and to request Reserve Bank of India for issuance of licence.
4. Letter dated 19.10.1997 addressed to CGM, Urban Banks, Reserve Bank of India, Mumbai
5. Postal acknowledgement indicating that the letter was received by CGM, Urban Banks, Reserve Bank of India, Mumbai on 24.10.1997.
6. Copy of resolution No.9 meeting of Board of Directors dt.16.10.1997 wherein the board resolved to convert the existing cooperative society into Urban Bank and to request Reserve Bank of India for issuance of license.
7. The assessee's counsel contention is that once the share capital and reserves exceed Rs.1.0 lakhs the society has to transform itself into Cooperative Bank. The society passed a resolution. The said 20 resolution passed by the Directors is confirmed by a resolution in the General Body dt. 20.11.1997. As per the directive, the assessee herein wrote to the CGM, Reserve Bank of India, Mumbai and also the Distt.
Cooperative Officer, RR Distt. In so far the Reserve Bank of India is concerned, there is no response in spite of the fact that the said request was received by them and acknowledgement was also submitted. In so far as the Distt. Cooperative Officer is concerned, he informed the society that the said letter dated 22.11.1997 is sent to Registrar of cooperative society.
7.1. He submitted that no importance to be given to the remand report of the assessing officer wherein he mentioned that he wrote to CGM, Urban Banks, Reserve Bank of India, Mum and the said authority mentioned that he did not receive any such application as claimed by the assessee.
7.2 The assessee's counsel in this regard submitted that the claim of the CGM, Reserve Bank of India, Mum is not correct in mentioning that the said communication was not received by them. The DGM did not mention about the acknowledgement sent along with the letter. The postal acknowledgement and the letter clearly indicate that the letter was received by the Reserve Bank of India.
7.3. The assessee's counsel submitted that on receipt of communication from Addl. CIT, it wrote the DGM, Reserve Bank of India, Urban Bank, Mum . vide its letter dated 10.10.2009 mentioning clearly as to what exactly happened. Assessee further submits that the said resolution was sent to Distt Cooperative Officer dated 22.11.1997 and was promptly received by the said authority who in turn wrote the Registrar of Cooperative Societies. The assessee requested the Registrar of cooperative society and Reserve Bank of India to convert 21 the existing cooperative society into Cooperative bank. The events that took place clearly indicate that the Reserve Bank of India is not correct in mentioning that the letter addressed to them was not received by them.
8. The Addl. CIT also obtained a letter from Reserve Bank of India who mentioned that the assessee society is not categorized as a cooperative bank and that cooperative society is not covered by Chapter V of Banking Regulation Act 1949 and not covered under the regulations of Reserve Bank of India. The assessee submitted a copy of the news report appeared in the Business standard as the news dt. 17.9.2009. The Reserve Bank of India requested all the Registrars of Cooperative Societies to restrict the individual shareholding in any Urban Cooperative Bank to 5% of the total paid up share capital and also further mentioned that the Reserve Bank of India requested the state governments not to register any new primary credit societies with a provision for acceptance of public deposits.
9. It has further requested the state governments not to register any new primary credit societies with a provision for acceptance of public deposits. This is because such cooperative society automatically become eligible to act as cooperative banks under the Reserve Bank of India when their paid up share capital and reserves exceeds Rs.1.0 lakh. Any cooperative society having share capital and reserves exceeding Rs.1.0 lakh would automatically be eligible to act as a Cooperative Bank. The opinion provided by Reserve Bank of India in the letter dated 6.1.2009 to the state Government. is contrary to law in view of the news appearing in the news paper as mentioned. Therefore the letter dated 6.1.2009 by AGM, Reserve Bank of India does not provide correct legal position.
2210. The assessee's counsel submitted a detailed explanation in this regard before the Hon'ble CIT with regard to part V of the Banking Regulation Act. Sec. 56A of Banking Regulation Act , the provisions of the said act as in force from time to time shall apply and in relation to cooperative society they apply to banking companies. The provision categorically mentions that cooperative society are termed as Cooperative Banks for the purpose of sec.56A. Therefore, the provisions of Banking Regulation Act categorically mention that the cooperative societies are governed by the said laws. Every cooperative societies having share capital of more than 1.0 lakh to convert itself into Cooperative Bank. The observations made by the AGM are not correct.
11. The learned Authorized Representative submitted that according to the provisions of S.5(1) (i) and S.11 of the Banking Regulation Act as modified by Part-V of the Act, the clauses are only prohibitory clauses restricting entry of cooperative societies into the sub clause of cooperative bank and that the criteria of capital and reserves of Rs.1 lakh is only an eligibility criteria and it is not an automatic ticket to banking. That when without licence to assessee cannot be permitted as a cooperative bank in view of Part-V of the Banking Regulation Act. The assessee submitted that sec.56 part-V of the Banking Regulation Act mentions as under:
The provisions of this Act, as in force for the time being, shall apply to, or in relation to, cooperative societies as they apply to or in relation to banking companies to the following modifications"
12. The assessee's counsel submitted that a plain reading of the provisions of the above section clearly indicates that the provisions of the act shall apply to a cooperative societies also. The assessee is a Multi State Cooperative Society which is primarily a cooperative bank 23 and therefore it is a Multi state cooperative bank. That the multi state cooperative societies Act, 2002 defines the word 'cooperative bank' to be multi state cooperative societies which undertakes banking business. The assessee herein is registered as a multi state cooperative society under the Act. The sub section is as under:
Extract of S.2(f) 'cooperative bank' means a multi state cooperative society which undertakes banking business.
Therefore, under the said Act, the assessee herein is a cooperative bank as it is carrying on banking business and it is a multi state cooperative societies .
The registration and licensing of new urban cooperative bank, the Reserve Bank of India has appointed a committee in Sept. 1997. Later it has appointed another committee in Sept. 1991 with SS Marathe, as the Chairman. According to the procedure involved, at para 3.02 Chapter 3 of the committee's report, the following observation is made:
'Primary credit societies are allowed to accept deposits from the public, call themselves as banks and use the word 'bank', 'banker', 'banking' as part of their names. They do not come within the purview of the Banking Regulation Act 1949 (as applicable to cooperative societies ), the Reserve Bank of India does not exercise any control over the working of such societies. The authority for registering such societies and exercising general superintendence and control over them - including control over their banking business is vested with the Registrars of Cooperative Societies Act and Rules in force in various states. Such societies are also not required to obtain a licence from the Reserve Bank of India for the commencement of business. However, once the level of their share capital and reserves reaches Rs.1.0 lakh 24 they are deemed to attain the status of primary cooperative bank and it then becomes obligatory on their part to apply for a licence from the Reserve Bank of India in order to continue to carry on banking business. Having applied, the assessee society/bank can carry on banking business until a licence is refused to it.
The committee has been given to understand that several weak primary credit societies were indeed registered by state government despite the instructions of Reserve Bank of India to the contrary from time to time. It would appear that the Banking Regulation Act 1949 (as applicable to cooperative societies ) until amended gives recognition to primary credit societies doing banking business irrespective of any administrative instructions to the contrary. The complicated legal and administrative background, the committee felt that a pragmatic solution was necessary. While it was not feasible or desirable to deny licences to all these societies, it was essential to ensure that they conformed to certain norms as worked by the committee for fresh entry.
The committee is of the view that all primary credit societies which attain the revised entry point norms prescribed under standards of viability for urban cooperative banks in this respect before 30th June, 1993 will become eligible for being considered for inclusion in the list of primary cooperative banks. In the case where societies have not applied, they may be allowed time upto 30th June, 1993 to apply in case they have reached the new entry point norms. Such societies may thereafter be taken up for inspection and considered for issue of licence on merit. This exercise should be completed within a period of 6 months from the date of taking the primary cooperative bank's name on record. The Reserve Bank of India's decision on the license application should be communicated to the concerned institution as early as possible by not later than 3 months from the completion of the 25 inspection process. In case, the application for issue of a licence is rejected by the Reserve Bank of India the concerned primary cooperative bank should itself discontinue the banking business. In case such initiative is not forthcoming, the cooperative department of the state concerned may invoke the powers vested in them and expedite the process'.
