Form AY 2014-15 Audit Report U/s. 10AA, 44DA, 50B or section 15VW to be furnished online
CA Sandeep Kanoi
Income Tax department has amended Rule 12 of Income Tax Rules vide Notification No. 28/2014, Dated- 30th day of May, 2014. Vide this amendment it is provided that An assessee required to furnish a report of audit specified under section 10AA , section 44DA, section 50B or section 115VW of the Act, shall furnish the said report of audit and the return of Income electronically for AY 2014-15 and onwards.
Form No. and Title of these Sections are as follows :-
| Section | Title | Audit Form |
| Section 10AA | Special provisions in respect of newly established Units in Special Economic Zones | Form No. 56F |
| Section 44DA | Special provision for computing income by way of royalties, etc., in case of non-residents | Audit Report in Form No. 3CE |
| Section 50B | Special provision for computation of capital gains in case of slump sale | Form No. 3CEA |
| Section 115VW | Maintenance and audit of accounts of tonnage tax company | Form No. 66 |
[TO BE PUBLISHED IN THE GAZETTE OF INDIA EXTRAORDINARY, PART II, SECTION 3,
SUB-SECTION (ii)]
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
[CENTRAL BOARD OF DIRECT TAXES]
NOTIFICATION
New Delhi, the30thday of May, 2014
Income-taxS.O.1418(E).
─
In exercise of the powers conferred by section 295 of the Income-tax
Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules
further to amend the Income-tax Rules, 1962, namely:-
1.(1)These rules may be called the Income-tax(6thAmendment)Rules, 2014.
(2)
They shall be deemed to have come into force with effect from the 1st
day of April,
2014.
2.
In the Income
-
tax Rules, 1962 (hereinafter referred to as the said rules),
in rule 12,
in
sub
-
rule(
2
),
in
the pro
viso
,
-
(a)
after the
expression
"
section
10A
"
,
the
expression
"
section
10AA
"
shall be inserted
;
(b)
after the
expression
"
section
44AB"
,
the
expression
"
section
44DA, section 50B"
shall
be inserted
;
(c)
for the
expression
"or
section
115JB"
,
the
expression
"section 1
15JB
or section
115VW"
shall be
substituted
.
3. In the said rules,
in Appendix
-
II,
for
FORM
ITR
-
3
,
FORM
ITR
-
4
,
FORM
ITR
-
5,
FORM
ITR
-
6
and
FORM
ITR
-
7
,
the
following FORMS shall respectively
be
substituted
, namely:
-
Jurisdiction couldn't be transferred for co-ordinated investigation if assessee wasn't given a chance to speak
IT: Where pursuant to search proceedings carried out in case of connected concern, jurisdiction of assessee's case was transferred from one place to another place for purpose of co-ordinated investigation, in view of fact that said order was passed without giving assessee details of document seized and opportunity of being heard, there being violation of principles of natural justice, order so passed deserved to be set aside
Losses from sale of jewellery disallowed and held as unexplained monies as jewellery wasn't reflected in WT return
IT : Where assessee, a legal heir of 'W', declared certain loss arising from sale of jewellery belonging to 'W', in view of fact that nothing had been disclosed in respect of said jewellery in Wealth tax return, sale in question being bogus, sale amount deposited in bank was to be treated as assessee's income from unexplained sources
Acceptance Of Deposit – Section 73 to 76 Simplified
CA Gaurav Mittal
The companies Act 2013 by way of Section 73 to 76 has bought many changes in respect of Acceptance of deposits by company and the changes are applicable are on Private Limited Companies also.
To understand the ambit of Section 73 to 76 we first need to know the definition of Deposits under old Companies Act wiz a wiz to new Companies Act,2013.
Meaning of Deposit As per Companies Act 1956
1. As per explanation to Section 58A "deposit means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
2. uch exempted categories prescribed by the Central government in consultation with RBI (through Companies (Acceptance of Deposit Rules), 1975) are as follows:
- Amounts Received from the Government/Foreign Sources
- Loans from Banking company/Financial Institution
- Inter company deposits
- Amount Received from Employee by way of Security Deposit
- Amount Received from Agents
- Advances against Orders (for supply of goods etc.)
- Subscriptions to Securities
- Calls in Advance of Shares
- Trust Moneys
- Amount Received from Directors or his relative
- Amount Received from Members (only in case of Private co.)
- Secured Bonds or Debentures
- Convertible Bonds or Debentures
- Promoters Unsecured Loans pursuant to stipulations laid down by the financial institutions for granting the loan.
Also, section 3 (1)(iii) of the Companies Act, 1956 prohibits a private company from the inviting and accepting any DEPOSIT from person other than its members, directors or their relatives.
DEFINITION OF DEPOSIT UNDER COMPANIES ACT 2013
In addition of above following has been included in the definition of Deposits
1) Any amount received against subscription to any securities including share application money provided the securities are allotted within 60 days from the date of receipt of the application money or advance.
If the securities are not allotted within 60 days then the same should be refunded within 15 days else the same shall be treated as deposit after completion of 15 days.
2) Any amount received from Director of the company provided the Director furnishes a declaration that the amount given is not out of borrowed funds.
3) Any amount received from an employee of the company not exceeding his annual salary in the nature of non interest bearing security.
4) Any amount received in the course of or the purpose of the business for the following :-
a. As advance for the supply of goods or provision of services provided such advance is appropriated against supply of goods or provision of service within 365 days from the receipt of such amount,
b. As advance received in connection with consideration for property under an agreement or arrangement,
c. As security deposit for the performance of the contract for supply of goods or provision of services.
d. As advance received under long term projects for supply of capital goods.
If any amount received under clause (a),(b) and (d) becomes refundable due to the reasons that the company accepting money does not have necessary permission or approval to deal with the goods or services then the amount received shall be deemed to be a deposit after the expiry of 15 days from the date they become due for refund.
5) Any amount accepted by a Nidhi Company in accordance with rules made u/s 406 of the Act.
LET Us Understand the Concept of Acceptance of Deposits under Companies Act 2013 with the help of 2 practical examples:
EXAMPLE 1
ABC Private Ltd has a Share Capital of Rs 10 Crore and it wishes to raise another Rs 10 Crore by the following means:-
- 5 Crore from Government Agency, Financial institutions, Banks or by way of Commercial Paper.
- 50 Lakhs by way of Share Application.
- 50 Lakhs from Director by way of Loan.
- 50 Lakhs from issue of bonds and debentures.
- 50 Lakhs from ICD.
- 25 Lakhs from Employees.
- 50 Lakhs as business advance from customer.
- 50 Lakhs as Advance against property Sale.
- 25 Lakhs as security deposit.
- 50 Lakhs from promoter or Relative.
- 50 Lakhs from relative of a Director.
- 50 Lakhs from a shareholder.
ABC Private Limited has sought your advice on the above means of finance.
ANSWER 1
- 5 Crore from Government Agency, Financial institutions, Banks or by way of Commercial Paper.
The amount received or borrowed from any government agency or FI or Bank or by way of CI is not covered under deposits.
Hence, company can raise money by way of above.
- 50 Lakhs by way of Share Application.
Company can raise money by way of issue of share if
a) Section 42 compliance i.e. Private Placement.
b) Allotment of share within 60 days of receipt of amount.
c) If not allotted then termed as deposit.
- 50 Lakhs from Director by way of Loan.
Company can receive a loan from a Director provided
Director gives an undertaking to the company that the loan given is from own funds and not from borrowed money.
NOTE : Suppose if Director Net Worth is Rs 10 Crore and he has taken a loan for Rs 4 Crore then he is eligible to give loan to a company up to Rs 6 Crore.
- 50 Lakhs from issue of bonds and debentures.
Company can raise money by way of bonds and debentures provided
Provided
a) Amount is secured by a first charge against property;
OR
b) Such bonds or debentures should be compulsorily convertible into shares within 5 years.
- 50 Lakhs from ICD.
Inter corporate deposits are not covered in the definition of deposits, hence company can use ICD as a means of finance.
- 25 Lakhs from Employees.
Yes, can be raised from employees provided amount received from employee doesn't exceed by his total annual salary.
- 50 Lakhs as business advance from customer.
Yes, amount can be raised from customer however, such advance should be adjusted with 365 days from the date of receipt of advance.
- 50 Lakhs as Advance against property.
Yes it can be raised, however such amount should be adjusted against the property only.
- 25 Lakhs as security deposit.
Yes, as security deposits are out of the ambit of definition of deposits.
However, it is advised to receive security deposit under a specific agreement.
Eg :- Security deposit against rent, security deposit against supply of material or fulfillment of service.
- 50 Lakhs from promoter or Relative.
No, but if any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely:-
(a) the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
(b) the loan is provided by the promoters themselves or by their relatives or by both; and
(c) the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;
- 50 Lakhs from a shareholder.
No, Company cannot raise an amount from shareholders.
EXAMPLE 2
On 1st April 2014, following loans are standing outstanding in the books of M/s ABC Pvt Ltd. The board has sought your advice regarding the treatment of them.
1) Rs 1 Crore from Director.
2) Rs 50 Lac from shareholder.
3) Rs 50 Lac from relative of a Director
4) Rs 50 Lac as a business Advance.
5) Rs 2 Crore as advance against property.
6) Rs 1 Crore as share application money.
7) Rs 2 Crore as ICD
8) Rs 1 Crore from unknown sources or non relatives.
SOLUTION 2
The Companies Act 2013, states that in case any Deposit is outstanding in the books of accounts of company then same has to be reported to the ROC by 30th June 2014 and has to be repaid by 31st March 2015.
Here, the deposits are to be checked under the definition of Deposits as defined under Companies Act 1956 instead of Companies Act 2013.
We Will take each case separately Now:
1) Rs 1 Crore from Director.
Any amount received from a Director is not a Deposit hence it need not be reported and can continue to stay in books. The loan can be renewed on the expiry of term, if there is no term then it is advisable to make a tenure for same.
2) Rs 50 Lac from shareholder.
Amount received from shareholders was not covered in the definition of deposits under old Act; hence the same is not required to be reported.
However, Loan from shareholders cannot be renewed and has to be repaid back on expiry of term. If there is no term than a term contract should be made now.
3) Rs 50 Lac from relative of a Director
Again as per old definition loan from relatives of Director were out of the ambit of the definition of Deposits, Hence no reporting required however same cannot be renewed and has to be repaid back on expiry of term. If there is no term than a term contract should be made now.
4) Rs 50 Lac as a business Advance.
Business Advance is excluded from the deposits, hence there is no need to report the same and the amount can continue to appear in books.
The 365 days condition is not applicable here. However genuineness of the transaction is to be checked. It should be checked whether there are any transaction happening between the parties.
If not, then it is advisable to refund the amount.
5) Rs 2 Crore as advance against property.
Same as above it is not a deposit, hence no reporting necessary.
6) Rs 1 Crore as share application money.
Share Application money is not a deposit; hence there is no need to report the same.
However, all the pending application money appearing in books of Accounts should either be allotted or refunded back to the subscribers. As in many cases share application money is standing outstanding since many years and as per rules outstanding share application money should be deposited in Investor Protection Fund Account.
