Madras High Court
M/S.Indian Bank vs The Deputy Commissioner Of Income Tax on 11 February, 2014
Author: Chitra Venkataraman
Bench: Chitra Venkataraman, T.S.Sivagnanam
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 11.02.2014 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice T.S.SIVAGNANAM Tax Case (Appeal) No.416 of 2008 --- M/s.Indian Bank, 66, Rajaji Salai, Chennai 600 001. ... Appellant -vs- The Deputy Commissioner of Income Tax, Special Range-I, 121 Nungambakkam High Road, Chennai 600 034. ... Respondent Tax Case (Appeal) filed under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal Bench 'A', dated 25.10.2007, in I.T.A.No.1898/MDS/2004 For petitioner : Dr.Anita Sumanth For Respondent : Mr.T.Ravikumar Standing Counsel for Income Tax Department ORDER
(The Order of the Court was made by CHITRA VENKATARAMAN, J.) The following substantial questions of law are raised in the Tax Case (Appeal) filed by the assessee relating to the assessment year 1990-91:-
"1. Whether on the facts and circumstances of the case, the Tribunal is right in law in confirming the reassessment which was completed beyond 4 years from the end of the relevant assessment year?
2. Whether on the facts and circumstances of the case, the Tribunal is right in law in restoring the claim relating to the broken period interest to the assessing authority?
3. Whether on the facts and circumstances of the case, the Tribunal is right in law in directing the assessing authority to classify the securities into permanent and current since the appellant is holding the securities as stock-in-trade?
2. The assessee herein is a Nationalised Bank engaged in the business of banking as defined under the Banking Regulations Act. The assessee filed its return originally on 31.12.1990, the assessement under Section 143(3) of the Income Tax Act was completed on 26.03.1993, applying the provisions of Section 115-J of the Income Tax Act. In the course of assessment proceedings for the subsequent year, it was noticed that the assessee had made payments through M/s.Chandrakala & Co., under various demand drafts payable to the Public Sector Undertakings (PSUs); the payments being by way of additional interest on deposits during the previous years relevant to the assessment years 1990-91, 1991-92, 1992-93 & 1993-94; these claims were as per adjustments of interest at higher rate payable to the PSUs from what was prescribed under the guidelines of Reserve Bank of India. Originally, the payment made through M/s.Chandrakala & Co., under various demand drafts to the PSUs, were accepted for deduction. However, in the assessments made for the assessment years 1992 to 1994, these payments were held as illegal and contrary to the RBI guidelines. Consequently, they were added as income from undisclosed sources and brought to tax a sum of Rs.10,60,63,910/- represent the payments made to PSUs through Chandrakala & Co., during the previous year ending 31.03.1990, relevant to the assessment year 1990-91.
3. Apart from that yet another issue involved in this Tax Case (Appeal) is as regards the expenses allowed by way of broken period interest paid at the time of purchase of securities. Thus, based on the orders of assessment for the assessment years 1991-92, 1992-93 & 1993-94 and the decision of the Hon'ble Supreme Court in the case of CIT vs.,M/s.Vijaya Bank reported in 187 ITR 541, that the expenses by way of broken period interest at the time of purchase should not be allowed as an expenditure but should be brought to tax, were sought to be relied on for the purposes of reopening of the assessment for the assessment year 1990-91. Thus, notice under Section 148 of the Income Tax Act was issued to the assessee proposing to assess the income on the interest payment made through M/s.Chandrakala & Co., to the various PSUs as well as for disallowing the expenses on the broken period interest relating to the purchase of securities.
4. The assessee resisted the reopening as totally without any jurisdiction by contending that except for the assessment orders for the assessment years 1991-92 to 1993-94, there were no fresh materials available with the Revenue to invoke the larger limitation period under Section 147 of the Income Tax Act. Further, the assessment for the assessment years for 1991-92 to 1993-94 were on the very same materials, which were considered by the Assessing Officer for the year under consideration.
