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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’ NEW DELHI
Before: DR. B.R.R. KUMAR & SHRI YOGESH KUMAR U.S.
PER YOGESH KUMAR U.S., JM
This appeal is filed by the assessee for assessment year 2013-14 against the orders of the ld. Commissioner of Income Tax (Appeals)–XXV, New Delhi, dated 20.09.2018.
The assessee has raised the following grounds of appeal:-
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“1. That the AO erred in facts and law in disallowing the amount of Rs.63602481/- on account of non deduction of tax on interest paid on deposits by various invoking provisions of Section 40(a)(ia) of the Act. The break-up of is as under:-
i) Interest on Saving Rs. 6973450/- Bank Accounts ii) Interest on Compulsory Rs. 1676968/- Deposit Accounts iii) Interest on Recurring Deposits Rs. 1180887/- iv) Interest in FDR’s- Rs. 42267943/- Members v) Interest on FDR’s - Non Members I) Interest below Rs. 4107176/- Rs.10,000/- per person II) Interest above Rs. Rs. 7396057/- 10,000/- per person
The Learned CIT Appeal has erred in confirming disallowance of Rs.17227362/- out of the disallowance of Rs.63602481/- made by the AO, the breakup of which is as under:-
i) Interest on Saving Rs. 6973450/- Bank Account vi) Interest on CDS Rs.1676968/- (Compulsory Deposit Account) vii) Interest on RD (Recurring Rs.1180887/- Deposits) viii) Interest in FDR’s - Non Rs.7396057/- Members
Rs. 17227362/-
That the AO has erred in facts and law in making addition of Rs. 5220914/- on account of interest on non-performing assets and the
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Learned CIT has further erred in confirming the said addition.
That the AO has erred in facts and law in disallowing the amount on Rs. 192041/- on account of amortization of premium on Government Securities and the Learned CIT appeal has further erred in confirming the said addition.”
Brief facts if the case are that, the assessee is a co-operative society carrying on the business of providing credit and deposits facilities. The assessee filed return of income declaring the total income of Rs. 1,76,68,630/-. The case of the assessee was selected for scrutiny, assessment proceedings have to been initiated. The Assessing Officer has passed the assessment order passed by computing the incomes of the assessee as under:-
’S.No. Particulars (Amount in ?) Income as per computation filed by the assessee Rs.1,76,68,630/- 1. Disallowance u/s 40(a)(ia) Rs.6,36,02,481/- 11. Addition on account of accrued interest on NPAs Rs.52.20,914/- ill. Disallowance of amortization of premium Rs. 1,92,041/- IV. Disallowance of deduction u/s 36(i)(viia) Rs.14,31,781/- V. Disallowance out of Entertainment Expenses Rs. 59,480 /- VI. Disallowance out of staff welfare Expenses Rs.4,085/- VII. Disallowance out of Miscellaneous Expenses Rs. 1,30,778/- VIII. Disallowance out of Honorarium Expenses Rs.1.58,719/- IX. Disallowance out of General body meeting Expenses Rs.41,184/- X. Disallowance out of Repairs and renovation Expenses ' Rs.1,27,823/- XL Disallowances out of Conveyance Expenses _ Rs. 88,896/- Total disallowance Rs.7,10,58,182/-
Total Income Rs.8,87,26,812/- Rounded off RS.8,87,26,810/
As against the assessment order, the assessee has preferred the Appeal before the CIT(A), the Ld.CIT(A) has confirmed the disallowance of Rs. 1,72,27,362/-, out of total disallowance of Rs. 6,36,024,81/- made by the A.O on
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account of non deduction of the tax on interest paid on various depositions invoking provisions of Section 40(a)(ia) of the Act. Further the CIT(A) has also confirmed the addition of Rs. 52,209,14/- on account of interest on Non Performing Asset and also confirmed the disallowance of an amount of Rs. 19,20,41/- on account of amortization of premium on government securities.
Aggrieved by the order of Ld. CIT (A) dated 20/09/2018, the assessee has preferred the present appeal on the grounds mentioned above.