So it is advised either to refund or allot the amount in current financial year.
7) Rs 2 Crore as ICD
ICD are exempt from the definitions of Old as well as New Companies Act, hence company can freely accept ICD.
8) Rs 1 Crore from unknown sources or non relatives.
We must have faced a situation under some amount is outstanding in books of accounts, however the company is unable to ascertain to whom that amount belong to.
Such amount received or unexplained money or money standing in books from non relatives needs to be reported to ROC by 30th June 2014, as they get covered under the definition of Companies Act. The said amount is to be repaid by 31st March 2015.
(Author may be contacted at mittalgaurav05@gmail.com)
NRI – Non Resident Indian –FAQs on Income Tax for AY 2014-15
CA Chirag Chauhan
Q) Who is NRI as per Income Tax Act?
A) Residential status of an individual or HUF or a company is of great importance in Indian Income Tax Act as the liability to pay tax in India does not depend on the nationality or domicile of the Tax payer but on his residential status. Residential Status is determined on the basis of physical presence i.e. the number of days of stay in India in any year.
An individual is resident if any of the following conditions are satisfied: (i) he stayed in India for 182 days or more during the previous year, or (ii) he stayed in India for 365 days or more during the four preceding years and stays in India for at least 60 days. 182 days in case of an Indian citizen or a person of Indian Origin coming on a visit to India or 182 days in case of an Indian citizen going abroad for an employment during the previous year. Otherwise he is Non Resident.
Hindu Undivided Family (HUF) or firm or other Association of persons is resident of India except in cases where the control and management of its affairs is wholly situated outside India in the previous year
A company is resident in India if-it is an Indian company, or during the previous year, the control and management is situated wholly in India.
Q) I am NRI, do I need to file my Income Tax Return for A Y 2014-15?
A) NRI need to file your return provided your taxable income in India during the Assessment Year 2014-2015 was above the basic exemption limit of Rs 2 lakh OR you have earned short-term or long-term capital gains from sale of certain investments and assets, even if the gains are less than the basic exemption limit. For NRIs, certain short term or long term capital gains from sale of investments or assets are taxed even if the total income is below the basic exemption limit. There is an exception: If your taxable income consisted only of investment income (interest) and/or capital gains income and if tax has been deducted at source from such income, you do not have to file your tax returns.
Q) Is Income Tax Return need to file compulsory Online for NRI for AY 2014-15?
A) Central Board of Direct Taxes (CBDT) in India issued a notification which has made it mandatory for individuals who have annual gross total income in excess of Rs 5 lakh to file their returns online from Assessment Year 2014-2015. This applies to all individuals including non resident Indians. So as an NRI with gross total income exceeding Rs 5 lakh in Assessment Year 2014-2015, you must file your returns electronically.
In case your taxable income exceeds Rs.5 lakh in the previous year, you would be required to file the return of income electronically either using the digital signature or through submission of the verification Form ITR-V after electronically filing the return of income. In case your income does not exceed the above limit, you would also have an option to file the return of income in paper form.
Q) Are NRI were liable to pay advance tax for Assessment Year 2014-2015?
A) As per the Income Tax Act, Individual must pay advance tax in three installments during the year in case the tax payable is likely to be Rs 10,000 or more after considering TDS deduction. In case of default interest is generally 1 percent per month for the default amount and extends till the date of payment. Therefore, NRIs should evaluate if they were liable to pay advance tax and whether the same was paid in time.
Q) What is last date to file your Income Tax Return? What if NRI do not have any tax payable?
A) The last date to file returns for the financial year Assessment Year 2014-2015 is July 31st 2014. However, If you do not have any tax payable (that is all your tax has been deducted at source), you can still file your tax return by 31st March 2015 without any penalties.
Q) What if NRI do not file return till 31 March 2015?
A) If you do not file your tax returns even by the 31st of March 2015, you may be charged a penalty of Rs 5,000 for every year of delay or sometimes may not be able to file your returns at all after 2016.
Q) My NRO account TDS has been deducted at source @30%. My interest income is 1 Lakhs Rs? Do I Need to File Return?
A) As your total income is less than 2 Lakh Rs, you are not liable to file return. However you can cliam refund of Rs 30,000/- of your TDS deducted for which you should file return. If you are expecting a refund, make sure that you put accurate bank details such as account number and IFIC code of the branch as refunds are processed electronically.
Q) Can NRI get Refund of TDS by Filing IT return for Last year 2013 March Ending.
A) Yes you can file your return for Financial Year ended 2013 and get refund.
Q) What all income is exempt for NRI?
A) Dividends from equity shares and equity mutual funds is tax free in India. Interest received on the NRE account and FCNR account is tax free. Long term capital gains on equity shares and equity mutual funds (provided you pay securities transaction tax at time of sale). Further, If you have given a property on rent, you can claim an ad hoc deduction of 30% of net annual value as repairs and maintenance expenses in addition to claiming a deduction on mortgage interest.
Health insurance premium in India for yourself or your dependents, you can claim a deduction under section 80D. If the health insurance is taken for your spouse and dependent children, you can claim a deduction of Rs 15,000 per annum. An additional Rs 15,000 is available as deduction on insurance premium paid on behalf of your parents. If either of your parents is over the age of 65, the additional deduction will be Rs 20,000 instead of Rs 15,000.
Contributions to an approved charity, you can claim a deduction under section 80G. Investments such as PPF, life insurance premiums, etc. can be claimed as deduction under section 80C up to a total of Rs 1 lakh.
Q) I am NRI has deposited Rs. 1 crore in a non-resident ordinary (NRO) account in the form of fixed deposit. I want to transfer the amount from NRO to a non-residential external (NRE) account. Is it compulsory to give Form 15CB and 15CA to banks? Who has to file these forms? The bank has deducted tax at source when it credited the interest amount. What is the ceiling for transfer from NRO to NRE during a year?
A) An NRI can transfer / remit out of the NRO account subject to production of documentary evidence in support of acquisition by the remitter and an undertaking by the remitter along with a certificate by a chartered accountant in Form 15CA and 15CB
As per regulations, NRI are permitted to transfer a maximum of $1 million per financial year to your NRE account. The transfer will be subject to payment of applicable taxes. So far the amount being transferred to the NRE account represents balances for which tax has already paid or exempt there shouldn't be additional tax.
Q) I am a non-resident Indian (NRI) and have a piece of agricultural land and an apartment in India. I earn agriculture income and rental income from these two. Do I need to file income tax return? Also, can an NRI buy agricultural or farmland in India?
A) NRI would be subject to taxes in India on any income accruing or arising from an asset located in India. The agricultural income earned by you would be exempt, whereas the rental income from the house property would be subject to tax. You would be under an obligation to file an income tax return in India on or before 31 July 2014 for financial year 2013-14 if your taxable income exceeds Rs.2 lakh in the previous year. However, you may note that the income tax law prescribes a specific method of computing taxable income where the taxpayer has earned agricultural income. While this type of income is exempt from tax, it is nonetheless included in the total income for rate purposes.
Q) Is NRI allowed to buy Agriculture property or Farm house in India?
A) NRIs and Persons of Indian Origin are not allowed to buy agricultural property, plantation or a farm house.
Q) What are the tax implications for an NRI looking at selling his property in India?
A) If the property is more than 3 years old, long term capital gains tax will be incurred on the sale of the property. On long term capital gains, tax is payable @ 20%. However, tax can be minimised by making alternative investments in India.
Q) I am a NRI living in US. Can you please advise me if long term capital gains tax are payable on sales of shares purchased by paying STT, and if it is exempt is there a limit?
A) LTCG is fully exempted on sale of listed company shares, purchased by paying STT, provided the transaction is long-term. i.e that share are hold for period of more than 12 months
Q) I an NRI, bought a property in 2005 and sold it in 2014 at a difference of Rs 40 lakhs for Rs 80 lakhs. If I repatriate this amount to the US, am I liable for any tax? What is the procedure to repatriate money to the US?
A) You have earned a long term capital gain on your property. You have to pay taxes in India on this income and then obtain a certificate from a chartered accountant. After this certificate only, you would be able to repatriate the money abroad.
Q) During Year Ended 2014, I, NRI leased out my building to a bank which is paying rent monthly but is deducting TDS. Can you please let me know what kind of documentation is required from the bank to submit my taxes in India? Is form 16 sufficient?
A) Form 16 is enough to determine your income on rent and TDS deducted by the bank.
Q) Is the money received from sale of inherited property in India taxable for an NRI? Earlier it was mandatory to put it in an NRO account but now with the RBI go ahead can we transfer it to NRE account provided the tax is paid?
A) Yes, the money received from NRI is taxable in India. Sale proceeds will first be credited to NRO account. Then you have to obtain a certificate from the chartered accountant relating to payment of taxes after which the money would be transferred from NRO account to NRE account.
Q) I hold NRI status for this year 2014. I have FD and RD accounts in ICICI Bank and they are deducting taxes. Do I need to pay the tax for the interest I get from FD and RD?
A) If the FD and RD were opened under NRE status as (NRE-FD or NRE-RD) then the interest earned on the same will not be taxable. However, in case the FD/RD was opened when you were resident Indian then the said FD will be converted to NRO- FD (upon your status being changed to NRI) and the interest earned on the same will be subject to TDS. However, depending on your cumulative tax liability in India, you may claim refund while filing tax return in India.
Q) If I have 8 year NRE FRD and if in second year I become resident, how NRE FDR will be treated after third year and will interest thereon be taxable?
A) For returning Indians, funds held in fixed deposits in NRE accounts, interest will be payable at the rate originally fixed, provided the deposit is held for the full term even after conversion into resident account. However, the interest earned after the status was updated to resident will be taxable.
Q) If I buy a property out of NRE funds and later on sell the property and credit the proceeds to my NRO account, what are the tax implications?
A) Profits earned by selling property in India will be liable to Capital gain is the difference between the sale value of the property and its cost of purchase. Capital gains can be classified as short term (up to 36 months) or long term (more than 36 months), depending on the period for which the property is held. Short-term capital gain will be taxed at normal slab rates and long-term gain will be taxed at 20%.
If a residential property is sold after being held for more than three years and the proceeds are reinvested for purchase of a new residential property, then the capital gains will be exempt to the extent of the amount reinvested. The exemption is subject to the new property being purchased within a year before or two years from the date of sale, or if new property is being constructed within three years from the date of sale.
Q) Can NRIs can also claim exemption by investing the amount of capital gains in bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) in case of Profit from sale of property which is long term?
A) Yes Investment in the specified bonds is to be made within six months of such sale and there is a lock-in period of three years for such bonds.
Q) I am an Indian resident taking up employment abroad. I want to know whether I am eligible to claim exemption of income under NRI category. If the employment is in Dubai, where there is no tax on income, will it make any difference?
A) Your employment in Dubai will not make any difference. As per taxation laws in India, your overseas income getting credited to your NR account in India will not be taxed. It is indifferent to overseas country tax regulations.
Q) I have an account in Qatar and want to send money to my resident (saving) account in SBI Bank, Will it be taxable? What is the ceiling for wire transfer? Can I open an NRO/NRE account before completing first six months out of India.
