THE DY. CIT,, VIJAYAWADA vs. M/S. THE KRISHNA DISTRICT CO -OPERATIVE CENTRAL BANK LTD,, MACHILIPATNAM

आदेश /O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

These appeals are filed by the revenue against the order of the Commissioner of Income Tax(Appeals) [CIT(A)], Vijayawada vide I.T.A. Nos.106/CIT(A)/VJA/2015-16,105/CIT(A)/VJA/2015-16 dated 29.12.2016 and I.T.A.Nos.20/CIT(A)/VJA/2016-17, 266/CIT(A)/VJA/2016-17 dated 01.02.2018. Cross Objections are filed by the assessee supporting the order of the Ld.CIT(A) for the assessment year (A.Y.) 2011-12 to 2014-15. Since the grounds raised in the appeals are common, these appeals are clubbed, heard together and a common order is being passed for the sake of convenience as under.

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second issue with regard to waiver of penal interest and other interest as per the scheme announced by ACOB and KDCCB is involved for A.Ys 2011- 12, 2012-13, 2013-14 and 2014-15.

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are eligible under the Debt Waiver Scheme. The AO also observed from clarification provided by the Department of Financial Services dated 18.06.2008, para2(ix)(a) of the implementation circular 1/2008 that the lending institutions shall neither claim from the Central Government nor recover from the former the (i) interest in excess of capital, (ii) unpaid interest (iii) penal interest (iv) Legal charges (v) inspection charges and (vi) Miscellaneous charges and all such charges will be borne by the lending institutions. 3.1 As per para 2(vii) of the cited circular No.1/2008 issued by the Department of Financial Services, loans/ amounts actually or prudently written off by the lending institutions are not eligible under the scheme. Lending institutions shall not charge any interest on the eligible amount after 29.02.2008 subject to certain conditions. 3.2. The Board of the assessee vide resolution dated 23.09.2010 has resolved to grant additional relief for other farmers who repaid 75% of the loan by the loan by the time of the announcement of ADWDRS- 2008. 3.3 The AO examined the Circular of RBI in RPCD.CO.RF.BC No.17/07.38.03/2008-09 dated 30.07.2008 on Prudential Norms on Income Recognition, Asset Classification and Provisioning and Capital

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Adequacy and observed the following salient features or important issues which are applicable to State Cooperative Banks and DCCBs as under:  As per clause 2.1 of the circular, as regards the small and marginal farmers eligible for debt waiver, the amount eligible for waiver, pending receipt from the Government of India, may be transferred by the banks to a separate account named "Amount receivable from Government of India under Agricultural Debt Waiver Scheme 2008 and treated as performing asset.  As per clause 2.6 of the circular, on receipt of the final instalment from the Government, the provision made for loss in PV terms may be transferred to the General Reserves below the one.  As per clause 3.3. of the circular, the accounts subject to debt relief would stand classified as standard assets after receipt of the aforesaid Undertaking from the borrowers. Accordingly, such accounts would also attract the prudential provisioning as applicable to standard assets.  As per clause 3.5, the prudential provisions held in respect of the NPA accounts, for which the debt waiver has been granted, may be reckoned for meeting the provisions required on PV basis as well as for the standard assets (pursuant to classification of these loans as standard) and shortfall, if any, may be provided for, Thus, the total provisions held would comprise the provisions required on PV basis, provision for standard assets and excess prudential provisions, if any, towards NPA.  Clause 3.7 speaks of reversal of excess prudential provisions. In case the amount of the prudential NPA provisions held are larger than the aggregate of the provision required on PV (present value) basis and for the standard assets, such excess prudential provision to be reversed to P&L account when the entire outstanding of the borrower stands repaid or the excess provision exceeds the amounts outstanding on account of repayment.  Clause 3.8 speaks of reversal of the provisions made on PV Basis. The provision made on PV basis represents a permanent loss to the bank on account of delayed receipt of cash flows and hence, should not be reversed to the P&L Account. The amount of such provision should, therefore, be carried till the account s finally settled and after receipt of the Government's contribution under the Scheme, the amount should be reversed to the General Reserves below the line.”

