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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI PRAMOD KUMAR&
PER Ms. MADHUMITA ROY - JM: The instant appeal filed by the revenue is directed against the order dated 30.06.2017 passed by the Commissioner of Income Tax (Appeals) – 10, Ahmadabad arising out of the order dated 27.12.2016 passed by the Asstt. Commissioner of Income Tax, Circle – 1(3), Ahmedabad for Assessment Year 2014-15 under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) with the following grounds: (1) That the ld.CIT(A) has erred in law and on facts in deleting the disallowance made by the AO on account of Business Promotion DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 Members Gift, Scholarship expenses and payment to legal heirs of the members amounting to Rs.31,98,772/-. (2) That the ld.CFF(A) has erred in law and on facts in deleting the disallowance made by the AO on account of Amortization of Premium amounting to Rs.3,15,81,243/-.
(3) That the ld.CIT(A) has erred in law and on facts in deleting the disallowance made by the AO on account of interest accrued on non performing assets of Rs.41,18,29,397/-. On the fact and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above since the assessee has failed to disclose his true income/book profit.
The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the .Assessing Officer be restored to the above extent. The appellant craves, to leave, to amend or alter any ground or add a new ground which may be necessary.”
The assessee, a Co-operative Bank filed its return of income on 12.09.2014 declaring total income of Rs.80,14,86,735/-. Under scrutiny through CASS notice u/s 143(3) of the Act dated 28.08.2015 was issued followed by a further notice dated 17.06.2016 u/s 142(1) r.w.s. 129 of the Act due to change of incumbent. The assessment proceeding was finalized with the following additions: Returned Income Rs.80,14,86,735/- Additions: 1) Disallowance of Business Promotion Rs.31,98,772/- Members Gift, scholarship expenses and payment to legal heirs of the members 2) Amortization Expenses of Premium Rs.3,15,81,243/- amounting 3) Addition of an account of Interest accrued Rs.41,18,29,397/- on non performing assets (as discussed in para 5) DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 Total Rs.1,24,80,96,147/- Assessed Income u/s 143(3) Rs.1,24,80,96,150/-
The said addition in turn was deleted by the Learned CIT(A) in appeal. Hence, the revenue is before us.
During the course of assessment proceeding, it was found by the Learned AO that the assessee claimed certain expenses (Gift paid to members, payment towards scholarship to children of members, Members incentive) according to him which do not pertain to the business expenditure. Hence show-cause was issued. The assessee filed a reply dated 08.11.2016 explaining the issue in detail, it was also put on record that on the same issue though addition was made by the authorities for A.Y. 2008-09 and 2009-10 the same was ultimately deleted by the Hon’ble ITAT, Ahmedabad. Further that, the revenue itself allowed such claim of the assessee in the previous year i.e. A.Y. 2013-14. However, such plea taken by the assessee was not found suitable by the Learned AO. He thus made the addition of Rs.31,98,772/- by not considering it as business promotion expenses in the nature of member’s gift, scholarship expenses and also the payment to legal heirs of the members. In appeal, the same was deleted by the Learned CIT(A) following the order passed in assessee’s own case for A.Y. 2008-09. The judgment passed by the Hon’ble ITAT in appeal preferred by the Revenue for the said A.Y. 2008-09 was also taken into consideration by the learned CIT(A) while deleting such disallowance made by the Learned AO.
At the time of hearing of the instant appeal the Learned Senior Counsel appearing for the assessee submitted before us that the issue is covered in DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 favour of the assessee in assessee’s own case for A.Y. 2008-09 by the judgment passed by the Co-ordinate Bench which was further confirmed by the Juri ictional High Court in Tax Appeal No.596/2017, copy whereof was also submitted before us. The Learned Representative of the revenue, however, failed to controvert the said contention made by the Learned AR.
