A.D. Jain, Judicial Member -
(1.) THESE are department's appeals for the assessment years 1998-99 and 1999-2000.
(2.) I.T.A. No. 115(ASR)/2003 (Asstt. year 1999-2000):
The department has taken the following grounds:
1. That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting additions of Rs. 59,41,593/- made by the AO by drawing figure of peak credits in various doubtful accounts by treating it as unexplained income of the assessee from the sources other than banking business and not eligible for exemption Under Section 80P of the Income tax Act, 1961 under the provisions of Section 68 of the Income tax Act, 1961 in various bank accounts in respect of which the assessee bank failed to prove the identity of the so called account holder and also expressed its inability to prove the genuineness of the creditors/depositors.
2. That the ld. CIT(A) while upholding the initiation of notice Under Section 148 has admitted that the relevant accounts under consideration based on which notice was issued were operated in violation of banking norms by not obtaining any introduction photo or proper address which mans identity of the depositor was not verifiable. The amounts were deposited in the ledgers of the bank constituting the books of account of the appellant and in the light of finding of the investigation wing, the onus was on the appellant to establish the identity of the depositor which it failed to do so.
That while allowing relief at Sr. No. 1 above, the ld. CIT(A) has erred in admitting additional documentary evidence in violation of Rule 46A especially when vide reply dated 27-3-2002 before the A.O., the assessee bank denied to produce the bank account holders on the plea that it will adversely effect its banking business. As such the deletion of addition made was not called for.
5. The assessee has raised a ground in this case invoking Rule 27 of the Income lax (Appellate Tribunal) Rules, 1963, according to which, the respondent in an appeal may support an order decided against him. As per this ground, the learned CIT(A) was not justified in upholding the initiation the proceedings under Section 147/148 in the facts and the circumstances of the case, more particularly, when on appreciation of the same facts, he held the entire addition as bad in law.
6. We are taking up the issue raised by the assessee first. Before the learned CIT(A), the assessee contended that on the basis of inspection of the record, it could be said that the reasons recorded by the A.O. did not even remotely suggest to any subjective satisfaction having been arrived at by the A.O., before issuance of the said notice of reassessment; and that the A.O. was simply swayed by the directions of the DDIT to proceed in the manner proposed by the DDIT, without first ascertaining on his own, whether or not on the facts and as per law, such a notice could be validly issued to the assessee bank. The learned CIT(A) rejected the assessee's contention, observing that the relevant accounts, based on which the notice was issued to the assessee, were operated in violation of banking norms by not obtaining any introduction photo or proper address, which meant that the identity of the depositor was not verifiable; that the amounts were deposited in the ledger of the bank constituting books of account of the assessee and in the light of findings of the Investigation Wing, the onus was on the assessee to establish the identity of the depositors, which it had failed to do; that due to the failure of the assessee to prove the genuineness of the transactions, the A.O. took recourse of Section 148 of the Act and based on the material gathered by the Investigation Wing, the A.O., drawing his satisfaction, proceeded to issue the notice; that the reason to believe was of the A.O. and it was based on the material available on record; and that it could not at all be said that the A.O. had proceeded on the directions of the Investigation Wing. In this manner, the learned CIT(A) upheld the notice issued under Section 148 of the Act.
7. Before us, the stand of the assessee has remained much the same as that before the learned CIT(A). However, the categorical findings of fact recorded by the learned CIT(A) have remained firm. The assessee has not been able to show as to how the satisfaction recorded was not of the A.O., but of the DDIT. The reasons recorded also did not suggest that the satisfaction was not that of the A.O., but of some other authority. Moreover, the issue now stands well settled by the Hon'ble Supreme Court in the case of "ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd." 291 ITR 500 (SC), wherein, inter alia, it has been held that the expression "reason to believe" in Section 147 of the Act would mean cause or justification; that if the A.O. has cause or justification to know or suppose that income has escaped assessment, he can be said to have reason to believe that income had escaped assessment; that the expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion; that what is required is "reason to believe" but not the established fact of escapement of income; that at the stage of issue of notices, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief; that whether the material would conclusively prove escapement of income is not the concern at that stage; and that this is so because formation of the belief is within the realm of the subjective satisfaction of the Assessing Officer.
8. As to how "ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd." (supra), is not applicable to the present case, the learned Counsel for the assessee has not been able to make out, though this decision was specifically pointed out to him at the time of hearing of the appeals. It is nowhere the case of the assessee that the A.O. did not have cause or justification to know or suppose that income had escaped assessment. Once this is so, it has to be said that the A.O. had reason to believe that income had escaped assessment.