12.1. The assessee's counsel further submitted that even the provisions of section 22 of the Banking Regulation Act as applied to the cooperative societies in view of the provisions of sec.56(o) of the said act reads as under:
"(i) for sub sections (1) and (2) the following sub sections shall be substituted, namely:
1. Save as hereinafter provided, no cooperative societies shall carry on banking business in India unless:
a) it is a primary credit society or
b) it is cooperative bank and holds a lincece issued in that behalf by the Reserve Bank of India subject to such conditions, if any, as the reserve bank may deem fit to impose:
Provided that nothing in cl.(b) of sub section (1) shall be deemed to prohibit:
7. a cooperative society carrying on business as a cooperative bank at the commencement of the Banking Laws Act 1965 (23 of 1965) or
8. a cooperative bank which has come into existence as a result of the division of any other cooperative societies carrying on business as a cooperative bank, or the amalgamation of two or more 26 cooperative societies carrying on banking business at the time commencement of the banking laws (applicable to cooperative societies ) Act, 1965 or at any time thereafter; or
9. a primary bank which becomes a primary cooperative bank after such commencement from carrying on banking business until it is granted a licence in pursuance of this section or is, by a notice in writing, notified by the Reserve Bank of India that the licence cannot be granted to it:
12.2. In the proviso to the sub section to Sec.22, it is mentioned that primary because a primary cooperative societies carrying on the business of banking has not been granted license it shall not be deemed to prohibit the business unless by a notice in writing, notify by Reserve Bank of India that the license cannot be granted to it. From the reading of sec.22, it is clear that the observations by the committee is made a part of the section itself. Therefore, once a cooperative society carrying on the business makes an application unless it is prohibited to carry on the business of banking. Therefore, the assessing officer is not justified in mentioning that without license the assessee can not carry on business of banking. The Addl. CIT referred to the communication received by him from Reserve Bank of India. The assessee that the officer communicated the information to the Addl. CIT without looking into the details of the assessee. According to him no application was filed, whereas there is evidence to the effect that such letter was already served on the Reserve Bank of India. The assessee submits that a letter was addressed by Reserve Bank of India to Addl.CIT on 30.9.2009 to the effect that the Reserve Bank of India did not receive the application stated to have been sent by the assessee. The assessee offered evidence to show that the application was sent to Reserve Bank 27 of India. Therefore, the C.M.D approached the Reserve Bank of India, Bombay and requested them to provide the details with regard to the application. They were informed that no information will be kept beyond 5 years with the Reserve Bank of India. The assessee is trying to obtain the details from the Reserve Bank of India. However, the assessee submits that in view of the provision to sec.22 it is clear that a primary credit society cannot be prohibited from carrying on the banking business simply because the licence was not granted by Reserve Bank of India.
The assessee is a cooperative bank because of the definition of cooperative bank under the Multi State Cooperative Societies Act, 2002.
The assessing officer is of the view that as per section 22 no cooperative society can conduct banking business unless it is a cooperative bank and hold licence issued in that behalf by the Reserve Bank of India. The proviso to sec.22 as extracted above mentions clearly that a cooperative society cannot be prohibited from carrying on business for the reasons that it is not granted a license or it is notified by Reserve Bank of India that license cannot be granted to it.
As mentioned by assessing officer, to sec.5(1)(i) (ccv) of the Banking Regulation Act the bye laws of a cooperative bank shall not admit any other cooperative society as member and that in the case of the assessee, the assessee has accepted deposits from other cooperative societies by treating them as nominal members.
The State cooperative bank is governed by clause (cciiia) of Sec.2 of the Banking Regulation Act. In so far as Multi State Cooperative society is concerned, this is governed by the Multi cooperative society Act, 2002 and according to sec.25 the persons 28 who may become members include any other cooperative society. Therefore, the prohibition mentioned in Sec.5(1) (ccv) has no application to the Multi cooperative society.
13. The assessing officer referred to the exemption u/s 80P claimed by the assessee. The assessee is claiming exemption u/s80P and it is a matter to be considered while deciding the appeal.
13.1. The assessing officer mentioned the assessee suddenly remembers that it made an application to Reserve Bank of India, after about 12 months or so. It is submitted that the application was made long back and all the applications have been sent even to the Registrars of Cooperative Societies .
13.2. According to assessing officer sec.23 of the Banking Regulation Act states that no new place of business can be opened without permission from Reserve Bank of India. It is submitted that according to the provisions of sec.119 of the multi state cooperative society act, 2002, the assessee is entitled to open new branches in any part of India.
With regard to the reasonable cause, the assessee submits that it was under the bona fide impression that (a) it is carrying a Multi State cooperative society within the meaning of the provisions of the said act
(c) it made application to the Reserve Bank of India (d) the Reserve Bank of India did not reject the application by the assessee and was kept pending (e) according to provisions of sec.22 as adopted by sec.56(o) of the Banking Regulation Act the society need not stop the acticvity of banking simply because the Reserve Bank of India did not accept the application (f) the provisions of the Banking Regulation Act 29 and the report of the committee suggest that any cooperative society can carry on banking activity as long as the Reserve Bank of India rejects the application or objects to such carrying on the business (g) the assessee society did not receive any communication either from Reserve Bank of India or from Cooperative Registrar mentioning that it cannot carry on the banking business (h) the society was submitting the final accounts and the reports to the Registrars of Cooperative Societies
(i) the activity of receipt and payment of deposits was being made through out from its inception and at no stage none of the authorities objected to the carrying on such activity and therefore the assessee was under the bona fide impression that it is not governed by the provisions of sec.269SS or 269T.
13.3. The assessee submitted that the savings made by the members of the society and which were withdrawn as per their requirement. The cooperative society is only pooling the funds of the members and is utilizing among the members. Therefore, the amounts received and paid are not in the nature of loans or advances received or paid by the society. Further, the learned AR submitted as follows:
1. The main object of the assessee society is to carry on banking business among its members, the deposits are confirmed by its members and the money belongs to members. Therefore, the provisions of section 269SS or 269T are not applicable to the assessee.
2. The assessee is governed by the Banking Regulation Act and falls within the meaning of the word 'Banking Company' as per explanation 1 to section 269SS of the IT Act. The assessee also places reliance on sec.56 of Banking Regulation Act 1949 and sec.9 of the multi state cooperative societies Act, 2002 which mentions that any society registered under the said Act 30 shall be a body corporate by its name. As per sec.56 of Banking Regulation Act 1949 a cooperative society is to be termed as Banking Company for the purpose of the said act and the provisions of the said act applied to a cooperative society as they apply to banking company.
3. The provisions of Banking Regulation Act and regulation by Reserve Bank of India are different. The question whether a society is banking cooperative or not cannot be decided on the fact that whether the society is under the control of Reserve Bank of India or not. Therefore the letter written by Reserve Bank of India on this point is not relevant.
4. The assessee also cites news report in business standard dt. 17.9.2009 stating that Reserve Bank of India requested all the Registrars of Cooperative Societies to restrict the individual share holding in any urban cooperative bank to 5% of the total paid up capital. It also stated that Reserve Bank of India requested the state governments to not to register any new primary credit society with a provision to acceptance of public deposits. Also it is reported that Reserve Bank of India stated that any cooperative society having share capital and reserves exceeding Rs.1 lakh would automatically eligible to act as cooperative bank. Therefore the opinion provided by Reserve Bank of India in the present proceedings is contrary to the public view taken by the Reserve Bank of India.
5. The assessee filed a letter on 19.10.1997 Reserve Bank of India requesting for conversion of society into an urban bank.
A resolution was also passed by the Board and sent to Reserve Bank of India. The Chief GM, Reserve Bank of India is not correct in stating that communication from the assessee is not received by him and he did not mention any thing about the acknowledgement. The assessee wrote to DGM, Urban Bank 31 Deptt. Reserve Bank of India, Mumbai on 10.10.2009. The assessee's counsel also stated that resolution was forwarded to Distt. Cooperative Officer also on 22.11.1997.
6. Pending such application before Reserve Bank of India the society has to be treated as a Banking Company. As per Marathe Committee Report of the Reserve Bank of India, once an application is made for conversion into bank, the society can carry on the banking business till such time the said application for recognition has been rejected by the appropriate authority. Also as held by the Supreme Court in the case of Padmasundara Rao & Others Vs. State of Tamilnadu (255 ITR
147), 'it is well settled principle in law that the court cannot read anything into a statutory provision which is plain and unambiguous.'.
