THE SRI KANNIKAPARAMESWARI CO OP BANK LIMITED vs. THE INCOME TAX OFFICER

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 23RD DAY OF NOVEMBER, 2021

PRESENT

THE HON’BLE MRS.JUSTICE S.SUJATHA

AND

THE HON’BLE MR. JUSTICE HANCHATE SANJEEVKUMAR

I.T.A.No.65/2017

BETWEEN :

THE SRI KANNIKAPARAMESWARI CO-OP. BANK LIMITED, REP BY ITS PRESIDENT SRI R.G.SRINIVASA MURTHY # 165/1-2, 3RD MAIN, P.J.EXTENSION, DAVANAGERE - 577 002 PAN: AADTS3885J

...APPELLANT

(BY SRI V.CHANDRASHEKAR, ADV. A/W SRI BHAIRAV KUTTAIAH, ADV.)

AND :

THE INCOME TAX OFFICER WARD-3, SHREE TOWER, OPP: DRR POLYTECHNIC, HADADI ROAD, DAVANAGERE - 577 002.

…RESPONDENT

(BY SRI K.V.ARAVIND, ADV.)

THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23.09.2016 PASSED IN ITA NO.1364/BANG/2016, FOR THE ASSESSMENT YEAR 2004-2005 PRAYING TO A) TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED ABOVE AND THE ANSWER THE SAME IN FAVOUR OF

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THE APPELLANT. B) TO ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE ITAT, BENGALURU BENCH, SMC, BENGALURU IN ITA NO.1364/BANG/2016 DATED 23.09.2016 FOR THE ASSESSMENT YEAR 2004-2005 (ANNEXURE-A).

THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:

J U D G M E N T

This appeal is filed by the assessee under Section 260A of the Income Tax Act, 1961 (‘Act’ for short) challenging the order dated 23.09.2016 passed by the Income Tax Appellate Tribunal, Bangalore Bench “SMC”, Bengaluru (‘Tribunal’ for short) in ITA No.1364/Bang/2016 relating to the Assessment Year 2004-05.

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appellant is carrying out the activity of banking through among the members, it is governed by the Reserve Bank Act.

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who partly allowed the appeal. However, being aggrieved by the order of the Commissioner of Income Tax (Appeals) to the extent it was against the appellant, the appellant preferred an appeal before the Tribunal and the same came to be dismissed. Hence, this appeal by the appellant/assessee.

“1) Whether the Tribunal was justified in law in holding that the reopening of the assessment is valid in law on the facts and circumstances of the case.

2) Whether the Tribunal erred in law in not holding that as per mandatory conditions for issue of notice under Section 148 for reopening have not been complied the entire assessment order is liable to be cancelled on the facts and circumstances of the case.

3) Whether the Tribunal erred in law in not holding that the notice under section 148 is bad in law and consequently all further proceedings are

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bad in law on the facts and circumstances of the case.

4) Without prejudice, whether the Tribunal is justified in law in holding that an amount of Rs.44,53,500/- is to be assessed as income under the head Capital Gain and not under income from business and consequently denied the exemption under Section 80P(2)(a)(i) of the Act, 1961 and consequently passed a perverse order on the fact and circumstances of the case.”

(1) ALA Firm v. CIT, reported in (1991) 189 ITR 285;

(2) Commissioner of Income-tax, Delhi v. Kelvinator of India Ltd., reported in (2010) 320 ITR 561; and

(3) TTK Prestige Ltd., v. Deputy Commissioner of Income-tax, Bengaluru, (2018) 97 taxmann.com 112

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submitted that reopening of the assessment proceedings under Section 147/148 of the Act was made not on any new material or information, but on mere change of opinion. By referring to the reasons recorded by the assessing officer, learned counsel submitted that reopening of the proceedings is not justifiable; there was no failure on the part of the appellant to disclose all the material facts necessary for assessment of the correct income; and there was no reason recorded by the assessing officer to believe that the income has escaped assessment which is mandatory requirement in terms of Section 147 of the Act. Learned counsel has also argued that the assessing officer had no jurisdiction to invoke the provisions under Section 147/148 of the Act, hence, the entire proceedings, is vitiated under law. Despite bringing these aspects to the notice of the first appellate authority and the Tribunal, the same has been confirmed without assigning any valid reasons. Accordingly, he seeks to answer the substantial

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questions of law in favour of the assessee and against the revenue.