The Ld. Counsel for the assessee submitted that, there is no liability to deduct the TDS on interest paid on saving bank accounts (-of Rs. 69,73,450/-) as per the provisions contained u/s 194A of the Act. The said fact as been duly accepted for Assessment Year 2014-15 and no addition was made in the said assessment order. Further submitted that, in so far as interest on compulsory deposit of Rs. 16,76,968/-, the TDS provisions were applicable on interest paid on the term deposits only, but not on compulsory deposits and there is no liability to deduct TDS on interest. Further submitted that, the said fact has been accepted by the Ld. A.O while framing assessment order of the assessee bank for the Assessment Year 2014-15 and no addition was made in the said assessment order. Further contended that, the deduction of TDS on interest the interest paid on recurring deposit was introduced by the Government w.e.f 1st June 2015 only, which is having prospective effect, which is not applicable for the year under consideration. Therefore submitted that, the said addition of Rs. 11,80,882/- deserves to be deleted. Further, brought to our notice that the Ld. A.O has accepted the said propositions and not made any addition in the assessment order of the assessee bank for Assessment Year 2014-15. In so far as, interest paid on FDRs non members amounting to Rs. 73,96,057/- is concerned, the Ld. Counsel for the assessee fairly submitted that, the applicable rate of interest is 30% not 100%. Therefore, submitted that, the Ld.CIT(A) has committed an error by imposing interest at 100%. Further, also contended that the addition made by the
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A.O on account of accrued interest of NPA confirmed by CIT(A) is also illegal and disallowance of Rs. 1,92,041/- made by the A.O on account of amortization of premium of government security is also contrary to the ratio laid down n various judicial pronouncements.
Per contra, the Ld. DR has not disputed the above factual aspects, but relied on the order of the Ld.CIT(A)
We have heard the parties, perused the material on record and gave our thoughtful consideration.
The Ground No. 1: The Ld. A.O has disallowed an amount of Rs. 6,36,02,481/- on account of non deduction of tax on interest paid on various deposits by invoking section 40(a)(ia) of the Act. The Ld. CIT(A) while adjudicating the Appeal, disallowed sum of Rs. 1,72,27,362/- out of disallowance of Rs. 6,36,02,481/- made by the A.O in following manners:-
Interest on Saving Bank Accounts Rs. 6973450/- Interest on Compulsory Deposit Accounts Rs. 1676968/- Interest on Recurring Deposits Rs. 1180887/- Interest in FDR’s-Members Rs. 7396057/- Rs. 17227362/- 10. It is not in dispute that, there is no liability to deduct TDS on interest on saving bank accounts and interest of compulsory deposit accounts as per the provisions contained u/s 194A of the Act. Further, the Ld. A.O has duly accepted the said proposition and while making the assessment order for the year 2014- 15, no addition were made on the said aspects. Therefore, the additions made by the A.O, which was sustained by the Ld.CIT(A) for the year under consideration i.e AY 2013-14 in respect of interest on saving bank account of Rs. 69,73,450/- and interest on compulsory deposit account of Rs. 16,76,968/- deserves to be deleted.
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In so far as, interest on recurring deposits are concerned, the Ld.CIT(A) has invoked explanation 1 to the Sub Section 3 of Section 194 A, but failed to note that the said amendments having prospective effect from 1st June, 2015. Since, the year under consideration is Assessment Year 2013-14 the said explanation 1 to the Sub Section 3 of Section 194 A is not applicable. Therefore, in our considered opinion, interest on recurring deposits of Rs. 11,80,887/- also deserves to be deleted.
