TMI Blog2005 (11) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 80P of the Act in respect of Rs. 37,79,100 being profit on sale of Government Securities. 4. Without prejudice to the above grounds, the learned CIT(A) erred in holding that the entire income of Rs. 37,79,100 being profit on sale of Government Securities as taxable without even allowing pro rate expenditure attributable for earning these incomes." Additional ground of appeal 4. "In the alternative and without prejudice to the above grounds, the CIT(A) further erred in not directing the AO to allow full deduction of expenses in respect of all the incomes which are not eligible for deduction under s. 80P of the Act." As all these grounds of appeal are interlinked, we will take up all the grounds of appeal together. 5. The material facts are as follows. The order impugned in appeal before us is the assessment order passed in the second round of proceedings, as a result of setting aside of the assessment by the CIT(A) vide order dt. 5th Oct., 1998. While so setting aside the assessment order, the CIT(A) has observed as follows: "On the facts and in the circumstances of the case as discussed above, I feel it will be unjust if the appellant is penalized by denying relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Andhra Bank and Bank of India, but these banks have not issued any confirmation letters acknowledging the transactions. He also noted that these transactions have been carried out in violation of RBI instructions and rules, which is evident from the fact that the assessee-bank is alleged to have purchased and sold securities through SGL form, without signing SGL form and without keeping any account with the RBI. It was also noted that the assessee failed to furnish any confirmation from the brokers, whereas, according to the AO, the brokerage was indeed paid as built in the prices at which transactions were entered. In the words of the AO, "the fact is that this brokerage has been adjusted in purchase and sale price fabricated in the contract notes". The AO further added that 'the genuineness of these transactions is not free from doubt, because, as observed by my predecessor, several transactions have not been reported to the stock exchange". It was in the backdrop of these observations that the AO carne to the conclusion that the profit on sale of securities is treated to be non-genuine securities transactions, on which deduction under s. 80P cannot be allowed. 6. Aggrieved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bound by the directions is legally correct to a substantial extent. However, a careful perusal of the directions would show that this legal proposition would not apply to the facts of this year as the direction was to complete the assessment de novo and after considering the final report of Jankiraman Committee. The AO has not considered the final report and proceeded to mechanically repeat the earlier findings, though for this year, the AO should have applied and followed the directions of the CIT(As) in framing the assessment de novo. However, be that as it may, the first appellate authority is not fettered by any such directions. This is the legal position laid down in the case of CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) which was followed by Jute Corporation of India vs. CIT (1990) 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC) and more recently in CIT vs. Nirbheram Daluram (1997) 139 CTR (SC) 484 : (1997) 224 ITR 610 (SC)." Coming to the affidavit filed by the assessee, the CIT(A) observed that: "As regards the filing of the affidavit, the appellant-bank has reiterated its perception of the matter. The cases against two employees under s. 120A of the IPC are crimina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as made with counter-party as bank, but the actual beneficiaries of these transactions were certain brokers while the banks merely acted as 'routing banks' for the brokers. When the securities were not available, these routing banks issued their own BRs. The CIT(A) also noted that the Bank of Karad, and its brokers Excel Co. as well as Bhupen Champaklal Devidas, were specifically mentioned in the Jankiraman Committee Report. It was also noted that where a ready forward transaction is made, the sale rate reflected in agreed return on the use of funds and necessarily, therefore, either the sale or purchase was at a rate different from the real value of security. It was also noted that these transactions were de facto temporary finance transactions. It was in this backdrop that the CIT(A) came to the conclusion that unauthorized deployment of funds in breach of the guidelines could not be held to be income from banking, eligible for deduction under s. 80P. The CIT(A) was, after careful perusal of the Jankiraman Committee Report, of the view that "the activities engaged by the banks at p. 88 did not form part of the activities attributable to banking". The CIT(A) observed that fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-operative society assessee, gross total income includes profits and gains attributable to 'carrying on the business of banking or providing credit facilities to its members', the whole of such profits will be eligible for deduction. The decisive test for eligibility for deduction under s. 80P(2)(a)(i) is whether or not the profits and gains are attributable to 'carrying on the business of banking' so far as the case before us is concerned. 11. To decide whether or not the profits in question are profits attributable to the banking business, in turn, we have to understand the nature of these transactions particularly in the light of the Jankiraman Committee findings which have been extensively referred to by both the parties before us. The relevant extracts of the Jankiraman Committee, so far as transactions entered into by the assessee-bank are concerned, are as follows: Third Interim Report - pp. 88 and 89 "X : Bombay Mercantile Co-operative Bank Ltd. 1. Between 2nd Aug., 1991 and 8th April, 1992, Bombay Mercantile Co-operative Bank Ltd. (BMCBL) entered into 13 ready forward transactions in securities for an aggregate value of 97.34 crores through broker Bhupen C. Devi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er letters forwarding cheques. 5. In respect of 11 out of 13 transactions, the payment made by the BoK are debited to the current account of broker M/s Excel Co. In respect of the other two transactions, the account to which such payments were debited are still to be ascertained. 