We have heard the respective parties, we have also perused the relevant materials available on record. It appears that the similar claim of the assessee was allowed by the Learned CIT(A) in assessee’s own case for A.Y. 2008-09, confirmed by the Hon’ble Tribunal, which was taken care of by the Learned CIT(A) in his operative part of the order; the relevant portion whereof is as follows:
“4. I have carefully considered the submissions made by the appellant and the assessment order. The first issue is regarding disallowance of business promotion members gift, scholarship expenses and payment to legal heirs of the members amounting to Rs.31,98,7762/-. The similar issue came up before the Hon'ble ITAT, Ahmedabad "C" Bench in the appellant’s own case for A.Y. 2008-09. After discussing the issue in detail, the Hon'ble ITAT has held as under:-
"5.4 We have heard both sides, perused the material available on record and gone through the orders of the authorities below. The main source of income of the assessee is that of receipt of I interest realized on the advance made by the bank and out of the total advance outstanding at the end of the year at Rs. 735.65 crores, advances to the members works out to be Rs. 722.36 crores which comprises more than 98% of total advances. The principal source of recurring income of the assessee is from the members and therefore the expenditure for "keeping members' support and attraction towards the bank is wholly and exclusively necessary for the purpose of business. The Hon'ble High Court of Gujarat (Full Bench) in the case of Karjan Co- DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 Taluka Co-op Purchase & Sales Union Ltd., 126 ITR 413 of Hon'ble Gujarat High Court's judgement where it was held that the amount spent by the assessee society on purchase of stainless steel utensils and other for the purpose of tour expenses of members was considered to be business expenditure within the meaning of Section 37 of the Act.
6 Considering to the above stated facts and circumstances, the volume of earning of the assessee bank are mainly made through its members. These expenses are incurred by the assessee bank to attract the members' confidence and loyalty towards the bank in the prevailing competition so that the members place their deposits with the assessee bank and continue to borrow funds from the assessee bank in order to improve the profit earning and income of the assessee bank. We have also considered that the amount spent on the aforesaid expenditure is very marginal compared to the amount of interest realized on the advances made to the members by the bank and amount of deposit made by the members with the bank. Under these circumstances the amount spent on scholarship to the children of members, payment to legal heirs of members and gifts to members could be said to be expenditure incurred wholly and exclusively for the purpose of business since the amount was spent for keeping alive its good image amongst its members and ensuring that goodwill and continuity of business with the members. In view of above mentioned facts and circumstances, we find that the assessee had incurred above stated expenditure for promoting the business, even though there is no legal obligation to incur these expenditure but the assessee had incurred it for preserving business connection and goodwill of DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 the business. Therefore, in view of above findings, we allow the aforesaid expenditure as business expenditure under Section 37 of the Act."
1 Since the issue has already been decided against the Revenue by the Hon'ble ITAT, Ahmedabad Bench, respectfully following the order of Hon'ble ITAT, the addition made by the A.O on this account is deleted. This ground of appeal is allowed.”
We have also find that the said order has been affirmed by the Juri ictional High Court in revenue’s Appeal No. 596 of 2017; the tax appeal preferred by the Revenue was found to be devoid of merit by the Hon’ble Juri ictional High Court, relevant portion whereof is as follows:
“3. It can thus be seen that the Tribunal accepted the assessee's version that the expenditure was incurred for the purpose of business to maintain goodwill and continuity of business being provided by important members. It was pointed out that these members had provided for nearly 98% of the bank's business and the expenditure was marginal as compared to the interest realised on advances made to such members by the bank and the amount of deposits made by the members with the bank. The Tribunal held that merely because there was no legal obligation to incur such expenditure would not mean that the same was not allowable business expenditure if it could be pointed out that the expenditure incurred in preserving the business connections and goodwill of business expenditure incurred in preserving the business connections and goodwill of business.
No question of law arises. Tax appeal is accordingly dismissed.”
Respectfully relying upon the order passed by the Hon’ble Juri ictional High Court, we find no infirmity in the order passed by the first appellant authority in favour of the assessee. Hence the same is hereby upheld. Revenue’s ground appeal is found to be devoid of merit and thus dismissed. DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15
Ground No.2 Revenue has also challenged the deletion of disallowance of Amortization of premium of Rs.3,15,81,243/- as made by the Learned CIT(A).