From the above circular the AO found, that the provision made for loss in Present Value (PV) in terms, in case of eligible amounts receivable from Government of India has to be transferred to the General Reserves below the line. The amounts were also mainly related to the period during

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which the income of the assessee was deducted as exempt u/s 80P of the Act. The RBI mandates that the loss or expenditure, if any on account of debt waiver or relief should be carried to General Reserves below the line because it is a permanent loss and the assessee did not follow the guidelines of the RBI and charged the expenditure on waiver to P&L account which is in violation of the RBI guidelines on the scheme. The AO further observed in the Balance Sheet that the assessee has enough amounts in provision for standard assets, overdue interest and bad and doubtful debts which are maintained by him below the line for writing off the amounts on debt waiver. The assessee argued before the AO that the expenditure was on account of business expediency but the AO did not accept the contention of the assessee since the AO did not follow the RBI guidelines which stipulate that the expenditure is to be treated as part of standard assets or NPAs. Therefore, held that there is no case for application of section 37(1) of the Act. The AO further observed that the amounts written off mainly related to the period during which the income of the assessee was exempt u/s 80P of the Act. Accordingly, the amount of Rs.1,49,74,780/- was added back to the income.

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other option but to incur the expenditure as per the directive of the Govt. as well as APCOB. In the aforesaid view of the maiter, we hold that the amount of Rs. 3,12,31,869 is allowable as business expenditure. Since the Ld. CIT(A) has already allowed expenditure to the extent of Rs2,26,16,355, the balance amount of Rs. 86,15,145/- is directed to be allowed. This ground is allowed 5. Aggrieved by the order of the Ld.CIT(A), the revenue has filed appeal before the Tribunal. During the appeal hearing, the Ld.DR argued that the assessee has not followed the guidelines of the RBI that the loss or expenditure on account of Debt Waiver, the relief should be carried to the General Reserves below the line, because it is a permanent loss. The assessee’s claim that the debt waiver is a business expenditure is not acceptable. The Ld.DR further submitted that the RBI guidelines stipulate that the expenditure is to be treated as part of standard assets or NPAs. In which case, the provisions relating to the write off of bad debt apply and section 37(1) has no application. Since the assessee failed to carry forward the loss on write off to the General Reserves below the line as prescribed by RBI and the amounts are mainly related to the period during which the income of the assessee was tax exempt, the claim of the assessee u/s 37(1) is not allowable and accordingly requested to confirm the addition made by the AO and set aside the order of the Ld.CIT(A).

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small and marginal farmers but the scheme does not cover the penal interest, other charges and the interest more than the capital. As per the clarification provided by the Department of Financial services dated 18/06/2008,para2(ix)(a) of the implementation circular 1/2008 the lending institutions shall neither claim from the Central Government nor recover from the farmer the excess amount over above the loan covered under waiver scheme such as (i) interest in excess of capital, (ii) unpaid interest (iii) penal interest (iv) Legal charges (v) inspection charges and (vi) Miscellaneous charges and all such charges will borne by the lending institutions. The Board of the assessee also passed resolution dated 23.09.2010 to grant additional relief for other farmers who repaid 75% of the loan by the time of the announcement of ADWDRS-2008. The loss is permanent loss which in not denied by the AO. From the discussion of the AO and the circulars from the Department of Financial Services cited (Supra) it established that the assessee is barred from claiming the loss either from government or from the farmer. Therefore whatever written off is loss but cannot be held as NPA or the standard asset or bad debt. Though the RBI has directed the assessee banking institution to take the loss to the General Reserve it is imperative on assessee to debit the expenditure under