A) Yes, you can send money to your resident account and the said amount will not be taxable because it will be from your overseas earnings. There is no upper cap on the amount you can wire transfer to a bank account in India. Yes, based on a valid work visa and company offer letter, you can convert your existing resident account into NRO and open a NRE account as well.
Q) Can an NRI returning back to India, continue to hold his foreign earnings overseas, and gradually bring the money back to India as and when required?
A) You can bring your earnings as you wish. You should take care of income tax of your earnings. After you are return to India, your income earned outside India will not be taxable in India provided it is received in India for two years. After the two years, your worldwide income would be taxable in India.
For any query you can write to Chirag@cachauhan.in . Before making any decisions do consult your Professional / tax advisor. Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability neither for the loss or damage of any kind arising out of information in this document nor for any action taken in reliance there on.
Reason for Increase in NPA ; Credit Ratings and Asset Quality
Growing NPAs in Banks: Efficacy of Ratings Accountability & Transparency of Credit Rating Agencies- Date: 02 Jun 2014
(Speech delivered by Shri R. Gandhi, Deputy Governor, Reserve Bank of India at the Conference conducted by ASSOCHAM on May 31, 2014, at Le-Meridian, New Delhi)
Shri Jajodia, Shri Narang, Shri Dubey, Shri Kulkarni, Shri Dogra, Shri Khanna, Shri Pathak, other distinguished speakers, Ladies and Gentlemen, a very good morning to everyone! To start with I would like to commend ASSOCHAM for this seminar, for bringing together experts from banking and rating industry, to discuss and debate upon this very pertinent and challenging subject of NPAs and credit rating. A subject like this needs a lot of discussion and thinking, because there are evidently no easy answers; if they existed, we would not be in this state. In a way the last three years were wake-up calls for us; with the downturn in economic activity, the cracks in our credit appraisal and monitoring system have appeared and we should get our act together to repair the structures. This Conference provides an opportunity to get additional insights into credit risk assessment and mitigation in addition to getting to know the views of such a diverse and experienced panel of industry experts.
Asset Quality
As the conference is being held in the context of growing non-performing assets (NPAs) of Indian banks, let me begin with few statistics relating to NPAs to put things in perspective.
Before 2008, asset quality of SCBs was improving on a secular basis, following implementation of Prudential Guidelines since mid 1990s. The GNPA ratio had declined sharply from 12.0 per cent as at end March 2001 to 3.5 per cent as at end March 2006 and thereafter this ratio was flat till March 2011. However, since then, the NPA of the banks has been increasing; as at the end of Dec 2013, the Gross NPAs of the domestic banking system was 4.40 per cent of Gross Advances. The final figure for Mar 2014 is yet to be known; While some may view this ratio as reasonable given the economic conditions prevalent in the country and elsewhere, the total stressed assets in the banking system (which includes NPAs and restructured standard assets) as at Dec 2013 was 10.13 per cent of the gross advances of the banks, which is a cause of concern for the Reserve Bank.
Why are NPAs increasing?
Growing NPAs is the biggest challenge for the banking industry. A slowing economy is bound to see an increase in NPAs. Notwithstanding the economic weakness, the NPAs of banks have registered increases since FY 2012 which is a cause of concern for us. The NPA increases have been more pronounced in case of the public sector banks. There are various factors affecting the asset quality of SCBs adversely, such as the current slowdown- global and domestic, persistent policy logjams, delayed clearances of various projects, aggressive expansion by corporate during the high growth phase etc. However, it is the shortcomings in the credit appraisal, disbursal and recovery mechanism of the banks, besides the economic slowdown that can in large part be held responsible for their high levels of NPAs. Lack of robust verification and screening of application, absence of supervision following credit disbursal and shortfalls in the recovery mechanism have led to the deterioration of asset quality of these banks.
Credit Ratings and Asset Quality
Let us now see the relationship between credit ratings and asset quality of the banks. Credit ratings are forward looking opinion expressed by a credit rating agency on the ability and willingness of a borrower to pay his dues in full and on time. More specifically, credit ratings are relative ranking of borrowers based on the credit rating agency's assessment of creditworthiness of the borrowers within a given universe. Credit ratings may also indicate the credit risk associated with a specific credit facility or a specific security.
How does a credit rating differ from credit scores assigned by credit information companies? Both credit rating and credit scores are a measure of credit risk and reflect the varying level of probability of default of a given borrower. The difference is in the methodology used by them to assess the credit risk. While credit ratings are forward looking opinion about credit risk, credit scores assigned by credit bureaus are based on credit history of a borrower. Credit ratings take into account the risk that a borrower may face during a given time horizon in the future, whereas credit scores are based on the past performance of a borrower with regard to servicing of debt. The second difference is that credit scores are assigned to a particular borrower while credit ratings can be assigned to a specific facility.
While credit rating generally denotes a rating assigned by a credit rating agency, there is also a mechanism of internal ratings by banks. A mechanism of internal credit rating of borrowers was in existence in banks much before external credit rating of bank loans were introduced under Basel II regulations. Reserve Bank's guidelines on 'Risk Management Systems in Banks' issued in October 1999, indicated that measurement of credit risk through credit rating/scoring receive the top management's attention. Further, the 'Guidance Note on Credit Risk Management' issued in October 2002, stated that:
'A Credit-risk Rating Framework (CRF) is necessary to avoid the limitations associated with a simplistic and broad classification of loans/exposures into a "good" or a "bad" category. The CRF deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. Such a rating framework is the basic module for developing a credit risk management system and all advanced models/approaches are based on this structure……'
The credit rating assigned by a bank could be used for the following:
- Individual credit selection – to decide whether to lend or not to a particular borrower
- Pricing (credit spread) and specific features of the loan facility – While risk based pricing is an essential component of credit risk management, available evidence suggest that competitive factors influence the pricing of a bank loan more than the risk rating. However, for traded debt instruments, like commercial paper, there is still link between rating and credit spreads.
- Portfolio-level analysis.
- Surveillance, monitoring and internal MIS
- Assessing the aggregate risk profile of bank/ lender. These would be relevant for portfolio-level analysis. For instance, the spread of credit exposures across various CRF categories, the mean and the standard deviation of losses occurring in each CRF category and the overall migration of exposures would highlight the aggregated credit-risk for the entire portfolio of the bank.
In line with Reserve Bank's guidelines, banks in India have put in place an internal credit rating framework. Internal rating frameworks available with many of the banks are based on solutions developed by external service providers. However, the effectiveness and sophistication levels of internal rating framework vary from bank to bank. While difference of opinion is essential to avoid 'herding', large variance in ratings by banks using similar models could put a question mark over the stability of the models or the ability of users to use the models appropriately.
In addition to the internal credit rating framework, which are generally used to rate corporate clients, banks also use simple credit scoring models to rate smaller borrowers and retail borrowers. Credit scoring models for retail customers generally look at the following four groups of indicators – demographic indicators, financial indicators, employment indicators and behavioural indicators.
Since credit ratings/scores are a measure of credit risk, it has a strong link with NPAs. Loans extended by banks are classified as NPAs when the bank considers that borrower has not serviced his debt or is unlikely to service his debt as per the terms and conditions of the contract. As such NPAs are manifestation of credit risk. Since credit ratings are relative measure of credit risk, the likelihood of default of a borrower with a higher credit rating should be lower than a borrower with a lower credit rating. As a corollary, a higher proportion of borrowers with good credit rating in the books of a bank should translate into lower level of NPAs. Whether that assertion is true or not requires us to evaluate the credit ratings assigned by a credit rating agency by juxtaposing them against the actual default experience.
Another important factor that needs to be kept in mind while comparing the ratings by a CRA with that by a bank is what constitutes a 'default'? Credit rating agencies recognise default even if there is a default of one rupee or a delay of one day in servicing the scheduled debt obligations. As far as banks are concerned, an asset is treated as non-performing asset only when a scheduled payment remains overdue for a period of more than 90 days. The definition of default is different as the purpose of recognition of default is different.
What should banks be doing ?
There is growing need for banks to strengthen their internal credit appraisal system i.e. on their credit assessment and risk management mechanisms. At the same time, banks should also consider using external credit appraisals in conjunction with their own assessment. This would mean getting the house in order and at least on this score, banks would be on stronger ground. Banks would still be vulnerable to other factors such as economic slowdown, or policy changes or wilful defaults. But, one area of concern would be plugged. This is where credit rating agencies can play an important role given their experience as well as steady track record over the years.
Regulation of CRAs
In the Indian context, the general superintendence and regulation of credit rating agencies are carried out by the SEBI under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. The regulations issued by SEBI cover various aspects viz., registration of rating agencies, fit and proper criteria for rating agencies, rating process and methodology and its records, transparency and disclosures, avoidance of conflict of interest, code of conduct, etc. While these regulations were initially applicable to rating of debt securities by credit rating agencies, they have been extended to cover all rating activities including bank loan ratings.
Additionally, the accreditation for a credit rating agency to qualify as an eligible External Credit Assessment Institution under Basel II framework is issued by the Reserve Bank of India. Such accreditation by the Reserve Bank of India is issued after evaluating a credit rating agency's ability to adhere to the standards prescribed under the Basel II framework. Reserve Bank of India has so far accredited six credit rating agencies viz., Crisil, ICRA, CARE, India Ratings, Brickwork Ratings and SMERA Ratings. While accrediting credit rating agencies Reserve Bank has been mindful of the need to have an optimum level of competition in the ratings market.
In this regard, certain studies on effect of competition among credit rating agencies have indicated that increased level of competition may lead to 'rating shopping' and thus affect the quality of ratings. Anil K Kashyap and Natalia Kovrijnykh (September 2013) have shown that '…competition among CRAs causes them to reduce their fees, put in less effort, and thus leads to less accurate ratings'. However, in order to avoid predatory pricing, Reserve Bank has mandated that credit rating agencies should disclose the nature of their compensation arrangements with the rated entities on their websites. The disclosure should include the minimum fee that a credit rating agency will charge and factors determining the fee charged.
Credit rating agencies' eligibility is assessed against various qualitative and quantitative parameters. These requirements are grouped into the following six criteria: Objectivity, Independence, International access/Transparency, Disclosure, Resources, and Credibility.
Objectivity: Basel regulations prescribe that the methodology for assigning credit ratings must be rigorous, systematic, and subject to some form of validation (back testing etc.) based on historical experience. Further, the ratings should be subjected to continuous surveillance.
Reserve Bank assesses this criteria in terms of factors like credit rating agency's definition of default and action taken on default, historical default rates, ordinality of default rates (i.e., lower the rating higher the default probability), stability of the ratings (i.e., probability that a given rating remain unchanged during a given period), predictive ability of the ratings, improvement to the rating methodology to reflect current trends etc. Reserve Bank looks into the default studies, transition matrices, Gini Coefficient etc. of credit rating agencies to conduct the above assessment.
To ensure standardisation of default rates, the Reserve Bank of India has mandated that all rating agencies shall use a uniform definition of default as far as the bank loan ratings are concerned.
Independence: Basel norms state that a credit rating agency should be independent and not subjected to political or economic pressures while rating. The rating process should also be free from conflict of interest that may arise due to shareholding pattern or composition of board of directors.