Further, in so far as interest on FDR’s non members of Rs. 73,96,057/- is concerned, the assessee has provided following details of interest of FDRs on non members paid during the year under consideration which are reproduced hereunder:-
a. Interest above Rs. 10,000/- paid to staff members. Rs. 14,69,730/-
b. Interest above Rs. 10,000/- paid to others Rs. 48,90,136/-
c. Interest on which TDS has been deducted Rs. 10,36,191
Rs. 73,96,057/- 13. It is found that the Ld.CIT(A) has confirmed the about disallowance of Rs. 73,96,054/- on the ground that the same has been disallowed for the AY 2014-15, immediately succeeding assessment year under consideration. The Ld. Counsel for the assessee fairly submitted that the Section 40(a)(ia) of the Act was amended vide Finance Act, 2014 whereby the disallowance in respect of default in payment of TDS in case of payments to residents has been restricted to 30% instead of 100%, and since the amendment is curative in nature and have been made to remove the undue hardships to the assessee, therefore, submitted that the disallowance of 100% of the expenditure may be restricted to 30%. The Ld. DR has not objected for the same, therefore, the disallowance of 100% made by the
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CIT(A) has been restricted to 30% in view of the amendment vide Finance Act 2014 to Section 40(a)(ia) of the Act. Accordingly, the disallowance made by the A.O in respect of defaulting payment of TDS is restricted to 30%. Accordingly, the Ground No. 1 is partly allowed for statistical purpose.
Ground No. 2
Ground No.2 is in respect of addition of Rs. 52,20,914/- made by the A.O on account of accrued interest on NPA which has been confirmed by the Ld.CIT(A).
During the year under consideration, the assessee had total interest of Rs. 52,20,914/- on NPA Accounts. The case of the assessee before the A.O is that the said interest had not been offered as income and whatever amount was recovered in any subsequent financial year out of this interest that was offered for taxation in the Assessment Year relevant to such financial year of recovery. The said contention of the assessee was not agreed by the A.O on the ground that the assessee was following mercantile system of accounting. Therefore, it should offer the interest accrued on NPA also as income for the year under consideration. The Ld.CIT(A) has confirmed the addition by observing that the assessee is the NBFC and not a banking entity. Therefore, the decision of the Hon'ble Supreme Court in the case of Vasisth Chai Vyapar is not applicable to the assessee.
16. It is an admitted fact that the assessee is involved in banking activities t the classification of NPA and recovery of the loans are similar to that of the N at io Nationalized banks. Merely because the assessee is a cooperative society /NBFC the Assessing Officer cannot have different standards to the assessee.
17. In our opinion, the Department cannot make difference between banking companies/nationalized bank and the cooperative societies engaged in the business of banking activities while treating the accrued interest on NPA since the
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RBI Circular/guidelines for recognization of income from NPA is also applicable to the cooperative societies which are into banking activities.
In th 18. In the case of Vaish Cooperative Adarsh Bank Ltd., vide order dated 16/10/2015 in ITA No. 3310/Del/2012 the Coordinate Bench of the Tribunal has held as under:-
“ Against the above order, revenue is in appeal before us. We have heard both the counsels and perused the records. We find that the interest in this case was due on non-performing assets (NPA). As per the RBI guideline in this regard, interest on NPAs is not to be recognized. Accounting standard 9 issued by the Institute of Chartered Accountant of India also provides that income is to be recognized only when there is some reasonable certainty about the receipt of the income. We, further, find that this view is also supported by the decisions, as mentioned above. We find that in the case of CIT Vs. Elgi Finance Ltd. 293 ITR 357, Hon'ble Madras High Court has held that interest on non- performing asset is not to be recognized in light of the RBI notification and accounting standard 9 issued by the Institute of Chartered Accountant of India.
In the light of aforesaid discussion and precedents. We do not find any infirmity in the order of Ld. CIT(A). Accordingly, we uphold the same."
In view of above, at the very outset, we may point out that the AO wrongly mentioned that the guidelines of RBI and Circulars are not binding upon the income tax authorities as urban cooperative banks are bound to follow income recognition policy decided by the RBI and when RBI has made it clear that cooperative banks should not take to income account interest on performing assets on accrual basis, then it is not
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appropriate for the cooperative banks to recognise interest on non- performing assets as their income on national basis.
Therefore, basis of the action of the AO is not sustainable and in accordance with the provisions of the Act. We further note that where no income has resulted in the hands of the assessee cooperative bank as interest on NPA, then ITA No.3310/Del/12 AY: 2009-10 the same cannot be held as income accrued to the assessee merely on the ground that the assessee had been following the mercantile system of accounting. We are unable to agree with the conclusion of the CIT(A) that if no income has materialized in the hands of the assessee as actual accrual of interest from NPA, then there can be no liability to tax on hypothetical income. It is not a hypothetical accrual income based on mercantile system of accounting followed by the assessee that has to be taken into account but the crux of the issue is that whether the income has really materialized or accrued to the assessee as interest on NPA. We are also in agreement with the observations of the CIT(A) that the question whether real income as materialized to the assessee has to be considered with reference to business and commercial reality of the situation in which the assessee has been placed and not with reference to his system of accounting.