The assessee during the course of assessment proceeding was issued a show-cause as to why Amortization of premium of Rs.3,15,81,243/- should not be disallowed. In reply whereof, the assessee stated that the assessee followed the guidelines laid down by the Reserve Bank of India (RBI) in this respect being the Master Circular dated 1st July, 2015. It was further clarified that at the time of acquisition of investments, category of investment is decided as to whether it is for trading or held by maturity. It was also contended that for the allowability of claim of premium paid on purchase of Government Securities which are held under the HTM category, the assessee on consistent basis following the same method of accounting wherein amount of premium paid is distributed till the period of maturity and claimed as Revenue Expenditure in respective year. The judgment in the mater of CIT-vs-Nedungadi Bank Ltd reported in 130 Taxman 93 and Dy.CIT-vs-Surat National Co-op Bank Ltd passed in ITA No.2793/Ahd/2012 were also relied upon. Apart from that, the assessee pointed out that similar addition has been deleted by the Learned CIT(A) in assessee’s own case for A.Y. 2012-13. However, such plea taken by the assessee was not found acceptable by the Learned AO. He was of the opinion that the Amortization of premium paid to HTM Securities is not in the nature of expenditure of loss but more in the nature of capital and is not allowable u/s 37 of the Act. Ultimately, the said amount of Rs.3,15,81,243/- was added to the income of the assessee which was in turn deleted by the Learned CIT(A) in appeal, hence the revenue before us. DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15
At the time of hearing of the instant appeal, the Learned Senior Counsel appearing for the assessee submitted before us that the issue is entirely covered by the assessee’s own case for A.Y. 2013-14 which followed the order passed in A.Y. 2012-13. In fact, the order passed by the Learned CIT(A) for A.Y. 2012-13 was further affirmed by the Co-ordinate Bench; copy whereof has been also submitted by the Learned AR before us. The Learned DR, however, failed to controvert the arguments advanced by the Learned Senior Counsel appearing for the assessee.
Heard the respective parties, perused the relevant materials available on record. It appears from the records that while deleting the addition made by the Learned AO, the Learned CIT(A) observed inter alia as follows following the order passed by his predecessor. Relevant portion whereof is as follows: “…6. After taking into consideration the submission of the assessee, Id. CIT(A) deleted the addition by observing as under:-
"2.3 I have considered the facts of the case and legal position on the issue. The allowability of amortized expenses on premium on Government Securities has been provided u/s. 36(1)(ii) of the provisions have been clarified and explained by CBDT, New Delhi vide Instruction No. 17 of 2008 dated 26.11.2008. As per this clarification, investments of banks classified under HTM (Held to Maturity) 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 to maturity. On the basis of this Instruction, different Tribunals, as mentioned above by assessee, have allowed the amortized expenditure. The AO has ignored the provisions of Instruction which is binding on him while discussing the issue and disallowing the expenditure. Since, the Instructions and Circulars are binding in nature on AOs and different Tribunals have given decisions DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 against the revenue, respectfully following the same, ground of appeal of assessee is allowed and addition made by AO is deleted."
Since Ld. CIT(A) has given relief to the assessee by placing reliance on various decisions of Tribunals on the issue in view of CBDT Instruction dated 26-11-2008, we feel no need to interfere with the order passed by him and the same is hereby upheld. This ground of the revenue is dismissed."
Respectfully following the order of CIT(A)-4, Ahmedabad as mentioned above dt. 03/05/2016 and my order vide No.CIT(A)-10/ACIT.Cir-1 (3)724/15-16 dated 20/06/2016, as the facts of the appellant's case in this year are identical to the facts of the case decided by the CIT(A)-4, Ahmedabad, the addition of Rs. 2,74,57,365/- made by the AO on this issue are deleted. This ground of appeal is allowed."
1 Since the facts remain identical and issue remains the same, respectfully following the order of CIT(A)-4, Ahmedabad, and my order No. CIT(A)-10/DCIT.CIR. 1(3)7391/15-16 dated 28/02/2016, the addition of Rs. 3,15,81,2437- made by the A.O is deleted. This ground of appeal is allowed.”
