The Ahmedabad Bench of ITAT ruled that the sum received by a bank in liquidation, and whose legal obligation to reimburse the Indian Depository, Insurance and Credit Guarantee Corporation (DICGCI) is not fully satisfied, is not taxable since all income received by the beneficiary bank is diverted at source.
Bench Members TR Senthil Kumar (Judicial Member) and Annapurna Gupta (Accounting Member) held that, in view of the mandatory condition contained in Section 21(2) of the DICGCI Act, until the liability of the assessee towards the DICGCI is released, the beneficiary bank has no discretion or authority to apply the funds received by it and that all funds made by the bank are diverted at source.
The rated – General CO.OP Bank Ltd., is a cooperative bank, whose banking activities have been suspended by the Reserve Bank of India. A liquidation order was passed against the assessee by the government of Gujarat in 2003, and the assessee is managed and administered by an official liquidator.
An Assessment Order for the relevant tax year, accepting the assessed person’s tax return, was issued by the Assessment Officer (AO), which was subsequently reviewed by the Principal Commissioner of the income tax (PCIT) under Section 263 of the Income Tax Act. , 1961. The PCIT ruled that since the assessee was in liquidation, the assessee’s interest income could be assessed as “income from other sources”.
In addition, the PCIT ruled that since the assessee’s banking license was suspended, the assessee could not claim any loss on the realization of its non-banking assets and unabsorbed depreciation. As a result, the AO passed a reassessment order, disallowing the loss on realization of non-bank assets and unabsorbed amortization, and made certain additions to the assessee’s income under the heading “income from other source”.
Against this, the assessee filed an appeal with the Commissioner of Income Tax (Appeals) (CIT(A)). The assessee argued before the CIT(A) that he had taken out insurance with the Deposit, Insurance and Credit Guarantee Corporation of India (DICGCI). The assessee added that he was in liquidation and that all monies and advances he had received were being used to reimburse the DICGCI for liability towards the deposit insurance claim. Furthermore, he claimed that the DICGCI is a subsidiary of the RBI and is governed by the Deposit Insurance and Credit Guarantee Corporation Act 1961 (DICGCI Act), which statutorily prohibits the bank in liquidation from apply the funds received by it from the realization of its advances, vis-à-vis any liability other than that due to the DICGCI.
The CIT (A) ruled that, given the legal obligation of the subject bank to reimburse the sums due to the DICGCI, all the funds made by the subject bank in liquidation were misappropriated at source and that, consequently, the subject had no discretion or authority. apply its income. Believing that this income was not taxable in the hands of the assessee, the CIT(A) removed the additions made by the AO.
Against this, the tax authorities lodged an appeal with the ITA.
The ITA observed that, in view of the imperative condition contained in Article 21 (2) of the DICGCI law, until the responsibility of the assessee towards the DICGCI is fully satisfied, all funds made by a bank in liquidation are diverted at source.
While finding that the assessee’s bank had no discretion or authority to apply the funds received by it, the ITAT ruled that said funds were not available to the assessee as income and that , therefore, said income was not taxable in his hands.
“In accordance with these mandatory conditions of Article 21 (2) of the DICGCI Law, until the liability of DICGCI is fully paid, all funds made by the Bank in liquidation are diverted at source. income of the assessee, including interest income and stock dividend income, is diverted at source and the bank in liquidation has no discretion or authority to apply these funds. available to the assessee as income and therefore such income is not taxable in the hands of the assessee.
The ITA thus upheld the CIT(A) order and dismissed the tax authorities’ appeal.
Case Title: The JCIT (OSD) v. General CO.OP Bank Ltd.
Date: 05.08.2022 (ITAT Ahmedabad)
Appellant’s representative: MM. AP Singh, CIT/DR and Mr. VK Singh, Sr. DR
Representative of the Respondent: Mr. AP Nanavaty, AR
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