THE VISNAGAR NAGRIK SAHAKARI BANK LTD (UNDER LIQUIDATION),MEHSANA vs. THE ACIT, CIRCLE-GANDHINAGAR (PREVIOUSLY DCIT, PATAN CIRCLE, PATAN), GANDHINAGAR

For the lead year, i.e. A.Y. 2013–14, the assessee filed its return of income on 16.09.2013 declaring total income at Nil. Subsequently, revised returns were filed on 31.03.2014 and 31.03.2015, each time declaring Nil income. The return was initially processed under section 143(1). The case was selected for scrutiny. Notice under section 143(2) dated 15.09.2014 was duly served, followed by notices under section 142(1) dated 08.05.2015 and 18.09.2015, along with questionnaire. In response, the Authorised Representative of the assessee appeared and filed written submissions with supporting details.

During the course of assessment, the Assessing Officer noted certain points and a show-cause notice dated 02.03.2016 was issued to the assessee, pointing out that in view of the provisions of section 80P(4), deduction under section 80P is not available to a co- operative bank, and requiring the assessee to explain why the claim should not be disallowed.

In reply dated 10.03.2016, the assessee submitted that the bank was under liquidation and was continuing its activities under &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 4 the supervision of a liquidator. It was submitted that the bank remained a registered co-operative society under the Gujarat Co- operative Societies Act, and carried on recovery operations, maintained staff, incurred administrative and legal expenses, and earned interest on recoveries from borrowers as well as on investments. The assessee contended that, being a co-operative society, it was entitled to deduction under section 80P of the Act.

The Assessing Officer, after considering the reply of the assessee, held that the same was not acceptable. He observed that the provisions of section 80P are not applicable to a co-operative bank, irrespective of whether it is functioning or under liquidation. According to him, section 80P is meant only for co-operative societies carrying out specified activities. He further noted that section 80P(4) specifically excludes co-operative banks from the ambit of deduction. The assessee’s contention that it was a co- operative society registered under the Gujarat State Co-operative Societies Act and therefore eligible for deduction was also rejected on the ground that all co-operative banks are registered under the respective State Co-operative Societies Acts, and mere registration as a co-operative society does not alter the legal position created by section 80P. AO disallowed the deduction of Rs. 10,19,72,904/- claimed under section 80P and added the same to the total income of the assessee. He also directed initiation of penalty proceedings under section 271(1)(c) for concealment of income.

For A.Y. 2013-14 the assessee preferred appeal before CIT(A). The appeal before CIT(A) was delayed by more than 6 months. The &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 5 CIT(A) rejected the condonation of delay however also examined the matter on merit and dismissed the appeal. For other two assessment years also the CIT(A) dismissed the appeal of the assessee on merit. The assessee raised multiple grounds before CIT(A). In the first ground, it was contended that the AO had erred in disallowing deduction under section 80P amounting to Rs. 10,19,72,905/-, and that on facts as well as in law, the claim of deduction ought to have been allowed. In the second ground, the assessee argued that being a co-operative society bank under liquidation, its crystallised liability towards depositors ought to have been allowed against the interest income earned, and after such set-off the income was liable to be assessed at Nil. The third ground raised a grievance against the disallowance of deduction under section 37 in respect of accrued interest payable to depositors, contending that such liability towards depositors and the Deposit Insurance and Credit Guarantee Corporation of India (DICGCI) was real and had to be allowed as deduction, especially since accrued interest on deposits was liable to be set-off against interest earned from fixed deposits and recovery from borrowers. In the fourth ground, the assessee submitted that the AO had erred in not applying settled commercial principles while assessing the income of a bank under liquidation and that, applying the doctrine of real income, the income should have been assessed at Nil.

In addition to the above, the assessee submitted that by virtue of the provisions of the DICGCI Act, 1961 and the regulations framed thereunder, the amounts realised during liquidation proceedings belonged to DICGCI and not to the assessee bank. ,1414 &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 6 Accordingly, no income was taxable in the hands of the assessee on the principle of diversion of income by overriding title. In support, the assessee placed reliance on the decision of the ITAT Ahmedabad in its own case for A.Y. 2011-12 (ITA No. 2251/Ahd/2015, order dated 30.09.2021), wherein the Co-ordinate Bench had upheld the principle of diversion of income by overriding title in favour of DICGCI.

The contentions advanced by the assessee were rejected by the CIT(A). The CIT(A) discussed various issues and held that deduction under section 80P is restricted only to co-operative societies engaged in the activities specified in section 80P(2). A co-operative bank, whether in operation or under liquidation, is expressly barred by section 80P(4) from claiming such deduction. The CIT(A) further observed that the assessee’s income was derived only from interest on fixed deposits and recovery of advances. Such income could not be regarded as arising from eligible activities contemplated in clause

The assessee further relied on an order of the ITAT in its own case for an earlier assessment year (ITA No.2251/Ahd/2015 for A.Y. 2011-12). The CIT(A), however, rejected this plea by observing that each assessment year is a separate and independent unit of assessment, and the findings of the Tribunal in an earlier year could not govern the outcome in the present year. ,1414 &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 7 12. Aggrieved by the orders of CIT(A) the assessee is in appeals before us raising following revised grounds before us:

Assessee being bank under liquidation administered by official liquidator being official of Cooperation Department holds more than one charge and therefore appeal was filed without Miscellaneous Application for Condonation of Delay by bonafide and inadvertent mistake, such fact ought to have been brought to the notice of officiating official liquidator and appellate order was passed dismissing the appeal without specific notice of non-filing of Miscellaneous Application for Condonation of Delay.