9. In view of the above, we do not find any force in this grievance of the assessee and the same is hereby rejected.
10. Coming to the grounds taken by the department, the facts are that the assessee filed return of income on 29-6-1999. In the return, the assessee claimed profit of Rs. 3,01,16,750-25 as exempt under Section 80P of the Income tax Act. It was processed under Section 143(1) of the Income tax Act on 27-3-2002. Later on, the DDIT(Inv.)-II, Jalandhar, vide his letter dated 1-2-2000 intimated to the A.O. that the Investigation Wing had conducted a survey at the assessee-bank on 1-10-1999; and that after a long delay and prolonged pursuation only, the bank had supplied the copies of account opening form. The details of these accounts were intimated as follows:
11. The Investigation Wing, in its aforesaid letter, further intimated that huge transfers from FDRs were credited to the above accounts and afterwards, the cash was withdrawn and the accounts were closed; that the bank was asked to provide the identities of these account holders; that the bank expressed its inability to prove the genuineness of the creditors/depositors; that the Investigation Wing had recorded the statement of the Managing Director of the Bank, wherein he had admitted that the introducer, Shri Vijay Sethi, M.D. of the Bank had died and as the account holders had given more than one address, all incomplete, in the account opening forms; that the bank was unable to prove the identities of the account holders; and that since the bank was not able to prove the identity of the creditors/depositors, action under Section 68 of the Act in the hands of the bank was suggested.
12. On receipt of the above information, the A.O. issued a notice under Section 148 of the Act, which was served on the assessee. In response, vide letter dated 23-6-2000, the assessee stated that the return already filed on 29-6-1999 be treated as having been filed in compliance of the said notice. Notices under Section 143(2)/142(1) of the Act, alongwith questionnaire were served on the assessee, which were complied with.
13. The A.O. observed that the assessee bank, alongwith its Head Office in Civil Lines, Jalandhar, had seven branches, i.e., Partap Bagh Branch, Kishanpura Branch, Mithapur Branch, New Sabzi Mandi Branch, Nawanshahr Branch, Banga Branch and Goraya Branch; that as per the letter of the assessee, separate books of account were kept by each branch and at the end of the financial year, a consolidated profit and loss account and balance sheets were prepared; that during the assessment proceedings, copies of accounts and account opening forms were required to be produced; that the assessee was also called upon to establish the identities of the account holders; and that the assessee filed a copy of account of the following savings bank accounts:
14. From the above, the A.O. observed that the addresses given were incomplete; that they depicted only the names of the colonies/Bastis which were spread over thousands of acres and were having thousands of houses; that the address of the account holder only depicted the name of road/which stretched in kilometers and a number of colonies were located thereon; that the address of Ramesh Kumar and Mohinder Singh, account holders of account No. 1571 above, was Ladowali Road, Jalandhar; that Ladowali Road started from Shastri market and extended upto BSF Chowk, i.e., a distance of about 2 Kms.; that it had so many colonies located on both of its sides; that so, it was very difficult to locate Shri Ramesh Kumar and Shri Mohinder Singh; that so much so, even the names of their father/mother had not been given; that Jawahar Nagar, Mota Singh Nagar, Focal Point, Bye Pass, Basti Sheikh were very big colonies and thousands of landlords/tenants were residing in each colony; that it appeared that while opening the account, the bank had not obtained the full address, for the reasons best known to them, in violation of the banking rules; that this went to establish that the assessee was working as an escape-route to tax dodgers by firstly not obtaining the complete address of the account holder and then contending that the bank was in no way responsible to give the complete address or prove the genuineness of the identity of the account holders. It was observed that the following were the introducers of the account holders having account Nos. as shown against each:
15. In order to verify the contention of the bank, the A.O. issued summons to introducers at Sr. Nos. 2, 6, 8 and 9 above. It was seen that the introducers at Sr. Nos. 2 and 9, i.e., Shri Vijay Sethi, M.D. of the bank, and Shri M.L. Bhalla, the Manager of the bank, were the own employees of the assessee bank and the introducer at Sr. No. 6, i.e., Shri R.G. Goyal, was the bank's existing customer; that the statement of Shri R.G. Goyal was recorded, in which, he stated that he had introduced one Shri Rajinder Kumar s/o Tilak Raj, Kishanpura, Jalandhar, having account No. 1532, at the instance of the Manager of the bank, but actually he was not known to the account holder, i.e., the said Shri Rajinder Kumar; that as regards the introducer at Sr. No. 8, i.e., M/s. New S.K. Traders, Jalandhar, the summons remained unserved, as the addresses in the summons could not be traced out, because the address was incomplete; that the bank did not even take the trouble to produce the certificate from its own Directors to disclose the exact/full address of the persons whom they had themselves introduced, at Sr. No. 3 and 5, who were stated to be the existing Directors of the bank; that the assessee, vide his two letters, had given only the addresses of the introducers and had contended that it was not obliged to produce the account holders; that this version of the assessee was incorrect, since only the full address of the account holder was asked for; that the assessee had thus declined to provide the identity of the account holders/depositors, by not giving their complete addresses; that it had been stated that the bank obtained a witness as introducer regarding the identity of the person who opened an account; that the bank accepted the introduction of the person in accordance with the rules framed in this regard; that the so-called introducer was, in no way, accountable or answerable to the Income tax Department regarding the identity of the account holders, rather, he was responsible to the bank, which accepted the identity of the person as genuine at the instance of the introducer; that as per Section 68 of the Act, it is the onus of the bank to explain the credit entries in its books of