7. Provision to sec.22 of the Banking Regulation Act, a primary credit society cannot be prohibited from carrying on the banking business simply because the licence was not granted by the Reserve Bank of India.
8. The assessee does not receive deposits from outsiders. The persons who are depositing and to whom repayments are made are not different from the Association of Persons i.e. the assessee. The principle object of the society is to promote the interest of its members by providing mutual aid and by and large the amounts deposited by the members are used only for the sake of the members of the society. The activity is a mutual activity of sharing funds amongst members. The amounts received and repaid do not represent either loan or deposit made by are amounts kept voluntarily by members of mutual benefit. Reliance is placed on decisions of Hon'ble HC of Andhra Pradesh in the cases of CIT Vs. Merchant Navy Club (96 ITR 261), CIT Vs. Natraj Finance Corpn. (169 ITR 732) and 32 Addl.CIT Vs. Secunderabad Club (150 ITR 401), wherein it was held that when there is identity between the contributors and participants to the common fund then such an institution is mutual benefit association/society,
9. The society has provided addresses of all the members and applications of all the members are available with the society. Deposits in the names of minors were made by the members for their own reasons. It is the members who only made deposits and not minors themselves. Even in the case of firms, associations and societies from whom deposits were accepted, were represented by their members or partners.
10. At no earlier point of time, the provisions of sec. 269SS or 269T were put to the notice of the assessee by the department and the transactions were accepted by the deptt. because of returns of income being filed were never questioned.
11. The assessing officer mentioned that the assessee is engaged in large scale activity of providing shelter to activities of tax evasion. The assessing officer's findings is based on information gathered by him from some of the members. The observation is neither correct nor justified because admittedly the assessing officer is able to verify correctness of the returns of income filed by such persons and is liable to bring to tax the income that escaped assessment. The fact that the assessing officer is liable to issue notices to members clearly indicates that the assessee did not help any of its members in avoiding tax. The assessee maintains the application form, the addresses of its members which were provided to assessing officer. However, if there is any change in the address of any of the members which is not intimated to the society, the assessee cannot be found fault with.
3312. The decision of ADI (Inv.) Vs. AB Shanti (255 ITR 258) the said decision was rendered by the Apex Court to constitutional validity of section 269SS. In this case the Apex Court observed that the provisions of section 269SS are to ensure that a tax payer is not allowed to give false explanation for his unaccounted money. However, in the case of assessee the income from business is exempted from tax and the transactions are genuine. The purpose for which chapter XXB was introduced has no application to the assessee's case.
13. The assessee relied on the following decisions
1. Chandra Cement Vs. DCIT (68 TTJ 35), ITAT Jaipur Bench
2. Shrepak Enterprises Vs. DCIT (64 ITD 300)
3. Farrukhabad Investment (I) Ltd. Vs. JCIT (85 ITD 230)
4. Hindustan Steels Ltd. Vs. State of Orissa (83 ITR 26) He submitted that the claim of deduction of assessee u/s 80 P in the income tax return is a matter to be considered separately while deciding for the income tax assessment.
Submissions of Departmental Representative's:
14. The learned Departmental Representative Smt.Vasundhara Sinha, submitted that the issue under dispute is not on the point that whether the assessee is entitled to do banking business among its members or not. The issue is whether the assessee is following the applicable rules and regulations including the provisions of IT Act, 1961. 14.1. The assessee claims to be Banking Co. as per the explanation 1 to section 269SS of the IT Act. The explanation has two sub clauses which are relevant for the present purpose. Clause 1 states that a banking company means a company to which the Banking 34 Regulation Act applies and includes any Bank or Banking institutions refers to in section 51 of the act. As per clause C of section 5 of the Banking Regulation Act banking company means any company which transacts the business of banking in India. As per clause D explanation 2 clause 5(c ), the company means any company as defined in section 3 of the companies act, 1956 and includes a foreign company. Sec.51 of the Banking Regulation Act only tries to apply certain provisions of Banking Regulation Act to the State Bank of India and other notified banks. From the reading of the above provisions, it is clear that the assessee is not a banking company as defined in clause (i) of explanation to sec.269SS. As per the clause (ii) of explanation to section 269SS, a cooperative bank shall have the meaning assigned to it in Part V of the Banking Regulation Act. Reserve Bank of India is the statutory authority administering the Banking Regulation Act and Reserve Bank of India has clearly stated that the assessee vide their letter dt. 6.1.2009 as well as 30.9.2009 that the assessee is neither categorized as a cooperative bank nor covered by Part V of the Banking Regulation Act. Therefore, as per law, the provisions of section 269SS or 269T are applicable. It cannot be stated that the clarification from Reserve Bank of India is not relevant. It is common knowledge that regulates and conducts inspection as per Banking Regulation Act in case of all cooperative urban banks. All such Banks also maintained statutory reserves and furnish periodic reports to the Reserve Bank of India.
Such banks are also covered by the provisions of the IT Act. In the present case of the assessee no such activity is noticed. The contention that as per the Multi state cooperative society Act, the assessee is a company is not correct because the term 'body corporate' employed in the said act is only for the purpose of indicating limited liability of society and 'company' has to be read with the meaning of income tax act read with the Banking Regulation Act defined in section 269SS or 269T for the present purpose.
3514.2. She submitted that the news report in Business Standard on individual share holdings in a bank or grant of permission to new credit societies are not relevant for the present issue. With regard to the reported version on automatic eligibility to societies with capital and reserves of Rs.1 lakh to act as banks, the report of the news paper is not backed by any notification or circular from Reserve Bank of India and the procedure laid down by the Banking Regulation Act does not envisage such automatic conversion. There is difference between eligibility and sanction. No doubt the assessee may be eligible to become a bank but such eligibility has to be followed up by a licence from Reserve Bank of India to name itself as a bank. If that were not so, there was no need for the assessee to file an application before Reserve Bank of India as claimed by it for grant of banking licence. The recommendations of the Marathe committee report also cannot be of any help because as already referred the assessee has to conduct its activity following the relevant rules and regulations. Also the report of Marathe committee cannot become law unless relevant amendments are made to the Banking Regulation Act. Even the Marathe Committee report on which reliance is placed by the assessee states that the primary credit societies do not come within the purview of the Banking Regulation Act 1949. It is also to be noted that the assessee does not write the word 'bank' in its name and provided to clarification to Vartha News Paper through its letter No. cooperative society /170/2008-09 dt. 6.10.2008 that the assessee is a cooperative society and not a bank as it had not obtained any banking licence.
14.3. The fact that the assessee had applied for banking licence in 1997 is not a fact of immediate relevance because unless an applicant is granted banking licence, it cannot claim to be a bank.
3614.4. With reference to the decision of Apex Court in the case of Padmasundara Rao and Others Vs. State of Tamilnadu (255 ITR 147) the ratio in that case clearly shows that no one can read anything into a statutory provision which is plain and unambiguous. The ratio, in fact, runs contrary to the arguments of assessee because plain reading of the explanation to sec.269SS or 269T are applicable in the case of the assessee.
14.5. With regard to sec.22 of the Banking Regulation Act it may be stated that the issue is not prohibition from carrying banking business but conduct of such business as per the provisions of the Income tax Act, 1961(the Act).
14.6. She submitted that there is no dispute about the fact that the assessee is accepting deposits from and repaying the same to its members including nominal members. This does not mean that the identity of members gets merged into the society. For taxation purpose the status of a person is of a relevance. In the case, the status of the assessee is that of an 'association of persons' whereas that of its members is 'individual'. Therefore, when a deposit is accepted or repaid by a person from/to another person, the provisions of sec. 269SS or 269T are invoked. Any exemption from the operation of the above provisions has to be specifically mentioned in the act or notified by the Central Government. As per first proviso to sec.269SS second proviso to sec.269T only five categories of persons are exempt from the operation of sec. 269SS or 269T and the assessee is not covered in these categories. It may be seen here that till date only one institution viz., HDFC Ltd. is notified vide. S.O.3828 dt.28.10.1986 that too with regard to specific schemes. The decisions quoted by the assessee with regard to mutual benefit associations or principles of mutuality are not applicable in the case of the assessee as admittedly the assessee is filing 37 the returns of income in the status of AOP and also admittedly it is conducting banking business.
