2025 (9) TMI 744 - AT - Income Tax

Assessing Officer ordered to reassess cooperative bank liquidation income under real income theory; verify section 80P claim

The Visnagar Nagarik Sahakari Bank Ltd., (Under Liquidation) Versus The Assistant Commissioner of Income Tax, Circle Gandhinagar. (Previously DCIT, Patan Circle, Patan)

ITAT (Ahmedabad) set aside the CIT(A) orders and remitted all three assessment years to the AO for de novo assessment, directing verification whether any ... Deduction u/s 80P - claim as denied by the AO on the ground that the assessee is a co-operative bank hit by the provisions of section 80P(4) - HELD THAT:- We note from the computation of income for the assessment years under consideration that the assessee has not claimed any deduction u/s 80P of the Act. Therefore, the question of disallowance of such claim does not arise in these appeals. We further note that the assessee is a co-operative bank under liquidation. The balance sheet and profit and loss account indicate that the assessee has substantial deposits and advances on which interest income has been credited. At the same time, the liabilities of the assessee, particularly towards DICGC under the statutory scheme, are substantial and in fact exceed the available deposits and assets. The profit and loss account also shows that the expenditure towards One Time Settlement (OTS) and other liquidation-related obligations exceeds the interest income earned. We may clarify that under the scheme of the Income-tax Act, tax can be levied and recovered only on income which has in fact accrued or arisen to the assessee. If, upon verification, it is found that no real income has accrued to the assessee in view of its statutory obligations and liquidation status, no tax shall be recovered merely on the basis of notional entries in the accounts. The issue of taxability of the income in the hands of the assessee, particularly when it is under liquidation and saddled with overriding statutory obligations under the DICGC Act and the Gujarat Co-operative Societies Act, requires proper verification and fresh adjudication. The determination of taxable income has to be made on the touchstone of real income theory. Accordingly, in the interest of justice, we deem it appropriate to set aside the impugned orders of the ld. CIT(A) for all three years under appeal and restore the matters to the file of the Assessing Officer for de novo assessment. AO shall verify the factual details from the perspective of whether the assessee has in reality earned any income capable of taxation. Appeals filed by the assessee are allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether a co-operative bank (here, under liquidation) is entitled to deduction under section 80P of the Income-tax Act, or is excluded by operation of section 80P(4). 2. Whether amounts reflected as interest and other receipts in the books of a co-operative bank under liquidation constitute 'real income' taxable in the hands of the bank, or stand diverted at source by overriding statutory title in favour of the Deposit Insurance and Credit Guarantee Corporation (DICGC) under the DICGC Act and related statutory provisions (including section 115A of the Gujarat Co-operative Societies Act), so as to render them non-taxable in the hands of the bank. 3. Whether the assessment and appellate proceedings properly applied the doctrine of real income/diversion of income by overriding title on the available facts, and whether further factual verification is required before assessing taxability. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 80P and exclusion under section 80P(4) Legal framework: Section 80P grants deduction to specified co-operative societies carrying on enumerated activities; section 80P(4) expressly excludes 'co-operative banks' (except PACS and PCARDBs) from claiming such deduction. Precedent treatment: Lower authorities took a literal approach relying on the express exclusion in section 80P(4) and held that mere registration under State Co-operative Societies Acts does not alter the statutory exclusion applicable to co-operative banks. Interpretation and reasoning: The Court/Tribunal noted the plain language of section 80P(4) which bars co-operative banks from claiming the deduction irrespective of functional status (operational or under liquidation). The income of the assessee comprised interest on deposits and recovery of advances, not activities enumerated in section 80P(2)(a); therefore the statutory exclusion applies on its face. Ratio vs. Obiter: The conclusion that section 80P(4) on its face excludes co-operative banks from deduction is treated as a binding ratio on the statutory construction point; ancillary observations about registration under State Acts not altering statutory exclusion are corollary to that ratio. Conclusion: On statutory construction, a co-operative bank is prima facie excluded from section 80P deduction by section 80P(4); however, in the present proceedings the tribunal observed that no deduction under section 80P had in fact been claimed in the returns for the years in question, rendering the disallowance point not directly determinative of these appeals. Issue 2 - Taxability: real income theory vs diversion by overriding statutory title (DICGC claim) Legal framework: Tax is leviable only on income that has actually accrued or arisen to the taxpayer. Principles invoked include the doctrine of 'real income' and the principle of 'diversion of income by overriding title'-whereby an amount received but statutorily earmarked for another (or subject to an overriding