account; that the bank had failed to give the full addresses of the account holders and as such, the case was covered in the first limb of Section 68; that it appeared that the bank had accommodated the account holders by opening accounts in the names of unidentified persons, precluding the department from further smooth enquiry into the source of the deposit of funds by the account holders; that the proceedings in the case had started on 16-3-2004 by issuance of notice under Section 143(2) of the Act; that the assessee bank had purposely been seeking adjournments, thereby prolonging the proceedings upto the last week of the time barring month, when it rushed in with various letters, contending that it was not the obligation of the bank to disclose the identity of the account holders by way of complete addresses; that this showed that the assessee wanted to purposely shift the responsibility on to the introducers, which established the non-cooperation of the bank in the finalisation of the assessment proceedings in lime; that it had been gathered that obtaining of photograph of the account opening person had been made compulsory w.e.f. August, 1994; that the assessee bank had not even cared to obtain photographs of the account holders, which also showed that the bank had purposely acted in gross violation of the instructions of the Govt.; that the bank had thus failed to discharge its onus to disclose/establish the identity of the account holders by not giving their addresses as required under Section 68 of the Act; that the peak deposits in each account had been worked out, which were deemed to be the income of the assessee bank from sources other than its banking business which was exempted under section SOP of the Act; and that the total peak credits amounting to Rs. 59,41,593/- were being treated as unexplained income of the assessee bank for the year under consideration.
16. In appeal before the learned CIT(A), the assessee filed written submissions, copies of accounts of various account holders and other supporting documents. It was contended that out of these documents, certain documents had been filed before the A.O., whereas certain documents could not be produced before the A.O., since sufficient opportunity had not been afforded to produce the same, as the assessment proceedings were seriously pursued by the A.O. only towards the close of the limitation period. The assessee thus requested the CIT(A) to admit these documents stating that these documents could not strictly be termed as additional evidence, since they were only informative in nature with regard to the identity of the bank's clients and their respective accounts with the bank, because the assessee bank had been under the bonafide belief that it was not obliged to file such documents in respect of its depositors, who had been introduced either by the bank's own staff members, or by some one already having a bank account with the assessee bank.
17. The aforesaid request of the assessee was forwarded by the learned CIT(A) to the A.O. for his comments. The A.O. objected to the admission of the additional evidence, stating that the assessee, vide its reply dated 27-3-2002, filed before the A.O., had denied to produce the account holders on the plea that it would adversely affect the banking business of the assessee bank; and that the case did not get covered by Rule 46A(1) of the Income tax Rules, 1962. The bank, on the other hand, stated that its stand held good, since the bank could not be equated with others for the purpose of Section 68 of the Act.
18. The CIT(A) observed that since the documents submitted by the assessee in appeal were in relation to the additions made and could not be produced at the time of the assessment proceedings, the case was covered by the relevant clause as laid down under Rule 46A(1) of the Income tax Rules, 1962. The learned CIT(A) thus admitted the said additional documentary evidence.
19. Apropos the merits of the case, the assessee submitted before the learned CIT(A) that the A.O. had erred in holding that the accounts held by the bank in its ledger of customers could be considered as the personal accounts of the bank, the credits in which were required to be explained by the bank; that under the Banking Companies Act, 1959, multifarious functions and services are performed by the bank and accounts are operated by the customers, there being no choice with the bank to allow or not to allow the operation of the accounts by the respective account holders; that therefore, the banking company could not be equated with any individual or firm or other person; that the banking company is not even under obligation to question the source of the amount deposited with it in cash or otherwise and accordingly, even the provisions of Sections 269SS and 269T have not been made applicable to transactions made with the banking company; that the requirement of getting introduction of other persons was not applicable in the case of other persons, but introduction in the case of a bank was entitled to safeguard the bank against any fraud committed against it by any unscrupulous person/customer, since the bank deals with the general public and in this respect also, the bank cannot be equated with others, so far as regards Section 68 of the Income tax Act; that for any failure on the part of the assessee by not taking proper introduction while opening the new account, it gets deprived of the statutory protection given to collecting bankers Under Section 131 of the Negotiable Instruments Act, 1881, which is available for cheque transactions; that the bank could rely on the introduction of any old customer; that where there is any negligence in the opening of the current account, so as to affect the rights of the true owners of the cheques, the protection afforded under Section 131 of the Negotiable Instruments Act cannot be availed of by the bank; that where the account is opened only through cash deposit and is throughout operated in the same manner, the provisions of Section 131 of the said Act would not be applicable, since the opening of the account by cash is a little different from opening an account by cheque; that as such, the provisions of Section 68 of the Act are not applicable, the banking company being under no legal obligation to question the source of money deposited by its customers, nor can it compel its customers to deposit the money in cash or by cheque/draft; and that if at all the identities of the customers were found to be doubtful, it was also that the bank would lose the protection Under Section 131 of the Negotiable Instruments Act.
