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September 7, 2022

Income from liquidation funds diverted at source is not taxable

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Income from liquidation funds diverted at source is not taxable

Facts and Issue of the Case

The brief facts of the case is that the assessee is Co-Operative Bank under liquidation by virtue of order dated 02/06/2003 passed by Govt. of Gujarat and the banking business of the assessee company has been suspended by Reserve Bank of India. Thus the assessee bank is being managed and administered by official Liquidator.

In view of Liquidation Section 21(2) of Deposit, Insurance and Credit Guarantee Corporation of India Act, 1961 which provides that Insurance claim, being amount paid to depositors to the extent of Rs. 1,00,000/- per each depositor, shall have to be paid out of realization of all advances and other assets without making payment of any liability.

For the Assessment Year 2011-12, reassessment order u/s. 143(3) r.w.s. 147 of the Act, was passed on 12.12.2018 wherein the A.O. has made an addition of Rs. 3,09,96,840/- treating the income of bank as its “income from other sources”.

For the Assessment Year 2013-14, assessment order u/s. 143(3) was passed accepting the returned income of Rs. 70,70,720/- . Thereafter the assessment was revised u/s. 263 by the Ld. PCIT-2, Ahmedabad on the ground that the assessee being in liquidation the interest income of the assessee is assessable as “income from other sources” in view of the Hon’ble Gujarat High Court judgment in the case of M/s. Morvi Mercantile Bank Ltd. reported in 104 ITR 568. Further the ld. PCIT held that as the banking license of the assessee is suspended, it cannot claim any loss on realization of nonbanking assets and unabsorbed depreciation. Following the above direction, the Assessing Officer passed assessment order u/s. 143(3) r.w.s. 263 by making disallowance of loss on realization of non-banking assets and unabsorbed depreciation and added as income of Rs. 2,90,00,183/- under the head “income from other sources”.

Thus the ld. CIT(A) following the order dated 17.01.2020 in ITA No. 538/Ahd/2018 passed by the Co-ordinate Bench of this Tribunal wherein it is held that statutory obligation upon liquidation availing insurance claim for deposits and such liability has been fully paid off to DICGCI. Therefore till such obligation all funds realized by bank under liquidation are diverted at source, the assessee has no discretion or authority to apply its income as it wishes. Hence such funds are not available to the assessee as income and therefore such income is not taxable in the hands of the assessee. Thus Ld. CIT(A) deleted the addition made by the A.O. and allowed the assessee appeals.

Aggrieved against the same, the Revenue is in appeal before us and raising the following Grounds of Appeal:

1. The Ld.ClT I A) has erred in law and on facts in holding that the realization of advances and income thereon are diverted at source as the assessee is under statutory obligation to repay DICGCI under DICGCI Act.

2. The Ld CIT(A) failed to appreciate that in the instant case income has been received by the assessee and the payment to DICGCI is merely an obligation to pay it a portion of one’s own income which has been received.

3. The Ld CIT(A) failed to appreciate the fact that the assessee had retained a part of its interest income as expenses before payment to DICGCI.

The Ld. Sr. D.R. Mr. V.K. Singh appearing for the Revenue fairly submitted that the issue is covered by the order passed in the case of M/s. Janta Commercial Co.Op Bank Ltd. which has been followed by the Ld. CIT(A). The Ld. D.R. however could not produce any contra judgment in favour of the Revenue. The Ld. A.R. Mr. A.P. Nanavaty appearing for the assessee support the order passed by the Ld. CIT(A) and pleaded to dismiss the appeal filed by the Revenue following Co-ordinate Bench Decision in the case of Janta Commercial Co-op. Bank Ltd.

Observation by the Court

The court  heard the rival submissions and perused the materials available on record. We are in complete agreement with the findings of the Ld. CIT(A) in the light of various decisions discussed in the above order. As per this mandatory conditions of Section 21(2) DICGCI Act, till liability of DICGCI is fully paid all funds realized by Bank under liquidation are diverted at source. Entire income of the assessee including interest income and share dividend income are diverted at source and bank under liquidation has no discretion or authority to apply such funds. Such funds are not available to the assessee as income and therefore such income is not taxable in the hands of the assessee. Therefore the grounds raised by the Revenue are hereby rejected .

Conclusion

 The appeals filed by the revenue are dismissed by the court.

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