We have also carefully considered the order passed by the Learned Co- ordinate Bench in ITA No.2124/Ahd/2016 for A.Y. 2012-13. While deciding the identical issue in favour of the assessee the Hon’ble Co-ordinate Bench observed as follows:
“10. We have heard the rival contentions and perused the material on record carefully. The assessee has made investment in the HTM category as per the guidelines laid down by the RBI and claimed amortization of premium till the period maturity. The assessing officer has disallowed the claim following the similar addition made by his predecessors on the ground that the premium amount paid for acquiring the capital investment cannot be allowed as deduction expenditure. The ld. CIT(A) has deleted the addition by following the decision of his predecessors. We have noticed that as per RBI guidelines dated 16th Oct, 2000, the investment portfolio of the bank is required to be classified under three categories viz." Held to Maturity (HTM), Held for DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 Trading (HFT) and Available for Sale (ATS). Investment classified under HTM category needs to 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 remaining period. Allowable of amortized expenses on premium on government securities has been provided u/s. 36(1)(ii) of the act and explained by CBDT vide instruction No. 17 of 2008 dated 26-11-2008. The Hon'ble High Court of Gujarat vide (2014) 43 taxmann.com 161 (Gujarat) in the case of CIT, Rajkot-II vs. Rajkot Dist. Co-op. Bank Ltd. held that instructions clearly provide for amortization of premium paid on securities when the same are acquired at the rate higher than the face value. Such amortization would have to be for the remaining period of maturity. In view of the above stated facts and legal finding, we do not find any infirmity in the decision of the Learned CIT(A). Therefore, the appeal of the revenue is dismissed on this issue.”
Taking into consideration the judgment passed by the Co-ordinate Bench in the identical issue, we find no reason to interfere with the order passed by the Learned CIT(A) which in fact, followed the ratio as laid down by the Co-ordinate Bench. Hence, we confirm the same. The revenue’s appeal is thus dismissed.
Ground No.3: The order passed by the Learned CIT(A) in deleting the disallowance on account of interest accrued on non-performing assets of Rs.41,18,29,397/- was under challenge before us by the Revenue.
During the course of assessment proceeding, upon verification of the audited balance sheet, it was found that the assessee has not credited in its profit and loss account interest accrued on non-performing assets amounting to Rs.1,20,75,66,875/- which was rather shown as overdue interest reserve in the balance sheet. A show cause, therefore, was issued upon the assessee as to why DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 interest accrued on non-performing assets should not be disallowed and added back to the income. The assessee in reply submitted the following: “5.2 To this the assessee replied as follows:
“We are in receipt of your above referred notice and in compliance thereof we submit as under.
At the outset we clarify that, provisions made applicable and amount stated in notice both are incorrect and thus show-cause notice itself is void ab initio.
In show cause notice, it is being mentioned that "Interest accrued on Non Performing Assets (NPA) not credited to Profit & Loss account u/s 43 of the Income Tax Act" whereas said provisions does not deal with the subject matter under reference namely "Interest accrued on Non Performing Assets (NPA)". However, provisions of section 43D is for the Interest accrued on Non Performing Assets (NPA).
Further, you have mentioned that Interest accrued on Non Performing Assets (NPA) is of Rs.1,20,75,66,875/- but it is a cumulative balance of interest accrued on NPA accounts and breakup of the same is as under.
Cumulative balance as on 31/03/2014 Rs. 1207566875 Less: Additions made in AY 2013-14 Rs. 795737478 (Disputed in Appeal) Current year's interest accrued on NPA accounts Rs. 411829397
So if at all you propose to disallow and add back an amount of interest accrued on NPA, it should be Rs. 41,18,29,397 only and not as propose in the notice.
Regarding Non-applicability of Provisions of Section 43D & non considering interest accrued on NPA account as income, your assessee respectfully submits as under.
