Dhananjay Jog
Readers who have followed my earlier articles would be aware that simply having a bank account makes you a ‘Consumer’ in relation to the bank. This applies even to ‘Zero-Balance’ accounts introduced by the government for the underprivileged. A person without the minimum necessary funds can still open an account to receive government-sponsored aid directly, without middlemen. However, while an account holder is a consumer, a bank is liable only if it is at fault or has provided deficient service. In the present case, the bank was accused of such deficiency—let us examine whether it was indeed guilty.
Vijay Naik (name changed) lodged a complaint against the Ahmedabad Head Office and Panjim Branch of a private sector bank (henceforth referred to as ‘the bank’).
In addition to regular banking services such as managing accounts, accepting term deposits, and offering loans, the bank also acted as a ‘Financial Advisor.’ Naik, who held a savings account, received a substantial sum of Rs. 50 lakh from the sale of a property. Seeking financial advice from the bank, he invested this amount in a mutual fund scheme for three years. The advantage of this particular scheme was its tax benefits under ‘long-term capital gains.’
Investing Rs. 50 lakh naturally meant Naik would earn a substantial profit, classified as ‘Capital Gain.’ However, the more one gains, the more the Income Tax Department demands in taxes. The scheme Naik invested in provided a legal way to reduce his taxable capital gain. The investment was set to mature in December 2014.
Unfortunately for Naik, a new Finance Act came into effect in August 2014. It redefined ‘short-term capital gains,’ extending the period from 12 months to 36 months. As a result, his investment was reclassified from ‘long-term’ to ‘short-term,’ leading to an additional tax burden.
For clarity, Naik received approximately Rs. 64 lakh upon maturity in December 2014. Under the new definition, his ‘short-term gain’ amounted to Rs. 14 lakh, on which he had to pay Rs. 4.4 lakh in taxes.
Naik’s grievance was that the Bank should have informed him of this taxation change. Had he been aware, he could have opted for a ‘Roll-Over’—extending the investment period beyond 36 months—thus qualifying for long-term capital gains tax benefits. He filed a complaint with the Consumer Commission, demanding that the bank reimburse him Rs. 4.4 lakh for the additional tax, Rs. 1 lakh as compensation for mental distress, and Rs. 50,000 towards legal costs.
During proceedings, both sides submitted written arguments and made oral submissions. The bank contended that investing in mutual funds is speculative, aiming for profit, and that speculative investments are not covered under the Consumer Protection Act. (For instance, if one loses money at a casino, they cannot seek redress under this law.)
The bank also argued that it had no role in government taxation policies. It is solely the government’s prerogative to change tax laws, and the bank was not responsible for informing investors about such changes. Investors, it asserted, must stay informed about relevant legal developments and monitor their own investments.
Also, the bank pointed out that five days before Naik’s investment matured, the mutual fund had sent him an email suggesting the Roll-Over option. Despite this, Naik did not act on it.
To assess Naik’s claim, the first step was to determine the Bank’s actual responsibilities. Naik claimed the bank was his Financial Advisor. However, no contract defined the bank as his ‘Financial Advisor’, ‘Investment Advisor’, or ‘Portfolio Manager’. Even a signed document outlining the bank’s role, without explicitly using these terms, would have sufficed, but no such document existed.
Moreover, Naik did not explain why he had not made the mutual fund a party to the dispute, despite being asked during oral arguments. When questioned, he admitted receiving the email from the mutual fund but claimed it merely suggested the Roll-Over option without explaining its implications. However, he did not produce any copies of his communication with the mutual fund. Had he included the fund as a respondent, it would have allowed for a clearer understanding of its role.
The Securities and Exchange Board of India (SEBI) regulations (dated 21/01/2013) outline the roles and responsibilities of financial advisors, stating that such responsibilities must be explicitly defined in writing. Since no such agreement existed between Naik and the bank, liability could not be assigned to the bank.
Naik presented legal citations to support his claim, including Avinash Chander Batra v. Dy. CIT and Narendra Dessai v. ACIT. However, both cases involved ‘management expenses’ paid to a portfolio manager—whereas, as established, the bank was not Naik’s portfolio manager or advisor, making these precedents inapplicable.
Another case, Vimal Chandra Grover v. Bank of India, involved a client instructing a bank to sell shares immediately. The bank delayed for nine months, during which the share price dropped from Rs. 2,400 to Rs. 700, leading to a ruling of ‘deficiency in service.’ This situation did not apply to Naik’s case, as there was no specific instruction from him that the Bank had failed to follow.
The bank initially objected to Naik’s complaint, arguing that investments in mutual funds are speculative and not protected under the Consumer Protection Act. However, a different interpretation emerged upon detailed examination.
In Kavit Ahuja v. Shipra Estate Limited, the National Commission ruled that investing surplus funds in shares for better returns does not classify the transaction as ‘commerce,’ making such investors eligible for protection under the Act. Applying this precedent, Naik was recognised as a ‘Consumer’ and was entitled to a hearing. If he had not qualified as a consumer, his complaint would have been dismissed at the outset. After evaluating all arguments, the commission dismissed Naik’s complaint, concluding that no deficiency in service was established against the bank.
(If you have any questions, comments, or if you are a consumer seeking assistance, please feel free to email me at danjog@yahoo.com)
