2013 (10) TMI 760 - AT - Income Tax

Addition u/s 68 of the Income tax act in the banking business Assessee is engaged in the business of banking - Computerized sheets of the Fixed Deposit accounts contained only the account number, member s name, opening balance, debit, credit and balance amount, but not addresses of the depositors, which were not made available - Difference between the closing balance as on 31.3.2009 of Rs.160,24,48,937 and opening balance as on 1.4.2008 of Rs.121,70,76,143, viz. Rs.38,53,72,794 be treated by the assessing officer as representing the income of the assessee Held that - Remitted the matter back to the file of Commissioner(A) , who shall bring on record, the facts relating to the assessment year under consideration. The assessee is directed to file the relevant details, including the names and addresses of the depositors with PAN number, as per the KYC Scheme, as collected by the assessee. Reliance has been placed upon the judgment in the case of ACIT Vs. Citizen Urban Cooperative Bank Ltd 2008 (2) TMI 531 - ITAT AMRITSAR , wherein it has been held that the bank, for all its banking activities, is strictly governed by the Banking Regulations Act, 1949. The said Act defines a banking company as a company which transacts the business of banking. Banking is described as accepting, for the purpose of lending or investment of money, due from the public repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise. Thus, the deposits held by the assessee are its stock-in-trade. The amounts in the accounts maintained by the assessee bank were not in the control of the assessee bank. They are the deposits in the savings accounts of the customers of the assessee bank. To these deposits, s. 68 of the Act is not attracted. In the cases of banking companies like the assessee, the customer s identity is required to be taken by the bank with proper introduction, photographs and address, etc. This is so, because any person from the general public can open the account with the bank. The other cases of acceptance of deposits cannot be equated with that of the bank. In those cases, normally, deposits are accepted from the people connected with or known to the depositees. It is in accordance with the terms of s. 131 of the Negotiable Instruments Act that this requirement is there. As such, if introduction of the customer had been duly taken by the bank, the bank would not be liable in case of a fraud. Moreover, pertinently, if the customer seeks to operate the account with cash only, the bank can open an account without introduction and without proper identification. Further, the bank is not obliged to question the source of deposits made by its customers. Also, the customers can retain the amount in his savings bank account with the assessee bank for any period. The amount has to be repaid by the bank to its customers immediately on demand. These features distinguish the case of the bank from other ordinary assessees. Therefore, the provisions of s. 68 of the Act are not applicable to the bank as they are in the cases of the other assessees. Still further, under s. 35 of the Banking Regulations Act, 1949, a banking company is subject to periodical inspections and audit by the RBI and in case any default is found, the bank is liable for heavy monetary penalty, besides cancellation of its license. This is not the case with other assessees. Relying upon the decision in the above mentioned case, it is held in the present case that amounts in the accounts maintained by the assessee are deposits of the customers and/or not under the control of the assessee, and therefore, provisions of S.68 are not applicable to the Bank. Further, Society/Bank not required to go for detailed verification of address/whereabouts of the customers and therefore, addition u/s 68 cannot be made merely because the address of the customers are incomplete Decided against the Assessee.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 of the Income-tax Act, 1961.
2. Compliance with KYC norms and verification of depositor identities.
3. Applicability of Section 68 to banking institutions.
4. CIT(A)'s reliance on previous Tribunal orders and the need for fresh examination.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 68:
The primary issue in this appeal is the deletion of an addition made by the Assessing Officer (AO) under Section 68 of the Income-tax Act, 1961. The AO had added Rs.38,53,72,794 to the assessee's income, representing the difference between the closing and opening balances of deposits, due to the absence of depositor addresses. The CIT(A) deleted this addition, relying on earlier Tribunal orders for the assessment years 2006-07 and 2007-08, which dealt with similar circumstances and penalties under Sections 271D and 271E.

2. Compliance with KYC Norms and Verification of Depositor Identities:
The Tribunal previously held that the assessee, a cooperative society engaged in banking, maintained proper books of accounts and complied with KYC norms. The society had a large membership base and had computerized its operations. It was noted that the society collected all necessary information from its depositors, akin to a normal banking institution. The Tribunal emphasized that it is not obligatory for the assessee to verify the correctness of depositor details beyond what is required by normal banking practices. The assessee had discharged its onus by providing proof of identity and addresses as per KYC norms.

3. Applicability of Section 68 to Banking Institutions:
The Tribunal observed that Section 68 of the Income-tax Act, 1961, may not be applicable to banking institutions in the same way as it is to other assessees. The Tribunal referred to several judicial precedents, including the Hon'ble Supreme Court's decision in CIT vs. P.K. Noorjahan, which highlighted that the application of Section 68 depends on the discretion of the AO based on the circumstances of each case. The Tribunal also cited cases like ACIT vs. Citizen Urban Cooperative Bank Ltd., where it was held that deposits in banking institutions are part of their stock-in-trade and not subject to Section 68 in the same manner as other deposits.

4. CIT(A)'s Reliance on Previous Tribunal Orders and Need for Fresh Examination:
The CIT(A) had relied on the Tribunal's order dated 26th June 2010, which dealt with the deletion of penalties under Sections 271D and 271E, rather than directly addressing the additions under Section 68. The Tribunal noted that the CIT(A) did not conduct a thorough examination of the facts for the assessment year under consideration. Therefore, the Tribunal set aside the CIT(A)'s order and remitted the matter back for fresh examination. The CIT(A) was directed to bring on record the relevant facts, including depositor details and PAN numbers, and decide the matter afresh in accordance with the law, considering the Tribunal's previous decisions and after providing a reasonable opportunity for hearing to the assessee.

Conclusion:
The appeal of the Revenue is allowed for statistical purposes, with the matter remitted back to the CIT(A) for a fresh decision based on a detailed examination of the facts and compliance with legal requirements.