Income Tax Appellate Tribunal - Cochin
Dy. Cit vs Dhanalakshmi Bank Ltd. on 31 August, 2000
Order K.P.T. Thangal, J.M. These appeals are by the revenue and pertain to the assessment years 1984-85 to 1989-90. The first ground urged in the appeal by the revenue for the assessment years 1984-85 is common to the remaining assessment years and for those years this is the only ground. The ground is directed against the order of the first appellate authority deleting the disallowance made by the Inspecting Assistant Commissioner (Asst.) in respect of the interest paid to the Reserve Bank of India (RBI) on the ground that the expenditure cannot be considered as having been incurred for any infraction of law and it is not in the nature of penalty relying on the decisions in the cases of Corporation Bank, Bangalore and Syndicate Bank, Manipal. The case of the revenue is that the above decisions have not been accepted by the department and references have been filed before the High Court.
2. While framing the assessment orders for the assessment years under appeal, the assessing officer noticed that the assessee had paid penal interest to Reserve Bank of India (RBI) of different sums for the assessment years under consideration for non-maintenance of Cash Reserve Ratio (CRR) and/or Statutory Liquidity Ratio (SLR). This was disallowed by the assessing officer on the ground that the payment made represented penal interest and hence the same is not allowable in computing the income. The assessee contended before the first appellate authority that the said amount was paid to the Reserve Bank of India for non-maintenance of CRR and SLR as required by the Banking Regulations Act of the Reserve Bank of India. It was contended before the first appellate authority that the payment was not for any infraction of law and hence it was contended that it was an allowable expenditure. For the above proposition, the assessee also placed reliance on the decision of the Bangalore Bench of the Tribunal in the case of Syndicate Bank, Manipal v. ITO in ITA No. 750/Bang/1985 dated 15-3-1989, relating to the assessment year 1985-86. The first appellate authority allowed the claim. While doing so, the first appellate authority placed reliance on the decision of the Hon'ble Supreme Court in the case of Mahalakshami Sugar Mills Co. v. CIT (1980) 123 ITR 429 (SC) and also the decision of the Bangalore Bench of the Tribunal cited (supra). Aggrieved by the orders of the first appellate authority, the revenue is in appeal before the Tribunal.
3. Inviting our attention to the letter dated 30-4-1986, addressed to the assessee by the assessing officer requiring the assessee to furnish details of fines, penalties, if any, levied by any statutory authority, the learned Departmental Representative submitted that the assessee vide its letter, dated 31-7-1986, has submitted that no penalty or fine has been levied by any statutory authority during the year. However, the assessee has admitted in this letter that in that year and subsequent year the assessee had paid penal interest to RBI for non-maintenance of cash reserve requirements.
4. The learned Departmental Representative submitted that whatever be the nomenclature, what the assessee paid was penal interest. This is all the more clear from the language of section 42(5)(a) of the RBI, 1934. He submitted that all the schedule banks are supported to maintain certain percentage of assets for easy liquidity of the deposits, as laid down in section 24 of the said Act. Sec. 24 stipulates as follows :
"24. Maintenance of a percentage of assets.(1) After the expiry of two years from the commencement of this Act, every banking company shall maintain in India in cash, gold or unencumbered approved securities, value at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than 20 per cent of the total of its demand and time liabilities in India.
ExplanationFor the purposes of this section, "unencumbered approved of banking company shall include its approved securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of.
(2) In computing the amount for the purposes of sub-section (1) the deposit required under sub-section (2) of section 11 to be made with the Reserve Bank by a banking company incorporated outside India and any balance maintained in India by a banking company in current account with the Reserve Bank or the State Bank of India or with any other bank which may be notified in this behalf by the, Central Government, including in the case of a scheduled bank the balance required under section 42 of the RBI Act, 1934 (2 of 1934), to be so maintained, shall be deemed to be cash maintained in India :
(2-A) (a) Notwithstanding anything contained in sub-section (1) or in sub-section (2), after expiry of two years from the commencement of the Banking Companies (Amendment) Act, 1962 (36 of 1964
(i) a scheduled bank, in addition to the average daily balance which it is, or may be, required to maintain under section 42 of the RBI Act, 1934 (2 of 1934), and
(ii) every other banking company, in addition to the cash reserve which it is required to maintain under section 18, shall maintain in India, (A) in cash, or (B) in gold valued at a price not exceeding the current market price or in unencumbered approved securities valued at a price determined in accordance with such one or more of, or combination of, the following methods of valuation, namely, valuation with reference to cost price, market price, book value or face value, as may be specified by the Reserve Bank from time to time; an amount which shall not, at the close of business on any day, be less than twenty-five per cent of such other percentage not exceeding forty per cent as the Reserve Bank may, from time to time, by notification in the Official Gazette, specify, of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight."
