‘Willful defaults’ even cover those cases where ‘lender-borrower’ relationship is missing among parties and banks

In the instant case the moot question which arose before the Supreme Court was as under:

“Whether the expression ‘lender’ used in para 2.1 of RBI’s Master Circular dated 01.07.2008 on willful defaults should be restricted to a bank which had lent funds by way of loans and advances or it could be extended to cover a bank to which customer owes money under a derivative transaction”

Deliberating on the above issue the Supreme Court held as under:

1) The purpose of RBI’s Master Circular on willful defaults was  “to put in place a system to disseminate credit information pertaining to willful defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them”;

2) This Master Circular was issued pursuant to Central vigilance commission’s instructions, which covered “all cases of willful default of Rs. 25 lakhs and above” and were not confined to only willful default by a borrower of his dues to the bank in a lender-borrower relationship;

3) The mischief that was sought to be remedied was that banks should not be exploited by parties who have the capacity to pay their dues to the banks but who willfully avoid paying their dues to the banks;

4) It is crystal clear from a bare reading of para 2.6 of the Master Circular that non-funded facilities such as a guarantee is covered by the Master Circular and when a guarantee is invoked by a bank/financial institution but is not honoured, the defaulting constituent of the bank is treated as a willful defaulter even though it may not have borrowed funds from the bank in the form of advances or loans.

On basis of above, it was held that ‘willful defaults' of parties under a derivative transaction with a bank are covered by the Master Circular - Kotak Mahindra Bank Ltd. v. Hindustan National Glass & Ind. Ltd. [2012] 28 taxmann.com 140 (SC)

Extension of period to submit ITR-V can’t validate a time-barred Sec. 143(2) notice

In this case, the return was e-filed by the assessee on 25-09-2009. The ITR-V for the same was received by CPC on 29-11-2010 i.e., within the period as extended by Circular No. 3/2009. Consequently, the AO issued a section 143(2) notice on 26-08-2011 and also passed the order under section 143(3). Assessee contended that the time limit for issue of notice should be reckoned from the date of e-filing of return. Consequently, the order passed by AO was without jurisdiction as it was passed on the basis of a time-barred notice.
 
Deliberating on the issue, the Tribunal held in favour of assessee as under:

1) According to the CBDT Scheme framed in this respect, the date of transmitting the return electronically shall be the date of furnishing of return if the form ITR-V is furnished in the prescribed manner and within the period specified;

2) Since ITR-V, received by CPC was within the prescribed time in the prescribed manner and in the prescribed form, hence, for all practical purpose, the date of filing of the return shall be the date on which the return was electronically uploaded i.e. 25-09-2009.

In view of the above, it was held that the notice served on the assessee was beyond the period of six months from the end of the financial year in which the return was furnished and therefore, was invalid and could not be acted upon. Consequently, the assessment order passed was quashed - E.K.K. & Co. v. ACIT [2012] 27 taxmann.com 111 (Cochin - Trib.)