20. The assessee further submitted before the learned CIT(A) that in three accounts, i.e., account numbers 8211,8212 and 8213, the introducer was none other than the deceased Managing Director of the Bank itself and if the introducer is known to the bank, the formalities are well met with; that so far as regards the addresses of the account holders being not correct, the bank was under no legal obligation to make such enquiries, since if the bank fails to take a proper introduction, it would lose the protection under Section 131 of the Negotiable Instruments Act; that the bank is run by its employees and directors who keep changing periodically and if any account was found doubtful at a much later date when the introducer had passed away, the bank could not be held responsible for any alleged default in the opening of the account, or for non verification of proper address; that for the three accounts opened through the introduction of the late M.D., all the credits were by transfer from the Kishanpura branch of the Bank and the original investments were made as back as in the year 1992 and on maturity, the same were transferred to the Head Office of the bank; that since the origin of the amount fell in the earlier years, the same could not be taxed in the year under consideration; that so far as regards account Nos. 954, 955 and 956, the introducer was Shri Parmod Sharma, Accountant of the assessee bank, who admitted the fact of knowing the account holders personally, whereas account No. 9803 of Shri Harbhajan Singh was introduced by Shri Anil Chopra, Director of the assessee bank; that in this account, certain cheques, which could not be acknowledged, were sent to Shri Harbhajan Singh through registered post at his given address and had not been received back undelivered by the bank; that certain accounts were from all the Directors of the bank, where no independent introduction was needed to open their account and in the case of Shri Swaran Singh, a notice under Section 142(1) of the Income tax Act was issued by the A.O.; that in view of the service of the said notice on Shri Swaran Singh, Director of the bank, there was no legal basis to treat the peak credit in his account as the income of the bank; that in the case of Shri J.P. Singh, the transaction had been owned up by Smt. Harsimranjit Kaur and thus, there was no basis to tax the same again in the hands of the bank; that account No. 1658 was introduced by Shri Pawan Sharma, employee of the bank; that there was no substance in the A.O.'s allegation that the assessee bank did not take proper introduction while opening these accounts; that the A.O. ought to have applied his mind to the facts of the case, as to whether the amount which stood credited in the accounts of its customers could be deemed to be income earned by the assessee bank, as the discretion vested with the A.O. should have been exercised in favour of the assessee rather than against it; and that alternatively, there being no finding that the bank was engaged in any business other than the banking business, the entire income added should have been allowed as exempt under Section 80P of the Act.
21. By virtue of the impugned order, the learned CIT(A) deleted the additions made by the A.O., holding as follows:
I have considered the submissions of the appellant and have gone through the details filed during the course of appellate proceedings as well as the information lying on the records. Looking at the nature of activities of the appellant it can be said that not withstanding the facts of the case, the appellant's case was subject to rules laid down under Banking Regulation Act and as per regulations from RBI it has to maintain CRR/SLR ratio. All the banking operation are under audit and report in this regard goes to RBI. Therefore, its case can not be treated at par with the cases of other persons i.e. Individual/firms etc. because the bank does not have any control like other persons can exercise in respect of the amounts credited in their accounts. The bank is to maintain accounts of the customers which can only be operated by those customers by facility of cheques/drafts/cash vouchers and the bank being the custodian of the money cannot have control over the amount in these accounts, being operated by account holder than to provide the clement of interest or to charge interest on the credit/debit balances in these accounts. It is not the case that the accounts were not introduced by the addresses of the account holders were not complete. In respect of the first three accounts which were introduced but the addresses of the account holders were not complete. In respect of the first three accounts which were introduced by Ex. M.D. of the bank and wherein peak of Rs. 1025689/-, Rs. 1435122/- and Rs. 1322667/- have been worked out by A.O., the A.O. has omitted to consider that the credit in these accounts were by way of transfer entries. The major credit in each account being transfer by RMRD (Ready money recurring deposit account) it was transferred to head office from the branch office of the appellant in Kishanpura, Jalandhar. These transfers were on account of encashment of the FDRs which were for the period earlier than the year under consideration and since