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Profit & Loss account since it is a permanent loss. The Ld.CIT(A) has given a finding that the expenditure is allowable on the ground that the waivers are actual and the written off in the books of the assessee is not disputed and merely because of the RBI guideline suggest the assessee to take it to the General Reserve, the loss cannot be treated as recoverable in future and disallow the same since it is not a capital loss. Therefore, we hold that the assessee is entitled for claiming the loss as a business loss u/s 37(1) of the Act as above and the decision of the coordinate bench of ITAT, Hyderabad in the case of Nizamabad District Co-operative Central Bank Ltd. Vs. ITO, Wd- 2, Hyderabad in ITA No.906/H/2009-10 dated 10.12.2014 is squarely applicable. However the AO observed that the expenditure mainly related to the period in which the income of the assessee was exempt u/s 80P of the Act. But the AO did not give specific finding with regard to the amount of loss written off by the assessee which was exempted u/s 80P of the Act in the earlier years. Similarly, though passing remark was made by the AO With regard to the provision of claim for bad debts and NPA no specific finding was given by the AO/CIT(A) with regard to the actual claim made by the assessee in the earlier years. In a nut shell, the assessee should not claim double deduction under the waiver scheme as well as the exemption

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of the income or bad debt for the same amount in the earlier years. Therefore, this issue needs detailed verification at the end of the AO, hence, we remit the matter back to the file of the AO to allow additional relief of 25% OTS after verifying whether the assessee has claimed the exemption of the same income in the earlier year or made double claim in the earlier years with regard to bad debts or NPA and decide the issue afresh on merits. The AO should give reasonable opportunity to the assessee before deciding the issue and the assessee is directed to furnish the details. Accordingly, the appeal of the revenue on this ground is remitted back to the file of the AO for fresh consideration and this ground is allowed for statistical purpose.

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 DCCB share of 35%/60% of the penal interest and IOD waived as per APCOB debt waiver scheme (Rs.22,58,597)  Bank’s share 50% on the interest waived on overdue fish feed loans (Rs.1,20,47,905)  DCCB share of 35% of the interest waived under APCOB interest relief scheme (Rs.96,78,169) The assessee has charged the expenditure to P&L a/c for the relevant A.Ys. The details of the aggregate expenditure charged by the assessee for the A.Y. 2011-12 to 2014 -15 under the same heads are as under: Assessment Year Amount in Rs. 2011-12 2.39,84,671/- 2012-13 1,41,69,117/- 2013-14 1,92,43,019/- 2014-15 1,30,51,270/- 10. APCOB has introduced additional waiver scheme to provide relief to the farmers applicable for all DCCBs and the assessee also implemented the scheme. As per the scheme, the farmers who are not covered under the ADWDRS-2008, overdue loan installments are eligible for waiver of penal interest on short term, medium term and long term loans and waiver of interest on overdue loans, long term agricultural loans. Similarly the

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assessee also extended waiver scheme to the borrowers of fish feed loans given by PACS and the 50% of the interest waiver to be borne by the PACS and the balance to be borne by the assessee. APCOB has formulated the scheme with an intention to benefit the farmers and the cooperative credit institutions at a different levels to maximize cash inflow by way of recoveries, thereby reducing the NPAs and resulting provisions made and to reduce the further revision in respect of such loans, thereby the credit system would reap the overall benefits of reduction of overdues and NPAs. The assessing officer disallowed the expenditure stating that the assessee did not follow the guidelines of RBI in method of accounting to take such losses to the balance sheet in the general reserves or to take such amounts to profit and loss account below the line. Further the Ld.AO observed that the assessee has been making the provision on bad and doubtful debts/NPA and which have been claimed in the Profit and Loss accounts and which were allowed. All the above amounts written off on account of the waivers and relief schemes, was already provided by way of provisions which are present in the balance sheet of the assessee’s bank. The assessee had enough provisions for bad debts and its reserves in the balance sheet to cover these waivers and relief schemes announced by APCOB. Therefore,

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the assessee’s argument of business expediency was rejected by the AO accordingly disallowed the claims made by the assessee and added back the sums to the total income of the respective Assessment years.