To assess whether a rating agency is independent, Reserve Bank of India evaluates the ownership and organisation structure (presence of independent directors in the Board & rating committees), Independence of individuals i.e. conflict of interest-between rating fee and quality of ratings, conflict of interest with shareholders, conflict of interest at rating committee level, separation of business development and rating activities, separation of rating business from other business activities.
International Access / Transparency: Under this parameter, Reserve Bank evaluates whether a credit rating agency makes necessary disclosures with regard to rating methodologies and rating rationales to both domestic as well as international users without any differentiation.
Disclosure: During the accreditation process, the Reserve Bank assesses whether a credit rating agency makes the following disclosures: rating methodologies, including the definition of default, the time horizon, and the meaning of each rating; the actual default rates experienced in each rating category; and the transitions of the rating. In addition the Securities and Exchange Board of India has also mandated a detailed set of disclosures by credit rating agencies.
Resources: Access to sufficient resources is an important factor in determining a credit rating agencies ability to furnish quality ratings. Reserve Bank makes an assessment as to whether a credit rating agency has sufficient capabilities in terms of human resources i.e., number of employees, their qualifications and experience etc. Further, Reserve Bank also looks into the technological capabilities of the credit rating agencies before deciding upon their accreditation. In addition, Reserve Bank requires credit rating agencies to have access to various sources of information on economy, sectors, companies, etc.
Credibility: Credibility of a rating agency is assessed based on the degree of acceptability of ratings of a rating agency by independent parties viz., investors, insurers, trading partners etc. Reserve Bank also looks into the internal procedures put in place by the credit rating agencies to prevent misuse of confidential information acquired by them during their rating exercise. Credit rating agency's adherence to code of conduct prescribed by Securities and Exchange Board of India, International Organisation of Securities Commissions (IOSCO) and Association of Credit Rating Agencies in Asia (ACRAA) are also analysed to determine the credibility of a credit rating agency.
In addition to accrediting credit rating agencies, Basel II framework requires that the ratings assigned by credit rating agencies shall be mapped to appropriate risk weights available under the standardised risk weighting framework. Basel II framework requires that national regulators should decide which rating categories correspond to which risk weights. The mapping process should be objective and should result in a risk weight assignment consistent with the level of credit risk reflected in the ratings. In India the Reserve Bank has prescribed uniform risk weights for all rating agencies. Such uniform risk weights are prescribed due to relatively low penetration of ratings and absence of sufficient historical default data.
In addition to the detailed assessment at the time of accreditation, the Reserve Bank of India also conducts an annual review of accreditation of credit rating agencies to assess their eligibility for continued accreditation under Basel II framework. During the review exercise, Reserve Bank evaluates the processes as well as the outcomes. The cumulative default rates of rated portfolio of individual rating agency is evaluated in comparison with the benchmark cumulative default rates proposed under the Basel II framework. The cumulative default rates of the bank loan ratings in India are higher than the benchmarks provided by Basel II framework.
How to merge banks credit appraisals and CRAs' assessments?
There are essentially four issues here where banks and CRAs need to work together which will also help banks to de-risk their own portfolios as well as monitor their loans more effectively.
First, Indian banks in conformity with the Basel II norms have been extensively using the credit assessment opinion of external rating agencies for calculating risk based capital requirements. Even though banks do not require credit rating by external rating agencies for calculating their capital requirement for all loans (only loans above ` 10 crore require credit rating), some are seemed to be asking companies to get a rating.This evidently is being done to enhance their credit assessments. Quite clearly, there is recognition of the value brought to the table by CRAs for banks which is being used for purposes beyond capital adequacy. However, banks should take into account the cost to the companies and balance it against the benefits.
We talk of sharing of credit information, which is vital given the frequent occurrence of business cycles and their consequences. We have institutions called credit information companies which provide such information to banks on the individual companies. Further, a transition story of how ratings have been moving over time is also available which the bankers should monitor and pick up and regularly draw a parallel rating map of CRAs which they should compare with their own models and rating. This will be one useful check which banks can create for their entire portfolio.
Second, I do see a lot of use in the products offered by CRAs and there is need to see how we can further integrate the two models of credit risk assessment of banks and CRAs. There is a suggestion that banks should de-risk their own portfolio by asking companies looking for long term finance to partly borrow from the corporate debt market. This way the market intelligence of CRAs which is mandatory for bond market borrowing would be an additional input that would come in handy for banks when they are lending money to the entity. This is even more pertinent today because of ALM issues and the demand for funds that would arise once the economy picks up and infrastructure starts to boom. Banks may not be able to fully meet the demand for funds to the borrowers. We have to start working out in detail the implications of such a move, but in this forum it is worth germinating such a thought considering that we have experts from both banks and CRAs present here.
Thirdly, one segment which particularly becomes vulnerable to economic shocks is the SME segment. They are disadvantaged on account of their size and also are the first ones to get affected when the downturn takes place. CRAs have models in place for rating of SMEs and the NSIC scheme gives a subsidy to SMEs for the rating. It will be a good idea for banks to require a rating from these SMEs before giving a loan so that there is a check in place before the loan is disbursed. Given the large number of SMEs in our space, it may not be possible for banks to do a due diligence for one and all. This is where the systems organized by CRAs can be harnessed by banks so that there is some homework already done which is useful for banks
Fourth, as you may be aware, recently we have given guidelines on banks offering credit enhancement on infra bonds issued subject to certain conditions. This is definitely one measure that we would like to pursue which will also work towards developing the bond market. At the same time, we see an important role for CRAs here too. This is an example of a case of the bond market, banks and CRAs all working together for an optimal solution which will finally benefit the economy.
The development of corporate bond market is very critical for leveraging the synergies between banks and CRAs which can address the issue of growing NPAs in the system.
Therefore, I do see CRAs playing a very important role in the operations of banks that go beyond just capital adequacy and Basel II. The final decision as well as the credit appraisal has to be done by the bank and what the CRA provides will only be additional information that can be used. Banks will also be looking towards the CRAs to shape up their capital requirements under Basel III as they have to raise tier II bonds for shoring it up. But that will be more as a market borrower rather than a lender.
Although the road has been set for Indian banks to migrate to an internal rating based approach for evaluating their credit risk, the ability and preparedness of these banks to migrate to the internal rating approach is expected to be contingent on banks being in a position to test data based on the models to be used for this purpose. Banks would thus necessarily have to rely on external credit ratings for their calculation of credit risk until all the systems are in place.
Accountability of CRAs
Now let us look at the issue of accountability and transparency of credit rating agencies. Why should there be accountability and transparency of credit rating agencies? This brings us to the moot point of who pays for the credit ratings. There are two conventional models. These are: 'investor-pay' model, where the investor or banker commissions the credit rating and 'issuer-pay' model, where the issuer of the security or borrower pays for the rating. Of late, a new model is being proposed: 'society-pay' model, where a neutral third party, i.e., Government, Regulator etc., pays for the rating of a debt.
Each model has its own advantages and disadvantages. Let us analyse the 'issuer-pay' model further as that is the most prevalent model currently in our country. As said earlier, in the issuer pay model, the issuer of the debt or the borrower commissions the credit rating either voluntarily or to comply with regulatory requirement. In India, as far as public issue of debt is concerned, regulations by the Securities and Exchange Board of India and Reserve Bank of India make it mandatory for the issuers to obtain a credit rating. As far as the bank loans are concerned there is no such mandatory requirement, even though the capital requirements of banks with regard to corporate loans are dependent on credit ratings. Banks may at their discretion require borrowers to obtain credit ratings.
The advantages of issuer-pay model is that, ratings once assigned and accepted, are disclosed publicly and is available for users at free of charge. Small investors and individuals who wish to invest in debt securities need not pay for accessing the credit ratings. Another advantage of this model could be that issuers may be more forthcoming in sharing information as they are the ones who have commissioned the rating. However, there is an inherent conflict of interest in this model. Since the income and profits of credit rating agencies are dependent upon the volume of ratings they assign, there may be a tendency to assign inflated ratings to acquire and retain clients.
The Financial Crisis Inquiry Commission (2011, Page 212), which went into the causes of the financial and economic crisis in the United States, has concluded that '….the business model under which firms issuing securities paid for their ratings seriously undermined the quality and integrity of those ratings; the rating agencies placed market share and profit considerations above the quality and integrity of their ratings'. Such conclusions on the contribution of credit rating agencies to the recent financial crisis have led to calls for tougher regulatory oversight on credit rating agencies.
To conclude, we can see that among the proactive steps that a bank can take to stem the problem of increasing level of NPAs and stressed assets, use of credit ratings is an important one. Banks can use the external ratings as third party, professional assessment, either as a stand-alone basis or in combination with their own internal ratings. However, banks need to balance the use of external ratings, as the recent financial crisis has highlighted the dangers of over dependence on ratings.
I am sure today's deliberations will result in a lot of suggestions that can be used by regulators like RBI and SEBI to bring in improvements in the policy frameworks. I look forward to receive them from the organizers.
Thanking you all for your patient attention.
Speech delivered by Shri R. Gandhi, Deputy Governor, Reserve Bank of India at the Conference conducted by ASSOCHAM on May 31, 2014, at Le-Meridian, New Delhi. Assistance provided by Shri D.R. Dogra and Shri Nethaji B are gratefully acknowledged.
Source- RBI
IT : Where assessee-society having paid up share capital and reserves in excess of Rs. one crore, accepted deposits from non-members also and, moreover, bye-laws of society did not permit admission of other co-operative society as a member, assessee was to be regarded as a primary co-operative bank in terms of section 80P(4) and, thus, its claim for deduction under section 80P(2)(a)(i) was to be rejected
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[2014] 45 taxmann.com 142 (Panaji - Trib.)
IN THE ITAT PANAJI BENCH
Shree Brahmanath Co-operative Credit Society Ltd.
v.