consolidated account was drawn by the bank for its branches at Head Office, Jalandhar, therefore, even books of account of the branches became the books of account of the appellant bank and amounts credited in these books in the earlier years wee not taxable Under Section 68 as income of the relevant year. Coming to the main entry in the account No. 8211 of Rs. 899723/- the basis of the amount was the amount of Rs. 4 lakh represented by an FDR dated 9-5-92 in RMRD A/c No. 150 the proceeds of which were reinvested over the years and final maturity proceeds of Rs. 713138/- alongwith interest of Rs. 186585/- totalling to Rs. 899723/- was credited in this account on 8-1-1999. The said account was opened in Kishanpura Branch on the introduction of a staff member in that branch and its final proceeds were credited in Head Office in the account which was introduced by Ex-M.D. of bank. The other credits were also on account of realization of FDRs for which separate introductions are available and same was the position regarding other credits in this accounts. The similar transactions appeared in other accounts i.e. 8212 and 8213. It is seen from records that identity of account holders could not be established but the same were introduced by different persons either connected with the bank as MD/staff member or existing account holders of the bank and at the stage of introduction the introducer being aware whose account he is introducing the bank as a separate entity cannot be taxed for the credits in these accounts. In view of these facts, the addition on account of peak credits made by the AO is deleted and A.O. should proceed in the case of introducers by gathering all the documentary evidence from the bank in support of the transactions routed through these accounts and bring to tax the unaccounted income in the relevant years in the hands to whom it belongs.
Another addition of Rs. 20,01,009/- is made representing peak amount in the account of Shri Harbhajan Singh bearing A/c No. 9803. A look at the account reveal that there appear transactions in the name of Lally Motors and United India Insurance Co. and though letter was written to the A.O. on 24-2-2002 to trace the identity of the person in view of the said transactions and to comment upon propriety of the addition in the hands of the appellant yet no reply was received. In the same account, there appeared cheque transaction and though the cheques being dishonoured were returned back by the appellant yet the said letter was not received back unserved. In view of the cheque transactions reflected in the account it is beyond comprehension to treat the peak amount involved in these transactions as income of appellant when the cheque transactions reflected in the account were honoured by the appellant on the basis of signature of account holder. Simply because the account holder could not be located because of incomplete address, the account can not be attributed to the appellant. Further the relevant account was introduced by the director of the bank Shri Anil Chopra having A/c No. 7294. In the account No .9803 various transactions of withdrawl of cash appear in the names of persons of Chopra family. The two cheques of Rs. 5 lakhs each were issued in name of account holder from St. Soldier properties and industries Ltd. signed by its M.D. and signature on these cheques resemble with signature of introducer to the account of Harbhajan Singh and were returned by the appellant to Shri Harbhajan Singh at the same address. Thus in the light of my finding regarding three accounts discussed above and in view of facts above, there are no merits in the action of the A.O. to treat the sum of Rs. 20,01,009/- as income of the appellant. A.O. is directed to make enquiries from the introducer by starting the proceedings in his case after gathering the relevant details from the bank.
Another addition of Rs. 1,00,000/- in the case of Shri J.P. Singh does not survive because the credit in the said account has already been owned up by Smt. Harsimranjit Kaur Prop. M/s. H.S. Gas Service being assessed with Dy. CIT, Central Circle I and the facts in this regard were confirmed by the A.O. assessing the case of Smt. Harsimranjit Kaur. It was mentioned that the credits in the said account were owned up by the said Smt. Harsimranjit Kaur by filing petition before the Hon'ble Settlement Commission. Therefore, the said addition in view of these facts does not survive. The account of Shri Harish Chander wherein peak credit was worked out by the A.O. at Rs. 59,634/- was introduced by M/s. S.K. Traders having account S.B. A/c 244 with the appellant bank and following the decision in other cases and subject to same finding and direction the addition of Rs. 59,634/- is deleted. There are small additions of Rs. 5/-, Rs. 172/-, Rs. 189/- and Rs. 102/- in the case of other account holders but the same are supported by proper introduction and considering the quantum involved, these additions are deleted subject to same directions as in the eases of other account holders. In the result, the addition of Rs. 59,41,593/- made by the A.O. is deleted.
22. Aggrieved by the aforesaid order passed by the learned C1T(A), the department has filed the present appeal before us.