6. It appears that through these transactions, BMCBL has made available the funds to the brokers though ostensibly the transactions were shown as being with Bank of India." 12. In our considered view, following extracts from the final report submitted by the Jankiraman Committee dealing with ready forward transactions, which needs to be read along with the above findings are also relevant: Final Report - pp. 271 and 272 "9(a) The funds collected by the banks as also their own funds could be lent to the brokers only in accordance with RBI guidelines. To circumvent these guidelines, the funds were lent in the guise of ready forward transactions. As mentioned above, ready forward transactions could be entered only with banks and only in respect of Government Securities. To circumvent the first stipulation, transactions were recorded as made with counter-party banks but the beneficiaries of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate Bank of India State Bank of Saurashtra UCO Bank ANZ Grindlays Bank Hiten P. Dalal Andhra Bank N.K. Aggarwala Co. Hong Kong and Shanghai Banking Corporation Ltd." ------------------------------------------------ 13. Dealing with such transactions, at p. 273, this report further observes as follows: "15 (a) A very large proportion of the transactions entered into by the banks have been ready forward and double ready forward transactions. In a ready forward transaction, there is a present purchase or a present sale of a security tied with a forward sale or forward purchase of the same security with the same counter-party. The purpose behind the transaction is not to buy or sell the security but temporarily create finance by selling the security which finance is repaid when the sale is reversed in the second leg of the transaction. In a double ready forward transaction, two securities are simultaneously bought and sold on a ready forward basis. The purpose behind such a transaction is not to create liquidity but rather to temporarily exchange the investment portfolio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the PDO but to return them to the seller on the reversal of ready forward deal. In a number of cases this raises doubts whether underlying securities for the transactions existed at all. It will be appreciated that the ready forward transaction was in essence a financing transaction and if this transaction was not supported by underlying securities, the transaction was no more than an unsecured loan of funds. 16(a) The BR is intended to be a document which acknowledges receipt of funds for the sale of a security and which confirms that the issuer has undertaken to deliver the specified securities to the purchaser and, pending such delivery, is holding the securities in trust for the purchaser. Indian Banks Association (IBA) had prescribed a standard format for the BR and had also prescribed BR rules and a format for the monthly statements of BRs held and issued. These formats and rules were notified to the chief executives of all member banks vide IBA letter dt. 6th May, 1991. A copy of this letter and its enclosures are given in the Annexure to the first report of the Committee issued in May, 1992. (b) These rules, inter alia, provided that: (i) The BR should be issued on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Governor of the RBI to chief executives of all commercial banks. This circular, inter alia, observed as follows: "1. It is a matter of great concern for us that certain banks are engaged in the types of transactions in securities which they should not be undertaking. A list of such transactions is appended. (i) Ready forward (buy back) deals at rates which have no relevance to the market rates, inter alia, with a view to window-dressing their balance sheet/compliance of SLR requirements. (ii) Double ready forward deals with a view to covering their oversold position in a specific security. (iii) Sale transactions by issue of bank receipts (BRs)/SGL forms without actually holding the securities/without having sufficient balance in their SGLM account. (iv) Issuing BRs/SGL forms on behalf of their broker clients without safeguarding banks' interest. 2. You may be aware that with a view to helping the banks to overcome various deficiencies in their long-term securities market and to enable them to manage their short-term cash deficiencies/surpluses more efficiently, we have permitted banks to enter into buy back deals in Government Securities among themselves (and not with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision, Department of the Banking Operations and Development has been constituted as a separate Department named Urban Banks Department under a chief officer" and that henceforth all the future correspondence by them is to be addressed to this Urban Banks Department. The assessee-bank, therefore, did not come in the jurisdiction of the DBOD which had issued the secret circular on which so much reliance has been placed by the Revenue. As for the co-operative banks, that the assessee-bank is, a Circular No. UBD No. Plan 12/UB-81/92-93 was issued on 15th Sept., 1992. This circular, inter alia, stated as follows: "15th Sept., 1992 The Chairman/Chief Executives of all the primary co-operative banks Dear Sir, Investment portfolio of banks- Transactions in securities As you are aware, Governor of the RBI had appointed a committee to enquire into the securities transactions of banks and financial institutions. The committee had made a number of recommendations in its interim report submitted recently. RBI has examined these recommendations and accepted them generally. 2. In relation to the primary (urban) co-operative banks, the following instructions, which will come into force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace to account for each SGL form. .................." 17. One thing which is immediately clear from the above circular issued to the co-operative banks is that it was only with effect from the date of this circular, i.e., 15th Sept., 1992 that the co-operative banks were "prohibited with immediate effect from undertaking ready forward and double ready forward deals in dated Government and approved/trustee securities etc.". The fact that the circular uses the expression "with immediate effect" only indicates that there was no such prohibition prior to these instructions coming to force. 