DEPUTY COMMISSIONER OF INCOME TAX, PUNE vs. M/S. PUNE CANTONMENT SAHAKARI BANK LTD, PUNE

आदेश / ORDER PER ANIL CHATURVEDI, AM :

These two appeals filed by the Revenue are emanating out of a consolidated order of Commissioner of Income Tax (A), Pune-5, Pune dated 20.10.2016 for the assessment years 2007-08 and 2012-13, respectively.

submissions made by them while arguing one appeal would be equally

applicable to the other appeal also and thus, both the appeals can be

heard together. In view of the aforesaid submissions of both the

parties, we, for the sake of convenience, proceed to dispose of both the

appeals by a consolidated order.

as under :-

Assessee is a Co-operative Bank engaged in the business of

acceptance of deposits and giving loans. Assessee filed its return of

income for A.Y. 2007-08 on 31.10.2007 declaring total loss of

Rs.2,24,47,498/-. Thereafter, order u/s 154 of the Act was passed

and deduction of Rs.2,19,44,280/- u/s 36(1)(viia) was withdrawn and

the total income was determined at Rs.15,81,901/-. Thereafter, the

case was re-opened by issuing notice u/s 148 of the Act and thereafter

re-assessment was framed vide order dt.05.03.2015 and the total

income was determined at Rs.2,49,20,300/-. Aggrieved by the order of

AO, assessee carried the matter before Ld.CIT(A), who vide

consolidated order dated 20.10.2016 for A.Ys. 2007-08 and 2012-13,

granted substantial relief to the assessee. Aggrieved by the order of

Ld.CIT(A), Revenue is now in appeal before us and has raised the

following grounds :

“1. Whether on the facts and in the circumstances and in Law, the CIT(A) has erred in deleting the disallowance on account of accrued interest on NPAs and failed to appreciate that the assessee is a Non-Scheduled Co-operative bank and the provisions of section 43D are not applicable to the assessee.

3.1. Similar grounds have been raised by the Revenue in ITA

No.436/PUN/2017 for A.Y. 2012-13.

Ground Nos.1 to 5 in appeal for A.Y. 2007-08 are inter-connected

and are similar to ground Nos.1 to 5 of appeal for A.Y. 2012-13.

We therefore proceed to dispose of the aforesaid grounds.

4.1. On perusal of the Balance-Sheet, AO noticed that assessee had

accrued interest of Rs.1,96,28,483/- on the loans and advances which

were termed as bad debts by the assessee. The aforesaid interest

accrued was not considered by the assessee as income. In response to

the query of the AO as to why the accrued interest of loans and

advances which are termed as bad are not considered as income,

assessee made detailed submissions which were not found acceptable

to the AO. Assessee submitted that it was following the Prudential

Norms on Income Recognition, asset classification as directed by RBI

and it being a Co-operative Bank it has to follow the guidelines of the

RBI. It was further the submission of the assessee that the recognition

of income on NPA account has to be recognized as accrual receipt

basis as per the guidelines of RBI. The submissions of the assessee

were not found acceptable to AO as AO was of the view that RBI

guidelines cannot override the Income Tax Act. AO was further of the

view that provisions of Sec.43D are not applicable to the Co-operative

Banks for the year under consideration and therefore the benefit

cannot be extend to the assessee. He therefore held that the interest

income of Rs.1,96,28,483/- as income of the assessee and made its

addition. Aggrieved by the order of AO, assessee carried the matter

before Ld.CIT(A), who decided the issue in favour of assessee by

observing as under :

“7.3 I have perused the material on record and the submissions made by the Appellant bank carefully. I tend to agree with the contentions of the Appellant bank. I also find that a similar issue has been decided by the Hon’ble ITAT Pune in its order in the case of Western Maharashtra Development Corporation Ltd vs. DCIT (2008) 114 ITJ (Pune) 54 wherein it has elaborately considered a similar situation where recovery on interest on seed money loan given by the Assessee company was extremely low and possibility of recovering these amounts was somewhat remote. In the said case, the Hon'ble ITAT has observed that no doubt there is a legal right to receive the interest but there are also ground realities which do not permit strict enforcement of this right. While holding that such interest even though accrued as per mercantile system of accounting but did not give real income to the Assessee. The Hon'ble ITAT Pune has decided the issue on accrued interest on NPA advances not to be considered as income in favour of the bank in many cases a few of which are mentioned below:

ACIT Vs Osmanabad Janta Sahkari Bank Ltd ITA No. 795/PN/2011 dtd. 31.08.2012.