5. As far as the disallowance on the interest payment of broken period interest is concerned, the decision of the Supreme Court in the case of CIT vs., M/s.Vijaya Bank reported in 187 ITR 541, was very much available therein and it was also referred to by the assessee. Further, the assessee further pointed out that the assessee had consistently taken a stand that the securities in which the assessee was dealing constituted part of its stock-in-trade in the banking business and the securities were purchased and sold in the course of business of banking and not as an investment. Thus, the assessee claimed loss on investment in securities based on the valuation of the securities at cost or market value, whichever is lower and the interest received for the broken period was assessed under Section 28 of the Income Tax Act. Thus, the claim of the assessee was accepted by the Department for all the assessment years (1991-92 to 1993-94) and the decision in the case of CIT vs.,M/s.Vijaya Bank reported in 187 ITR 541, was not applicable to the assessee's case. The Assessing Officer however rejected the assessee's contention and confirmed the proposal as contained in the notice issued under Section 148 of the Income Tax Act.
6. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals) and reiterated the grounds. The Commissioner of Income Tax (Appeals), however, rejected the objections on the jurisdiction of the Officer to reopen the assessment and thus upheld the reopening of the assessment. However on the broken period interest, the Commissioner of Income Tax (Appeals) followed the order passed for the assessment year 1991-92 and directed the Assessing Officer to disallow the broken period interest, in respect of permanent securities, held as investment and allowed the broken period interest, in respect of current securities held as stock-in-trade. As regards the payment of higher amount interest to Public Sector Undertakings through M/s.Chandrakala & Co., the Commissioner followed the order for the assessment year 1991-92 and rejected the assessee's claim.
7. Aggrieved by this, the assessee went on appeal before the Income Tax Appellate Tribunal, so too, the Revenue in respect of the issues, which went against it. The Income Tax Appellate Tribunal considered the assessee's appeal as well as the Revenue's appeal for the assessment year 1990-91 along with other appeals of the assessee's as well as the Revenue, since the same issues were common in nature in respect of all those assessment years starting from 1987-88 to 2002-03.
8. As far as the issue raised under re-opening of the assessment for the assessment year 1990-91 is concerned, the Income Tax Appellate Tribunal pointed out that the reassessment notice was issued within four years; in determining whether commencement of re-assessment proceedings was valid or not, all that had to be seen was whether there was prima facie materials on the basis which the department could reopen the assessment; that the sufficiency of correctness of the materials was not a thing to be considered at this stage. Thus, referring to the decision in the case of Raymond Woolen Mills Ltd., vs. ITO reported in 236 ITR 34, the Income Tax Appellate Tribunal rejected the assessee's appeal and upheld the assessment.
9. As far as the claim of expenditure by way of additional interest paid through M/s.Chandrakala & Co., is concerned, which is a common issue for the subsequent years too, the Income Tax Appellate Tribunal held that since the payment of interest over and above the RBI guidelines was a contravention of the RBI Rules and the assessee had inflated the purchase price of securities, income generated through the inflation of expenses used to make payment of extra interest was to be treated as undisclosed income of the assessee. Thus, the Income Tax Appellate Tribunal rejected the assessee's appeal on the addition made on account of the extra interest paid to PSUs through M/s.Chandrakala & Co.
10. As regards the claim of deduction on broken period interest is concerned, the Income Tax Appellate Tribunal pointed out to the decision in the case of CIT vs.,M/s.Vijaya Bank reported in 187 ITR 541, and held that considering the law laid down by the Supreme Court, the reassessment proceedings was valid. It pointed out that the assessee had artificially bifurcated the purchase consideration and claimed a part as Revenue expenditure and this was not disclosed in the Audit report nor by the Director's report, consequently, there was non-furnishing of full and true particulars. Thus, the issue was held against the assessee. Such view was taken in respect of those assessments, which were original assessments, which related to the subsequent period.
11. The Income Tax Appellate Tribunal further pointed out that the investment portfolio of the Bank would normally consists of both approved securities predominantly Government securities, others, (shares, debentures and bonds). The investment securities should be bifurcated into permanent and current investments and permanent investments are those which banks are to hold till maturity, and current investments are those which the assessee could deal on day to-day basis. As per RBI guidelines, bank should not keep more than 70% of the investments in permanent category from the accounting year 1992-93. Since the Assessing Officer had not made any enquiry as to how the Bank had bifurcated permanent and current investments, the Income Tax Appellate Tribunal restored the matter back to the files of the Assessing Officer for considering the same in accordance with law.
