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2013 (11) TMI 320 - AT - Income TaxDeduction u/s 80P of the Income Tax Act - Assessee was registered under Multi State Cooperative Societies Act, 1984 and was subsequently notified by Government of Maharashtra as a State Cooperative Bank. The Reserve Bank of India also gave the assessee license under the Banking Regulations Act, 1949 - The RBI cancelled the license w.e.f. 30.10.2003. Thus, the assessee is neither a State Cooperative Society nor it is a Bank under the Banking Regulation Act, 1949 - Assessee filed the return of income declaring the total income NIL after making claim of deduction u/s 80P(2)(a)(i) of the Act Held that - Assessee was disallowed deduction u/s 80P, as he was prohibited to do banking business by cancellation of licence by RBI. Applicability of provisions of section 176(3)A of the Income Tax Act Held that - Question of considering the discontinuation of business does not arise. What happened in the assessee s case is only cancellation of license to do the banking business, but the assessee is not prevented in doing any other business by the cooperative society. Only the activity of banking was prohibited. Even otherwise, the issue is not whether the income is to be brought to tax as business income or not. The issue is whether the incomes arising out of investment is eligible for deduction under section 80P(2)(a)(i) as of banking business. Therefore, provisions of section 176(3)A does not help the case of assessee. Penalty u/s 271(1)(c) of the Income Tax Act Held that - Management of the society knows that the income earned does not qualify the banking income and so is the A.B. Mansinghka & Co., Auditors of the assessee - It is the case, where the assessee has not adopted the advise of the experts(auditors) and proceeded to claim deduction u/s 80P(2) of the Act - Normally, the case is other way around and they(auditors) issue certificates advising the claim of deduction u/s 80P - But in this case, Auditors advised that the impugned income is ineligible to be classified as banking income. But the assessee made a false claim of deduction and decided to provide false explanation in the penalty proceedings u/s 271(1)(c) of the Act Decided against the Assessee.
Issues Involved:
1. Penalty under Section 271(1)(c) of the Income Tax Act. 2. Denial of Deduction under Section 80P(2)(a)(i) of the Income Tax Act. 3. Applicability of Section 176(3A) of the Income Tax Act. 4. Interpretation of income from banking business and its eligibility for deduction. 5. Assessment of whether the explanation provided by the assessee was bona fide. 6. Analysis of the assessee's compliance with statutory obligations and the impact of Supreme Court judgments. Detailed Analysis: 1. Penalty under Section 271(1)(c) of the Income Tax Act: The Tribunal upheld the penalty imposed under Section 271(1)(c) by the Assessing Officer (AO). The AO determined that the assessee made a wrongful claim for deduction under Section 80P(2)(a)(i), amounting to deliberate furnishing of inaccurate particulars of income. The penalty was imposed after considering the Supreme Court's judgment, which canceled the assessee's banking license and the subsequent advice from statutory auditors against claiming the deduction. The Tribunal found that the assessee's actions were contumacious and in conscious disregard of the law, thereby justifying the penalty. 2. Denial of Deduction under Section 80P(2)(a)(i) of the Income Tax Act: The AO disallowed the deduction claimed under Section 80P(2)(a)(i) because the assessee's banking license had been canceled by the Reserve Bank of India (RBI). The AO concluded that since the assessee was no longer a banking company, it was not entitled to the deduction for income earned from banking activities. This decision was upheld by the Tribunal, which agreed that the assessee's income from investments, interest on balances, and other sources did not qualify for the deduction under Section 80P(2)(a)(i). 3. Applicability of Section 176(3A) of the Income Tax Act: The assessee argued that the income earned during the winding-up process should be considered under Section 176(3A), which deals with income received after the discontinuation of business. However, the Tribunal rejected this argument, stating that the business was not discontinued but only the banking license was canceled. Therefore, Section 176(3A) was not applicable, and the income could not be treated as arising from discontinued business activities. 4. Interpretation of Income from Banking Business and its Eligibility for Deduction: The Tribunal analyzed whether the income from investments, interest on balances, and other sources should be considered as income from banking business. It concluded that the income did not qualify as banking income because the assessee was no longer permitted to carry on banking activities after the cancellation of its license. Consequently, the income was not eligible for deduction under Section 80P(2)(a)(i). 5. Assessment of Whether the Explanation Provided by the Assessee was Bona Fide: The Tribunal found that the explanation provided by the assessee was not bona fide. Despite being aware of the Supreme Court's judgment and the auditors' advice, the assessee made a claim for deduction under Section 80P(2)(a)(i). The Tribunal held that the assessee's conduct was not in good faith and that the explanation was not substantiated. This lack of bona fide explanation justified the penalty under Section 271(1)(c). 6. Analysis of the Assessee's Compliance with Statutory Obligations and the Impact of Supreme Court Judgments: The Tribunal emphasized that the assessee acted in conscious disregard of its statutory obligations. The Supreme Court had explicitly directed the RBI to revoke the banking license, and the assessee was aware of this legal position. Despite this, the assessee continued to claim deductions for income that was no longer eligible under the law. The Tribunal concluded that the assessee's actions were deliberate and contumacious, warranting the imposition of penalty. Conclusion: The Tribunal dismissed the appeal, upholding the penalty imposed by the AO. It concluded that the assessee made an unsustainable claim for deduction under Section 80P(2)(a)(i) in conscious disregard of the law, following the Supreme Court's judgment and the statutory auditors' advice. The Tribunal found that the explanation provided by the assessee was not bona fide, and the provisions of Section 176(3A) were not applicable. The penalty under Section 271(1)(c) was deemed appropriate given the circumstances.
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