ACIT Vs Siddheshwar Sahkari Bank Ltd ITA No. 794/PN/2011 dated 31.08.2012

ACIT Vs Devnagari Sahkari Bank Ltd ITA No. 817 & 1114/PN/2011 dtd. 28.09.2012.

ACIT Vs Maharashtra Nagri Sahkari Nanded Bank ITA No.1713/PN/2011 Dated 28.02.2013.

7.4 Though there are diverse views on the issue of interest on NPA accounts of different High courts as in the case of CIT vs Vasisht Chay Vyapar Ltd. 330 ITR 440 wherein the Delhi High Court ruled in favour of the assessee by holding that interest income on NPA is not taxable on accrual basis, the Hon'ble Madras High Court on the other hand in the case of Shakti Finance Ltd. 31 taxmann.com 305 has taken the stand

that interest income on NPA is taxable on accrual basis, however, at present as there are no jurisdictional High Court decisions on this issue and the jurisdictional Bench has ruled in favour of the banks in various cases. Respectfully following the jurisdictional ITAT the action of the AO to tax accrued interest on NPA accounts is not justified in law. The AO is directed to delete the said addition. These Grounds of Appeal Nos.3 and 4 for the both years are allowed.”

Aggrieved by the order of Ld.CIT(A), Revenue is now before us.

other hand, reiterated the submissions made before AO and Ld.CIT(A)

and submitted that the issue in the present case is also covered in

assessee’s favour by the decision of Hon’ble Bombay High Court in the

case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd., (2015) 379 ITR 24 (Bom). He thus supported the order of Ld.CIT(A).

on record. The issue in the present ground is with respect to taxing of

interest accrued on NPAs. We find that the Co-ordinate Bench of the

Tribunal has held that interest on NPAs cannot be said to be accrued

to the assessee and therefore not chargeable to tax. We further find

that Hon’ble Bombay High Court in the case of CIT Vs. Deogiri Nagari

Sahakari Bank Ltd., (2015) 379 ITR 24 (Bom) has held that prudential

norms issued by Reserve Bank of India are applicable to Co-operative

Banks and that interest on sticky advances are not taxable. We

further find that Hon’ble Gujarat High Court in the case of PCIT Vs.

Shri Mahila Seva Sahakari Bank Ltd., (2017) 395 ITR 324 (Guj) after

considering the Reserve Bank of India guidelines, Reserve Bank of

India Act, 1934, Sec.45Q of Non-Banking Companies Prudential

Norms (Reserve Bank) Directions, 1998 & Sec.43D of I.T. Act has held

as under :

“The expression "banking company" has been defined under section 5(c) of the Banking Regulation Act, 1949 to mean any company which

transacts the business of banking in India. Part V of the 1949 Act bears the heading "Application of the Act to co-operative societies". Section 56 thereof provides that the provisions of the Act, as in force for the time being, shall apply to, or in relation to the co-operative societies as they apply to, or in relation to banking companies subject to the modifications stated thereunder. Clause (a) of section 56, provides that throughout the Act, unless the context otherwise requires- references to a "banking company" or "the company" or "such company" shall be construed as references to a "co-operative bank". Section 2(i) of the Reserve Bank of India Act, 1934 provides that" co-operative bank", "co- operative credit society", "director", "primary agricultural credit society", "primary co-operative society" and "primary credit society" shall have the meaning respectively assigned to them in Part V of the 1949 Act. Therefore, the expression "banking company" would take within its sweep a co-operative bank.