23. Challenging the order passed by the learned C1T(A), while supporting that of the A.O., the learned D.R., apropos ground Nos. 1 and 2, has argued before us that in the survey conducted by the DDIT(Inv.), a large number of accounts were found, the details with regard to which were not complete. The A.O. enquired and found the discrepancies as detailed in the assessment order. No address regarding the account holders was made available by the assessee bank to the A.O. Even the enquiries made by the A.O. with some introducers of the accounts did not bear any result. The A.O. added back all these amounts under Section 68 of the Act, as the income of the assessee bank. The learned D.R. has contended that the provisions of Section 68 of the Act are amply clear and that, therefore, if the credits under consideration are in the books of account of the assessee bank and if no explanation regarding the ingredients of Section 68 is given, or if the explanation offered is not proper, addition has to be made under Section 68 of the Act, as had correctly been done by the A.O. It is contended that the learned CIT(A) has erroneously deleted the addition made; that there is nothing in the provisions of Section 68 of the Act or in the Banking Regulations Act, that provisions of Section 68 are not applicable to such credits as are presently under consideration. It has accordingly been submitted that the order passed by the learned CIT A is liable to set aside and that of the A.O. is entitled to be revived by allowing the appeal filed by the department.
24. The learned Counsel for the assessee, on the other hand, besides making oral submissions, has placed on record written submissions on behalf of the assessee bank. It has been contended that taking loans is the business of banking companies like the assessee bank; that what the assessee is dealing with is somebody else's money and not its own; that the A.O. himself accepts that the account holders were different from the bank; that the definition of 'banking company' has been given in section ï¿½5(b) of the Banking Regulation Act; that the bank acts under the Customers Identification Scheme of the RBI, as is available at page 83 (back) of the assessee's paper book ("APB", for short); that therefore, the bank is acting within the guidelines issued by the Reserve Bank of India; that it is also a requirement of the RBI (APB 85) for the bank to maintain confidentiality and under this, personal information quoted by the banks in respect of their customers is not to be provided to other agencies, else it would amount to breach of customer's confidentiality obligation; that strict compliance in this regard has been required by the RBI; that then, in the case of offences punishable under the Income tax Act committed by the staff/officers of the bank, such a delinquent has to be proceeded against by the department, as provided by the RBI, (APB 83); that then, this is a case of a co-operative society, to which deduction under Section 80P is allowed; and that if any addition is made, the assessee's business income is exempt and deduction under Section SOP is available.
25. Apropos the merits, the learned Counsel for the assessee has contended that major additions were made in three accounts; that the credits are not relatable to this year and that so, no additions with regard thereto under Section 68 of the Act could be made; and that the learned CIT(A) duly took this into consideration, while ordering the deletion.
26. We have heard the parties and have perused the material on record. The facts are not in dispute. The issue is as to whether the provisions of Section 68 of the Act are applicable and whether it has rightly been applied to the assessee-bank. The learned CIT(A), while deleting the addition made, has observed that the assessee's case was subject to rules laid down under the Banking Regulation Act, as also the regulations of the RBI; that all the banking operations are under audit and report in this regard goes to the RBI; that therefore, the case of the assessee bank could not be put at par with the cases of other persons, since the bank does not have any control in respect of the amounts credited in its accounts; that the bank is to maintain accounts of its customers, which accounts can be operated only by those customers and the bank does not have any control over the amounts in the accounts. While holding in favour the assessee, the learned CIT(A) has duly taken into consideration the provisions under Section 68 of the Act, which are explicit.
27. As per Section 68 of the Act, where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof, or the explanation offered by him is not, in the opinion of the A.O., satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year. The business of the assessee bank is to carry on banking transactions. The bank, for all its banking activities, is strictly governed by the Banking Regulation Act, 1949. The said Act defines a banking company as a company which transacts the business of banking. '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. Thus, the deposits held by the assessee are its stock in trade. The amounts in the accounts maintained by the assessee bank were not in the control of the assessee bank. They are the deposits in the savings accounts of the customers of the assessee bank. To these deposits, Section 68 of the Act is not attracted. In the cases of banking companies like the assessee, the customer's identity is required to be taken by the bank with proper introduction, photographs and address, etc. This is so, because any person from the general public can open the account with the bank. The other cases of acceptance of deposits cannot be equated with that of the bank. In those cases, normally, deposits are accepted from the people connected with or known to the depositees. It is in accordance with the terms of Section 131 of the Negotiable Instruments Act that this requirement is there. As such, if introduction of the customer had duly taken by the bank, the bank would not be liable in case of a fraud. Moreover, pertinently, if the customer seeks to operate the account with cash only, the bank can open an account without introduction and without proper identification. Further, the bank is not obliged to question the source of deposits made by its customers. Also, the customers can retain the amount in his savings bank account with the assessee bank for any period. The amount has to be repaid by the bank to its customers immediately on demand. These features distinguish the case of the bank from other ordinary assessees. Therefore, the provisions of Section 68 of the Act are not applicable to the bank as they are in the cases of the other assessees. Still further, under Section 35 of the Banking Regulation Act, 1949, a banking company is subject to periodical inspections and audit by the RBI and in case any default is found, the bank is liable for heavy monetary penalty, besides cancellation of its license. This is not the case with other assessees. A bank, under the RBI guidelines, in order to maintain confidentiality in respect of the information collected by a bank relating to its customers, such information is not to be divulged to outsiders. There is no such obligation with other assessees.