12. Aggrieved by this, the assessee preferred appeal before this Court raising questions of law referred to above. We may point out, even though at the time of admission only three questions of law were considered for admission, yet, there are other questions raised in the memorandum of grounds as substantial questions of law, which we find as relevant for consideration. Consequently, we hold that the questions of law that arise for consideration are as follows:-
"1. Whether on the facts and circumstances of the case, the Tribunal is right in law in confirming the reassessment which was completed beyond 4 years from the end of the relevant assessment year?
2. Whether on the facts and circumstances of the case, the Tribunal is right in law in restoring the claim relating to the broken period interest to the assessing authority?
3. Whether on the facts and circumstances of the case, the Tribunal is right in law in directing the assessing authority to classify the securities into permanent and current since the appellant is holding the securities as stock-in-trade?
4. Whether on the facts and circumstances of the case, the Tribunal is right in law in confirming the assessment of the sum of Rs.10,60,63,910/- as undisclosed income?
5. Whether on the facts and circumstances of the case, the Tribunal is right in law in not considering the contention raised by the appellant that the Commissioner of Income tax (Appeals) erred in coming to the conclusion that the expenditure incurred by the appellant is bad in law, since the appellant had not claimed any expenditure?
6. Whether on the facts and circumstances of the case, the Tribunal is right in law in rejecting the appellant's claim for deletion of the additional tax on the ground that the appeal is not maintainable on the said issue and that the said issue does not arise if the order of assessment is under appeal?
13. As far as question Nos.2 to 5 are concerned, these issues had already arisen in T.C.(A)No.455 of 2008, dated 30.10.2012 [M/s.Indian Bank vs. The Deputy Commissioner of Income Tax], in the appeal preferred by the assessee for the assessment year 1991-92, whereby this Court, by judgment dated 30.10.2012, considered the payment of extra interest through M/s.Chandrakala & Co to various PSUs as entitled for deduction. It was found that the amount paid to the PSUs were properly accounted for disclosing therein before the Income Tax Authorities. This Court also referred to the judgment of the CBI Court relating to the prosecution taken on the Managing Director and other bank officials as regards the payment of additional interest. Referring to the circular issued by the RBI, we held that such payment was not opposed to the RBI circular, consequently the decision given on 30.10.2012, in T.C.(A).No.455 of 2008, would cover this issue in favour of the assessee.
14. As far as the payment of broken period interest is concerned, Learned counsel appearing for the assessee pointed out that the decision in CIT vs. M/s.Vijaya Bank reported in 187 ITR 541, which was rendered on 19th September, 1990, was very much available to the Assessing Officer, when he passed the assessment order under Section 143(3) on 26.03.1993. Thus, according to the assessee, the decision being well within the knowledge of the Assessing Officer, the question of reopening the assessement did not arise.
15. Leaving that aside for the time being, the issue on the claim of deduction on broken period interest was also a subject matter before this Court in T.C.(A)No.455 of 2008, dated 30.10.2012, where we had considered the decision of CIT vs.,M/s.Vijaya Bank reported in 187 ITR 541, as well as the decision of the Bombay High Court in the case of American Express Bank vs. Commissioner of Income Tax reported in 177 CTR 442 (Bom). Thus in paragraphs 14, 18, 19 and 21, ultimately we agreed with the assessee and set aside the order of the Income Tax Appellate Tribunal holding that the assessee was entitled to claim deduction on the expenditure incurred by way of payment of broken period interest. Thus, applying the decision of the Bombay High Court in the case of American Express Bank vs. Commissioner of Income Tax reported in 177 CTR 442 (Bom) and our own judgment dated 30.12.2012 in T.C.(A).No.455 of 2008, in this assessee's case on merits of reassessment, we have no hesitation in holding that the assessee is entitled to succeed that the reassessment on the above said issue is liable to be set aside.