Section 45Q of the Reserve Bank of India Act, 1934, is in Chapter III-B of the Act. The provisions of Chapter III-B have an overriding effect qua other enactments to the extent they are inconsistent with the provisions contained therein. In order to reflect a bank's actual financial position in its balance-sheet, the Reserve Bank has introduced prudential norms for income recognition, asset classification and provisioning for advances portfolio of the co-operative banks. The guidelines provided thereunder are mandatory and it is incumbent upon all co-operative banks to follow them.

Income from non-performing assets 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, the interest on non- performing assets on accrual basis.”

The Hon’ble High Court while dismissing the appeal of Revenue

observed as under :

“that in view of the mandate of the Reserve Bank of India Guidelines the assessee could not recognize income from non- performing assets on accrual basis and could book such income only when it was actually received. The benefit claimed by the assessee was not under any provision of the Income-tax Act, 1961. The assessee being bound by the Reserve Bank of India Guidelines which were issued under the provisions of the Reserve Bank of India Act, 1934 had not shown the interest on non-performing assets as income. By virtue of the provisions of section 45Q of the Reserve Bank of India Act, 1934, the provisions of Chapter III thereof had an overriding effect over other laws including the 1961 Act. Therefore, notwithstanding the provisions of section 43D of the 1961 Act, since the provisions of section 45Q of the 1934 Act had an overriding effect vis-a-vis income recognition principles in the Companies Act, 1956, the Assessing Officer was bound to follow the Reserve Bank of India Directions so-far as income recognition was concerned.”

Before us, Revenue has not placed any contrary binding decision

in its support. We therefore find no reason to interfere with the order

of Ld.CIT(A). Thus, all the grounds of Revenue in ITA

No.435/PUN/2017 and grounds 1 to 5 of Revenue’s appeal in ITA

No.436/PUN/2017 are dismissed.

2012-13 i.e., with respect to disallowance of claim of depreciation

of Rs.29,34,750/-.

7.1. On perusing the details, AO noticed that assessee has claimed

depreciation on investments amounting to Rs.29,34,750/-. The

assessee was asked to justify the claim. It was submitted that the

depreciation was claimed on securities held by the Bank under the

Available for Sale (AFS) category which needs to be valued at “Marked

to Market” as per the Prudential Norms issued by the RBI. It was

further submitted that since the securities were held under the

category of AFS, the Bank had worked out the depreciation amount

whenever the market rate is lesser than the acquisition cost and

claimed the amount of depreciation as business expenditure. The

submission of the assessee was not found acceptable to the AO. AO

was of the view that R.B.I guidelines has no role in computation of

income for income tax purpose and further assessee had not made

any actual loss and it was only notional lass based on the rates

prevailing on the last date of Financial Year. He was further of the

view that loss is contingent in nature and cannot be allowed to be set

off of against the taxable income. He accordingly denied the claim of

depreciation. Aggrieved by the order of AO, assessee carried the

matter before Ld.CIT(A), who following the decision of Hon’ble Bombay

High Court in the case of CIT Vs. HDFC Bank Ltd reported in (2014)

368 ITR 377 and the decision of Karnataka High Court in the case of

Karnataka Bank Limited Vs. ACIT reported in 356 ITR 546 decided the

issue in favour of the assessee. Aggrieved by the order of Ld.CIT(A),

Revenue is now in appeal before us.

other hand reiterated the submissions made before AO and Ld.CIT(A)

and further submitted that in view of the decision of Hon’ble Bombay

High Court in the case of HDFC Bank (supra), no interference to the

order of Ld.CIT(A), is called for. He thus supported the order of

Ld.CIT(A).

on record. The issue in the present ground is with respect to

disallowance of claim of depreciation. We find that Ld.CIT(A) while

deciding the issue in favour of assessee had relied on the decision of

Hon’ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd.,

(ITA No.250 of 2012 dt.17.07.2014) which has been reproduced by

CIT(A) under para 10.03 of her order :

“10.3 I have perused the material on record and submission made by the Appellant carefully. I find that this issue is squarely covered in favour of the Appellant in the case of CIT Vs. HDFC Bank Ltd. ITA No. 250 of 2012 dated 10.07.2014 wherein in the decision the Hon’ble Mumbai High Court at paragraph 7 to 12 has stated as under :

