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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & Shri GEORGE K. GEORGE
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by the assessee is directed against the order of the CIT(A) dated 28.9.2017 for the assessment year 2008-09. The assessee has raised following grounds of appeal:-
The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The authorities below ought to have accepted the claim of the appellant that the entire income derived by the
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 2 of 9 appellant was exempt under the concept of mutuality under the facts and in the circumstances of the appellant's case.
Without prejudice to the above, the learned CIT[A] is not justified in upholding the addition of Rs.39,70,782/- in respect of Interest due but not received during the year having regard to the method of accounting regularly employed by the appellant under the facts and in the circumstances of the appellant's case. 4. The authorities below are not justified in refusing to allow a sum of Rs.3,85,010/- being the Amortization of premium paid on acquisition of stock-in-trade under the facts and in the circumstances of the appellant's case. 5. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-B of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled.
For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
Ground Nos.1 & 2 are general in nature which do not require adjudication.
Ground No.3 relates to addition of Rs.39,70,782/- in respect of interest due but not received. Ld. CIT(A) observed that the AO brought on record that the assessee was following the hybrid system accounting as per the narration given in the 3CD report. As per section 145 of the Income-tax Act,1961 ['the Act' for short] which has been amended from 01.04.1997, the assessee has to follow either cash system of accounting or mercantile system of accounting. Hence a letter was issued to the assessee on 5.7.2010 to submit the interest receivable and received for the year ended 31.03.2008, as per
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 3 of 9 mercantile system. On its reply dated 06.10.2010 a detailed show- cause was issued to the assessee on 20.12.2010 wherein the AO categorically discussed and put forth the position regarding the method of accounting. With regard to the quoted circular No.F.No.201/60/867-IT(A-II), dated 30.06.1987; the amendment in section 145 has been done after the issue of this circular. Hence, the contents in the new section 145(1) are to be followed. Moreover, in the case of SBT Vs. CIT[19861 158 ITR 102, the Hon'ble SC has held that the interest accruing on sticky loans is taxable to Income Tax on accrual basis where the assessee follows mercantile system of accounting. The above circular was given by the Board to help the State Financial Corporation to change the method of accounting from mercantile to cash basis. Hence this circular is not applicable to the- assessee case. In view of this, the AO proposed to add back the accrued interest receivable as on 31.03.2008 amounting to Rs.39,70,782/ - which has not been accounted in the profit and loss account to the returned income for the AY 2008-09. In response the assessee simply mentioned in its reply on 23.12.2010 stating that they have already submitted the details to the first letter [i.e.05.07.2010] and the same may be considered now. It was observed from the assessment order that the AO has elaborately rebutted the reply already been sent vide letter dated 20.12.2010 with show-cause. The AO concluded that since the assessee had not accounted the accrued interest received amounting to Rs.39,70,782/-, the same is therefore added back to the returned income.
This issue came for consideration before Hon’ble Karnataka High Court in the case of Canfin Homes (347 ITR 382), wherein it was held as under:-
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 4 of 9 “A reading of section 145 makes it very clear that section 145(1) is subject to the provisions of sub-section (2). Sub-section (2) provides that the Central Government may notify in the Official Gazette from time-to-time accounting standards to be followed by any class of assessees or in respect of any class of income. Therefore, it is clear that the requirement of complying with cash or mercantile system of accounting is subject to the directions to be issued by the Central Government in the matter of Accounting Standards. After the amendment to section 145, the Board has issued accounting standards to be followed by way of a Notification No. SO 69(E), dated 25-1-1996. [Para 5] Clause (6) of the Accounting Standard defines 'accrual' for the purpose of paragraphs (1) to (5) in the said Accounting Standards. 'Accrual' refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. Relying on this definition in the Accounting Standard, the revenue contends that it is immaterial whether any revenue is actually received or not. If it is shown to have accrued, that is sufficient to charge the said income. In this context, it is also necessary to take note of the guidelines dated 28-4-1995 issued by the National Housing Bank with reference to non performing asset which is the subject-matter of these proceedings. It states that the policy on income recognition to be objective should be based on record of recovery. Income from Non-Performing Asset (NPA) may not be recognized merely on the basis of accrual. An asset becomes non performing when it ceases to yield income. The income from NPAs, therefore, should be recognized only when it is actually received. NPA is an asset in respect of which interest has remained unpaid and has become 'past due'. An amount is to be treated as past due' when it remains unpaid for 30 days beyond the due date. Interest on NPAs should not be booked as income if such interest has remained outstanding for more than six months on and from 31-3-1995. [Para 6]
