THE BHARAT COOPERATIVE BANK (MUMBAI) LTD,MUMBAI vs. DCIT (OSD) -1,, MUMBAI

In its appeal, assessee has raised the following Grounds of appeal :- “1) In the facts and circumstances of the case and in law, the Learned Assessing Officer erred in disallowing Rs.1,16,71,677/- on account of broken period interest by reopening the assessment u/s 148 of Income Tax Act 1961 by mere change of opinion after a gap of four years, which is bad in law as per the judgment of SC in the case of Kelvinator of India Ltd. (320 ITR 561 SC), even though objections were raised in this regard by the Appellant u/s 292BB.

The AO also erred in levying interest u/s 234B.”

In order to appreciate the controversy raised in Ground of appeal no. 1, the following discussion is relevant. The appellant before us is an urban co-operative bank which is engaged in the business of banking through its branches spread over the states of Karnataka and Maharashtra. For the assessment year under consideration, it filed a return of income declaring the total income at Rs.41,93,25,300/-, which was subject to a scrutiny assessment u/s 143(3) of the Act dated 26.11.2010 wherein the total income was assessed at Rs.46,23,45,880/-. Subsequently, the Assessing Officer reopened the assessment by issuing notice u/s 148 of the Act on 28.03.2013 on the ground that certain income chargeable to tax had escaped assessment. According to the Assessing Officer, an amount of Rs.1,16,71,676/- debited to the Profit & Loss Account under the head ‘broken period interest paid’ was wrongly allowed as a deduction in the original assessment because such expenditure was capital in nature. In the ensuing assessment, the Assessing Officer held that the ‘broken period interest paid’ was a part of the capital outlay on acquisition of securities and could not be allowed as a revenue expenditure. Therefore, the Assessing Officer completed the assessment u/s 143(3) r.w.s. 147 of the Act after making an addition of Rs.1,16,71,676/- to the originally assessed income of Rs.46,23,45,880/-.

Before us, the learned representative for the assessee vehemently pointed out that the complete facts were available before the Assessing Officer during the course of assessment proceedings and, in fact, the same were duly examined by him. It was pointed out with reference to the correspondence carried out during the course of the assessment proceedings that the assessee had not only submitted a note on the ‘broken period interest paid’, but also the summary thereof and the ledger account depicting the amount of broken period interest. Notwithstanding the aforesaid, the learned representative pointed out that assessee had also pointed out before the Assessing Officer that alongwith debit to the Profit & Loss Account of Rs.1,16,71,676/- under the head ‘broken period interest paid’, the same amount was also credited to the Profit & Loss Account under the head ‘interest received on investments’ and, therefore, there was ‘nil’ effect on the taxable income for the year. Therefore, under these circumstances, it is sought to be canvassed that this is a case of ‘change of opinion’ by the Assessing Officer on the same set of facts and, therefore, it is not a valid initiation of proceedings u/s 147/148 of the Act.

On the other hand, the ld. DR appearing for the Revenue has reiterated the stand of the CIT(A) that reopening of assessment by the Assessing Officer was valid. With regard to assessee’s claim that the debit to the Profit & Loss Account on account of ‘broken period interest paid’ was as per RBI guidelines, the ld. DR contended that under the Income Tax Act, the income of assessee has to be assessed not on the basis of the principles laid down by the RBI circulars, but as per the provisions of the Income Tax Act.

We have carefully considered the rival submissions. As the aforesaid discussion reveals, the sum and substance of the dispute is with regard to the amount of Rs.1,16,71,676/- debited in the Profit & Loss Account under the head ‘broken period interest paid’. On this aspect, the judgment of the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd., 366 ITR 505 (Bombay) is quite relevant wherein one of the questions of law before the Hon’ble High Court was as under :-

Thus, in view of the judgment of the Hon'ble Bombay High Court in the case of HDFC Bank (supra), the controversy before us is liable to be decided in favour of the assessee on the point of law. So, however, a factual aspect which is clearly emerging from record, and which has been canvassed by the assessee before the lower authorities is as follows. The learned representative has referred to page 85 of the Paper Book wherein is placed copy of communication dated 13.09.2010 addressed to the Assessing Officer during the original assessment proceedings informing the Assessing Officer that the ‘broken period interest paid’ of Rs.1,16,71,676/- is not only debited to the Profit & Loss Account, but has indeed been credited to ‘interest received on investments’ account on the credit side of the Profit & Loss Account. Our attention has also been drawn to the annual financial statements placed in the Paper Book in support of the aforesaid assertion. In fact, we find that though the said assertion of assessee has been noted by the Assessing Officer, but there is no credible repudiation of the same. The aforesaid clearly brings out that factually speaking, there is no claim left of any debit in the Profit & Loss Account of Rs.1,16,71,676/- since the same stands negated by way of corresponding credit in the Profit & Loss Account. Be that as it may, in view of the judgment of the Hon'ble Bombay High Court dated 25.09.2002 in the case of American Express International Banking Corpn. v. CIT, 258 ITR 601 (Bombay), and having regard to the facts, we do not find that it is a fit case where it can be said that any income chargeable to tax had escaped assessment qua the debit of Rs.1,16,71,676/- in the Profit & Loss Account under the head ‘broken period interest paid’. Clearly, at the time of recording of reasons for escapement of income on 28.03.2013, the judgment of the Hon'ble Bombay High Court in the case of American Express International Banking Corpn. (supra) was available, and therefore the allowance of debit of Rs.1,16,71,676/- on account of ‘broken period interest’ in the original assessment could not be treated as erroneous. Thus, in view of the aforesaid discussion, on point of law as well as on facts, we find no reasons to uphold the stand of the Assessing Officer, which is hereby set- aside.

Insofar as Ground of appeal no. 2 is concerned, the same relates to initiation of penalty proceedings u/s 271(1)(c) of the Act, which is premature and is dismissed.

The issue raised in Ground of appeal no. 3 is regarding levy of interest u/s 234B of the Act. As the said issue is consequential in nature, it is dismissed as such.

In the result, appeal of the assessee is partly allowed, as above.