Income Tax Officer. Being aggrieved, the Assessee Bank went in appeal to the CIT (Appeals) who took the view that the said investments were rightly valued at the end of the year at cost or market value whichever was lower and the difference arising as a result of this valuation had to be allowed to the Assessee as a loss. The Revenue, being aggrieved by the order of the CIT (Appeals) carried the matter further to the Tribunal who confirmed the order of the CIT (Appeals). In view thereof, the Revenue approached this Court by way of a reference. On these facts, the question of law framed by this Court was as follows :-

"(A) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to deduction on account of depreciation in the value of investments and, consequently, debiting disallowance of Rs.11,82,35,007 ?"

"In our view, the judgment of the Supreme Court in United Commercial Bank's case (1999) 240 ITR 355 squarely applies to the facts of this case.

In fact, the present case before us is on a stronger footing because in the case of United Commercial Bank, the loss was not debited to the profit and loss account whereas in this case, as can be seen from the working at pages 25 and 26 of the paper-book, the loss of Rs.11,82,35,007/- has been debited to the profit and loss account which is reflected as a provision for liability in the balance-sheet and the shares and securities were valued at cost on the assets side.

For the reasons given hereinabove, we answer the above quoted question in the affirmative, i.e. in favour of the assessee-bank and against the Department."

thereby, the Assessee preferred an Appeal to the Tribunal. The Tribunal inter alia held that since the securities on which the depreciation had been claimed on the earlier years had not been identified, the issue was restored to the file of the Assessing Officer for consideration afresh and partly allowed the Appeal. Being aggrieved by the said order, Karnataka Bank Ltd. preferred an Appeal to the Karnataka High Court under section 260A of the Act. After discussing various judgments of the Supreme Court, the Karnataka High Court held as under :-

"From the aforesaid judgments of the apex court, now it is clear that a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. Financial institutions like bank, are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. The RBI Act or the Companies Act do not deal with the permissible deductions or exclusion under the Income Tax Act. For the purpose of the Income Tax Act, if the Assessee has consistently been treating the value of investment for more than two decades the investments as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of account. It is not decisive or conclusive in the matter. For the purpose of the Income Tax Act whichever method is adopted by the assessee, a true picture of the profits and gains, i.e. real income is to be disclosed. For determining the real income, the entries in the balance- sheet is required to be maintained in the statutory form may not be decisive or conclusive. It is open to the Income Tax Officer as well as the assessee to point out true and proper income while submitting the income tax returns. Even if the assessee under some misrepresentation or mistake fails to make an entry in the books of account, although under law, a deduction must be allowed by the Income Tax Officer, the assessee will not lose any right on claiming or will be debarred from being allowed the deduction. Therefore, the approach of the authorities in this regard is contrary to the well settled legal position as declared by the apex court.

In the instant case, the assessee has maintained the accounts in terms of the RBI Regulations and he has shown it as investment. But consistently for more than two decades it has been shown as stock-in-trade and depreciation is claimed and allowed. Therefore, notwithstanding that in the balance-sheet , it is shown as investment, for the purpose of Income Tax Act, it is shown as stock-in-trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the

bank has to take into consideration the market value of the shares. If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance-sheet." (emphasis supplied.)

Before us, Revenue has not placed any contrary binding decision in its

support. In view of the aforesaid facts, we find no reason to interfere

with the order of ld. CIT(A). Thus, ground No.6 of Revenue’s appeal

in ITA No.436/PUN/2017 is dismissed.

Order pronounced on 27th day of March, 2019.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER

पुणे Pune; �दनांक Dated : 27th March, 2019. Yamini

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. CIT(A), Pune-5, Pune. . 4. The Pr.CIT, Pune-4, Pune. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” / DR, ITAT, “B” Pune; 6. गाड� फाईल / Guard file.

आदेशानुसार/ BY ORDER,स

/ / TRUE COPY / / //T// True Copy // व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.