Income-tax Officer, Ward-1(1) Belgaum*
P. K. BANSAL, ACCOUNTANT MEMBER
AND D. T. GARASIA, JUDICIAL MEMBER
AND D. T. GARASIA, JUDICIAL MEMBER
IT APPEAL NO. 242(PNJ.) OF 2013
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
MARCH 14, 2014
Section 80P of the Income-tax Act, 1961 - Deductions - Income of co-operative societies (Primary Co-operative bank) - Assessment year 2009-10 - Assessee was a co-operative society registered under State Co-operative Societies Act - Assessee filed return claiming deduction under section 80P(2)(a)(i) - Assessing Officer rejected assessee's claim holding that assessee was a primary co-operative bank and therefore provisions of section 80P(4) were applicable to assessee's case - It was noted that assessee was accepting deposits from persons who were not members and paid up share capital and reserves in case of assessee was more than Rs. one crore - Further, bye-laws of society did not permit admission of other co-operative society as a member - Whether since assessee-society complied with all three pre-requisite conditions, in view of Explanation (a) to section 80P(4), it had to be regarded as a primary co-operative bank and, thus, assessee's claim for deduction was rightly rejected - Held, yes [Para 2.3.9] [In favour of assessee]
FACTS
| ■ | The assessee was a co-operative society registered under the State Co-operative Societies Act. The assessee filed return claiming deduction under section 80P(2)(a)(i). | |
| ■ | The Assessing Officer denied the deduction claimed taking a view that the assessee was a 'primary co-operative bank' and therefore provisions of section 80P(4) were applicable in the case of assessee. | |
| ■ | The Commissioner (Appeals) confirmed the order of Assessing Officer. | |
| ■ | On second appeal: |
HELD
| ■ | From the plain reading of section 80P(2)(a)(i) it is apparent that if the co-operative society is engaged in carrying of business of banking or providing credit facilities to its members, the co-operative society is entitled for deduction on whole of the income relating to any one or more of such business. From the reading of section 80P(4) it is apparent that this section denies deduction to a co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank. | |
| ■ | The provisions of section 80P(4) were introduced in the statute by the Finance Act, 2006 w.e.f. 1-4-2007. The Explanation to the section defines the co-operative bank and primary agricultural credit society to have the same meaning as assigned to them in Part-V of the Banking Regulation Act, 1949. It is not the case of either of the parties that the assessee is a primary co-operative agricultural and rural development bank. It is also not the claim of the assessee that assessee is a primary agricultural credit society. | |
| ■ | If one reads both the sections, section 80P(2)(a)(i) and section 80P(4) together, one finds that the provisions of section 80P(4) mandate that the provisions of section 80P will not apply to any co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank but as per the provisions of section 80P(2)(a)(i), a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is entitled for deduction. | |
| ■ | After the insertion of section 80P(4), the provisions of section 80P(2)(a)(i) were not amended, rather the co-operative society engaged in carrying on business of banking facilities to its members continued to be entitled for deduction under section 80P(2)(a)(i). This pre-supposes that every co-operative society engaged in carrying on business of banking cannot be regarded as a co-operative bank. The embargo put under section 80P(4) are applicable only to a co-operative bank. It cannot be said that a co-operative society cannot carry on business of banking facilities to its members even if it is not a co-operative bank. | |
| ■ | If one reads the provisions in the manner that every co-operative society engaged in carrying on business of banking even for its members is regarded to be a co-operative bank, then, the provisions of section 80P(2)(a)(i) will become redundant. Therefore, before deciding the issue whether the assessee is entitled for deduction under section 80P(2)(a)(i), it is essential to decide whether the assessee is a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. | |
| ■ | In case it is found that the assessee is a co-operative bank, the assessee will not be entitled for deduction as stipulated under section 80P(2)(a)(i) but in case the assessee is not a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the provisions of section 80P(2)(a)(i) will be applicable to the assessee provided the assessee is engaged in carrying on business of banking or providing credit facilities to its members. This action nowhere states co-operative credit society except mentioned under proviso 2 to section 80P which is relevant for sub-clause 6 or 7. It has nothing to do with section 80P(2)(a)(i). [Para 2.3] | |
| ■ | Section 80P(2)(a)(i) provides two types of activities in which the co-operative society must be engaged to be eligible for deduction under sub-clause (i). These two activities are not alternate ones because the section allows deduction to the co-operative society on the whole of profits and gains of business attributable to any one or more of such activities. This pre-supposes that eligible co-operative society can carry on either one of these two businesses or can carry both these businesses for the members. If the assessee co-operative society carries on one or both of the activities, it will be eligible for deduction. | |
| ■ | These two activities are (a) co-operative society engaged in carrying on business of banking facilities to its members or (b) co-operative society engaged in providing credit facilities to its members. Both the activities must be carried on by the co-operative society for its members. If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co-operative society, will not be eligible for deduction under section 80P(2)(a)(i) on the income which it derives from carrying on the activities not relating to its members. | |
| ■ | Therefore, where a co-operative society is engaged in carrying on business of banking facilities to its members and to the public or providing credit facilities to its members or to the public, the income which relates to the business of banking facilities to its members or providing credit facilities to its members will only be eligible for deduction under section 80P(2)(a)(i). There is no prohibition under section 80P not to allow deduction to such co-operative societies in respect of business relating to its members. [Para 2.3.1] | |
| ■ | The question is whether the assessee is a co-operative bank or not. The term 'Co-operative Bank' is defined in Part V of the Banking Regulations Act, 1949. [Para 2.3.2] | |
| ■ | From the definition of Co-operative bank it is apparent that Co-operative bank means State co-operative bank, a Central Co-operative Bank and a Primary Co-operative bank. It is not the case of the revenue that the assessee is a State Co-operative bank or Central Co-operative bank. It is therefore to find whether the assessee is a primary Co-operative bank. [Para 2.3.3] | |
| ■ | The Primary Co-operative bank is defined under section 5 clause (CCV) of Banking Regulation Act, 1949. From the said definition, it is apparent that if the co-operative society complied with all the three conditions; firstly that the primary object or principal business transacted by it is a banking business, secondly, the paid up share capital and reserve of which are 1 lakh or more and thirdly, bye-laws of the co-operative society do not permit admission of any other co-operative society as a member, it will be regarded to be primary co-operative bank. If co-operative society does not fulfil any of the conditions, it cannot be regarded to be a primary co-operative bank. | |
| ■ | Therefore, in the case of the assessee one has to examine on the basis of the facts and materials on record whether the assessee co-operative society complies with all the three conditions. In case, it does not comply with all the three conditions, it cannot be regarded to be a co-operative bank and the provisions of section 80P(4), will not be applicable in the case of the assessee. Once, the assessee does not fall within the provisions of section 80P(4), the assessee, will be eligible to get deduction under section 80P(2)(a)(i) in respect of whole of the income which the assessee derives from carrying on the business of banking or providing credit facilities to its members. [Para 2.3.5] | |
| ■ | Banking business has been defined under section 5(b) of the Banking Regulation Act. From the said definition it is clear that banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment. These deposits must be accepted from the public, not only from the members. These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise. The assessee has categorically accepted before the authorities below that the assessee was accepting deposits of money not only from the members but also from the general public who are non-members. | |
| ■ | The deposits so accepted are used by the assessee co-operative society for lending or investment. This fact has not been denied by the assessee. Even out of the deposits so received, the loans have been given to the members of the society. Thus, condition No. 1 stands satisfied and it cannot be said that the assessee-society was not carrying on banking business as it was accepting deposits from the persons who were not members. So far as the second condition is concerned, there is no dispute that the paid up share capital and reserves in the case of the assessee was more than Rs. 1 lakh. Therefore, the assessee satisfies the second condition. So far as the third condition is concerned, that section 16 of the State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member. | |
| ■ | The provision of section 16 mandates admission of any other co-operative society as a member of the co-operative society. The word used in section 16(1) is 'shall'. This fact is clarified further by sub-section (2) that no co-operative society shall refuse admission to the membership, without sufficient reason, to any person who is qualified to become member under the provisions of this Act, rules and bye-laws. This clearly proves that in case the rules and bye-laws of the other co-operative society provides otherwise the co-operative society may not be admitted as a member of the co-operative society. The person, as per sub-section (2), must be qualified for becoming member not only under section 16(1) but also as per the rules and bye-laws of the co-operative society. One cannot read sub-section (2) in the manner that the rules and bye-laws cannot permit the admission of any other co-operative society as a member of the co-operative society. Had that been the intention of the legislature, they would have not used the words 'this Act, rules and bye-laws' in sub-section (2). [Para 2.3.6] | |
| ■ | Bye-laws 19 deals with the nominal membership. It also does not talk of admission of membership of another co-operative society. Condition for completing 18 years of age cannot be imposed for co-operative society. This condition can be applied only to an individual. From this, it is apparent that the bye-laws of societies do not permit the admission of other co-operative society as member. Thus the third condition for becoming primary co-operative bank is also complied with. Since the assessee society complies with all the three conditions therefore the assessee society becomes a primary co-operative bank and in view of Explanation (a) of section 80P(4) it has to be regarded as a co-operative bank and is hit by section 80P(4). [Para 2.3.7] | |
| ■ | In view of above, it is held that the assessee has to be regarded to be a primary co-operative bank as all the three basic conditions are complied with, therefore, it is a co-operative bank and the provisions of section 80P(4) are applicable in the case of the assessee and assessee is not entitled for deduction under section 80P(2)(a)(i). Consequently, the order of the Commissioner (Appeals) in not allowing deduction under section 80P(2)(a)(i) to the assessee is confirmed. [Para 2.3.9] |
CASE REVIEW
Asstt. CIT v. Palhawas Primary Agriculture Co-operative Society Ltd. [2012] 54 SOT 53 (URO)/23 Taxmann.com 318 (Delhi) (para 2.3.8) distinguished.
CASES REFERRED TO
CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. [Tax Appeal Nos. 442, 443 and 863 of 2013, dated 15-1-2014] (para 2.1), ITO v. Divyajyothi Credit Co-operative Society Ltd. [IT Appeal No. 72/Bang/2013] (para 2.1), Dy. CIT v. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd.[2012] 137 ITD 163/23 taxmann.com 313 (PNJ.) (para 2.2), Asstt. CIT v Palhawas Primary Agriculture Co-operative Society Ltd. [2012] 54 SOT 53 (URO)/23 Taxmann.com 318 (Delhi) (para 2.1), ITO v. Jankalyan Nagri Sahakari Pat Sanstha Ltd. [2012] 54 SOT 60 (URO)/24 taxmann.com 127 (Pune) (Para 2.1), Citizen Co-op. Society Ltd. v. Addl. CIT [2012] 24 taxmann.com 347/54 SOT 196 (Hyd.) (URO) (para 2.2) and ACIT v. Bangalore Commercial Transport Credit Co-operative Society Ltd. [IT Appeal No. 1069 (Bang.) of 2010] (para 2.3.8).
Bharat R. Porwal and Chetan Chowgule for the Appellant. B. Barthakur for the Respondent.
ORDER
P.K. Bansal, Accountant Member - This appeal is filed by the Assessee against the order of CIT(A), Belgaum dated 20.5.2013. The Assessee has taken the following grounds of appeal :—
| "1. | Because, the learned Commissioner of Income Tax (Appeals) erred in law as well as on facts while disallowing the deduction claimed u/s 80P(2)(a)(i) of the Income Tax Act, 196 and concluding that the assessee is a primary co-operative bank within the meaning of Part V of the banking Regulation Act, 1949.. | |
| 2. | That the Authorities failed to appreciate that the assessee is not governed by RBI Act or the Banking Regulation Act, 1949, whereas it is governed by the Karnataka Co-operative Societies Act. | |
| 3. | Because, the learned lower authorities have erred in denying the deduction claimed u/s 80P(2)(a)(i) of Income Tax Act, 1961 by adjudicating the assessee as cooperative bank by applying section 80P(4) instead of treating it as cooperative credit society." |
2. The brief facts of the case for the assessment year 2009-10 are that the Assessee is a co-operative society registered under the Karnataka State Co-operative Societies Act. The Assessee filed return declaring gross total income of Rs.10,70,982/- and claimed deduction u/s 80P(2)(a)(i) and therefore net taxable income was shown to be 'nil'. The AO did not allow the deduction to the Assessee u/s 80P(2)(a)(i) and the income was assessed at Rs.10,70,982/-. The AO while denying the deduction to the Assessee u/s 80P(2)(a)(i) took the view that the Assessee is a primary co-operative bank and therefore provisions of Sec. 80P(4) are applicable in the case of the Assessee. The Assessee went in appeal before the CIT(A). CIT(A) dismissed the appeal of the Assessee but did not allow deduction u/s 80P (2) (a) (i).