On this issue, it is relevant to note that as per RBI Circular No. UBD.PCB.MC.3/09.14.000/2009-10 dated 1.7.2009, the income recognition policy from NPA has been set out as follows:-
"4.1 Income Recognition - Policy 4.1.1 The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on
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accrual basis."
It is pertinent to mention that all cooperative banks including the assessee are bound to follow RBI Circular (supra) for recognition of income from NPA and in derivation therefrom may create serious problems for the violating bank.
Hence, conclusion of the AO was not correct that RBI guidelines/Circulars are not binding on the income tax authorities. Per contra, when the assessee cooperative bank is following income recognition policy set out by the RBI, then it cannot be compelled to follow other method of recognition and income tax authorities have to consider this aspect before making any disallowance or addition in this regard.
At this point, we respectfully take cognizance of the judgment of coordinate bench of Delhi 'H' Bench dated 21.6.13 in asessee's own group cooperative bank case (supra) wherein it has been expressly held that as per RBI guidelines, the interest on NPA is not to be recognized and also as per Accounting Standard 9 issued by Institute of Chartered Accountants of India, that income is to be recognised only when there is some reasonable certainly about the receipt of income. In view of above, we have no reason to take a deviated view from the order of the Tribunal (supra) and therefore, we are unable to see any valid reason to interfere with the conclusion of the first appellate authority and thus, we uphold the same. Accordingly, ground no. 1 of the revenue being devoid of merits is dismissed.”
In view of the facts and circumstances, by relying on the above ratio, we are of the opinion that the assessee who is into banking activities has to follow RBI Guidelines and we do not find any error with the assessee in offering the
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interest on NPA for taxation in the assessment year relevant to such financial year of recovery. The Ld. A.O/CIT(A) have committed an error in disallowing Rs. 52,20,914/- on account of interest on non performing assets. Accordingly, the ground of Appeal No. 2 of the assessee is allowed.
Ground No. 3 is regarding disallowance of Rs. 1,92,041/- on account of amortization of premium on government securities. The assessee claimed deduction of Rs. 1,92,041/- on account of amortization of premium on government securities in accordance with RBI Guidelines. The assessee has relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. 366 ITR 505 (BOM) and also on the CBDT Instruction No. 17/2008 dated 26/11/2008. The Ld.CIT(A) A.O is of the opinion that premium paid was capital in nature. Therefore, disallowed the claim of the assessee. In the Appeal before the CIT(A) has been held that the same was ‘capital loss’ and by relying on the decision of the Hon'ble Supreme Court in the case of Southern Technology Vs. CIT 320 ITR 577 S.C held that RBI Guidelines do not over ride the Income Tax Act and confirmed the disallowance made by the A.O.
It is not in dispute that the very same issue has been decided in favour of the assessee in the case of M/s Visvesvaraya Cooperative Bank Ltd. and further in assessee’s own case for Assessment Year 2010-11 and 2011-12 the Tribunal has deleted the similar addition. The said fact of the deletion of the disallowance of amortization premium for the Assessments Year 2010-11 and 2011-12 has been also mentioned by the A.O in the Assessment order, but has not followed the consistency. Apart from the same as per the RBI Guidelines dated 16/10/2000, the investment portfolio of the bank is required to be classified under three categories viz. Held to Maturity (HTM), held for Trading (HFT) and Available for Sales (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining
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to maturity. In the case of HFT and AFS securities forming stock in trade of t he bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts.
Therefore, by considering the facts and circumstances of the case, in our opinion, the disallowance of Rs. 1,92,041/- on account of democratization of premium of government securities is deserves to be deleted. Accordingly, we allow Ground No. 3 of the assessee.
In the result, the Appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the open court on 15th September , 2022
Sd/- Sd/- (Dr. B.R.R. KUMAR ) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 15/09/2022
*R.N* Sr. PS