14.7. The argument that the assessee has provided addresses of all is not borne out from record. She submitted that as seen from record, the assessee has provided clear addresses in only about 30 cases. Also the same is not relevant for levy of penalty because admittedly deposits are taken and repaid in cash. In case identity of the depositors is under doubt, the department may have to pursue its case u/s 68 of the Income tax Act, 1961(the Act). The argument that applications of all members are available with the society, members only made deposits in case of minors, firms, associations and other societies, the same are not relevant for the present proceedings. Besides there is no evidence on record to show that the above details are furnished before the assessing officer.
14.8. Regarding the argument that the provisions of sec.269SS or 269T were never put to the notice of the assessee at an earlier point of time, it is submitted that the assessee is expected to know the legal provisions and conduct its operations following those provisions. Verification of records reveals that the assessing officer has provided adequate opportunity to the assessee but the assessee chose not to furnish the relevant documents or persons for verification.
14.9. Regarding the activity of providing shelter to tax evasion it is admitted by the assessee that the assessing officer is able to bring to tax the income that escaped assessment. This only proves that most of the persons verified by the assessing officer chose to make deposits and withdraw deposits in cash with the assessee but did not disclose such investments or the interest therein to taxation. It is also noticed that two of such depositors viz., Shri YSR Murthy, and Shri A. Somalingam 38 Goud are directors of the assessee as seen from the annual report for financial year 2006-07 and in light of this fact it cannot be stated that the activities are unknown to the assessee society. Contrary to the arguments of the assessee, chapter XXB was introduced with an intention to curb the activities of tax evasion and the validity of the applicability of section 269SS or 269T is upheld by the Apex Court in the case Kum. AB Shanti (255 ITR 258).
14.10. Regarding decisions of ITAT cited by the assessee, she submitted that in the case of Chandra Cement Vs. DCIT, the ITAT examined the facts and noticed that when the promoter director found company being unable to make the resources available for the project work, he decided to involve and utilize his own money for construction work. There were neither compelling reasons nor a compelling force by the so called artificial person, i.e. company, to bring in the money. It was merely a suo motu decision of the promoter to expose himself to such a huge risk of utilizing his personal money for company's purpose with the hope that he would take it back when the loans were disbursed to the company. It was a case where agent utilized his own money in order to fulfill his obligations towards the principal upon which he became entitled to get back the money. This was thus a unilateral transaction on the part of the promoter to involve and utilize his own money by withdrawing it from his own source. The company was bound to pay for the construction expenditure. The promoter paid it because he was interested in the capacity as promoter and also because his personal guarantees were involved in the finances to the company. Thus, he paid the amount and became entitled for the reimbursement by the company. It was thus, neither a loan which was a bilateral transaction at the instance of borrower having predetermined repayment period, nor a deposit which was at the instance of depositor and was repayable on fulfillment of certain conditions,. The case of the 39 assessee is totally different wherein there is no obligation for the members or nominal members to make deposits. As explained by the jurisdictional bench of ITAT in the case of Industrial Enterprises Vs. DCIT (2000) 73 ITD 252, a 'loan' is a contract by which property is transferred by a lender to a borrower on the promise of the borrower to return the property or its exact equivalent at a stated time or on demand. Whereas deposit is something entrusted to another's case, especially money put in a bank. The relationship between a lender and a borrower of money in the context of loan is the relationship of a creditor and a debtor. In the case of deposit, the person who accepts the deposit is acting as a trustee and he is not standing in the position of the debtor. He is standing in a higher pedestal than a debtor, in as much as he, as an acceptor of the deposit, has the discretion to accept or not to accept a particular deposit. Therefore, no doubt, a depositor has come voluntarily to become a member or to make a deposit. But the assessee had the discretion to accept the same or not. Therefore, the act is not unilateral. Also, while repaying the amount, there is no need for the assessee to pay the same in cash. In fact, in case of deposits, the assessee is acting as a trustee and he has to exercise higher responsibility in terms of unaccounted money. The cooperative principles on which the assessee is established also bestow such responsibility on the shoulders of the assessee.
14.11. In the case of Shrepak Enterprises, the issue was related to a firm. In this case it was clearly held by the ITAT that 'a partner may be a debtor or a creditor of his copartners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm for a man cannot be his own employer". ITAT also held that 'there cannot be a relationship of a debtor and creditor between the firm and the partners". The same does not hold good in the case of the assessee as the identity of the member 40 is distinct from that of a partner. The assessee can enforce the debts against its members. Also, the rights of members and nominal members are different. Besides, some of the members could be employees of the society. Another important distinction is that in case of a firm, the liability of the partners is unlimited whereas in the case of the assessee, the liability is limited. Also, in the case of Shrepak Enterprises, the issue of tax evasion was snot under consideration and the act was a technical violation of law.
14.12. In the case of Farukhabad Investments (I) Ltd., ITAT clearly held that the provision brought on the statute to prevent unaccounted income being brought into the books of account in the form of loans/deposits and held that the department has not made any allegation to this effect. In the present case, there is ample evidence that unaccounted income of members is brought into the books of the assessee in the form of loans and deposits. It is also pertinent to mention here that in the case of Industrial Enterprises Jurisdictional bench of ITAT held that 'Provision of section 269SS were brought, in the statute book to counter the evasion of tax in certain cases, as clearly stated in the heading of chapter XXB of the Income tax Act, 1961(the Act) which reads requirement as to mode of acceptance, payment or repayment in certain cases to counteract. 'Evasion of Tax' Legislative intention in bringing sec. 269SS in the IT Act was to avoid certain circumstances of tax evasion, whereby huge transactions are made outside the books of account by way of cash'.
14.13. She submitted that all the decisions cited above are prior to the decision of the SC in the case of A.B. Shanti, which clearly held that the provisions of sec. 269SS or 269T are applicable to the borrower. Also, in the case of Chamundi Granites (P) Ltd. Vs. DCIT & Another (239 ITR
694) the Karnataka HC held that 'the loan may be genuine and in a 41 particular case reasonable hardship might be created to the borrower by such provisions. But the ultimate aim of the sec. is to prevent evasion of tax'. In the same judgement another case is also quoted for analogy and the relevant portion is reproduced as under. "In Tripura Goods Transport Assn. Vs. CIT of Taxes (1999) 222 STC 609, AIR 1999 SC 719 requirement under sec. 38B of the Tripura Sales Tax Act for transporter operating its transport business relating to taxable goods in Tripura to obtain certificate of registration from the Commissioner of Taxes was held as within the legislative competence. It was observed that if such an obligation is not cast on such transporters then any dealer under a false name, can dispatch his taxable goods to another person through a transporter escaping his sales tax liability on such goods. It cannot be denied that some such dealers and transporters do indulge in such illegal pratices'. The Karnataka HC also held in the above referred case that 'sec. 269SS has placed restriction in not taking any loans or deposits otherwise than by way of an account payee cheques. It is also reasonable restriction and does not take away the right of any person even to take the loan from other person in the manner prescribed under law. It is the mode prescribed under the section which is to ensure prevention of evasion tax to avoid fictitious entries to be made in the books of account without there being any actual transaction. There is no infirmity in the enactment of such a provision since it carried lout its object of prevention of evasion of tax and plug possible loopholes'.
14. 14. In the case of Orissa State Warehousing Corporation Vs. CIT (237 ITR 589), the SC cited some decision of House of Lord and the same are reproduced as under. "Lord Halsbury as early as 1901, in Cooke V. Charles A Vogeler Company (1901) AC 102 (HL) stated that the law in the manner following : 'a court of law, has nothing to do with the reasonableness or unreasonableness of a provision of a statute except so far as it may hold it in interpreting what the Legislature has 42 said. If the language of a statute be plain, admitting of only one meaning, the Legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should elad to absurd or mischievous results. If the language of this sub section be not controlled by some of the other provisions of the statute. It must, since its language is plain and unambiguous, be enforced and your Lordships' House sitting judicially is not concerned with the question whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust beneficial or mischievous'. The oft quoted observations of Rowlatt J. in the case of Cape Brandy Syndicate Vs. ITC (1921) 1 KB 64 ought also to be noticed at this juncture. The judge observed "in a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothuing is to be read in, nothing is to be implied. On can only look fairly at the language used'. The observations of Rwlatt J. as above stand accepted and approved by the House of Lords in a later decision, in the case of Cacadian Eagle Oil Co. Ltd. Vs. The King (1946) AC 119 (1945) 2 All ER 499. Lord Thankerton also in a manner similar in IRC V. Ross and Coulter (Bladnoch Distillery Co. Ltd.) (1948) 1 All ER 616 at page 625 observed : If the meaning of the provision is reasonably clear, the courts have no jurisdiction to mitigate such harshness". From the above, it is clear that the purpose of the legislation is very clear i.e. to prevent tax evasion. When activity of Tax evasion is noticed and there is no reasonable cause for explaining the conduct, the assessee has no right to seek remission from the penalty as intended by law.