18. Let us now go back to the nature of transactions entered into by the assessee-bank and the import of Jankiraman Committee report thereon. The transactions entered into by the assessee-bank are, ready forward transactions in the Government Securities but then at the material point of time the ready forward transactions in the Government Securities were not at all prohibited. It was only on 15th Sept., 1992 that Executive Director of the RBI issued a circular to chief executives of all co-operative banks and advised them that "The banks are prohibited with immediate effect, (i.e., from 15th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of pay orders in the name of Bank of India. It was also noted that the assessee-bank did not have an SGL account with the Public Debt Office and that it did not deposit any SGL transfer forms. The committee also took note of assessee-bank's contention that SGL forms received from Bank of India were returned to Bank of India through the broker Bhupen C. Devidas. It is also noted that the payments were received by the assessee-bank through the pay orders Issued by the Bank of Karad. Jankiraman Committee also placed on record the fact that the pay orders issued by the assessee-bank were found credited to the account of Bhupen C. Devidas, the broker involved, and that the pay orders issued by the Bank of Karad were mostly issued by way of debit to a broker by the name of Excel Co. It was based on these facts that the Jankiraman Committee expressed the apprehension that "it appears that through these transactions, BMCBL has made available the funds to the brokers though ostensibly the transactions were shown as being with Bank of India". These observations were made in the interim report dt. 23rd Aug., 1992. In the final report submitted by the Jankiraman Committee on 29th Apri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pholes in the system, the broker was able to get the same credited to his account in the alleged counter-party bank. As for the sale transactions, the assessee again got the pay orders from Bank of Karad which, as a routing bank, was acting for the same broker. Since there was no occasion for delivery of security to be effected, as was the common practice at the material point of time, there was no way for the assessee-bank to discover that the Bank of India is not actually involved. In such circumstances, there cannot be any occasion for the entries in the books of account of Bank of India or of confirmation of transaction by the Bank of India. Similarly, as far as Bank of Karad was concerned, as the Jankiraman Committee has noted it was a 'routing bank' Which was in fact purchasing and selling the securities in its own name without indicating that it was acting for the brokers, and, therefore, it was deeply involved in the scam. No entries for these entries could be found in the books of the Bank of Karad because though it was buying and selling securities in its own name, the transactions actually belonged to the brokers for whom the Bank of Karad was acting as a routing bank. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot figure there, At p. 272, names of routing banks have been specified and the assessee-bank does not appear there as well. It has to be noted that the impugned assessment order has been passed by the AO in the remanded proceedings and the remand directions were that the AO should "go through the final report of Jankiraman Committee on security transactions scam 1992 and find out whether the contention of the appellant is correct that the assessee-bank has not been found involved in the securities scam. If it is so, there is no reason to deny the appellant the relief that it was getting in earlier years under s. 80P on security transactions". There is nothing in the Jankiraman Committee's final report which calls assessee's conduct into question and yet it is held that the transactions entered into by the assessee were not in the nature of banking business transactions and, therefore, the assessee is not entitled to deduction under s. 80P in respect of profits from such transactions. The Revenue never filed an appeal against these directions of the CIT(A) and yet these directions have not been implemented. 20. Let us consider another aspect of the matter. If this transaction, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not infrequently, indicates the truth more unerringly than direct evidence" and that "the facts in such cases would be in the personal knowledge of the persons who have entered into the transaction and, therefore, asking the AO to prove otherwise would be to expect an impossibility". It is difficult to understand as to what is the circumstantial evidence that the CIT(A) is referring to. The CIT(A) is at best referring to the Jankiraman Committee's finding that many banks were actually involved in funding the brokers knowing fully well that the securities did not exist and that the brokers were operating on their own accounts and not the account of the banks they claimed to be representing. It would be impossible for anyone to come out of this circumstantial evidence because that would put the impossible onus of proving a negative on the assessee, i.e., the assessee was not aware of the possibility that the transactions entered into by the assessee-bank with Bhupen C. Devidas were transactions in brokers account and the bank he claimed to be representing had nothing to do with those transactions. When CIT(A) states that "the facts in such cases would be in the personal knowledge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grievances are raised by the assessee: 1. On the facts of the case and in law, the learned CIT(A) erred in holding that the additional ground is academic. 2. On the facts of the case and in law, the learned CIT(A) erred in holding that of the thirty odd banks, the appellant-bank also features as one where charges have been specified. 3. On the facts of the case and in law, the learned CIT(A) erred in rejecting the claim of deduction under s. 80P of the Act in respect of Rs. 32,88,395 being profit on sale of Government Securities. 4. On the facts of the case and in law, the learned CIT(A) erred in rejecting the claim of deduction under s. 80P of the Act in respect of Rs. 24,72,896 being broken period interest received on sale of Government Securities. 5. Without prejudice to the above grounds, the learned CIT(A) erred in holding the entire income of Rs. 32,88,395 and Rs. 24,72,896 being profit on sale of Government Securities and broken period interest on sale of securities as taxable without allowing pro rata expenditure attributable to earning these incomes. 25. Learned representatives fairly agree that the outcome of this appeal will depend on the outcome of the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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