The Apex Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 / 104 Taxman 547 held that under the accounting practice, interests, which is transferred to the suspense account and not brought to the profit and loss account of the company, is not treated as income. The question whether in a given case such 'accrual' of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all the ITOs should treat such amounts as not forming part of the .income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119. Such a circular is binding under section 119. Such circulars are meant for ensuring proper administration of the statute and they are designed to mitigate the rigours of the- application of a particular provision of the statute in certain situations by applying a beneficial interpretation of the provision in question. [Para 7] Therefore, it is clear that if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, then that amount,
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 5 of 9 whether it is really accrued or not, is liable to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realized immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated that though a particular tricome is due to him but it 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. As the definition of non performing asset shows, an asset becomes non performing when it ceases to yield income. 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 to be a non performing asset, then the assumption is that it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the-National Housing Bank, the income from non performing asset should be recognized only when it is actually received. That is what the Tribunal held in the instant case. Therefore, the contention of the revenue that in respect of non performing assets, even though it does not yield any income, as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. [Para 8] For the aforesaid reason, there is no merit in appeal and same is to be dismissed. [Para 9]”
Respectfully following the above judgement of jurisdictional High Court, we are inclined to decide this issue in favour of the assessee. This ground of the appeal of the assessee is allowed.
Ground No.4 relates to Amortization of Securities Premium of Rs.3,85,310/-. The Ld. CIT(A) in his order has observed that the AO is not justified in refusing to allow a sum of Rs.3,85,010/ - being the Amortization of premium paid on acquisition of stock-in-trade under the facts and in the circumstances of the assessee's case. In this regard the AO has issued a show cause notice to the assessee on 05.07.2010 & 20.12.2010, proposing to disallow the same. The assessee simply mentioned in its reply on 23.12.2010 stating that they have already submitted the details to the first letter [ie.05.07.2010] and the same may be considered now. It was observed from the assessment order that the AO has elaborately rebutted the reply already been sent side letter and show-cause dated 20.12.2010. The
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 6 of 9 AO concluded that since the amortization expenses claimed by the assessee are capital in nature and not revenue item of expenditure, the above mentioned amount of Rs.3,85,310/ - is disallowed and added back to the returned income. On a plain reading the assessee has not come up with any satisfactory explanation or any fresh evidences. Ld. CIT(A) gone through the submissions and scores of judicial pronouncements relied by the assessee. The AO has brought on record the following narration:- "... The banks are supposed to maintain the investment level in the Govt. Securities under three categories as per the guidelines of the RBI. There is no doubt, the maintenance of investment in the Govt. Securities is essential for the functioning to the bank. But, it is nowhere mentioned in the Master Circular of the RBI that the amortization of premium on securities is expenditure debited in the profit & loss account and it is deductible from the income. The investment level in the Govt. Security is to be maintained as per the guidelines of the RBI and the premium paid on purchase f these Govt. Securities are not in the nature of revenue expenditure and is not a debitable expenditure u/s 37 of the IT Act. There is no fight between the RBI Act and IT Act. The purpose of both the Acts are different. The RBI circular only says that the premium paid on purchase of a security under HMT category should be amortized over the period remaining to maturity. It nowhere says that it should be deducted from the income of the bank. The nature of any expenditure has to be examined with reference to the fact of the case. In this case the amortization of premium on securities is not a revenue item of expenditure. Hence, the amount of Rs.3,85,310/ - being the amount of amortization expenditure on premium paid on Govt. Securities is proposed to be disallowed u/s 37 of the IT Act treating the same as not revenue item of expenditure."