Your Assessee is a schedule Bank and Provisions of Section 43D of the IT. Act. reads as under. DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 "Sec. 43D - Notwithstanding anything to the contrary contained in any other provisions of the Act, - (a) In the case of a public financial institution or a scheduled bank or a State Financial Corporation or a State Industrial Investment Corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts ; (b) In the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts. (c) Shall be chargeable to tax in the previous year in which it is credited by the-public financial institution or the scheduled bank or the State Financial Corporation or the State Industrial Investment Corporation or the Public Company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. Explanation - For the purposes of tins section"
It is clarified that Section 43D provides that in, case of a public financial institution or a scheduled bank or state financial corporation, Income by way of interest on such categories of bad & doubtful debt as may be prescribed, having regard to guidelines issued by RBI in relation to such debt i.e. in other words interest on (N.P.A) non performing asset classified as such on the basis of guidelines prescribed by the RBI shall be chargeable to tax
(a) In the previous year in which it is credited to its profit and loss account by the said institution or bank or corporation
OR (b)In the previous year in which it is actually received by the institution or bank, whichever is earlier On facts of the case, assessee bank has neither credited any such interest nor any part of interest which is actually received and not DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 shown as income and therefore provision of section 4 3D are not applicable as made applicable by your show cause notice.
Moreover, a copy of the gazette of India duly showing your assesses bank as Scheduled Bank is appended. (Annexure A)
Kindly refer to the assessment order for the immediate previous year i.e. AY 2013- 14, where in for the first time learned assessing officer has made additions of Rs.79,57,37,478 and the matter is pending before the CIT (A), Ahmedabad and same is partly heard.
Even for making said addition, the learned assessing officer heavily relied upon the incorrect observation that the assessee is not a "Schedule Bank". The learned Assessing Officer further agreed that had it been schedule bank it would have been otherwise now for the year under reference your good self have categorical inquired about the status of the assessee bank (Which your predecessor had, not) and your assessee has produced a copy of Gazette published by the authority recognizing assessee bank as a "Schedule Bank" since September 1, 1988. In view of the clear provisions of Sec. 43D of the I. T. Act, 1967 ns clarified, here in above, it is humbly requested not to make such addition as alleged and save your assessee from facing uncalled for pressure of paper demand.
Kindly refer to "Income\Recognition Policy contains in Master Circular issued by the RBI dated July 1, 2015 relating to Income Recognition, Asset classification provisioning and other related matters- UCB on Page 16A copy of the said circular is appended - Annexure III (Annexure B)
Therein it has been categorically stated that "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 income account interest on non performing assets on accrual basis.
Para 4.5 Interest Application DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 4.5.1 In case of NPAs where interest has not been received for 90 days or more, as a prudential norm, there is no use in debiting the said account by interest accrued in subsequent quarters and taking this accrued interest amount as income of the bank as the said interest is not being received. It is simultaneously desirable to show such accrued interest separately or park in a separate account so that interest receivable on such NPA Account is computed and shown as such, though not accounted as income of the bank for the period.
3 With a view to ensuring uniformity in accounting the accrued interest in respect of both the performing and non-performing assets, the following guidelines may be adopted notwithstanding the existing provisions in the respective State Co. Operative Societies Act. : (i) Interest accrued in respect of non-performing advances should not be debited to borrowal accounts but shown separately under "Interest Receivable Account" on the "Property and Assets" side of the balance sheet and corresponding amount shown under "Overdue interest Reserve Account" on the "Capital and Liabilities" side of the balance sheet. Thus, as it is mandatory required assessee has prepared, its accounts exactly as per said guidelines.
Moreover, if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount; accrued was not realized, cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated that though a particular income is due to him but is not possible to recover the same, then it cannot be said to have been accrued and the said amount cannot be brought to tax. In the instant case we are concerned with a non performing asset. As the definition of non performing asset shows an asset (loan or advance) becomes non performing when it ceases to yield income, Non per forming asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non performing asset then the assumption is it is not yielding any revenue and even principal repayment is doubtful. When it is not yielding any DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 revenue, the question of showing that revenue and paving tax would not arise.
Your assessee rely upon the following decision - (Annexure C) • The Sindagi Urban Co. Op. Bank Vs. Department of Income Tax – ITAT, Banglore • Commissioner of Income Tax Vs. Shri Siddeshwar Co. Operative Bank Ltd. - Karnataka High Court • Commissioner of Income Tax Vs. Can/In Homes ltd. - Karnataka High Court Relevant Documents regarding to aforesaid matter is being appended herewith."