14.15. In the case of Orissa State Warehousing Corporation Vs. CIT (237 ITR 589) the Supreme Court cited some decisions of House of lord and the same are reproduced as under: Lord Halsbury as early as 43 1901, in Cooke V. Charles A. Vogeler Company (1901) AC 102 (HL) stated the law in the manner following: A court of law, has nothing to do with the reasonableness or unreasonableness of a provision of a statute except so far as it may hold it in interpreting what the legislature has said. If the language of a statute be plain, admitting of only one meaning, the legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should lead to absurd or mischievous results. If the language of this sub section be not controlled by some of the other provisions of the statute. It must be, since its language is plain and unambiguous, be enforced, and your Lordships' House sitting judicially is not concerned with the question whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust, beneficial or mischievous".
14.16. She submitted that that penalty is a quasi criminal proceeding and based on facts of particular case. To avoid penalty u/s 269SS and 269T the assessee has to prove that there was a reasonable cause for failure to obey law so that sec.273B can be invoked. In the instant case the assessee did not show any such reasonable cause. On the contrary, various depositors whose clear addresses have been furnished were found to evade tax on transactions of cash deposits and repayments. For the assessment years 2006-07 out of 229 persons from who cash deposits of Rs.20,000 and above were accepted by the assessee, the assessee provided clear addresses in only 30 cases. In the balance cases the assessee did not furnish addresses. In None of the case the assessee produced any members for verification despite adequate opportunity being given as seen from record. Similarly, for the assessment years 2007-08 out of 287 persons from whom cash deposits of Rs.20,000 and above were accepted by the assessee, the assessee provided clear addresses in only 30 cases. In balance cases the 44 assessee did not furnish addresses. In none of the cases the assessee produced any members for verification despite adequate opportunity being given as seen from the record. If the assessee had no intention of protecting tax evaders, he would have made all efforts to produce the members whose list was provided by the assessing officer for verification. Also the assessee never furnished the full list of persons with regard to all its branches for verification. When the assessee does not come forward to produce all its members for verification and fails to provide addresses in majority of the cases and also when all the members who are verified by the assessing officer except one is found to evade tax, there is no merit in the argument of the assessee that it does not provide shelter for tax evasion.
14.17. She submitted that the judgement cited by the assessee in the case of Hindustan Steels Ltd. (83 ITR 26) is not applicable because the assessee failed to provide reasonable cause and the penalty in the present case is levied after due verification of the facts.
14.18. She submitted that on one hand the assessee claims deduction u/s 80P in the status of Cooperative Society and for the purpose sec.269SS and 269T claims the status of a banking company/cooperative bank. The assessee cannot take contradictory stand as per his convenience.
14.19. She submitted that the provisions of sec.269SS and S.269T of the IT Act, 1961 are applicable to the assessee. She also stated that the assessee society facilitated deposits and repayments of unaccounted money of its members. Therefore, the levy of penalty u/s 271D and Sec.271E of the IT Act is to be confirmed.
4514.20 Finally, she drew our attention to the Remand Report dated 23.10.2009 submitted by the assessing officer which reads as follows:
The share capital and reserves exceeds Rs.1 lakh, it has to transform into a bank is only a half truth. Part V of the Banking Regulation Act applies to Cooperative Bank. Part V modifies certain terms and section of the Banking Regulation Act to make it suitable for cooperative bank. As per clause (ccv) of s.5(1)(i) of the Banking Regulation Act a primary cooperative bank means a primary cooperative societies other than a primary agricultural cooperative societies , the primary object of which is transacting banking business and the paid up share capital and reserves of the society are not less than 1 lakh. Also as per sec.11 of the Banking Regulation Act 'notwithstanding any law relating to cooperative societies for the time being in force, no cooperative bank shall commence or carry on the banking business in India unless the aggregate value of its paid up capital and reserves is not less than Rs.1 lakh'. It may be seen that the above clauses are only prohibitory clauses restricting entry of cooperative societies into the sub class cooperative bank. In other words, to be a cooperative bank, the entity has to be a cooperative society with minimum capital but not vice versa. All cooperative bank are cooperative societies but all cooperative societies are not cooperative banks. The criteria of capital and reserves of Rs.1 lakh is only an eligibility criteria. It is not an automatic ticket to banking. Once a society is eligible, Reserve Bank of India has to decide to grant a banking licence or not depending on the entry norms and regulations. In the present case, no doubt the assessee is eligible for obtaining a banking licence but no such licence is granted by Reserve Bank of India. Without such licence, the assessee cannot be termed as cooperative bank within the meaning of Part V of the Banking Regulation Act. This is clearly evident from the communication of the Reserve Bank of India.46
1. As per clause (cc iia) of sec. 5(1)(i) of the Banking Regulation Act a multi state cooperative bank is a multi state cooperative society which is a primary cooperative bank. In the present case the assessee is not primary cooperative bank and it does not hold a banking licence.
2. As per the sec.22 of the Banking Regulation Act (as modified by Part V of the Act), no cooperative society can conduct banking business in India unless it is a) primary credit society or b) it is cooperative bank and holds a licence in that behalf by Reserve Bank of India to such conditions, if any, the Reserve Bank of India may deem fit to impose. From this it is clear that a primary credit society may undertake banking. This does not mean that it becomes a cooperative bank. When it is not cooperative bank, it does not escape its obligations u/s 269SS or 269T and has to conduct its business by obeying the law as laid down in S.269SS or 269T.
3. As per clause (ccv) of S.5(1)(i) of the Banking Regulation Act referred above, the bye laws of a cooperative bank shall not admit any other cooperative society as member. In the present case, the assessee has accepted deposits from other cooperative societies by treating them as nominal members.
4. It may be treated here that the assessee is claiming deduction u/s 80P even for assessment year 2007-08 onwards. For assessment year 2007-08, such deduction is not available to cooperative bank and the definition of cooperative bank is same for both sec. 80P and section 269SS or 269T.
5. The assessee suddently remembers that it made an application to Reserve Bank of India after about 12 years or so that too when it is found violating the provisions of sec.269SS or 269T. The assessee also makes a mention of sec.56A which does not exist in the Banking Regulation Act .47
6. The fact that when an application filed by the assessee is received by Reserve Bank of India or not is irrelevant because as stated above, unless the assessee is granted banking licence by Reserve Bank of India it cannot claim the status of a bank.
7. S.56A of the banking act clearly specified that the the provisions of the act shall override any resolutions passed by any banking company. Therefore, the resolutions passed by the assessee which is not even a banking company cannot override the provisions of Banking Regulation Act.
8. Reserve Bank of India is a statutory regulator and the statement of the assessee that Reserve Bank of India is not correct is without any sanction of law.
9. The assessee is not mentioning itself as 'The citizen Cooperative Bank' and describes it only as 'Citizen Cooperative Society'. when a news paper referred to the society as bank, clarification was also issued that it is not a bank.
10. The news items quoted by the assessee regarding directions of Reserve Bank of India to Registrars of Cooperative Societies and other authorities, if any are not relevant for the present proceedings as such directions are advisory in nature to ensure financial discipline in the country. If such directions were to be mandatory in nature, then Registrars of Cooperative Societies must have debarred the assessee from accepting deposits, which is not the case. The directions were issued only with a view to limit entry of new players into the financial sector. Restrictions on individual holdings has no bearing on the present proceedings.
11. The assessee is not accepting deposits from public and conducting business only with its members. That is why TDS is also not done on interest on deposits. Banking is a wider activity compared to providing credit facilities to members.48
12. The assessee is not maintaining any cash reserves or SLR funds, which clearly shows that it is not a banking company. The assessee also not subject to Reserve Bank of India inspections nor it provides information under the AIR scheme of ITD. '
13. S.23 of the Banking Regulation Act states that no new place of business can be opened without permission from Reserve Bank of India. The assessee has recently a branch at Khammam for which no permission is taken from Reserve Bank of India.