The learned Departmental Representative submitted that if a banking company fails to maintain cash reserve or security reserve at the prescribed percentage, then as per section 24(4)(a) of the Banking Regulation Act, 1949, such banking company will be liable to pay to the RBI in respect of that day's default, penal interest for that day at 3 per cent per annum above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum. As per section 24(4)(b) of the Act, if the defaulter continues to maintain the amount at the prescribed minimum, then such banking company is liable to pay penal interest at the increased rate of five per cent instead of three prescribed for the default under section 24(4)(a). The learned Departmental Representative further inviting our attention to sub-section 6(a) of section 24 of the Banking Regulation Act, 1949, submitted that the language of this sub-section makes it clear that what the assessee paid for the default under sub-sections (4) and (5) is nothing but penalty. The learned Departmental Representative, for this purpose, laid emphasis on sub-section (6)(a) of section 24, which reads as under :
"(6)(a) The penalty payable under sub-section (4) and sub-section (5) shall be paid within a period of fourteen days from the date on which a notice issued by the Reserve Bank demanding payment of the same is served on the banking company and in the event of failure of the banking company to pay the same within such period, the penalty may be levied by a direction of the principal civil court having jurisdiction in the area where an office of the defaulting banking company is situated, such direction to be made only upon an application made by the Reserve Bank in this behalf to the court."
This Banking Regulation Act, 1949 was promulgated by the RBI as empowered by section 42 is as follows :
"Cash reserves of scheduled banks to be kept with the bank (1) Every bank included in the Second Schedule shall maintain within the bank an average daily balance the amount of which shall not be less than three per cent of the total of the demand and time liabilities in India of such bank as shown in the return referred to in sub-section (2) :
Provided that the bank may, by notification in the Gazette of India increase the said rate to such higher rate as may be specified in the notification so however that the rate shall not be more than twenty per cent of the total of demand and time liabilities."
Again inviting our attention to sub-section (5)(a) of section 42 of the RBI Act, 1934, the learned Departmental Representative submitted that this section speaks of the penalty imposable by sub-sections (3) and (4). According to the learned Departmental Representative the provisions of the Banking Regulation Act, 1949, and RBI Act, 1934, make abundantly clear that what the defaulting banking company pays for the failure to maintain the cash reserve or security reserve at the minimum prescribed percentage, is penal in nature. The mere expression of the words "penal interest" does not make the payment any less than penalty. The learned Departmental Representative submitted that the reliance placed by the learned first appellate authority on the decision of the Hon'ble Supreme Court in the case of Mahalakshmi Sugar Mills Ltd. v. CIT (supra) is misplaced since the case is distinguishable on facts. He further submitted that in the case before the Supreme Court, the Apex Court found that what was paid by the assessee was interest on arrears of cess and there was a separate penalty leviable under section 4 of the U.P. Sugarcane Cess Act, 1956. which was held to be a criminal liability. Therefore, the case of the assessee is distinguishable. The learned Departmental Representative submitted, relying on the decision of the Hon'ble Supreme Court in the case of Prakash Cotton Mills Ltd. v. CIT (1993) 201 ITR 684 (SC), that a deduction can be allowed if it is wholly compensatory in nature and no penal element is involved. For the same proposition, the learned Departmental Representative relied on the decision of the Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT (1998) 233 ITR 199 (SC).