16. We may point out herein that the Special Leave Petition filed as against the decision of the Bombay High Court in I.T.R.No.500 of 1997, dated 09.01.2002, was also dismissed by the Apex Court in the case of CIT vs. Deutsche Bank A.G., in SLP.(C) No.3710 of 2004, dated 27.01.2004, wherein the decision of the Bombay High Court in the case of American Express Bank vs. Commissioner of Income Tax reported in 177 CTR 442 (Bom), was referred to vide Sri Hanuman Sugar and Industries Ltd. v. Commissioner of Income-tax reported in [2004] 266 ITR 106.
17. This leaves us with the one and only question namely, on the validity of the reopening of the assessment under Section 147 of the Income Tax Act.
18. As far as the scope of power of the Assessing Officer to reopen the assessment under Section 147 of the Income Tax Act is concerned, in the decision in the case of Commissioner of Income Tax vs. Kelvinator of India Ltd., reported in 320 ITR 561, the Apex Court had an occasion to consider its scope and pointed out that the power to reopen post 1st April, 1989 amendment is much wider. However, the Apex Court pointed out that Section 147 of the Income Act does not give arbitrary powers to the Assessing Officer to reopen the assessments on the basis of 'mere change of opinion'. Pointing out the conceptual difference between power to review and power to reassess and the Apex Court observed as follows:-
6....The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer....
19. Keeping this enunciation of law in the background, when we look at the facts of the case, it is evident that one of the issues considered for reopening related to the payments made to PSUs through M/s.Chandrakala & Co by way of demand drafts on the additional interest on deposits. The payments were made during the previous year relevant to the assessment years starting from 1990-91 to 1993-94. Although for the assessment year, 1990-91, the assessee's claim was considered favourably in the original assessment, yet in respect of the assessment years 1991-92 to 1993-94, the Income Tax Officer, however, took a different view and brought the entire amount to tax. The fact situation in respect of all these assessment years was one and the same, the materials considered for 1991-92 to 1993-94 were no different from one considered in 1990-1991, the only difference was that for the assessment year 1990-1991, the Income Tax Officer accepted the assessee's case for deduction and for the assessment years 1991-92 to 1993-94, the Income Tax Officer, however, rejected the assessss's contention and added the same to income tax assessment as income from undisclosed sources and brought to tax under the provisions of the Act. These assessment orders passed for 1991-92 to 1993-94 were taken as the basis for reopening the assessment for 1990-1991. Evidently, while rejecting the assessee's claim for 1991-92 to 1993-94, there were no fresh materials at the disposal of Revenue to take a different decision. We are pointing out this only for the purposes of showing that when the facts remained one and the same through out from the assessment years 1990-91 to 1993-94 and there were no fresh materials at the disposal of the Revenue for the assessment years 1991-92 to 1993-94, the mere fact that the Officer had taken a different view for the assessment years 1991-92 to 1993-94, by itself would not clothe the department with necessary jurisdiction, as fresh material to fall under Explanation to Section 147 of the Income Tax Act to reopen the assessment for the year 1990-91. In other words what has been embarked upon while reopening the assessment for the assessment year 1990-91 is mere in the nature of review, rather than a reopening based on materials available at the hands of the Revenue. Thus, the issue raised comes directly under the decision of the Apex Court reported in 320 ITR 561, referred to above and we have no hesitation in accepting the assessee's contention that on a mere change of opinion, the assessment for the assessment year 1990-91 was sought to be revised under Section 147 of the Income Tax Act, a course which has been denounced upon by the Apex Court; consequently, we hold that the proceedings initiated suffer from want of jurisdiction.
20. We may further point out that the Supreme Court in the case of ESS ESS Kay Engineering Co. P. Ltd. vs. Commissioner of Income Tax, reported in 2001 ITR 818, held that reopening of assessment for an earlier assessment year based on the findings of fact made on the basis of fresh materials in the course of assessment of the next year was well within the scope of Section 147 of the Income Tax Act. Considering the fact that, in the case on hand, no fresh materials were stated to have been considered for the subsequent assessment years, we agree with the assessee's contention that there is total lack of jurisdiction under Section 147 of the Income Tax Act to reopen the assessment.