However, such submission of the assessee was not accepted by the Learned AO and he was of the view that the Circular issued by the RBI which has been relied upon by the assessee was of no impact on the computation of taxable income under the Income Tax Act. The directions given under such circular cannot overrule the permissible deduction or other exclusion under the Income Tax Act. He further added the following: “5.7 Further, according to section 145, with effect from 1.4.1997, income of the assessee shall be computed either on cash or on mercantile system of accounting regularly employed by the assessee. It cannot be on mixed system of accounting. Sub section (1) of section 145 contains the word "shall" which suggest that the provisions 01 section 145 are mandatory in nature. Further, section 5 defines the scope of total income. The combined reading of the provisions of section 5 and 145 shown that the total income of an assessee shall include the income on the7 basis of system of accounting regularly employed by him. Therefore, once income has accrued as per the method of accounting followed by the assessee, it shall be included total income. Admittedly, in the present case, the assessee had been following mercantile system of accounting and, therefore, assessee is required to credit the income accrued on its assets including non-performing assets to its profit and loss account. Merely because RBI has issued certain guideline in case DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 of recognition of income from Non Performing Assets, it would not he proper to hold that interest income has not accrued to the assessee on its non-performing assets, if any, during the year. The assessee cannot postpone the income or, receipt basis except in the case of category of assessee covered by the provisions of section 43D. As already discussed, the provisions of section 43D are not applicable to co- operative banks for the year under consideration and therefore the question of extending the benefit under section 43D to the assessee bank does not arise.
8 It may be relevant to refer to the decision of Hon'ble Supreme where the Apex Court had an occasion to examine the concept of real income and review the case law on the subject and held under:
In slate Bank of Trauancore. V CIT (1986) 158 ITR 102/24 Taxman 337(SC), this court held that the interest on sticky advances did accrue to the assessee bank according to the mercantile system of accounting and that, indeed the assessee had debited the respective parties with interest. The appellant, however did not choose to treat the debt as bad debts but carried, the interest amount to the interest 'Suspense Account' Mere crediting of the said interest amount to, what it called the 'Interest Suspense Account', without treating it as bed debts or irrecoverable interest, was repayment to section 36(1)(vii) and section 32(3)of the Act and that the concept of real income does not help the appellant-bank . It was observed the concept of real income cannot be so read as to defeat the object and the provision of the Act. Sabyasachi Milkharaji J, in his opinion, discussed all the relevant cases on the subject including Morin "Industries Ltd's case(Supra) and Biral Gwalior(P) Ltd's case (Supra) as well as the decision of this court in Shooji Vallabhdas and Co's case (supra) and stated the proposition emerging therefrom in the following words:
".... (1) It is the income which has really accrued or arisen to the assessee that the taxable whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 not really accrue. (3)Where a debt has become bad, deduction in compliance with the provision of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assesses is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry - but taking the interest merely to a suspense account cannot be such evidence to show that no real income has accrued to the assessee as has been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has income or not but, in every case, it must be applied with care and within well- recognized limits" (P-104) To the argument of real income pressed with great persistence in that case, the learned judger responded in the following words:
"We were invited to abandon legal fundamentalism. With a problem like the present one, is better to advice to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is as well accepted on and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of income-tax, as developed". We respectfully agree with the propositions as well the observations of the learned Judge with respect to the plea of real income"
The concept of real income cannot be employed so as to defeat the provision of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room-nor would be permissible for the Court to import the concept of real income so as whittle down, qualify or defeat the provisions of the Act and the Rules.
9 Thus, the Supreme Court observe that the concept of real income should not be so read as to defeat the provisions of the Act and to make DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 accrued income no income on the mere ipse dixit to the assessee. The Apex Court also held that the concept of real income must be applied with extreme caution and that it should not be extended to the areas where it has no application. In the case on hand, it is not in dispute that the assessee was following mercantile system of accounting and therefore the interest income on the advances including NPAs accrued to the assessee u/s 5 r.w.s 145 of the I.T. Act and the case of the assessee is not covered by section 43D. In such, a situation, the concept 01 reality of income cannot be utilized for whittling down or nullifying the provision of section 5 of the I.T. Act. Under section 5, income has accrued to the assessee during the year and accordingly entries to that effect were made in the books of accounts of the bank and shown in the balance sheet even, if the realization of the interest amount is delayed. Therefore, it cannot be said that what is assessed is notional income or hypothetical income or unreal income.