5. Replying to the above, the learned counsel for the assessee submitted, relying on the decision of the Bangalore Bench of the Tribunal in the case of M/s Syndicate Bank, Manipal v. ITO ITA No. 750 (Bang) 85, dated 15-3-1989, that there is no infraction of law by the assessee and what the assessee has paid is interest for not complying with the instructions/regulations of the Apex Bank. He also submitted that the mere use of the word "penalty" does not ipso facto lead to the conclusion that it has a penal element. The assessee's counsel submitted that many times because of the fluctuations in the market the depository position changes putting the assessee in a helpless position. Because of the fluctuations the assessee is not in a position to maintain the prescribed limit with regard to the reserves intact and as such there is no infraction of law wilfully. The assessee's counsel submitted that the order of the Commissioner (Appeals) is, therefore, liable to be confirmed,
6. Replying to the above, the learned Departmental Representative submitted that there is no creditor-lender relationship between the RBI and the assessee-bank. The penalty levied in this case is not compensatory. It is for infraction of law. The term "interest" is used. For calculation of the penalty, the period the rate and the principle amount are to be taken into account. Otherwise, it is penal in nature.
7. We have heard rival submissions and gone through the orders of the revenue authorities and the decisions relied on by the contending parties. Though mens rea is not relevant as far as penalty for infraction of law is concerned, still if the assessee has, without any action from its side, crossed the border of permissible limit, such action cannot be treated as a criminal action liable to penalty, or for that matter infraction of law. In banking parlance it is an additional interest, termed as "Penal interest." In the instant case of the assessee, the assessee failed to maintain the ratio of cash reserve and statutory liquidity prescribed by the Banking Regulation Act, 1949. For such default assessee is liable to pay penal interest. It is true that there is no creditor-lender relationship between the RBI and the assessee. Still the RBI is the controlling body. It has to keep a check on the assessee and to guard the interests of the depositors. It is for this purpose that the RBI prescribed certain limit with regard to cash reserve and security reserve ratio. Penal interest is automatic in nature and without any further action on the part of the assessee the consequence follows. We are unable to agree with the learned Departmental Representative that that the word "penalty" used in sub-section (6)(a) of section 24 of the Banking Regulation Act, 1949, would not lead to the conclusion that interest paid by the assessee is not interest, but penalty for infraction of law. For imposing any penalty, the assessee by action or inaction has to contribute something. Falling short of the percentage of assets by cash or reserve may be unintentional. By levy of the penalty interest the assessee is checked from falling into the trap. Section 24(4)(a) and (b) of the Banking Regulation Act, 1949, use the words "rate of penal interest". It is interest only.
8. In the case of M/s Syndicate Bank, Manipal v. ITO (ITA No. 750 (Bang) 85, the Bangalore Bench of the Tribunal held :
"Although the circular describes the payment as penalty interest, whether it is penalty or not has to be decided not on the basis of the RBI circular but on the basis of the statutory provisions. We have already considered those provisions and held that the payment is not infraction of law."
While coming to the above conclusion, the Tribunal, Bangalore Bench, vide para 2 of its order has considered section 42 of the RBI Act. In conformity with the view of the Bangalore Bench of the Tribunal in the case mentioned (supra) and also for the reasons stated hereinabove, we are of the view that the order of the learned first appellate authority does not call for any interference.
8.1 The only other ground left in the appeal of the revenue for the assessment year 1984-85 is directed against the order of the Commissioner (Appeals) deleting the addition of Rs. 90,000 assessed as income from other sources holding that though there may be irregularities in accepting the deposits, it cannot be treated as income of the assessee. The case of the revenue is that the first appellate authority erred in holding that section 68 of the Income Tax Act contemplates addition in respect of cash credits appearing in the books of accounts and it does not contemplate addition in respect of any deposit standing in the name of depositors in a financial institution. Further, section 68 does not make any distinction between other assessees and financial institutions.
9. The facts leading to the above dispute are summarised as under : The assessing officer made an addition of Rs. 90,000 as the branch manager could not identify persons who deposited the amounts, and also for the reason that the persons who are said to have introduced the depositors have denied the fact of introduction of the depositors. One of the persons introduced was Sri. C.P. Simon. Summons issued under section 131 of the Income Tax Act, 1961, were returned with the endorsement "not known" and the other introducer Sri A.A. Jose appeared and stated that he has not introduced anybody to the assessee-bank for the purpose of depositing money. The assessing officer also found that the signatures varied with regard to the same deposit, viz., the signature of the person at the time of depositing the money is entirely different from the signature of the person at the time of receipt of the money after an interval of few days. For all these, reasons, the assessing officer came to the conclusion that the assessee has failed to identify the depositors to prove the genuineness of the deposits. He accordingly made the impugned addition.