21. The other issue considered for reopening was on the broken period interest. As already noted in the preceding paragraphs, the original assessment under Section 143(3) was originally made on 31.12.1990, the reopening of assessment was made based on the decision in the case of CIT vs. M/s.Vijaya Bank reported in 187 ITR 541, which was rendered on 19th September, 1990. The original assessment under Section 143(3) was made on 26.03.1993, which means the decision of the Apex Court was very much available before the Assessing Officer at the time the original assessment was made under Section 143(3) of the Income Tax Act, while he considered the claim of deduction on the broken period interest. The assessee thus took the right plea that when the Officer had considered the claim of the assessee in the background of law declared by the Apex Court and granted the relief, the question of reopening the assessment based on the very same decision which was very much available as on the date of the original assessment, does not arise.
22. The Income Tax Appellate Tribunal, in its order made a reference to investment in Government securities, which would be of two nature, one permanent and other current investment. In the decision rendered in the case of American Express Bank vs. Commissioner of Income Tax reported in [2002] 258 ITR 601 (Bom), at page 604, the Bombay High Court referred to the investment by banking companies in Government securities, the issue therein also related to claim on broken period interest. The Bombay High Court pointed out that the bank subscribing to Government securities are at liberty to deal with securities like any other trader and to maintain Statutory Liquidity Ratio levels, every bank subscribes to the loans through the SGL namely Subsidiary General Ledger. Thus, there are two activities involved one being subscribing to the loan in Subsidiary General Ledger maintained in the public data office of the RBI, and the other is trading. The RBI pays interest on due dates on such securities to the holders of the securities every six months and after subscribing to the said loans, the banks could transfer such loans freely for consideration to the other banks. Thus, the subscription to the Government securities are more for the purposes of maintaining the SLR and one of such security being SGL.
23. As far as the assessee's case is concerned, the securities thus subscribed are part of its business and this was for the purpose of maintaining statutory liquidity ratio and thus the fact that they were classified as permanent and current investments for the purposes of complying with the Banking Regulations would not make nevertheless the investment a permanent one to deny the assessee, claim for deduction.
24. Learned counsel appearing for the assessee pointed out that the interest received in respect of these securities for the broken period were assessed under Section 28 of the Income Tax Act and taking note of this alone, this Court had already decided the issue in favour of the assessee in T.C.(A).No.455 of 2008, dated 30.10.2012. She pointed out that in denying the assessee's claim for deduction, no fresh materials were placed by the Revenue to embark on Section 147 proceedings. She also placed before this Court the circular issued by the RBI, dated 04.08.1998, which referred to some of the banks capitalizing the broken period interest included in the cost price on the ground that such accrued interest paid to the seller at the time of purchase was not recognised as a revenue expenditure for tax purpose. Clarifying this issue, the RBI observed as follows:-
It is observed that some banks capitalise the Broken Period Interest (interest accrued on the securities purchased upto the time of acquisition) included in the cost price, on the ground that such accrued interest paid to the seller at the time of purchase is not recognised as a Revenue Expenditure for tax purposes.
The matter has been examined and with a view to bringing about uniformity in the accounting treatment of Broken Period Interest on Government Securities paid at the time of acquisition and also complying with the Accounting Standards prescribed by the institute of Chartered Accountants of India, it has been decided that banks should not capitalise, the Broken Period Interest paid to seller as part of cost, but treat it as an item of expenditure under Profit and Loss Account as per AS 13.
It may please be noted that the accounting treatment explained above does not take into account taxation implications and hence banks will have to comply with the requirements of Income Tax Authorities in the manner prescribed by them.
Please acknowledge receipt.
25. In the background of this circular, dated 04.08.1998, she submitted that the claim of the assessee merits to be considered even on merits. We have already pointed out that the issue on broken period interest payment was considered favourably to the assessee's advantage in T.C.(A).No.455 of 2008, dated 30.10.2012. Leaving aside the merits considered in favour of the assessee, we thought it fit to consider this issue once again only for the purposes of considering the jurisdiction aspect raised by the assessee that the entire proceedings was devoid of any merits to confer legality to Section 147 proceedings.