2.1 The ld. AR before us vehemently contended that the provisions of Sec. 80P(4) are not applicable in the case of the Assessee. He also submitted written submission. The Assessee is not a co-operative bank. The Assessee is a co-operative society duly registered under the Karnataka State Co-operative Societies Act, 1959. The primary object of the Assessee is to promote the economic interest of its members and to encourage thrift, savings, co-operation and self help among themselves. For this, our attention was drawn towards the bye-laws of the Assessee from (I) to (VII). The Assessee is a credit society. He contended that the word credit is of outmost important to decide the status of the assessee under the Banking Regulation Act, 1949. According to him the assessee is a co-operative credit society but when we question that section 80P does not talk of co-operative credit society, he could not reply thereto but relied on Banking Regulation Act forgetting that the section 80P only uses the word 'co-operative society engaged in'. The activities of the Assessee are limited to its members. He did not dispute the finding of CIT(A) that the society take deposits from the public at large. The paid up capital of the Assessee, no doubt, is more than Rs. 1 lacs. It was contended that the issue is duly covered in favour of the Assessee by the decision of the Hon'ble Gujarat High Court in the case of CIT v. Jafari Momin Vikas Co-op. Credit Society Ltd. [Tax Appeal nos. 442 443 and 863 of 2013, dated 15-1-2014]. Attention was also drawn towards the decision of the Hon'ble Karnataka High Court in the case of Vyavasaya Seva Sahakara Sangha v. State of Karnataka for the proposition of law by referring to para 12 that merely because the co-operative society is required to advance loan to its members, it does not cease to be a co-operative society governed by the Co-operative Societies Act nor can they be treated as banking companies. The activities carried out by the society cannot be regarded to be banking activities as contemplated under the Banking Regulation Act, 1949. Reliance was also placed on the decision of the Bangalore Bench of this Tribunal in the case of ITO v. Divyajyothi Credit Co-operative Society Ltd. [IT Appeal No. 72/Bang/2013] for the A.Y 2009-10 in which it was held that the provisions of Sec. 80P(4) are applicable only to credit co-operative banks and not to credit co-operative society. Reliance was also placed on the decision of the Panaji Bench in the case of Dy. CIT v. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. [2012] 137 ITD 163/23 taxmann.com 313 (PNJ.). Reliance was also placed in Asstt. CIT v Palhawas Primary Agriculture Co-operative Society Ltd.[2012] 54 SOT 53 (URO)/23 taxmann.com 318 (Delhi), ITO v Jankalyan Nagri Sahakari Pat Sanstha Ltd. [2012] 54 SOT 60 (URO)/24 taxmann.com 127 (Pune).
2.2 The ld. DR, on the other hand vehemently contended that the Assessee is a co-operative bank. In view of the definition of the co-operative bank given under explanation to Sec. 80P(4) the Assessee is engaged in the business of banking. Sec. 80P(4) puts an embargo w.e.f. 1.4.2007 that if a co-operative society is carrying on banking business, the Assessee will not be entitled for the exemption. Reliance was placed on the decision of Hyderabad Bench of the Tribunal in the case of Citizen Co-op. Society Ltd. v. Addl. CIT[2012] 24 taxmann.com 347/54 SOT 196 (Hyd.)(URO).
2.3 We have heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below as well as the decisions and the entire material and case laws referred to before us. The question before us is whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) and whether the Assessee is hit by the provisions of Sec. 80P(4) which was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007. The relevant provisions of both the sections are re-produced for our ready reference as under :—
'80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely :—
| (a) | in the case of a co-operative society engaged in- |
| (i) | carrying on the business of banking or providing credit facilities to its members, or……………" |
the whole of the amount of profits and gains of business attributable to any one or more of such activities.
"80P(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
Explanation.— For the purposes of this sub-section,—
| (a) | "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); | |
| (b) | "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.' |
From the plain reading of Sec. 80P(2)(a)(i) it is apparent that if the co-operative society is engaged in carrying of business of banking or providing credit facilities to its members, the co-operative society is entitled for deduction on whole of the income relating to any one or more of such business. From the reading of Sec. 80P(4) it is apparent that this section denies deduction to a co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank. The provisions of Sec. 80P(4) was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007. The explanation to the section defines the co-operative bank and primary agricultural credit society to have the same meaning as assigned to them in Part-V of the Banking Regulation Act, 1949. It is not the case of either of the parties that the Assessee is a primary co-operative agricultural and rural development bank. It is also not the claim of the Assessee that Assessee is a primary agricultural credit society. If we read both the sections, Sec. 80P(2)(a)(i) and Sec. 80P(4) together, we find that the provisions of Sec. 80P(4) mandates that the provisions of Sec. 80P will not apply to any co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank but as per the provisions of Sec. 80P(2)(a)(i), a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is entitled for deduction. After the insertion of Sec. 80P(4), the provisions of Sec. 80P(2)(a)(i) were not amended, rather the co-operative society engaged in carrying on business of banking facilities to its members continued to be entitled for deduction u/s 80P(2)(a)(i). This pre-supposes that every co-operative society engaged in carrying on business of banking cannot be regarded to be a co-operative bank. The embargo put u/s 80P(4) are applicable only to a co-operative bank. In our opinion, it cannot be said that a co-operative society cannot carry on business of banking facilities to its members even if it is not a co-operative bank. If we read the provisions in the manner that every co-operative society engaged in carrying on business of banking even for its members is regarded to be a co-operative bank, then, the provisions of Sec. 80P(2)(a)(i) will become redundant. Therefore, in our opinion, before deciding the issue whether the Assessee is entitled for deduction u/s 80P(2)(a)(i), it is essential to decide whether the Assessee is a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. In case it is found that the Assessee is a co-operative bank, the Assessee will not be entitled for deduction as stipulated u/s 80P(2)(a)(i) but in case the Assessee is not a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the provisions of Sec. 80P(2)(a)(i) will be applicable to the Assessee provided the Assessee is engaged in carrying on business of banking or providing credit facilities to its members. This action nowhere states co-operative credit society except mentioned under proviso 2 to section 80P which is relevant for sub-clause 6 or 7. It has nothing to do with section 80P(2)(a)(i).
2.3.1 In our opinion, Sec. 80P(2)(a)(i) provides two types of activities in which the co-operative society must be engaged to be eligible for deduction under sub-clause (i). These two activities are not alternate ones because the section allows deduction to the co-operative society on the whole of profits and gains of business attributable to any one or more of such activities. This pre-supposes that eligible co-operative society can carry on either one of these two businesses or can carry both these businesses for the members. If the Assessee co-operative society carries on one or both of the activities, it will be eligible for deduction. These two activities are (a) co-operative society engaged in carrying on business of banking facilities to its members or (b) co-operative society engaged in providing credit facilities to its members. Both the activities must be carried on by the co-operative society for its members. If a co-operative society is engaged in carrying on these activities/facilities for the persons other than its members, the co-operative society, in our opinion, will not be eligible for deduction u/s 80P(2)(a)(i) on the income which it derives from carrying on the activities not relating to its members. Therefore, where a co-operative society is engaged in carrying on business of banking facilities to its members and to the public or providing credit facilities to its members or to the public, the income which relates to the business of banking facilities to its members or providing credit facilities to its members will only be eligible for deduction u/s 80P(2)(a)(i). There is no prohibition u/s 80P not to allow deduction to such co-operative societies in respect of business relating to its members.
2.3.2 Now, the question before us is whether the Assessee is a co-operative bank or not. 'Co-operative Bank' is defined in Part V of the Banking Regulations Act, 1949 as under :
'"Co-operative bank" means a state co-operative bank, a central co-operative bank and a primary co-operative bank:'
2.3.3 From the definition of Co-operative bank it is apparent that Co-operative bank means state' co-operative bank, a Central Co-operative Bank and a Primary Co-operative bank. It is not the case of the revenue that the assessee is a state Co-operative bank or Central Co-operative bank. We have therefore to find whether the assessee is a primary Co-operative bank.
2.3.4 The Primary Co-operative bank is defined under section 5 clause (CCV) of Banking Regulation Act 1949 as under: —
'(CCV) "primary co-operative bank" means a co-operative society, other than a primary agricultural credit society—
| (1) | the primary object or principal business of which is transaction of banking business: | |
| (2) | the paid-up share capital and reserves of which are not less than one lakh of rupees: and | |
| (3) | the bye-laws of which do not permit admission of any other co-operative society as a member: |
Provided that this sub-clause shall not apply to the admission of a co-operative bank as a member by reason of such co-operative bank subscribing to the share capital of such Co-operative society out of funds provided by the State Government for the purpose.'
2.3.5 From the aforesaid definition, it is apparent that if the co-operative society complied with all the three conditions; firstly that the primary object or principle business transacted by it is a banking business, secondly, the paid up share capital and reserve of which are 1 lakh or more and thirdly, by laws of the co-operative society do not permit admission of any other co-operative society as a member, it will be regarded to be primary co-operative bank. If co-operative society does not fulfil any of the conditions, it cannot be regarded to be a primary co-operative bank. Therefore, in the case of the Assessee we have to examine on the basis of the facts and materials on record whether the Assessee co-operative society complies with all the three conditions. In case, it does not comply with all the three conditions, it cannot be regarded to be a co-operative bank and the provisions of Sec. 80P(4), in our opinion, will not be applicable in the case of the Assessee. Once, the Assessee will not fall within the provisions of Sec. 80P(4), the Assessee, in our opinion, will be eligible to get deduction u/s 80P(2)(a)(i) in respect of whole of the income which the Assessee derives from carrying on the business of banking or providing credit facilities to its members.
2.3.6 Whether condition no. 1 is applicable in the case of the Assessee, for this we have to look into the bye-laws of the Assessee. The objects of the Assessee in this case are enumerated as under :—
| "I. | To promote the economic interest of its members and to encourage thrifts, savings, co-operation and self help among themselves. | |
| II. | To create funds by means of deposits and borrowings and thereafter to lend the members of society at moderate rate of interest. | |
| III. | To lend money to its members on hire-purchase, for house-hold articles; | |
| IV. | To lend money for small scale industries, traders, tobacco processors and any other incidental work of tobacco. | |
| V. | To advance loan to the members of the society on pledge of gold and silver ornaments and hypothecation of goods, machinery and vehicles. | |
| VI. | To establish and manage centres or branches of business place or other place for carrying out the objects of the society. | |
| VII. | To receive grants, subsidy, donations from Government." |
On the basis of these objects whether it can be said that the primary object or principal business of the Assessee is transaction of banking business? Banking business has been defined u/s 5(b) of the Banking Regulation Act in the following manner :
'"banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.'