10. When the matter was carried before the first appellate authority, the addition was deleted. The learned first appellate authority held that there was no dispute that the money did not represent the unaccounted income of the assessee. He further held that the assessee being a public limited company under the control and supervision of the RBI, the bank had no other source except the income from banking activities. Hence, the learned first appellate authority held that against such deposits section 68 of the Income Tax Act cannot be invoked. Further, the irregularities in accepting the deposits cannot be a ground for treating the same as the income of the assessee. He also held that section 68 does not contemplate the addition in respect of any deposits standing in the names of the depositors in the hands of the assessee, a financial institution. Aggrieved by the above order, the revenue is in appeal before the Tribunal.
11. Contending parties reiterated their respective stands reading of para 7 of the assessment order makes it clear that the assessing officer has noticed violation of the procedures laid down by the RBI in accepting the deposits. He states that these deposits were introduced in a reckless manner. The signature of the introducer, the signature of the depositor, the signature of the depositor at the time of withdrawal of the deposit are not properly recorded. Signature of some of the depositors at the time of making the deposits and withdrawing the same looked entirely different. Hence, summons were issued to the introducing persons, viz., Sri A.A. Jose and Sri C.P. Simon. The summons issued to Sri Simon were returned unserved while Sri Jose appeared on 22-5-1984 and affirmed that he had not introduced anybody to M/s Dhanalakshmi Bank Ltd. the assessee, for the purpose of making deposits. The branch manager on oath also could not identify the depositors. The cumulative effect of all these led the assessing officer to make the addition under section 68.
12. We are afraid failure of the branch manager to identify certain depositors alone is not sufficient to treat the deposits as the income of the assessee and add the same in its hands under section 68. We have perused the sworn statement recorded from the bank manager on 5-8-1996. In this statement, the bank manager, Sri RK. Sacharia, states as follows :
"In this connection I may inform you that unless we have written instructions from higher authorities or the government or any judicial court, we cannot withhold the payments of fixed deposits on the due dates.
In the case of fixed deposits, the banks were not usually insisting on written introductions. In some cases, there were introductions signed by the person who is introducing the depositor, in some other cases we will enquire about the prospective depositors' contacts and in many cases, we accept the deposits without any introduction. This is because there is no regular transactions in the fixed deposit account. When once the deposit is received, it will be repaid the due date on the production of the fixed deposit receipt issued by the bank. So there is no necessity for identification of the depositor. Unless the fixed deposit receipt is returned after endorsement the deposit is not repaid. In the case of savings bank and current account, the bank insist on proper introduction because the transactions are continuous and frequent. We also note the names and addresses as furnished by the depositors and we had no necessity to enquire about his whereabouts as the depositor will come to our office on the due date for the encashment of deposits. The address given in the fixed deposits are those furnished by the depositors themselves and we had no ground for any suspicion about the addresses.
I understand that some of the depositors were called by the Income Tax Officer, A-Ward, Trichur and their deposits were cleared for payment over phone. I hereby declare that there was no objections from the Income Tax Officer for repayment of any of the deposits and as such I had repaid the deposits. It was also my belief that the depositors who deposited the money with the bank owned the same and was not Benamidar for anybody else and I acted in good faith."
We find considerable force in the argument of the assessee's learned counsel that if the revenue suspects the genuineness of the deposits, it would have been proper to instruct the assessee to stop payment till the depositors appear before the assessing officer and satisfies him. It is difficult to hold that when thousands of deposits are made with the assessee-bank, the assessee should be in a position to identify each and every depositor. It is true that as far as the taxing authorities are concerned banks and individuals or for that matter any institution are liable to be taxed and treated equally. At the same time, it is also true that law does not demand impossible. Looking to the facts and circumstances of the case, we are of the view that the order of the learned first appellate authority does not warrant any interference.
13. The appeal by the revenue for the assessment year 1984-85 on both grounds fails and the appeals for the assessment years 1985-86 to 1989-90 on the common ground also fail.
14. In the result, all the appeals by the revenue fail and are dismissed.