26. As rightly pointed out by learned counsel appearing for the assessee, except for citing the decision in the case of CIT vs.,M/s.Vijaya Bank reported in 187 ITR 541, which was very much available before the Officer at the time the original assessment was made under Section 143(3) of the Income Tax Act, no materials were placed by the Assessing Officer for assumption of jurisdiction under Section 147 proceedings. Thus, in the absence of any other decision, subsequent to the date of the original assessment, we do not find any good ground to accept the Revenue's plea that the reopening was well within the parameters of Section 147 of the Income Tax Act. In the light of the aforesaid view, we set aside the order of the Income Tax Appellate Tribunal and there were no materials which would clothe the Assessing Officer, the right jurisdiction to reopen the assessment.
27. This leaves us with only one question, namely, the levy of additional tax. Learned counsel appearing for the assessee pointed out that the Income Tax Appellate Tribunal rejected the claim of the assessee on the correctness of the levy of the additional tax on the ground that the claim did not arise out of the assessment year. She pointed out that the additional tax levy was demanded in the assessment order, hence, the appeal was maintainable.
28. We find that the question of additional tax levy was considered under Section 143(1A) of the Income Tax Act originally in the 143(1)(a) proceedings against which the assessee is stated to have filed an appeal also before the Income Tax Appellate Tribunal. In the background of this, the Assessee raised an issue before the Commissioner of Income Tax (Appeals) that the additional tax levy originally was on the basis of computation under Section 115J of the Income Tax Act and the reopening proceedings went on assessing the income under normal computation procedure. Consequently, the question of levy of additional tax on the basis of computation under Section 115J of the Income Tax Act could not be retained in the present proceedings. In other words, in the proceedings now taken under Section 147 of the Income Tax Act, there was no scope of retaining the levy of additional tax made under Section 143(1A) of the Income Tax Act. The Commissioner of Income Tax (Appeals) pointed out that the issue was not arising from the order of the Assessing Officer under Section 143(3) read with 147 of the Act. Consequently, the Appeal was dismissed and this view was confirmed by the Income Tax Appellate Tribunal once again. When we look into the assessment order passed under 143(3) of the Act read with 147 proceedings, we find that the assessment order considered the levy of additional tax at 20% to the tune Rs.3,17,61,714/-, the computation made under the regular assessment procedure and not under Section 115J of the Income Tax Act.
29. Considering the fact that the levy of additional tax in respect of computation under Section 115J of the Income Tax Act is already a subject matter in an appeal filed by the assessee and that the present assessment is not concerned about computation under Section 115J of the Income Tax Act, but under the regular procedure, the question of thus adding additional tax in the regular assessment proceedings does not arise. However, the correctness or otherwise of the levy on the computation under Section 115J of the Income Tax Act is a matter, which has to be subjectively canvassed by the assessee in the manner known to law and recording the statement of assessee that the said issue is subject matter pending in appeal before the Income Tax Appellate Tribunal, the merits, we leave at this point and no farther. In the light of the above, we hold that the question of demand of additional tax under Section 143(1A) of the Income Tax Act on the regular assessment proceedings, does not arise.
In the light of the above observations, we set aside the order of the Income Tax Appellate Tribunal and allow the Tax Case Appeal. No costs.
(C.V.,J) (T.S.S.,J) 11.02.2014 pbn Index :Yes/No Internet:Yes/No CHITRA VENKATARAMAN, J. and T.S.SIVAGNANAM, J. pbn To 1.The Income Tax Appellate Tribunal 'A' Bench, Chennai.
2.The Commissioner of Income-Tax (Appeals)-V, 121, Mahatma Gandhi Road, Chennai - 600 034.
3.The Deputy Commissioner of Income Tax, Special Range-I, 121 Nungambakkam High Road, Chennai 600 034.
Tax Case (Appeal) No.416 of 2008 11.02.2014