Sum Received By Bank Under Liquidation, Whose Liability Towards DICGCI Not Cleared- Not Taxable Due To Diversion Of Income At Source: ITAT

The Bench of Members T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) held that in view of the mandatory condition contained in Section 21 (2) of the DICGCI Act, till the liability of the assessee towards the DICGCI is cleared, the assessee bank has no discretion or authority to apply the funds received by it and that all the funds realized by the bank is diverted at source.

The assessee- General CO.OP Bank Ltd., is a Co-Operative Bank, whose banking business was suspended by the Reserve Bank of India. An order of liquidation was passed against the assessee by the Government of Gujarat in 2003, and the assessee is managed and administered by an official liquidator.

An assessment order for the relevant assessment year, accepting the income tax return of the assessee, was passed by the Assessing Officer (AO), which was later revised by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. The PCIT held that since the assessee was in liquidation, the interest income of the assessee was assessable as "income from other sources".

Also, the PCIT ruled that since the banking license of the assessee was suspended, the assessee could not claim any loss on realization of its non-banking assets and the unabsorbed depreciation. Accordingly, the AO passed a reassessment order, disallowing the loss on realization of non-banking assets and unabsorbed depreciation, and made certain additions to the assessee's income under the head "income from other sources".

Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The assessee contended before the CIT(A) that it had availed insurance from the Deposit, Insurance and Credit Guarantee Corporation of India (DICGCI). The assessee added that it was under liquidation and that all the sums and advances received by it were being utilized for repaying the DICGCI the liability towards the deposit insurance claim. Further, it averred that the DICGCI is a subsidiary of the RBI and is governed by the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGCI Act), which statutorily prohibits the bank who is under liquidation to apply the funds received by it from realization of its advances, towards any liability other than the liability owed to the DICGCI.

The CIT (A) ruled that in view of the statutory obligation of the assessee bank to repay the amounts due to the DICGCI, all the funds realized by the assessee bank under liquidation were diverted at source and hence, the assessee had no discretion or authority to apply its income. Holding that such income was not taxable in the hands of the assessee, the CIT(A) deleted the additions made by the AO.

Against this, the revenue department filed an appeal before the ITAT.

The ITAT observed that in view of the mandatory condition contained in Section 21 (2) of the DICGCI Act, till the liability of the assessee towards the DICGCI is fully satisfied, all the funds realized by a bank who is under liquidation is diverted at source.

While holding that the assessee bank had no discretion or authority to apply the funds received by it, the ITAT ruled that the said funds were not available to the assessee as income and therefore, the said income was not taxable in its hands.

"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."

The ITAT, thus upheld the order of the CIT(A) and dismissed the appeal of the revenue department.

Case Title: The JCIT(OSD) versus General CO.OP Bank Ltd.

Dated: 05.08.2022 (ITAT Ahmedabad)

Representative of the Appellant: Mr. A.P. Singh, CIT/DR and Mr. V.K. Singh, Sr. D.R.

Representative of the Respondent: Mr. A.P. Nanavaty, A.R.

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