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on account of waivers and relief schemes. The assessee also did not follow the RBI guidelines on prudential norms on income recognition, asset classification and provisioning and capital adequacy which is important circular to implementation of the scheme. The assessee has violated the RBI mandate, that the loss on expenditure on account of debt waiver relief should be carried to the General Reserve below the line because it is a permanent loss. Accordingly, the Ld.DR argued that since the assessee has not followed the RBI guidelines and the assessee had sufficient reserves and NPA, the addition made by the AO required to be upheld and the order of the Ld.CIT(A) to be set aside.

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required principal was never included in the NPA provision and the amounts were never part of bad and doubtful debts. With regard to the penal interest and IOD, the Ld.AR submitted that the issue is squarely covered in favour of the assessee in assessee’s own case for the assessment year 2007-08 and 2008-09 in ITA No.120 & 121/Viz/2013 dated 08.11.2017.

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the books. The Ld.AR also submitted that that all the issues are covered by the order of this Tribunal in ITA No.120& 121/Viz/2013 dated 08.11.2017.Hence no interference is called for in the Ld.CIT(A)’s order.

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“22. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has waived the interest on short term and long term loans given to the farmers. This is evidenced by page no.28 of paper book submitted before us. As per the scheme of waiver 35% of the interest relating to waiver of penal interest and Interest on deposits (IOD) is borne by the assessee. There is no dispute that 35% of the share was borne by the bank relating to IOD and penal interest. This is on repayment of the loans collected along with interest. Waiver of over due interest and the penal interest is an incentive to the borrowers to make them to repay the loan granted by the bank. There is no dispute regarding the genuineness of the waiver. The Ld. A.R. submitted that it is on account of reimbursement given to PACS on complete repayment of loans. The similar issue was considered by the coordinate bench of ITAT, Hyd in Nizamabad Co- operative Society and held the same as allowable. For ready reference, we extract the relevant paragraphs of the coordinate bench of ITAT, Hyderabad in Nizamabad District Co-operative Central Bank Vs. ITO Ward-2, ITQA No.905 & 906/H/2013 which reads as under: 1. Waivers of Penal Interest and IOD as per the APCOB - circulars were explained during the assessment. Our letter dt. 24.12.2009 shows our submission on the issue and reference to our earlier submissions vide our letter dt.15.9.2009. The procedure of waiver amounts passed on to PACSs was also explained. As per the APCOB circulars and our own circulars to PACSs, the PACSs were to collect the dues of loans and interest from small and marginal-farmer-borrowers and the balance of IOD and Penal interest are borne by concerned PACS, concerned DCCB and APCOB in the ratio of 25%, 35% and 40% respectively. It was not out of any earlier provision and laid out wholly and exclusively for business. 2. It was held by the Hon'ble ITAT , Hyderabad A Bench in the case of Nizamabad Dist. Co-op Central Bank Ltd vs. ITO,Ward-2, Hyd (ITA Nos. 905/H/13,906/H/13), the same amount of waiver was held as allowable u/s.37(1). 3. The reimbursement of waivers on penal interest and IOD were explained by way of Circular dt. 7.3.2006 (Copy of the Circular in Telugu is filed in the Material paper Book for AY:2007-08 at page No. 28 and its Translation is enclosed herein as page Nos.61-63, which shows that the impugned waiver was in fact a reimbursement to PACSs by DCCB and APCOB. It got crystallized and quantified only in the relevant previous year and hence the respondent-assessee made the claim for deduction rightly in the relevant previous year, which was duly allowed by the learned CIT- Appeals. 4. The learned AO-Appellant's objection as to the non-allowability of the impugned amount as an expenditure of the relevant previous year as the