claim) may not be regarded as income of the recipient. Precedent treatment: The assessee relied on a Coordinate Bench Tribunal order in the assessee's own case for an earlier assessment year applying diversion by overriding title in favour of DICGC. The lower authorities declined to treat that prior year finding as conclusive for the years under appeal, noting separate assessment years and the need to examine year-specific facts. The Department and lower authorities treated the receipts as having accrued to the assessee and therefore taxable. Interpretation and reasoning: The Tribunal examined the financial statements: large deposits/advances with interest credited, but liabilities-especially DICGC claims-substantially exceeded assets; accumulated losses and negative net worth were shown; expenditure on One Time Settlement (OTS) exceeded interest receipts. Given the liquidation context and statutory scheme obliging repayment to DICGC, the Tribunal recognized a plausible argument that receipts may be earmarked/absorbed by overriding statutory liabilities and thus not represent real taxable income of the bank. However, the Tribunal also observed that the Assessing Officer had not examined or verified these factual assertions (extent of liabilities, priority claims, whether sums were in substance at the disposal of the bank, applicability of diversion by overriding title, reconciliation with accounts etc.). The Tribunal emphasised that tax can be levied only on income that in fact accrues to the taxpayer and that whether such accrual occurred is a factual determination requiring proper verification. Ratio vs. Obiter: The Tribunal's declaration of the legal principle-that tax attaches only to real income and that the doctrine of diversion by overriding title can negate accrual-is ratio as applied here. Its factual findings (negative net worth, DICGC claim exceeding assets) are case-specific and form the factual basis for remanding the matter; observations inviting the Assessing Officer to consider the prior Tribunal order and relevant judicial authorities are directive but not final adjudication on taxability for the years under appeal. Conclusion: The question of whether the amounts represent real taxable income or are diverted to DICGC cannot be answered without fresh, detailed factual inquiry. Given the liquidation status and indicia on record (large statutory claims, negative net worth, OTS outgo exceeding receipts), the Tribunal concluded that a de novo verification is necessary; it did not finally hold the amounts non-taxable but held that assessment should be reopened for fresh adjudication in light of real income principles and potential diversion by overriding title. Issue 3 - Procedural adequacy of assessment and need for remand for de novo adjudication Legal framework: Assessments must be grounded in verified facts and afford the assessee opportunity to be heard; the determination of taxable income requires proper factual investigation where disputed records and competing legal principles (real income/diversion) arise. Precedent treatment: Lower authorities concluded on taxability without purportedly verifying the factual matrix relied upon by the assessee (extent of DICGC liability, whether sums were at the bank's disposal, netting of liabilities/receipts, effect of OTS expenditures). The assessee argued reliance on an earlier Tribunal order favouring diversion by overriding title. Interpretation and reasoning: The Tribunal found that the AO did not adequately verify the factual contentions that could negate accrual of income (e.g., whether DICGC had an overriding claim, whether amounts were truly at the disposal of the bank, whether statutory obligations consumed the receipts). Given these lacunae and the complex interplay of liquidation law and tax principles, the Tribunal considered it necessary in the interest of justice to set aside the impugned appellate orders and restore the matters to the file of the Assessing Officer for fresh adjudication after factual verification and opportunity to the assessee to place evidence and authorities. Ratio vs. Obiter: The order directing de novo assessment and factual verification is the operative ratio on procedure; the remark that each assessment year is a separate unit and prior-year findings are not automatically binding is declaratory of law (ratio) insofar as it limits automatic application of earlier decisions, while still permitting consideration of such precedent as evidence. Conclusion: The Tribunal set aside the CIT(A) orders for all three years and remanded the matters to the Assessing Officer to verify facts afresh, to examine the applicability of the real income doctrine and diversion by overriding title (including consideration of the earlier Tribunal's order in the taxpayer's favour), and to conduct assessment proceedings de novo with full opportunity to the assessee to produce records and authorities. Cross-references - Issue 1 and Issue 2 interact: while section 80P(4) excludes co-operative banks from deduction as a matter of statutory construction, the central controversy in these appeals ultimately concerned whether amounts credited to the bank in liquidation were truly the bank's income or diverted to DICGC (Issue 2); that factual legal determination superseded a purely mechanical application of section 80P(4) in the present record. - Issue 3 governs remedy: because the Assessing Officer did not undertake necessary factual verification on real income/diversion issues, the Tribunal remanded for de novo assessment rather than deciding the taxability on merits.