Section 68 and bank customer deposits: peak credits in ordinary banking books were not treated as unexplained income, while one reopening was upheld.

Section 68 was held inapplicable to peak credits in a co-operative bank's customer accounts where the deposits were maintained in ordinary banking books, regulated by banking norms, and were linked to identifiable introducers, account holders, or earlier traced sources; the deletion of the additions was upheld. On reassessment, the material was found sufficient to support reason to believe for one year, so reopening was sustained. For the other year, the dispute over recording and service of reasons under sections 147/148 had not been independently examined, so the jurisdictional issue was remitted for fresh consideration before any merits decision.

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Issues: (i) Whether section 68 could be invoked to treat peak credits in the assessee-bank's customer accounts as unexplained income of the bank and whether the CIT(A) was justified in deleting the additions; (ii) Whether the reassessment notice under sections 147/148 was validly initiated and, in the other assessment year, whether the absence of proof of recording and service of reasons required remand.

Issue (i): Whether section 68 could be invoked to treat peak credits in the assessee-bank's customer accounts as unexplained income of the bank and whether the CIT(A) was justified in deleting the additions.

Analysis: The accounts in question were savings/customer accounts maintained by a co-operative bank in the ordinary course of banking business and subject to banking regulations and RBI supervision. The deposits stood in the bank's books as customers' money, the bank had acted on introductions and available particulars, and the material showed that several credits were transfers of earlier investments or were otherwise traceable to specific introducers and account holders. The legal distinction between an ordinary assessee and a banking company was material because the bank did not exercise the same control over credited sums as a trader does over its own unexplained receipts. On the facts found, the addition on peak credits was not sustainable in the bank's hands, and the admission of supporting documents in appeal was also not shown to be improper.

Conclusion: The deletion of the section 68 additions was upheld and the department's challenge failed.

Issue (ii): Whether the reassessment notice under sections 147/148 was validly initiated and, in the other assessment year, whether the absence of proof of recording and service of reasons required remand.

Analysis: For one year, the Tribunal held that the material before the Assessing Officer was sufficient to constitute reason to believe and sustained the reopening. For the other year, however, the assessee specifically disputed service of the recorded reasons and of the notice under section 148, while the appellate order below had not dealt with that objection independently. Since the preliminary jurisdictional issue had not been examined on the relevant facts, the matter required fresh consideration by the CIT(A) before any decision on merits.

Conclusion: The reopening was sustained for one year, while the other year was remitted to the CIT(A) for fresh decision on the preliminary jurisdictional issue.

Final Conclusion: The Tribunal sustained the deletion of the bank-account additions, rejected the department's challenge for one year, and sent the jurisdictional reopening issue for the other year back for fresh adjudication.

Ratio Decidendi: Section 68 is not attracted to customer deposits in a banking company's ordinary banking books where the bank is acting under the banking regulatory framework and the credits are explained by the nature of banking transactions, introductions, or earlier identified sources.

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