LD NFAC has no reason to deviate from appellate order of Hon'ble ITAT Ahmedabad Bench in appeal no. ITA No.2251/Ahd/2015 DATED 30/09/2021 and apply judgement in the case of Associated Power Company Ltd 218/TR195(SC) without distinguishing facts with the judgement of appellate order of Hon'ble ITAT Ahmedabad Bench as well as without considering DICCI Act and its regulations as well as Sec. 115A of the Gujarat Cooperative Societies Act 1961.

During the course of hearing, the learned Authorised Representative (AR) of the assessee submitted that the claim of deduction under section 80P of the Act was not made in the original return of income. The assessee had subsequently revised the return on the misleading advice of a local tax consultant. The AR explained that the assessee, being a co-operative bank under liquidation, is saddled with substantial liability towards repayment of depositors through the Deposit Insurance and Credit Guarantee Corporation (DICGC) in terms of the scheme framed under section 18 of the DICGC Act, 1961. It was therefore urged that the income reflected in the accounts does not represent real income in the hands of the assessee but is only an amount statutorily earmarked for discharge of the overriding liability towards DICGC. On this basis, the AR contended that the amount cannot be brought to tax in the hands of the assessee.

The learned Departmental Representative (DR) relied upon the orders of the lower authorities. Referring to the Balance Sheet and the Profit and Loss Account of the assessee as placed at pages 124 to 126 of the paper book, the DR pointed out that the assessee is holding substantial funds which have been parked in fixed deposits with banks and has earned income thereon. According to the DR, &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 11 such income has clearly accrued to the assessee and is chargeable to tax in accordance with law.

In response, the learned AR reiterated that although the assessee has deposits with banks, the outstanding statutory liabilities far exceed the available funds. It was further submitted that as per the Profit and Loss Account, the expenditure incurred towards settlement under the One Time Settlement (OTS) scheme is higher than the interest income earned from bank deposits and advances. Therefore, in substance, the assessee has no real income at its disposal, and all receipts stand absorbed by overriding statutory obligations towards DICGC.

The learned DR further submitted that the Assessing Officer had not verified the factual details now being relied upon by the assessee before arriving at the conclusion in the assessment order. According to the DR, the assessee’s plea regarding excess liabilities over deposits and the expenditure under the One Time Settlement (OTS) scheme vis-à-vis the interest income earned from deposits and advances has not been subjected to proper examination or verification at the assessment stage. It was therefore contended that these aspects require thorough factual verification by the Assessing Officer before any conclusion can be drawn as to whether the assessee is left with any real income.

We have carefully considered the rival submissions and perused the material available on record, including the computation of income and the financial statements placed in the paper book. At the outset, we note from the computation of income for the &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 12 assessment years under consideration that the assessee has not claimed any deduction under section 80P of the Act. Therefore, the question of disallowance of such claim does not arise in these appeals.

We further note that the assessee is a co-operative bank under liquidation. The balance sheet and profit and loss account indicate that the assessee has substantial deposits and advances on which interest income has been credited. At the same time, the liabilities of the assessee, particularly towards DICGC under the statutory scheme, are substantial and in fact exceed the available deposits and assets. The profit and loss account also shows that the expenditure towards One Time Settlement (OTS) and other liquidation-related obligations exceeds the interest income earned. On a perusal of the consolidated balance sheet and profit and loss account placed on record for the A.Y. 2013-14, we further observe that the assessee is having a debit balance in its Profit and Loss Account aggregating to Rs. 441.97 crore, reflecting accumulated losses. The balance sheet also discloses that the DICGC claim outstanding is to the tune of Rs. 374.40 crore, far exceeding the realizable assets. The net worth of the assessee stands completely eroded and is in the negative. These financial indicators, coupled with the assessee being under liquidation, clearly demonstrate that the assessee is not carrying on normal banking business and is functioning only as a statutory vehicle for realisation of assets and repayment of creditors in accordance with law. ,1414 &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 13 20. The learned DR, while relying on the orders of the lower authorities, fairly pointed out that the Assessing Officer has not verified the factual position of the assessee’s claim in the light of the concept of real income and the principle of diversion of income by overriding title. Thus, the issue has not been properly examined at the assessment stage.

We may clarify that under the scheme of the Income-tax Act, tax can be levied and recovered only on income which has in fact accrued or arisen to the assessee. If, upon verification, it is found that no real income has accrued to the assessee in view of its statutory obligations and liquidation status, no tax shall be recovered merely on the basis of notional entries in the accounts.

In our considered view, the issue of taxability of the income in the hands of the assessee, particularly when it is under liquidation and saddled with overriding statutory obligations under the DICGC Act and the Gujarat Co-operative Societies Act, requires proper verification and fresh adjudication. The determination of taxable income has to be made on the touchstone of real income theory.

Accordingly, in the interest of justice, we deem it appropriate to set aside the impugned orders of the ld. CIT(A) for all three years under appeal and restore the matters to the file of the Assessing Officer for de novo assessment. The Assessing Officer shall verify the factual details from the perspective of whether the assessee has in reality earned any income capable of taxation, keeping in view the judicial precedents including the order of Co-ordinate Bench in &1415/Ahd/2025 The Visnagar Nagrik Sahakari Bank Vs. ACIT Assessment Years 2013-14, 2014-15 & 2015-16 14 assessee’s own case for earlier year. Needless to say, the assessee shall be afforded due opportunity of being heard and to place on record all relevant facts, documents, and judicial authorities in support of its claim.

In the result, the appeals filed by the assessee are allowed for statistical purposes.