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assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If no such analysis is made in the assessment order, it may be difficult to attribute to the assessing officer, the change in opinion.

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“REPLY TO AUDIT ENQUIRY NO.2 DATED 25.07.2006

Name of the assessee : Kannika parameshwaari Co-op. Bank Ltd., Davanagere,

Asst. year/s

: 2004-05

The assessee is a Regional Rural Bank notified u/s 3 of the Regional Rural Banking Service Act, 1976. The Bank is deemed Co- operative Society and therefore eligible for exemption u/s 80P of the Act.

During the year, the assessee had earned profit of Rs.44,53,500/- from purchase and sale of Govt. securities and had claimed that this income was also exempt u/s 80P of the Act for the following reasons: a) The assessee Bank is constituted under RRBS Act, 1976; b) As per sec. 18 of the RRBS Act, the Banks can carry all business specified in clause (b) of sec.5 and sub-sec.(1) of sec.6 of the Banking Regulation Act; c) As per Sub-sec.(1) of sec.6 of Banking Regulation Act, Banks can carry business of dealing in stock, funds, shares, debentures, debenture stock, bonds obligations, securities

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and investments of all kinds. So, the purchase and sale of Govt. securities was a part of regular banking business only. d) The various Govt. securities held by the assessee Bank was in the normal course of business of banking only and profit earned on sale of these investments forms part of business of banking only.

After examining the aforesaid contention of the assessee, it was held that the assessee Bank was entitled to the claim of deduction u/s 80P of the Act in respect of profit on the sale of securities as the said income was also derived by the assessee from banking business only.

In addition to the above, the decision of the Privy Council in 1940-8 ITR 635(PC) where it was held that the various securities held by Banks are stock in Trade of Bank profit on sale of investments was income from business of Banking only is also relevant. The relevant observations from the Privy Council are as under: “Enhanced values obtained from realizations or conversion of securities may be assessable where what is done is not merely a realization or change of investment, but an act done in what is

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truly the carrying on, or carrying out, of a business. In the ordinary case of a Bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rate of interest. But the banker has always to keep enough cash or easily realizable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If some of the securities of the bank are realized in order to meet withdrawals by depositors, this is a normal step in carrying on the banking business, or in other words, that it is an act done in what is truly the carrying on of the banking business.”

Considering the aforesaid judicial pronouncements on the subject, allowance of

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deduction u/s 80P of the Act in respect of profit from sale of securities is justified.

In view of the above, the objection raised by the Audit my please dropped.”

It appears, subsequently, the notice under Section 148 of the Act was issued on 06.07.2009 by the assessing officer.

To answer the above question, we need to note the changes undergone by Section 147 of the Income Tax Act, 1961 [for short,

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"the Act"]. Prior to Direct Tax Laws (Amendment) Act, 1987, Section 147reads as under: "147. Income escaping assessment. – If – [a] the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

[b] notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income- tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions

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of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)."

After enactment of Direct Tax Laws (Amendment) Act, 1987, i.e., prior to 1st April, 1989, Section 147 of the Act, reads as under:

"147. Income escaping assessment. – If the Assessing Officer, for reasons to be recorded by him in writing, is of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the

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depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year)."

After the Amending Act, 1989, Section 147 reads as under:

"147. Income escaping assessment. – If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter

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in this section and in sections 148 to 153 referred to as the relevant assessment year)."

On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re-open the assessment. Therefore, post-1st April, 1989, power to re- open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of

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opinion", which cannot be per se reason to re- open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re- assessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening 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, Assessing Officer has power to re-open, 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

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"opinion" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer.”