14. The deposits insurance and credit guarantee corporation Act applies to cooperative bank but the assessee is not subject to the Act.
15. The letter issued by 'The AP Cooperative Urban Banks & Credit Societies Association' has no sanctity because the association itself suggests that cooperative bank as well as credit societies are its members. The letter appears to be issued in total ignorance of law and procedure. Such a letter is not also admissible as evidence as per the principles of Indian Evidence Act.
16. The provisions of 269SS or 269T are squarely applicable to the assessee as it is only a society and not a bank. The assessee failed to cite any special circumstances under which deposits are accepted in cash. During the penalty proceedings in several cases, it has been proven that the depositors are evading tax by not disclosing the investment and/or interest on the cash deposits for taxation and the assessee is providing shelter to such activity of tax evasion by accepting deposits in cash. One of the directors during the relevant period by name Shri A. Somalingam Goud found evading tax in his own case.49
Findings:
15. We have heard both the parties and perused the material on record. Before appreciating the rival contention made by the parties, we would first like to discuss relevant provision of the IT Act. Sec.
269SS/269T, Sec.271D and Sec.271E of the IT Act - :
15.1. Sec.269SS was inserted by the Finance Act, 1984, w.e.f.
April 1, 1984 which lays down the mode of taking and accepting certain loans and deposits. Sec.269SS reads as under:
"269SS Mode of taking or accepting certain loans and deposits:
No person shall after the 30th day of June, 1984 take or accept from any other person (hereinafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or a/c payee bank draft if:
a) The amount of such loan or deposit or the aggregate amount of such loan and deposit; or
b) On the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid(whether repayment has fallen due or not)
c) The amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause(b) Is twenty thousand rupees or more:
Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by:
a) Government
b) Any banking company, post office savings bank or cooperative bank 50
c) Any corporation established by a Central, state or provincial act
d) Any Govt. Company as defined in sec.617 of the Companies Act 1956(1 of 1956)
e) Such other institution, association or body or class of institutions, associations or bodies which the central government may, for reasons to be recorded in writing notify in this behalf in the office gazettee Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.
Explanation: For the purposes of this section:
i) 'banking company' means a company to which the Banking Regulation Act 1949 (10 of 1949) applies and includes any bank or banking institution referee to in section 51 of that Act.
ii) 'Cooperative bank' shall have the meaning assigned to in it Part V of the Banking Regulation Act, 1949 (10 of 1949)
iii) 'Loan or deposit' means loan or deposit of money'.
From the above reading of the aforesaid provision, it is manifestly clearly that after the insertion of the aforesaid said, no person should take or accept from any other person from any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount is Rs.20,000 or more.
15.2. Section 271D lays down the provisions of imposition of penalty for failure to comply with the provisions of sec.269SS.
Sec.271D reads as under:
271D: Penalty for failure to comply with the provisions of sec.269SS (1) 51
1. If a person takes or accepts any loan or deposits in contravention of the provisions of sec.269SS he shall be liable to pay by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted.
2. Any penalty imposable under sub section (1) shall be imposed by the Joint Commissioner".
15.3. Sec.269T reads as follows:
Mode of repayment of certain loans or deposits:
No Branch of a banking company or a cooperative bank and no other company of cooperative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft in the name of the person who has made the loan or deposit if:
a) the amount of the loan or deposit together with the interest, if any payable thereon or
b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or cooperative bank or as the case may be the other company or cooperative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest if any payable on such loans or deposits
c) is twenty thousand rupees or more Provided that where the repayment is by a branch of a banking company or cooperative bank such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account if any with such branch of the person to whom such loan or deposit has to be repaid.52
Provided further that nothing contained in this section shall apply to repayment of any loan or deposit taken or accepted from:
i) government
ii) any banking company, post office savings bank or
cooperative bank
iii) any government company as defined in sec.617 of the companies Act 1956 (1 of 1956)
iv) any corporate established by a central state or provincial Act.
v) Such other institution, association or body or class of institutions associations or bodies which the central govt. may for reasons to be recorded in writing notify in the behalf in the official gazette.
Explanation - For the purpose of this section:
i) banking company shall have the meaning assigned to it in clause (i) of the Explanation to sec. 269SS
ii) 'cooperative bank' shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949)
iii) 'loan or deposit' means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature.
15.4. Thus, Sec.269T provides that no company (including banking company) cooperative society or partnership firm shall repay to any person, any deposit made by him with such entity otherwise than by cheque or an a/c payee bank draft in case where the amount of the deposit, or the aggregate amount and the interest thereon equals or exceeds the stipulated amount. In case of repayment by a bank , the 53 repayment may be made by crediting the amount to the account, of the concerned creditor, if any, with such bank vide the first proviso Sec.269T (1) of the IT Act. The section would apply in relation to the repayment of any deposit made before 19th Sept. 1991. further, provides that no branch of a bank, and no other company, cooperative society, or a firm shall repay any deposit otherwise than through an a/c payee cheque or a/c payee bank draft, if amount of deposit or aggregate of deposit and interest thereon equals or exceeds the stipulated amount. W.e.f. 1.4.1989, the Direct Tax Laws (Amendment) Act, 1987 made provision 269T applicable to all other persons such as individuals, HUFs, and AOPs. The word 'deposit' also amended so that in case of all persons other than companies 'deposit, for the purpose of sec.269T means deposit of any nature. In view of the extended definition in case of persons other than companies, deposits for the purpose of S.269T include deposit payable on demand also.
15.5. Section 271 E of the Act reads as follows:
If a person repays any (loan or) deposit referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the (loan or) deposit so repaid.
Any penalty imposable under sub section (1) shall be imposed by the Joint Commissioner.
15.6. Section 273B which was inserted by the Taxation Laws (Amendments and Miscellaneous Provisions) Act, 1986, however provides that no penalty shall be imposed if the assessee proves that there was reasonable cause for the said failure.54
15.7 Section 273B reads as under:
Sec. 273B Penalty not be imposed in certain cases:
Not withstanding anything contained in the provisions of clause (b) of sub section (1) of sec.271, sec.271A, sec.271AA, sec.271B, sec.271BS, sec.271BB, sec.271C, sec.271CA, Sec.271D, sec.271E, sec.27F, sec.271FA, sec.271FB, sec.271G, clause (c ) or clause (d) of sub section (1) or sub section (2) of sec.272A, sub sec.(1) of sec.272AA, or sec.272B, or sub section (1) or sub section (1A) of sec.272BB or sub section (b) or clause ( c) or sub section (2) of sec.273 no penalty shall be imposable on the person or the assessee, as the case may be for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.
16. Now, it would be useful to consider the purpose and object of the provisions of Sections .269SS, 269T, 271D, 271E and 273B of the IT Act, 1969.
16.1. The Memorandum explaining the provisions in the Finance Bill, 1984 was placed before the Parliament by the Finance Minister. In the said Memorandum., the purpose of enacting the provisions of section 269SS was explained saying that unaccounted cash found in the course of searches carried out by the Income Tax Department is taxable by the taxpayer as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits and taxpayers are also able to get confirmatory letters from such persons in support of their explanation. With a view to circumventing this device, which h enables taxpayers to explain away unaccounted cash or unaccounted deposits, 55 the provisions was inserted. The relevant text of the memorandum is reproduced herein below (1984) 146 ITR (St.) 157, 162).
'Prohibition against taking or accepting certain loans and deposits in cash:
22. Unaccounted cash found in the course of searches carried out by the IT Deptt. Is often explained by taxpayers as representing loans as representing loans taken from or deposits made by various persons.
Unaccounted income is also brought into the books of account in the form of such loans and deposits, and taxpayers are also able to get confirmatory letters from such persons in support of their explanation.
23. With a view to circumventing this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the bill seeks to make a new provision in the IT Act debarring persons from taking or accepting after June 30 1984 from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft in the amount of such loan 10,000 or more is prohibition will also apply in cases where on the date of taking or accepting such loan or deposit. Any loan or deposit taken or accepted earlier by such person from the deposits is remaining unpaid (whether repayment has fallen due or not) and the more amount or aggregate amount remaining unpaid is Rs.10,000 or more. The proposed prohibition would also apply incases where the amount of such loan or deposit together, with the aggregate amount remaining unpaid on the date or which such loan or deposit is proposed to be taken Rs.10,000/-.