Hence, Ld. CIT(A) agreed with the aforesaid reasons and held that the AO was justified and he did not find any need to interfere with the assessment order stating that the assessee has not even submitted details of holding of Government securities such as whether they are “held to maturity” or “held for trading”. The
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 7 of 9 contention of the assessee to solely rely upon the RBI’s circular was not acceptable to Ld. CIT(A) as it was not binding on Income Tax Act. In light of the facts and circumstances of the case the Ld. CIT(A) has decided that assessee’s contention stands on a weak footing and lacks merits. Therefore, the addition made of Rs.3,80,120/- was sustained by him and the relevant ground of appeal was dismissed.
We have heard both the parties. The Ld. CIT(A) observed that assessee has not submitted any details of holding of government securities such as whether they are held to maturity or held for trading. The assessee only relied on the RBI circular No.UBD/BPD.(PCB).MC.No.2/16.20.00/2007-08 dated 2nd July, 2007 which cannot bind the Income Tax Act.
The assessee placed reliance on the RBI Circular (supra), wherein it was observed that in point No.16 that premium paid on purchase of securities under HTM category should be amortized over the period remaining to maturity.
“Point No.16 of RBI Circular:- “16.1 Valuation Standards 16.1.1 Investments classified under 'Held to Maturity' category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. 16.1.2 The individual scrip in the 'Available for Sale' category will be marked to market at the year-end or at more frequent intervals. The book value of the individual securities would not undergo any change after the revaluation. 16.1.3The individual scrip in the "Held for Trading" category will be marked to market at monthly or at more frequent intervals. The book value of individual securities in this category would not undergo any change after marking to market .
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 8 of 9 Note: Securities under AFS and HFT categories shall be valued scrip- wise and depreciation/appreciation shall be aggregated for each classification as indicated at para 15.6 above separately for AFS and HFT. Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. Similarly net depreciation for any classification in one category should not be reduced from appreciation in similar classification in another category.”
7.1 However, the contention of the Ld. D.R. is that assessee has not even submitted details of holding of Government securities such as whether they are held to maturity or held for trading. In the absence of such details, it is not possible to consider the claim of assessee. In our opinion, if the securities are held by assessee under “held to maturity” the benefit of amortization of premium is to be given to the assessee as held by Mumbai Bench in the case of ACIT Vs. The Bank of Rajasthan Ltd. (2011) TIOL35ITAT Mumbai as follows: “In case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortized over the period till maturity is allowable as revenue expenditure since the claim is as per RBI guidelines and CBDT also has directed to allow such premium. It has also been held in the case of Catholic Syrian Bank Ltd. Vs. ACIT that amortization on purchase of Government securities was made as per prudential norms of the RBI and same was allowable deduction. In view of above, assessee was justified in contending for amortization of premium paid in excess of face value of securities held to maturity (HTM) category or period remaining till maturity it was found reasonable by the CIT(A). Accordingly, addition of Rs.17,91,659/- made by the Assessing Officer by disallowing amount towards amortization of Government securities (HTM) was deleted. This reasoned factual and legal finding of the CIT(A) needs no interference from our side. We uphold the same.”
7.2 Further, Hon’ble Supreme Court in the case of Southern Technologies Ltd. (320 ITR 577) held that the direction of the RBI have nothing to do with the computation of income under the Income Tax Act.
ITA No.2609/Bang/2017 M/s. The Davangere Harihar Urban Sahakari Bank Niyamitha, Devangere
Page 9 of 9
7.3 In the present case, the assessee failed to give details of securities whether they are held to maturity or held for trading. Even before us, assessee has not furnished these details. In absence of these details, we are not in a position to adjudicate the issue whether premium paid is relate to securities held to maturity (HTM) or held for trading (HFT). Accordingly, we remit this issue to the file of the A.O. with the direction to the assessee to furnish the details in this regard and the A.O. has to decide the issue in accordance with law.
In the result, the appeal of the assessee is partly allowed for statistical purposes
Order pronounced in the open court on 18th May, 2022
Sd/- Sd/- (George K. George) (Chandra Poojari) Judicial Member Accountant Member
Bangalore, Dated 18th May, 2022. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.