"(i) What is meant by the term "change of opinion?

(ii) Whether assessment proceedings can be validly reopened under Section 147 of the Act, even within four year, if an assessee has furnished full and true particulars at the time of original assessment with reference to income alleged to have escaped assessment and whether and when in such cases

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reopening is valid or invalid on the ground of change of opinion?

(iii) Whether the bar or prohibition under the principle "change of opinion" will apply even when the Assessing Officer has not asked any question or query with respect to an entry/note, but there is evidence and material to show that the Assessing Officer had raised queries and questions on other aspects?

(iv) Whether and in what circumstances Section 114 (e) of the Evidence Act can be applied and it can be held that it is a case of change of opinion?"

Analyzing the Judgments of the Hon’ble Apex Court in extenso, observed thus:

“(1) Reassessment proceedings can be validly initiated in case return of income is processed under Section 143(1) and no scrutiny assessment is undertaken. In such cases there is no change of opinion;

(2) Reassessment proceedings will be invalid in case the assessment order itself

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records that the issue was raised and is decided in favour of the assesse. Reassessment proceedings in the said cases will be hit by principle of ― change of opinion.

(3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons.

In the second and third situation, the Revenue is not without remedy. In case the assessment order is erroneous and prejudicial to the interest of the Revenue, they are entitled to and can invoke power under Section 263 of the Act. This aspect and

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position has been highlighted in CIT vs. DLF Powers Limited, ITA 973/2011 decided on 29th November, 2011 and BLB Limited vs. ACIT Writ Petition (Civil) No. 6884/2010 decided on 1st December, 2011. since reported in [2012] 343 ITR 129 (Delhi). In the last decision it has been observed (page 135): “The Revenue had the option, but did not take recourse to Section 263 of the Act, inspite of audit objection. Supervisory and revisionary power under Section 263 of the Act is available, if an order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. An erroneous order contrary to law that has caused prejudiced can be correct, when jurisdiction under Section 263 is invoked.”

Thus where an Assessing Officer incorrectly or erroneously applies law or comes to a wrong conclusion and income chargeable to tax has escaped assessment, resort to Section 263 of the Act is available

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and should be resorted to. But initiation of reassessment proceedings will be invalid on the ground of change of opinion. xxxxx xxxxx xxxxx

The result of these decisions is that the statute does not require that the information must be extraneous to the record. It is enough if the material, on the basis of which the reassessment proceedings are sought to be initiated, came to the notice of the Income-tax Officer subsequent to the original assessment. If the Income-tax Officer had considered and formed an opinion on the said material in the original assessment itself, then he would be powerless to start the proceedings for the reassessment. Where, however, the Income- tax Officer had not considered the material and subsequently come by the material from the record itself, then such a case would fall within the scope of Section 147(b) of the Act. (emphasis supplied)

The aforesaid observations are complete answer to the submission that if a particular subject matter, item, deduction or claim is not

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examined by the Assessing Officer, it will nevertheless be a case of change of opinion and the reassessment proceedings will be barred.

We are conscious of the fact that the aforesaid observations have been made in the context of Section 147(b) with reference to the term ‘information’ and conceptually there is difference in scope and ambit of reopening provisions incorporated w.e.f. 1st April, 1989. However, it was observed by the Supreme Court in Kelvinator India (supra) that amended provisions are wider. What is important and relevant is that the principle of ‘change of opinion’ was equally applicable under the unamended provisions. The Supreme Court was therefore conscious of the said principle, when the observations mentioned above in A.L.A. Firm [1991] 189 ITR 285 were made.