24. The proposed prohibition will however not apply to any loan or deposit taken or accepted from or any loan or deposit taken or accepted by the following namely
i) Government 56
ii) Any banking company post office savings bank or cooperative bank
iii) Any corporation established by a central or state provincial Act.
iv) Any govt. Company as defined in the sec.617 of the Companies Act 1956.
v) Such other institution association or body or class of the institution association or bodies which the central govt. May for reasons to be recorded in writing notify in this behalf the official gazette.
25. For the purposes of the proposed provision the expression banking company shall have the meaning assigned to be in clause (a) for the explanation to the sec.40A (8) of the IT Act and the expression cooperative bank shall have the meaning assigned to it Part V of the Banking Regulation Act 1949. The expression loan or deposit for the purposes of the proposed provision would mean loan or deposit of money.
26. If a person without reasonable cause or excuse takes or accepts any loan or deposit in contravention of the aforesaid provisions, he shall be punishable with imprisonment for a term which may extent to two years and shall also be liable to a fine equal to the amount of such loan or deposit.
27. The proposed provisions will take effect from April 1 1984, but as stated above, the prohibition contained therein shall apply only in relation to any loan or deposit taken or accepted after June 30, 1984.
16.1.1 In the case of KP Varghese Vs.ITO (131 ITR 597), the Supreme Court while considering the admissibility of the speeches made by the members of the Legislature on the floor of the House, observed that:
57"Now it is true that the speeches made by the Members of Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in accord with the recent trend in justice thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible."
16.1.2 In the case of Kerala State Industrial Development Corporation Ltd. Vs. CIT (2003) 259 ITR 51, the Supreme Court while answering the reference on a particular question of law under the IT Act, referred the decision of KP Varghese's case (1981) 131 ITR 597 (SC) and held that the Finance Minister's speech can be relied upon to throw light on the object and purpose of the particular provisions introduced by the Finance Bill.
16.2. The moot question, therefore, that falls for consideration is that as to whether the assessee shall be subjected to imposition of penalty, notwithstanding the findings recorded by the authorities that the transaction made in violation of Sec.269SS of the Act was a genuine transaction and the return was finally accepted u/s 143(3) of the Act and further no loss of revenue was found.
16.3. The nature of penalty and principle governing imposition of the same as well as settled by a catena of decisions of SC and the various HCs. The settled proposition of law, therefore, is that the provisions dealing with penalty must be strictly construed.
58An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding and penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest or acted in conscious disregard of his obligation. Penalty will also not be imposed merely because it is lawful to do do. Rather penalty should be imposed for failure to perform a statutory obligation which is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Ref. May be made to the decision in Hindustan Steel Ltd. (83 ITR 26 (SC). 16.4. One of the cardinal principles of the English criminal law is expressed in the maxim actus non facit reum, nisi mens sit rea, that is a person cannot be convicted and punished in a proceeding of a criminal nature unless it can be shown that he had a guilty mind. A penalty imposed for a tax delinquency is a civil obligation, remedial coercive in its nature and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal loss.
16.5. In the case of Hindustan Steel Ltd. Vs. State of Orissa (1972) (83 ITR 26) (SC): (1969) to SCC 627, the facts of the case were that the appellant, company supplied to the contractors for using construction coal of factory building for the steel plant, residential building for its employees, bricks, coal, cement, steel, etc. For consideration and adjusted the value of the goods supplied at the rates specified in the Tender. The sales tax Officer held that the 59 company was liable to pay tax on the ground that it was a dealer in the building material and had sold materials to contractors and imposed penalty for failure to register as a dealer. The Appellate authority and the Tribunal confirmed the order. The HC also answered the reference against the assessee. The main questions that arose before the SC were whether the company sold building materials to the contractors during the relevant period, whether the company was a dealer in respect of building material within the meaning of the Orissa Sales Tax Act, whether the imposition of penalties for failure to register as a dealer was justified. On the question of imposition of penalty, the SC observed that the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. Penalty will not ordinarily be imposed unless the person acted as a dealer in defiance of law was guilty of conduct, contumacious or dishonest. Their Lordships observed (page 29).
"8. Under the Act, penalty may be imposed for failure to register as a dealer; sec.9(1) read with sec.25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judiciously on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is technical or venial breach of the 60 provisions of the act or where the breach flows from a bona fide belief that the offer is not liable to act in the matter prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as a dealer acted in the honest and genuine belief that the company was not a dealer. Granting that they erred, no case for imposing penalty was made out."
16.6. In levying the penalty, u/s 271D or 271E one has to see the existence of reasonable causes. The word 'reasonable cause' has not been defined under the Act, but they could receive the same interpretation which is given to the expression 'sufficient cause'. Therefore, in the context of penalty provisions, the words 'reasonable cause' could mean a cause which beyond the control of the assessee.
"Reasonable cause' means a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances without negligence or inaction or want of bona fides. Before imposition of penalty, u/s 271 , the assessing officer must be satisfied, not arbitrarily but judiciously that the assessee has without reasonable cause failed to comply with the provisions.
16.7. Further, there should be findings in the assessment order that the transactions made by the assessee in breach of provisions of Sec.269SS or 269T were not a genuine transaction. The assessment order passed u/s 143(3) of the IT Act, which is after scrutiny of the books of accounts of the assessee should have findings that the transaction made by the assessee was mala fide and with the sole object to disclosed the concealed or undisclosed money. If there is a merely technical mistake committed by the assessee which is not resulted in any loss of Revenue then invoking the provisions of S.271D or 271E is very harsh, which to be avoided. The object of Sec.269SS or 269T is to ensure that a tax payer is not allowed to give false 61 explanation for his unaccounted money or if he makes some false entries, he shall not escape by giving false explanation for giving same. A tax payer shall not be allowed to manipulate his account to suit the plea of him. The main object of these Sections is to curb this menace of making false entries in the account books and later giving an explanation for the same. The transactions not being impeached as not genuine or bogus, cannot lead to the levy of penalty u/s 271D/271E. Even if they were to apply, one should see the provisions of sec.273B. If the assessee having bona fide belief that it would not attract the penalty provisions, given the nature of the transactions and circumstances, the penalty need not be levied. In other words, bona fide belief coupled with genuineness of the transactions constitutes reasonable cause for not invoking the provisions of sec.271D & 271E.