From the said definition it is clear that banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment. These deposits must be accepted from the public, not only from the members. These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise. We noted that the Assessee has categorically accepted before the authorities below that the Assessee was accepting deposits of money not only from the members but also from the general public who are non-members. This fact as per the remand report of A.O dated 13.2.2013 before the CIT(A) confirms from the following :—
"We accepts deposits from members as well as from non-members. But we grant loans and advances to members only. We do not grant loan to non members because it is not allowed by our bye law."
The deposits so accepted are used by the Assessee co-operative society for lending or investment. This fact has not been denied by the assessee or by his counsel in the written submission. Even out of the deposits so received, the loans have been given to the members of the society in accordance with the objects as enumerated above. Thus, in our opinion, condition no. 1 stands satisfied and it cannot be said that the Assessee society was not carrying on banking business as it was accepting deposits from the persons who were not members. So far as the second condition is concerned, there is no dispute that the paid up share capital and reserves in the case of the Assessee is more than Rs. 1 lac. Therefore, the Assessee satisfies the second condition. So far as the third condition is concerned, we noted that Sec. 16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member. The provisions of Sec. 16 are laid down as under :
"16. Persons who may become members — (1) Subject to the provisions of Section 17, no person shall be admitted as a member of a co-operative society except the following, namely:—
(a) an individual who needs the services of such co-operative society and is residing in the area of the operation of the society and is competent to enter into contract under the Contract Act, 1872 (Central Act IX of 1872);
(a-1) a depositor;
(b) any other co-operative society;
(c) the State Government or the Central Government;
(d) the Life Insurance Corporation of India, State Warehousing Corporation and such other institutions as may be approved by the State Government;
(e) a firm, a company or any other body corporate constituted under any law for the time being in force including a society registered under the Karnataka Societies Registration Act, 1960 (Karnataka Act 17 of 1960);
(f) a Market Committee established under the Karnataka Agricultural Produce Marketing (Regulation) Act, 1966 (Karnataka Act 27 of 1966);
(g) a local authority.
Explanation.-For the purpose of this clause, local authority means, a Municipal Corporation, Municipal Council, Town Panchayat, Zilla Panchayat, Taluk Panchayat or Grama Panchayat constituted under any law for the time being in force
(2) No co-operative society shall, without sufficient cause, refuse admission to membership to any person duly qualified therefor under the provisions of this Act, rules and bye-laws"
The aforesaid provision of Sec. 16 mandates admission of any other co-operative society as a member of the co-operative society. The word used in Sec. 16(1) is 'shall'. This fact is clarified further by sub-section (2) as re-produced hereinabove that no co-operative society shall refuse admission to the membership, without sufficient reason, to any person who is qualified to become member under the provisions of this Act, rules and bye-laws. This clearly proves that in case the rules and bye-laws of the other co-operative society provides otherwise, the co-operative society may not be admitted as a member of the co-operative society. The person, as per sub-section (2), must be qualified for becoming member not only u/s 16(1) but also as per the rules and bye-laws of the co-operative society. We cannot read sub-section (2) in the manner that the rules and bye-laws cannot permit the admission of any other co-operative society as a member of the co-operative society. Had that been the intention of the legislature, they would have not used the words "this Act, rules and bye-laws" in sub-section (2).
2.3.7 We have gone through the bye-laws which contains the membership which is bye-laws no.9. It states as under :—
" 14. MEMBERSHIP :
There shall be two classes of members as :- 'A' Class members comprising of individuals 'B' Class membership to Government without entrance fee.
(A) Any person can become member of the society provided
| (a) | He has completed his 18 years of age. | |
| (b) | He is living permanently within the area of operation. | |
| (c) | He/she has applied in the prescribed Form of society for his/her membership and his/ her application is admitted by the Board of Directors. | |
| (d) | He/she has paid :— |
| (i) | Entrance fee of Rs.5/-. | |
| (ii) | Share fee of Rs. 2/-. | |
| (iii) | Share amount of at least one share along with an application |
(B) The application for membership of any person shall be disposed off by the Board of Directors within stipulated time as per K.C.S. Act 1959.
| C ** | ** | **" |
Bye-laws 19 deals with the nominal membership. It also does not talk of admission of membership of another co-operative society. Condition for completing 18 years of age cannot be imposed for co-operative society. This condition can be applied only to an individual. From this, it is apparent that the bye-laws of societies does not permit the admission of other co-operative society as member. Thus the third condition for becoming primary co-operative bank is also complied with. Since the assessee society complies with all the three conditions therefore in our opinion the assessee society becomes a primary co-operative bank and in view of explanation (a) of section 80P(4) it has to be regarded as a co-operative bank and is hitted by section 80P(4).
2.3.8 We have gone through the decision of the Hyderabad bench of this Tribunal in the case of Citizen Co-operative Society Ltd. (supra). We noted that this decision is not applicable to the facts of the case before us.
In this decision, under para 23 the Tribunal has given a finding that the Assessee is carrying on banking business and for all practical purposes it acts like a co-operative bank. The Society is governed by the Banking Regulations Act. Therefore, the society being a co-operative bank providing banking facilities to members is not eligible to claim deduction u/s 80P(2)(a)(i) after the introduction of sub-section (4) to section 80P. In view of this finding, the Assessee was denied deduction u/s 80P(2)(a)(i). We have also gone through the decision of the Bangalore Bench of the Tribunal in the case of ITO v. Divyajyothi Credit Co-operative Society Ltd. (supra) in ITA No. 72/Bang/2013. In this case, we noted that the Hon'ble Tribunal confirmed the order of CIT(A) following the decision of the Tribunal in the case of ACIT v. Bangalore Commercial Transport Credit Co-operative Society Ltd. [IT Appeal No. 1069 (Bang.) of 2010] holding that Sec. 80P(2)(a)(i) is applicable only to credit co-operative society a and not to co-operative bank. With due regards to the Bench, we are unable to find any term 'credit co-operative society' u/s 80P(2)(a)(i) or u/s 80P(4), therefore, this decision cannot assist us. We noted that the Hon'ble Gujarat High Court in the case ofJafari Momin Vikas Co-op. Credit Society Ltd. (supra) vide order dt. 15.1.2014 took the view that Sec. 80P(4) will not apply to a society which is not a co-operative bank. In the case of Vyavasaya Seva Sahakara Sangha (supra) we noted that the issue before the Hon'ble High Court in the Writ Petition filed by the Petitioner related to the legislative competence of the State Legislature for issuing a circular. The issue does not relate to the claim of deduction u/s 80P(2)(a)(i). While dealing with this issue, the Hon'ble High Court under para 12 observed as under :
"12. It is not possible to accept this contention. The petitioners are not the banking institutions coming under the purview of the Banking Regulation Act. They are the co-operative societies registered under the Act, and as such they are governed by the provisions of the Act passed by the State Legislature. Consequently, the State Government has control over them to the extent the Act permits. Major activities of the petitioners are to finance its members. For the purpose of financing its members, they borrow money from the financing agencies and repay the same. Merely because the petitioners-the co-operative societies in question-are required to advance loans to their members, they do not cease to be co-operative societies governed by the Act nor can they be treated as banking companies. It is also not possible to hold that these activities of the petitioners amount to "banking" as contemplated under the Banking Regulation Act, 1949, inasmuch as these co-operative societies are not established for the purpose of doing "banking" as defined in section 5(b) of the Banking Regulation Act, 1949."
This decision, in our opinion, is not applicable to the case before us because the provisions of Sec. 80P(2)(a)(i), as we have already held in the preceding paragraphs, are applicable to a co-operative society which is engaged in carrying on banking business facilities to its members if it is not a co-operative bank. We have also gone through the decision of this Bench in the case of Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. (supra), for which the undersigned is the author. While discussing this issue, after analysing the aims and objects of the co-operative society under para 12 of its order, this Tribunal has held as under :
"12. From the aforesaid objects, it is apparent that none of the aims and objects allows the assessee cooperative society to accept deposits of money 'from public for the purpose of lending or investment. In our opinion until and unless that condition is satisfied, it cannot be said that the prime object or principal business of the assessee is banking business. Therefore, the assessee will not comply with the first condition as laid down in the definition as given u/s. 5(ccv) of the Banking Regulation act, 1959 for becoming "primary cooperative bank". The assessee, therefore, cannot be regarded to be primary cooperative bank and in consequence thereof, it cannot be a co-operative bank as defined under part V of the Banking Regulation Act 1949. Accordingly, in our opinion the provisions of section 80P (4) read with explanation there under will not be applicable in the case of the assessee. The assessee, therefore, in our opinion will be entitled for the deduction u/s 80P(2)(a)(i). We accordingly confirm the order of CIT(A) allowing deduction to the assessee."
We have also gone through the decision of Palhawas Primary Agriculture Co-operative Society Ltd, (supra). Section 80P(4) clearly excludes primary agriculture credit society from its domain.
Therefore this decision will not assist the assessee. We have also gone through the decision of Pune Bench in the case of Jankalyan Nagri Sahakari Pat Sanstha Ltd, (supra). This we have already stated that section 80P(2)(a)(i) no where talks of co-operative credit society and therefore the distinction made under the Banking Regulation Act cannot be imported u/s 80P(2)(a)(i). This decision in our opinion will not assist the assessee.
2.3.9 We, therefore, in view of our aforesaid discussion hold that the Assessee has to be regarded to be a primary co-operative bank as all the three basic conditions are complied with, therefore, it is a co-operative bank and the provisions of Sec. 80P(4) are applicable in the case of the Assessee and Assessee is not entitled for deduction u/s 80P(2)(a)(i). We, therefore, confirm the order of the CIT(A) not allowing deduction u/s 80P(2)(a)(i) to the assessee.
3. In the result, the appeal filed by the Assessee is dismissed.
SUNIL*In favour of assessee.
IT : 'Due date' mentioned under section 54F is due date for filing return under section 139(1) and not under section 139(4)
■■■
[2014] 45 taxmann.com 153 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
Income-tax Officer, Ward -1, Kanpur
v.