10 To sum up, RBI guideline have been issued under delegated legislation for the purpose of effective supervision and control of monetary and system and to supervise and exercise control on banks and NBFCS. The RBI guideline would not override the '.mandatory provisions of section 145 and accrual of income under section 5 (he- Income-tax Act. Since the assessee was following mercantile system of accounting, the interest income from assets including NPAs has to be assessed to tax on accrual basis. Accordingly, the interest income of Rs 41,18,29,397/- on loans and advance claimed to be NPA accounts is hereby added back to the total income of the assessee. Penalty proceedings under section 271(1)(c) of the I.T. Act are being initiated for concealing the particulars of income and furnishing inaccurate particulars of income. [Addition of Rs.41,18,29,397/-]”
In appeal, the Learned CIT(A) deleted the same following the order passed by his predecessor in assessee’s own case for A.Y. 2013-14. Hence, the instant appeal by the revenue before us.
At the time of hearing of the instant appeal, the Learned Senior Counsel appearing for the assessee submitted before us that the issue is entirely covered DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 in assessee’s own case for A.Y. 2013-14 which was followed by the Learned CIT(A) while deleting the addition made by the Learned AO. It was further contended by the Learned Senior Counsel that once it is established that the assessee is a scheduled bank as per the notification by the RBI and the interest as accrued on non-performing assets as has been clarified by the RBI the benefit of section 43D would be applicable to the instant case and the same cannot be added by taking shelter of section 145 of the Act. He also relied upon the judgment passed by the Hon’ble High Court in the matter of PCIT-1, Rajkot-vs-Kutch District Central Co-op. Bank Ltd. where the issue was decided in favour of the assessee. A copy whereof was also duly submitted before us. However, the Learned DR relied upon the order passed by the Learned AO.
Heard the respective parties, perused the relevant materials available on record. We find from the records that the Learned CIT(A) while deciding the issue in favour of the assessee by deleting the addition made by the Learned AO followed the order passed by his predecessor in assessee’s own case for A.Y. 2013-14. Apart from that, we have also carefully considered the order passed by the Juri ictional High Court as cited above where the Hon’ble High Court observed as follows:
“2. Respondent assessee is a cooperative bank. For the assessment year 2010-11, the assessee had filed the return of income on 14-10- 2010 declaring total loss of Rs. 3.22 crores (rounded off). The return was taken in scrutiny. During such scrutiny assessment, one of the issues examined by the Assessing Officer was of the assessee's claim of deduction of Rs. 93.03 lakhs. The Assessing Officer noticed that the P & L account, the assessee had debited the said sum under the head "reserve for overdue interest". The Assessing Officer called upon the assessee to explain this, in response to which, the assessee conveyed DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 that the assessee is a cooperative bank governed by the Gujarat Cooperative Societies Act, 1961, Banking Regulations Act, 1949 and the rules and regulations framed by the Reserve Bank of India ('RBI' for short), as per which, it is mandatory for the bank to follow directives issued by the RBI. During the year under consideration, the bank had made a provision for overdue interest of Rs. 93.03 lakhs against interest accrued but not receivable on non performing assets which were irrecoverable, sticky loans, or doubtful loans. The assessee pointed out that as per the Reserve Bank of India circular dated 22-06-1996, the bank had to follow prudential norms of State Central Cooperative Banks and District Central Cooperative Banks. As per these guidelines, such banks are required to make 100% provision for the entire overdue interests as on 31st March of the year. The bank further pointed out that when the loan itself had become NPA, there was no possibility of recovering the interest and thus no prudent businessman would consider interest accruing out of such NPA as income leading to additional tax burden.
The Assessing Officer was however unmoved. He was of the opinion that the assessee's case would be governed under section 36(1)(viia) of the Act. Within the parameters of such provisions, the deduction cannot be granted. The RBI directives cannot govern the taxability of the income. Primarily on such grounds, the Assessing Officer added back the said sum of Rs. 93.03 lakhs which was claimed by way of deduction by the assessee by way of provision for overdue interest.