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same relates to earlier assessment years is submitted as not correct, as the concept of "prior period expenditure " enunciated in Acc.Std.5 of ICAI defines the same as " expenditure incurred in a preceding year but omitted to be recorded therein", which is not the case here. All waivers or write-offs invariably relate to earlier years and they can't be disallowed on that ground. 5. The nature of the expenditure was such that the same had to be incurred in the relevant previous year only on fulfilment of the conditions laid out in the scheme of waiver. we enclose a translation of our circular no. ADM/penal interest/ 2005/06 dt.7.3.2006 which postulates that a PACS is entitled to get reimbursement of penal interest and IOD, only on its realisation of the overdue loans from farmers in full with principal and interest. as the said conditions were fulfilled in the relevant previous year, we incurred the expenditure also in the same previous year, debited the same and claimed deduction, which is submitted as appropriate. We submitted that as the expenditure for reimbursement of penal interest HOD was laid out /expended irretrievably during the relevant previous year, the same was claimed as expenditure in the previous year and the said claim is in accordance with the language of Sec. 37( 1). 6. There can't be an insistence for claim of expenditure at a different point of time, because we submit that we were instructed by APCOB to implement a waiver scheme, the expenditure was claimed in the relevant previous year only when we irretrievably spent the amount towards reimbursement of penal interest and IOD , in pursuance of the scheme and on fulfilment of the scheme conditions by eligible farmer-borrowers (for a moment, if the APCOB resolves differently, as per any modification in Govt. instructions on waiver, claim of expenditure by us on mere resolution would have been unfair and would have been without actual incurrence of the expenditure.) 7. We rely on "Saurashtra Cement & Chemicals Industries Ltd. vs. CIT"( 213 ITR 523 Guj HC),wherein it was held that even for an assessee following mercantile system of accounting, an expenditure shall be allowed under Sec.37(1) on the actual incurrence of the expenditure on its crystallization . This decision was cited by us before the learned CIT(Appeals) too.

Though the subject expenditure does not fall u/s 36(2) or 36(1)(viia) of the Act, undoubtedly, the same is business loss and the aggregate amount of overdue interest and penal interest and the NPA provision did not exceed the limit for allowing the deduction u/s 36(1)(viia) or 36(1)(vii) of the Act. Since the expenditure is genuine and incurred in the ordinary course of business, we hold that the IOD interest and the penal interest should be allowed as business

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loss and accordingly the appeal of the revenue is dismissed and the order of the Ld. CIT(A) is upheld.

The Ld.CIT(A) also deleted the addition placing reliance on the decision of Nizamabad District Cooperative Central Bank for the A.Ys 2011- 12 and 2013-14 and for the A.Ys 20113-14 and 2014-15 the Ld.CIT(A), Vijayawada relied on the decision of this Tribunal in the assessee’s own case supra. In the instant the waivers are actual and written off in the books of accounts which fact was accepted by the Ld.CIT(A). The claim of the assessee was in all cases the waiver of interest on over due and sticky loans and the assessee submitted that such interest was never claimed as expenditure in the earlier years. Though there was change in the nomenclature the waiver and written off was interest and stated to be admitted as income in the earlier years. The assessee submitted that there was no double claim made by the assessee. The department did not bring any evidence to show that the assessee has made double claims of the deduction. Since facts of the case are identical to the assessee’s own case in appeal No.120&121/Viz/2013 of this tribunal respectfully following the view taken by the coordinate bench of this tribunal we uphold the order of

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the Ld.CIT(A) and dismiss the appeals of the revenue on this grounds for the A.Ys 2011-12 to 2014-15.

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Order pronounced in the open court on 28th November, 2018.

Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 28.11.2018 L.Rama, SPS

आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. निर्ााररती / The Assessee – M/s The Krishna District Co-operative Central Bank Ltd., YSR Sahakar Bhavan, Jagannadhapuram, Machilipatnam 2. राजस्व / The Revenue - Deputy Commissioner of Income Tax, Circle-2(1), Vijayawada 3. The Pr.CIT, Vijayawada 4. The Commissioner of Income Tax(Appeals), Vijayawada 5. धिभागीय प्रधिधिधि, आयकर अपीलीय अधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6. गाडा फ़ाईल / Guard file

आदेशािुसार / BY ORDER // True Copy //

Sr. Private Secretary ITAT, VISAKHAPATNAM