It will be appropriate to reproduce the succeeding passage from A.L. A. Firm [1991] 189 ITR 285 (page 299):

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We think there is force in the argument on behalf of the assessee that, in the face of all the details and statement placed before the I.T.O. at the time of the original assessment, it is difficult to take the view that the Income Tax Officer had not at all applied his mind to the question whether the surplus is taxable or not. It is true that the return was filed and the assessment was completed on the same date. Nevertheless, it is opposed to normal human conduct that an officer would complete the assessment without looking at the material placed before him. It is not as if the assessment record contained a large number of documents or the case raised complicated issues rendering it probable that the I.T.O. had missed these facts. It is a case where there is only one contention raised before the I.T.O. and it is, we think, impossible to hold that the Income-tax Officer did not at all look at the return filed by the assessee or the

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statements accompanying it. The more reasonable view to take would, in our opinion, be that the Income-tax Officer looked at the facts and accepted the assessee's contention that the surplus was not taxable. But, in doing so, the obviously missed to take note of the law laid down in Ramachari which there is nothing to show, had been brought to his notice. When he subsequently became aware of the decision, he initiated proceedings under Section 147(b). The material which constituted information and on the basis of which the assessment was reopened was the decision in Ramachari. This material was not considered at the time of" the original assessment. Though it was a decision of 1961 and the I.T.O. could have known of it had he been diligent, the obvious fact is that he was not aware of the existence of the decision then and, when he came to know about it, he rightly initiated proceedings for reassessment.

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In view of the above observations we must add one caveat. There may be cases where the Assessing Officer does not and may not raise any written query but still the Assessing Officer in the first round/ original proceedings may have examined the subject matter, claim etc, because the aspect or question may be too apparent and obvious. To hold that the assessing officer in the first round did not examine the question or subject matter and form an opinion, would be contrary and opposed to normal human conduct. Such cases have to be examined individually. Some matters may require examination of the assessment order or queries raised by the Assessing Officer and answers given by the assessee but in others cases, a deeper scrutiny or examination may be necessary. The stand of the Revenue and the assessee would be relevant. Several aspects including papers filed and submitted with the return and during the original proceedings are relevant and material. Sometimes application of mind and formation

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of opinion can be ascertained and gathered even when no specific question or query in writing had been raised by the Assessing Officer. The aspects and questions examined during the course of assessment proceedings itself may indicate that the Assessing Officer must have applied his mind on the entry, claim or deduction etc. It may be apparent and obvious to hold that the Assessing Officer would not have gone into the said question or applied his mind. However, this would depend upon the facts and circumstances of each case.”

“As requested by you, vide your letter cited in the above reference, I am hereby communicating the reasons for re-opening the assessment u/s 147 of the Act, in respect of Sri Kannikaprameswari Co-

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op., Bank Ltd., Davanagere for the A.Y. 2004-05 as under: “the deduction claimed by the assessee u/s 80(P)(2) of the Act to the tune of Rs.44,53,500/-, being the profit on sale of Securities, is not allowable, as the same has to be charged under the head “Capital Gain” and is not an income from banking business.”

“The assessee has filed return of income for the Asst. Year 2004-2005 on 27.10.2004 declaring NIL income. The same was completed u/s 143(3) with NIL an income of Rs.44,53,500/- from profit on sale of securities and has claimed as exemption u/s 80P(2) of the I.T.Act. As per Section 80P(2), in the case of Co-operative Society engaged in carrying on the business of banking or providing credit facilities to its members etc., the whole of the amount of profit or gain of such business is available for deduction u/s 80P(2).

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The assessee has sold the securities and earned profit of Rs.44,53,500/- which is not a business income and hence not eligible for deduction u/s 80(P)(2) of the I.T.Act. Thus, the total addition to be made works out to Rs.44,53,500/- which is escaped income within the meaning of Section 147.

Thus, I have reason to believe that the income chargeable to tax has been under- assessed as per Section 147(c)(i) of the I.T.Act. Approval may kindly be accorded u/s 151(1) of I.T.Act 1961 for issue of notice u/s 148 for the A.Y. 2004-05.”

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Holdings (P) Ltd., reported in (2018) 99 taxmann.com 343.

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Resultantly, the appeal stands allowed.

Sd/- JUDGE

Sd/- JUDGE