17. In the present case, assessee is subject to rules laid down by cooperative society Act and the assessee has been carrying out banking operation which are under audit of various authorities and therefore the assessee could not be put at par with the other cases of other concerns since the assessee have no control in respect of the amounts received from the customers in the form of deposits. The customer usually go to the bank to make deposits with an intention of earning interest and the assessee is to maintain the same and the depositor operate those accounts and the deposits repayable on expiry of specific period. There is no dispute in these assessment years that the assessee has been carrying on the banking transactions which may be with or without approval of the Reserve Bank of India. If the carrying on the operations of the banking activities is not at all approved by the Reserve Bank of India or the assessee is having no requisite licence from the authorities, the concerned authorities could have stopped the same or taken action against the assessee. Once the assessee is permitted to carry on the banking activities, then the assessee is bound 62 by the relevant provisions of the Banking Regulations Act. The bank, for all its banking activities is strictly governed by the Banking Regulation Act 1949. 'Banking' is described as accepting, for the purpose of lending or investment of money, due from the public repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise. The deposits held by the assessee are its stock in trade. The deposits and loans are just like buying and selling of goods/products. The amounts in account maintained by the assessee bank were not in the control of the assessee. In the sense that the bank may be required to pay at any point of time. In case of banks, like present assessee, the customer identity required to be taken with proper introduction, photographs and address etc. This is so because, any person from general public can come and open a deposit account with the bank. The acceptance of deposit by this assessee cannot be equated with other kind of assessees. In other cases, normally, deposits are accepted from the people connected with are known to the depositees. It is in accordance with the terms of Sec.131 of the Negotiable Instruments Act. The customer introduction had to be been taken to avoid any kind of fraud. The assessee like present is not obliged to question the source of deposit made by its customers. Also, the customer can keep the deposit for a period which is according to their convenience . The amount has to be repaid by the assessee to its customer immediately on demand. These features distinguish the case of the assessee from other ordinary assessees. Therefore, the provisions of sec.271D/271E to be viewed in the back ground of these aspects. Further, the assessee is subject to periodical inspects and audits by various statutory authorities and in case of any default assessee is liable for having penalty besides cancellation of its licence. This is not the case with other assessees. Further, the assessee has to maintain confidentiality in respect of the information collected by it from its customers , such information is not to be divulged to outsiders.63
There is no such obligation with other assessee. In spite of this, the assessee has furnished the information as available with it. Now if the address of the customers of the assessee found to be incomplete, this cannot form the basis for levying the penalty. There is no finding by the lower authorities that the assessee violated any guidelines issued by the Regulatory authorities. Usually, the bank was not required to go for detailed verification of addresses, whereabouts of its customers. There is no absolute obligation to assessee to make enquiries about the proposed customer so as to examine the genuineness/sources of the deposits. Bank usually rely in the introduction of any old customer and that if the bank bona fide acted on the reference of a customer, it can avail of the protection under section 131 of the Negotiable Instrument Act. Further, the bank is accepting the deposits and there is no involving of any risk to the bank, even the rule of proper introduction did not operate strictly. It is to be noted that the assessee while doing the business in ordinary course, if it puts various conditions, the expected business may not be able to achieve. Therefore, it cannot be said that assessee did commit any infringement or it is incorrect to say that there was any deliberate attempt on the part of the assessee to accommodate tax dodgers. The deposits accepted and repaid by the assessee were part of its Banking activities and the depositors were its Members. The deposits received by the assessee, which was carrying on the banking business, were not in the nature of taking of any loan or deposits for the purpose of funding its project as a source of investment, that rather, it was in the business of accepting deposits that in view of the nature of such business, the scrutiny of the deposits could not be the same as in the case of assessee making entries of deposits on account of loan etc. The authority vested with the power to impose penalty as a discretionary power not to levy the penalty. It is all very well to paint justice blind, but she does better without a bandage round the eyes. She should be blind indeed to favour or prejudice, but clear to 64 see which way lies the truth and the less dust there is about the better. We made attempt to examine the truth. We found that there is no addition on account of these impugned deposits in the return of income it means that deposits are genuine. Veracity of creditor not doubted by the Revenue. Assessing officer did accept the deposit as genuine. The breach of provisions of Sections 269SS /269T from a bona fide belief. Ex facie it is a venial breach. The law takes no notice of trivialities. Cash payments and receipts made because of business exigencies. The mere violation of a statutory obligation is not liable for any penalty more so, undisputedly the penal action is quasi criminal nature. The income of the assessee is exempt u/s 80P of the Act and more so, there is no establishment of deliberate and intentional violation of the provisions by the assessee, that too, in order to hide any income or to evade any payment of tax. Usually penalty will not be imposed unless the party concerned has acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation and that penalty will also not be imposed merely because it is lawful to do so. The imposition of penalty for failure to perform statutory obligation is only a discretionary power of the authority exercising judicial functions on consideration of all the relevant circumstances. If the assessee acted on genuine belief that penal provisions have no application to deposits and it applied only to other kind of assessees, then penalty could not be levied. As such, in present case, there exists reasonable cause in accepting the deposits in cash and paying by cash. Assessee may therefore be exonerated from the levy of penalty. The other contention of the assessee counsel is that the words 'any other person' in Sec. 269SS are 269T does not denote the director of the assessee or members of the assessee society, when read with the legislative intent as reproduced in Board circular No.387, dated 6.9.1984. The term 'any other person' in the context of introduction of sec.269SS appears to means persons who are 65 not very intimately or very closely connected with the assessee . In the present case the assessee accepted the deposits and repaid the same either to the members/directors or to their dependents children or their associated concerns or their relatives. Further, we have carefully pursued bye-law of the assessee society. As seen from the bye-law, it is working on the concept of mutuality. Where a number of persons coming together and contribute a common fund for financing of some venture or object and will in this respect have no dealing or relation with any outside body, then any transactions with those persons cannot be regarded in any sense as loan. There must be complete identity between the contributors and the participators. If these requirements are fulfilled it is immaterial what particular form the association takes. Trading between people associating together in this way does not give rise levy of penalty. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of facilities which it offers does not affect the mutuality of the enterprise. The contributor of the fund are entitled to participate in the surplus, thereby creating an identity between the participators and contributors and acceptance of deposits and repayment of the same is incidental to the attainment of the main object of the assessee society. The concept of mutuality is primarily based on the principle that one cannot make profit from himself . Thus, when the facilities are provided to only to members of the society, who provide the funds to the society and their identity with the funds and their participation in the surplus arising from the said fund is unmistakably found then the principles of mutuality will apply. The fact of the present case, are akin to the above position and all the ingredients necessary for holding the application of the concept of mutuality are satisfied because there is complete identity between the contributors and participators and the requirement of the law is that contributors of the common fund and the participators in the surplus must be an identical body. That 66 does not mean that each member should contribute to the common fund that or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a clause must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve with the society for his development and for providing better amenities to the member. In view of the transaction took place between the assessee and its member, the strict provisions of the sec.269SS/269T cannot be applied.
17.1. Further, the Legislature was intending to curb the tax evasion in a 'search situation' and referred to confirmatory letters produced in such situations to counter 'cash found'. A statute is an edict of the legislature and the conventional way of interpreting or constituting a statute is to seek the intention of its maker. A statute is to be constitute according to the intent of them who make it. The legislature in a modern state is actuated with some policy to curb some evils or to some public benefits. A bare mechanical interpretation of the words without the application of a legitimate intent, devoid of any concept or purpose will reduce most of the remedial and beneficial legislation to futility. Keeping in view of the intent of the legislature behind the enacting sections 269SS/269T, it is clear that the loan or deposit brought in by the assessee was not to explain its unaccounted cash and, therefore the question of violating these provisions did not arise. The term 'various persons' and 'such persons' is to be understood only in relation to 'search situation' as the section itself was introduced to meet such situations only. Thus, the director or member of the assessee society is clearly not covered by the expression 'any other person' occurring in sec.269SS. The transaction in question cannot be considered as 'loan' or 'deposit' so as to attract sec.269SS or S.269T of the Act. The transactions can also be attributed various 67 exigencies of business carried on by the assessee and thus constitutes a 'reasonable cause' as contemplated by sec.273B. The expression 'reasonable cause' has to be considered pragmatically and as it is transactions are openly done, to meet the exigencies of business, it can be said to constitute 'reasonable cause'. The bona fide business of transaction cannot be considered for levying the penalty u/s 271D or 271E. More so, the assessee has been carrying on the banking business and it is having bona fide belief that provision of sec.269SS/269T is not applicable to the assessee case and same is coupled with genuineness of the transaction constitute a reasonable cause and in such case the default on the part of the assessee is merely of a technical or venial nature and no penalty be levied.
18. To sum up, a harmonious construction of the relevant provisions of sections 271D, 271E and 273B clearly reveals the use of expression 'shall be liable to pay' in sections 271D and 271E and the provisions of sec.273B providing that no penalty would be leviable if the person concerned proves that there are reasonable cause or the said failure clearly indicates these provisions give a discretion to the authority to impose the penalty or not to impose the penalty. Such a discretion has to be exercised in a just and fair manner having regard to the entire facts and materials existing on record. Ordinarily, a plea as to be ignorance of law cannot support the breach of a statutory provision but the fact of such an technical break due to ignorance of the relevant provisions of law or on account of bona fide belief, coupled with the fact that transactions in question are genuine and bona fide transaction were undertaken during the regular course of its business will not result in levy of penalty u/s 271D and 271E.
6819. In view of the above discussion, we inclined to delete the penalty levied u/s 271D and 271E of the Income Tax Act for the assessment year 2006-07 and 2007-08.
20. In the result, all the four appeals of the assessee are allowed.
Order pronounced in the open Court : 26 .2.2010
Sd/- sd/-
G.C. GUPTA CHANDRA POOJARI
VICE PRESIDENT ACCOUNTANT MEMBER
Dated the 26th February, 2010
Copy forwarded to:
1. Shri S. Rama Rao, Advocate, 102 Shriya's Elegance, Door No.3-6-643, St. No.9, Himayatnagar, Hyderabad.
2. Addl. CIT, Range -9, Hyderabad
3. CIT(A)- VI, Hyderabad.
4. CIT, Hyderabad
5. The D.R., ITAT, Hyderabad.
Np/