The assessee carried the matter in appeal. Commissioner of Income Tax (Appeals) allowed the appeal. He relied on the decision of Income Tax Appellate Tribunal and of the Delhi High Court in case of CIT v. Vasisth Chay Vyapar Ltd. [2010] 8 taxmann.com 145/[2Q11] 196 Taxman 169/330 ITR 440. 5. The Revenue carried the matter in appeal before the Tribunal. The Tribunal by the impugned judgment, rejected the Revenue's appeal. The Tribunal relied on its earlier judgment in case of the assessee for earlier assessment years, in which, reliance was placed on the decision of Bombay High Court in case of CIT v. Deogiri Nagar Sahakari Bank Ltd. [2017] 79 taxmann.com 396/[2015] 379 ITR 24 (Bom). DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15
Learned counsel for the Revenue submitted that the deduction under section 36(1)(viia) of the Act in respect of any provision of bad and doubtful debts made by a bank comes with the ceiling of prescribed percentage of the total income computed before making any deduction under chapter VIA. The Commissioner of Income Tax (Appeals) as well as the Tribunal granted deduction ignoring this statutory limitation. Counsel further submitted that the effect of the decision of the Supreme Court in case of Southern Technologies Limited v. Joint CIT [2010] 187 Taxman 346/320 ITR 577 was not examined. In the said judgment, the Supreme Court has held that the RBI directives would not govern the taxability a certain receipt.
On the other hand, learned advocate Shri Darshan Patel and Shri Bandish Soparkar appearing for the assessees submitted that the bank was bound by the RBI directives, as per which, the bank would have to make 100% provision for the entire overdue interest on NPA. The account having become non performing account, there was little chance of recovering even the principal sum. Merely because the interest goes on accruing, the same cannot be taxed even though the possibility of recovering interest was almost nonexistent. Learned advocate submitted that various Courts have taken a similar view and granted the deduction on the principal of taxing real income. Our attention was drawn to the decision of Division Bench of this Court in case of Pr. CIT v. Shri Mahila Sewa Sahakari Bank Ltd. [2016] 72 taxmann.com 117/242 Taxman 60/[2017] 395 ITR 324 (Gujarat) in which the said issue came up for consideration.
In our opinion, entire issue is covered by the judgment of this Court in case of Shri Mahila Sewa Sahakari Bank Ltd. (supra). In the said case, the Court has considered following substantial question of law:
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law and on facts in holding that interest on non performing assets is not taxable on accrual basis looking to the guidelines of the Reserve Bank of India ?"
The Court answered the question in favour of the assessee and concurred with the view of the Delhi High Court in case of lasisth Chay DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 Vyapar Ltd. (supra). In the said decision, contrary to what was argued before us by the counsel for the Revenue, the Court had not only noticed but also referred to at some length the judgment of the Supreme Court in case of Southern Technologies Limited (supra).
In the result, the question is answered in favour of the assessee and against the Revenue and all Tax Appeals are dismissed.”
Relying upon the ratio laid down by the Juri ictional High Court on the identical issue, we find the interest accrued on NPA accounts to the tune of Rs. 41,18,29,397/- which was shown as overdue interest reserve in the balance sheet of the appellant before us cannot be taxed since the same was not possible to be recovered. The non-performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown as NPA then the assumption would be it is not yielding any revenue and even the principle repayment is doubtful. Since it is not yielding any revenue the same cannot be brought to tax. We, therefore, find no infirmity in the order passed by the Learned CIT(A) so as to warrant interference. Thus revenue’s appeal is found to be devoid any merit and hence dismissed.
In the result, revenue’s appeal is dismissed. This Order pronounced in Open Court on 18/06/2019 ( PRAMOD KUMAR ) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 18/06/2019 Priti Yadav, Sr.PS DCIT vs. The Kalupur Commercial Co-op Bank Ltd. Assessment Year 2014-15 आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त(अपील) / The CIT(A)-10, Ahmedabad.
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड" फाईल / Guard file. आदेशानुसार/ BY ORDER, स"या"पत ""त //// उप/सहायक पंजीकार (Dy./Asstt.