28. Despite the RBI guidelines providing maintenance of secrecy with regard to the information regarding the customers of the bank, the assessee furnished to the A.O. whatever information it had in its possession. The addresses of the account holders, as mentioned in the bank ledgers, as also the addresses of the introducers of the accounts were furnished to the A.O. Now if the addresses of the customers of the assessee bank were found to be incomplete, this cannot form the basis for making the addition in question. Undisputedly, the assessee bank did not violate any of he relevant guidelines of the RBI. In the Master Circular of the RBI, (copy at page 75 of the assessee's paper book), introduction by an existing account holder by the bank has been held to be one of the proper methods of introduction of a customer to the bank for opening an account. The bank was not required to go for detailed verification of the addresses/whereabout of its customers, though this position has now changed and at present the requirement in this regard calls for a much more stringent compliance. In "Bapulal Premchand v. Nath Bank Ltd." AIR 1946 (Bom.) 483, as pointed out, it has been held, inter alia, that there is no absolute obligation on a bank to make inquiries about a proposed customer, so as to avail of the protection under Section 131 of the Negotiable Instruments Act. In "Union of India v. National Overseas and Grindlays Bank Ltd." (1978) 48 Comp. Cases 277 (Del.) referring to the Bapulal Premchand (supra), it was held that the bank could rely on the introduction of any old customer and that if the bank bonafide acted on the reference of a customer, it can avail of the protection under Section 131 of the Negotiable Instruments Act. So far as regards non obtaining of photographs of the account holders, it is true that the same were not obtained in the normal course. Pertinently, in savings bank accounts where cheque facilities were not provided, RBI guidelines (page 76 of the assessee's paper book) provided exemption. Thus, in respect of accounts with only cash transactions, even the rule of proper introduction did not operate strictly. All this shows that the assessee bank did not commit any infringement in taking proper introduction and, therefore, it is incorrect that there was any deliberate attempt on the part of the assessee to accommodate tax dodgers.
29. In CIT v. Nainital Bank Ltd.", the Hon'ble Supreme Court, vide its order dated 25-9-1964 (copy at page 110 of the assessee's paper book), held that cash is stock in trade of a banking business and that loss in the course of its business by way of dacoity is deductible as a trading loss in computing the total income of the business. This strengthens the assessee's contention that the deposits accepted by it were part of its trading activity and that its clients were its customers.
30. In TIT v. Pragati Coop. Bank Ltd." 278 ITR 170 (Guj.), it was held that the provisions of Section 68 of the Income tax Act would not apply to the case of a banking company working under the control of the Reserve Bank of India, particularly when the deposits were not stated to have been made either by the directors of the bank or by any relative of the directors.
31. In "Shri Mahavir Nagari Sahakari Pat Sanstha Ltd. v. Dy. CIT" 74 TTJ (Pune) 793 (copy at pages 95 to 104 of the assessee's paper book), it was held that addition could not be made under Section 68, even though the minimum onus of proving the identity of depositors had not been discharged by the assessee.
32. In "Dy. CIT v. Sahara India Financial Ltd. (2004) 2 SOT 733 (Luck.) (copy at pages 105 to 109 of the assessee's paper book), it was held that the deposits received by the assessee, which was a non banking financial institution, recognised by the Reserve Bank of India, were not in the nature of taking of any loan or deposit for the purposes of its business, that rather, it was in the business of accepting deposits and that in view of the nature of such business, the scrutiny of the deposits could not be the same as in the case of an assessee making entries of deposits on account of loan, etc.
33. In "CIT v. Settler Investment Ltd." 192 ITR 287 (Del.), it was held that even if the subscriber to capital was not genuine, the amount of share capital could not, under any circumstance, be regarded as the undisclosed income of the company. This decision was upheld by the Hon'ble Supreme Court in the case of "CIT v. Steller Investment Ltd." 261 ITR 263 (SC).
34. Further, even on merits, the addition was uncalled for. Concerning account Nos. 8211, 8212 and 8213, the introducer was Shri Vijay Sethi, the deceased Managing Director of the assessee bank itself. The original investments were made in RMRD accounts or S.B. accounts with the Mithapur Branch of the assessee. These investments were made way back in 1992. It was only on maturity that they were transferred to the accounts under consideration. It has rightly been contended that the origin of these amounts falling in the earlier years, which fact has also been admitted by the A.O., they could not be brought to tax in the year under appeal, in the hands of the assessee. The learned CIT(A) thus rightly deleted the addition in this regard.