Smt. Rosamma Korah*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NOS. 646 & 663 (COCH.) OF 2013
[ASSESSMENT YEARS 2005-06 & 2007-08]
[ASSESSMENT YEARS 2005-06 & 2007-08]
MARCH 7, 2014
Section 54F of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house (Capital gains account scheme) - Assessment years 2005-06 and 2007-08 - Assessee's claim of exemption under section 54F was denied on ground that assessee had not deposited unutilized capital gain in capital gain account scheme within due date for filing return of income under section 139(1) - Assessee claimed that due date provided under section 139(4) should be considered - Apex Court in Prakash Nath Khanna v. CIT [2004] 266 ITR 1/135 Taxman 327 held that 'due date' means date for filing return under section 139(1) and not under section 139(4) - Whether, matter needed reconsideration by Assessing Officer in light of said decision - Held, yes [Para 9] [In favour of revenue/Matter remanded]
FACTS
| ■ | The assessee claimed exemption under section 54F. | |
| ■ | The Assessing Officer held that the assessee had not deposited the net sale consideration which was not appropriated/used in the capital gain account scheme within the due date for filing the return of income under section 139(1). Therefore, the assessee was not eligible for exemption under section 54F. | |
| ■ | The Commissioner (Appeals) found that the assessee had constructed the house within the period of three years and allowed exemption. | |
| ■ | On appeal: | |
| ■ | the department submitted that for claim of exemption only the utilized portion of the sale consideration had to be considered for the year under consideration and the unutilized portion of the sale consideration was not eligible for exemption in case it was not deposited in the capital gain account scheme within the due date for filing of return of income. The assessee submitted that section 54F being a beneficial provision, the time limit provided under section 139(4) for filing the return of income would be considered. |
HELD
| ■ | A bare reading of section 54F clearly shows that the assessee is entitled for exemption in case he/she constructs a residential house within a period of three years after the sale of the capital asset. However, sub-clause (4) of section 54F clearly says that the unutilized portion of the net sale consideration which is otherwise liable for capital gain tax shall be deposited in the capital gain account scheme within the period of due date for filing return of income under section 139. The question arises for consideration is whether the due date mentioned in section 54F(4) is the due date for filing the return under section 139(1) or the due date for filing the return of income under section 139(4). [Para 5] | |
| ■ | The Apex Court had an occasion to interpret the provisions of Income-tax Act in Prakash Nath Khanna v. CIT [2004] 266 ITR 1/135 Taxman 327 (SC), more particularly, the term 'due date' and held that due date means the due date for filing the return under section 139(2) and not section 139(4). [Para 6] | |
| ■ | This judgment of the Apex Court was not considered by the Commissioner (Appeals). The assessee also had no occasion to bring this judgment to the notice of the Commissioner (Appeals). When Legislature specifically refers only section 139(1) and omitted to refer section 139(4), this Tribunal is of the considered opinion that making a reference to section 139(4) cannot be proper. [Para 9] | |
| ■ | Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer in the light of the judgment of the Apex Court. Accordingly, the orders of the lower authorities are set aside and the issue of exemption under sectin 54F is restored to the file of the Assessing Officer. [Para 9] |
CASE REVIEW
Prakash Nath Khanna v. CIT [2004] 266 ITR 1/135 Taxman 327 (SC) and CIT v. V. R. Desai [2011] 197 Taxman 52/[2010] 8 taxmann.com 185 (Ker.) (para 9) followed.
CASES REFERRED TO
CIT v. V.R. Desai [2011] 197 Taxman 52/[2010] 8 taxmann.com 185 (Ker.) (para 3), Muthuletchumi Janardanan [IT Appeal No. 372 (Coch.) of 2011, dated 7-12-2012] (para 4), CIT v. Ms. Jagriti Aggarwal [2011] 339 ITR 610/203 Taxman 203/15 taxmann.com 146 (Punj. & Har.) (para 6) andPrakash Nath Khanna v. CIT [2004] 266 ITR 1/135 Taxman 327 (SC) (para 6).
Smt. Latha V. Kumar for the Appellant. T.M. Sreedharan for the Respondent.
ORDER
N.R.S. Ganesan, Judicial Member - The revenue filed the appeal for the assessment year 2005-06 and the assessee filed the appeal for the assessment year 2007-08. Since the issue raised by the assessee and the revenue is identical in nature both the appeals were heard together and are disposed of by this common order.
2. The only issue arises for consideration is exemption u/s 54F of the Act.
3. Smt. Latha V Kumar, the ld.DR submitted that the assessee has not deposited the net sale consideration which was not appropriated/used in the capital gain account scheme within the due date for filing the return of income u/s 139(1) of the Act. Therefore, according to the ld.DR, the assessee is not eligible for exemption u/s 54F of the Act, as claimed. The CIT(A), however, found that the assessee has constructed the house within the period of three years. According to the ld.DR, for claim of exemption only the utilized portion of the sale consideration has to be considered for the year under consideration. The unutilized portion of the sale consideration is not eligible for exemption in case it was not deposited in the capital gain account scheme within the due date for filing of return of income. The CIT(A) confused the investment made by the assessee with the transfer of the capital asset which was under construction. What was referred by CIT(A) is with regard to sale of the flat which was allotted to the share of the assessee for which the assessee is liable to pay short term capital gain separately. This fact was not considered properly by the CIT(A). According to the ld.DR, the CIT(A) has completely ignored the provisions of section 54F(4) of the Act. The ld.DR placed reliance on the judgment of the Kerala High Court in the case of CIT v. V.R. Desai [2011] 197 Taxman 52/[2010] 8 taxmann.com 185 (Ker).
4. On the contrary, Shri T.M. Sridharan, the ld.senior counsel for the assessee submitted that when the assessee constructed residential house within the period of three years, there is no necessity for depositing the amount in the capital gain account scheme. According to the ld.senior counsel, in fact, the assessee has constructed a house within the period of three years. Referring to the order of this Tribunal inMuthuletchumi Janardanan in ITA 372/Coch/2011 dated 07-12-2012, the ld.senior counsel for the assessee submitted that section 54F is a beneficial provision, therefore, the time limit provided u/s 139(4) for filing the return of income shall also be taken into consideration. In view of the decision of this Tribunal, according to the ld.senior counsel, the assessee is entitled for exemption u/s 54F of the Act.
5. We have considered the rival submissions on either side and also perused the material available on record. A bare reading of section 54F clearly shows that the assessee is entitled for exemption in case he/she constructs a residential house within a period of three years after the sale of the capital asset. However, sub clause (4) of section 54F clearly says that the unutilized portion of the net sale consideration which is otherwise liable for capital gain tax shall be deposited in the capital gain account scheme within the period of due date for filing return of income u/s 139. The question arises for consideration is whether the due date mentioned in section 54F(4) is the due date for filing the return u/s 139(1) or the due date for filing the return of income u/s 139(4) of the Act.
6. We have carefully gone through the decision of this Tribunal in the case of Muthuletchumi Janardanan(supra). This Tribunal, after referring to the judgment of the Punjab & Haryana High Court in the case ofCIT v. Ms. Jagriti Aggarwal [2011] 339 ITR 610/203 Taxman 203/15 taxmann.com 146 found that the assessee can deposit the amount within the time limit provided for filing the return u/s 139(4) of the Act. We find that the Apex Court had an occasion to interpret the provisions of Income-tax Act, more particularly, the term "due date" in Prakash Nath Khanna v. CIT [2004] 266 ITR 1/135 Taxman 327 (SC). The Apex Court found that due date means the due date for filing the return u/s 139(1) and not 139(4). No doubt, the term "due date" was interpreted by the Supreme Court in the context of prosecution u/s 276CC of the Act. Normally, the court should take a liberal construction of the provisions in the case of criminal prosecution. The Supreme Court, after considering the scheme of the Income-tax Act and the Rule of Interpretation, more particularly, the Laws of Taxation has observed as follows at page 9 of the ITR:
'It is a well settled principle in law that the court cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the Legislature itself. The question is not what may be supposed and has been intended but what has been said. "Statutes should be construed, not as theorems of Euclid". Judge Learned Hand said, "but words must be construed with some imagination of the purposes which lie behind them". (see Lenigh Valley Coal Co. v. Yensavage (218 FR 547). The view was reiterated in Union of India v. Filip Tiago De Gama of Vedem Vasco De Gama, AIR 1990 SC 981 and Padma Sundara Rao v. State of Tamil Nadu [2002] 3 SCC 533; [2002] 255 ITR 147 (SC)).
In D.R. Venkatachalam v. Deputy Transport Commissioner [1977] 2 SCC 273 it was observed that courts must avoid the danger of a priori determination of the meaning of a provision based on their own preconceived notions of ideological structure or scheme into which the provision to be interpreted is somewhat fitted. They are not entitled to usurp legislative function under the disguise of interpretation.
While interpreting a provision the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of process of law, it is for the Legislature to amend, modify or repeal it, if deemed necessary. (see Rishabh Agro Industries Ltd v. P.N.B. Capital Services Ltd.[2005] 5 SCC 515; [2000] 101 Comp Cas 284). The legislative causus omissus cannot be supplied by judicial interpretative process.'
7. After referring to them "due date", the Apex Court has also observed as follows at pages 10 & 11 of the ITR:
'On of the significant terms used in section 276CC is "in due time". The time within which the return is to be furnished is indicated only in sub-section (1) of section 139 and not in sub-section (4) of section 139. That being so, even if a return is filed in terms of sub-section (4) of section 139 that would not dilute the infraction in not furnishing the return in due time as prescribed under sub-section (1) of section 139. Otherwise, the use of the expression "in due time" would lose its relevance and it cannot be said that the said expression was used without any purpose. Before substitution of the expression "clause (i) of sub-section (1) of section 142" by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989, the expression used was "sub-section (2) of section 139". At the relevant point of time the Assessing Officer was empowered to issue a notice requiring furnishing of a return within the time indicated therein. That means the infractions which are covered by section 276CC relate to non-furnishing of return within the time in terms of sub-section (1) or indicated in the notice given under sub-section (2) of section 139. There is no condonation of the said infraction, even if a return is filed in terms of sub-section (4). Accepting such a plea would mean that a person who has not filed a return within the due time as prescribed under sub-section (1) or (2) of section 139 would get benefit by filing the return under section 139(4) much later. This cannot certainly be the legislative intent.'
8. The Apex Court further found that had the intentions of the Legislature was to permit the assessee to file the return u/s 139(4) also, the use of the expression "section 139" alone would have been sufficed. The Legislature would not have said that it should be filed u/s 139(1). When the Legislature specifically refers to section 139(1), it cannot be the intention to permit the assessee to file the return u/s 139(4) also. The Supreme Court specifically observed that it cannot be said that the Legislature without any purpose or intent specified only the sub-sections (1) and (2) and the conspicuous omission of sub-section (4) has no meaning or purpose behind it. Sub-section (4) of section 139 cannot by any stretch of imagination control the operation of sub-section (1) wherein a fixed period for furnishing the return is stipulated.
9. This judgment of the Apex Court was not considered by the CIT(A). The assessee also had no occasion to bring this judgment to the notice of the CIT(A). When Legislature specifically refers only section 139(1) and omitted to refer section 139(4), this Tribunal is of the considered opinion that making a reference to section 139(4) cannot be proper. This judgment of the Apex Court in Prakash Nath Khanna's (supra) was also not brought to the notice of the bench of this Tribunal when the case of Muthuletchumi Janardanan(supra) was decided. Therefore, this Tribunal apparently followed the judgment of the Punjab & Haryana High Court in the case of Ms. Jagriti Aggarwal (supra). The judgment of the Kerala High Court in the case of V.R. Desai (supra) also was not considered by this Tribunal in the case of Muthuletchumi Janardanan(supra). Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the assessing officer in the light of the judgment of the Apex Court in the case of Prakash Nath Khanna(supra) and the judgment of the Kerala High Court in the case of V.R. Desai (supra). Accordingly, the orders of the lower authorities are set aside and the issue of exemption u/s 54(F) is restored to the file of the assessing officer. The assessing officer shall reconsider the issue afresh in the light of the judgment of the Apex Court in the case Prakash Nath Khanna (supra) and the judgment of the Kerala High Court in V.R. Desai's case (supra) and thereafter decide the same in accordance with law after giving reasonable opportunity of hearing to the assessee.
10. In the result, both the appeals of the assessee and the revenue stand allowed for statistical purpose.
POOJARegards,
Pawan Singla , LLB
M. No. 9825829075__._,_.___
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