35. The introducer of account Nos. 954,955 and 956 was Shri Parmod Sharma, Accountant of the assessee bank. He appeared before the A.O. in response to summons under Section 131 of the Act. He admitted knowing the account holders personally. The onus with regard to these accounts thus stood amply discharged.
36. S. Swaran Singh was the account holder of account No. 1108. He was one of the directors of the bank and so he needed no independent introduction to open his account with the assessee firm. His independent existence also stands proved by the entries through clearing in his account.
37. Shri Pawan Sharma was the introducer to account No. 1658. His statement was recorded by the A.O. under Section 131 of the Act. He also confirmed knowing the account holder.
38. Smt. Harsimranjit Kaur, Prop. M/s. H.S. Gas Service owned up account No. 8268 of Shri J.P. Singh, which fact was got confirmed by the learned CIT(A) through the A.O. assessing the said lady.
39. The above facts were duly taken into consideration by the learned CIT(A) while admitting the appeal. We do not find anything erroneous with the order of the learned CIT(A).
40. Not only this, in pursuance to the directions issued by the learned CIT(A), the assessee located further details/addresses of account holders. These details were furnished to the A.O. vide letter dated 4-10-2005. A copy of this letter had been placed at pages 90-91 of the assessee's paper book. This also boosts the stand taken by the assessee.
41. In view of the above, we find ourselves to be in agreement with the observations recorded by the learned CIT(A) while allowing the appeal of the assessee. The grievance of the department in this regard is found to carry no force whatsoever and is, as such, rejected.
42. Apropos the objection of the department that the learned CIT(A) erroneously admitted additional documentary evidence when before the A.O., the assessee had denied producing the bank account holders on the plea that this would adversely affect its banking business. Here also, we find no case made out by the department.
43. Before the learned CIT(A), the assessee, inter alia, filed copies of accounts of various account holders and other supporting documents, as additional evidence. The A.O. objected to the same. The learned CIT(A), however, allowed such evidence to be produced as additional evidence. In this regard, the assessee did not produce such evidence before the A.O. under the bonafide belief that it was not obliged to do so, as it would adversely affect its business. The learned CIT(A) found that the documents produced as additional evidence were in regard to the additions made and could not be produced at the time of assessment proceedings, in the bonafide belief which was, as aforesaid, nurtured by the assessee.
44. We do not find any error in the order of the learned CIT(A). In this regard, it has not been made out that the plea of the assessee of not being obliged to file such documents in respect of its depositors, who had been introduced either by the bank's own staff members or by someone already having a bank account with the assessee bank, was malafide.
45. Further, undisputedly, the documents so produced were directly related to the additions made. In this view of the matter, the department's grievance in this regard also stands rejected.
46. I.T.A. No. 114(ASR)/2003 (Asstt. Year; 1998-99): In this case also, the assessee has, under Rule 27 of the Income tax (Appellate Tribunal) Rules, 1963, taken the objection/ground that the learned CIT(A) erred in sustaining the assumption of jurisdiction by the A.O. to issue notice under Section 148 of the Act. It has been contended that no such notice or any reasons recorded for issuing the same were ever served on the assessee; and that the learned CIT(A) has not recorded any separate finding in this regard for the year under consideration, whereas such objection was specifically taken before him by the assessee.
47. In response to this, no specific reply has come from the department.
48. A perusal of the CIT(A)'s order in I.T.A. No. 114(ASR)/2003 shows that the learned CIT(A) has followed his order in this regard for the assessment year 1999-2000, without applying his mind to the specific assertion of the assessee to the effect that neither were the reasons recorded for initiation of reassessment proceedings communicated to the assessee, nor any show cause notice under Section 148 was ever served on it.
49. In this view of the matter, in our considered opinion, this matter needs to be remitted to the file of the learned CIT(A) for decision afresh on the preliminary issue of recording and communication of reasons for initiation of reassessment proceedings and issuance and service of notice under Section 148 of the Act. It is only thereafter that the merits of the case can be- gone into. The learned CIT(A) shall afford adequate opportunity to the assessee and the assessee shall cooperate with the learned CIT(A). The onus of proving service on the assessee, of the notice Under Section 148 and the reasons recorded is clearly on the Department. The CIT(A) shall decide the merits of the case keeping in view our above observations in I.T.A. No. 115(ASR)/2003.
In the result, I.T.A. No. 115(ASR)/2003, filed by the department, is dismissed, whereas I.T.A. No. 114(ASR)/2003 is allowed, for statistical purposes.
Order pronounced in the Open Court on 15th Febr., 2008.