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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
These three appeals filed by the Revenue are directed against the three separate orders all dated 28.02.2024 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)"] pertaining to Assessment Years (“AYs”) 2013-14, 2014-15 and 2015-16 respectively. Since the issue(s) involved are identical, these were heard together and are being disposed of by this common order. ITA No. 800/PUN/2024, AY 2013-14. 2. Briefly stated, the facts of the case are that the assessee is a Co-operative Bank registered under the Maharashtra Co-operative Societies Act, 1960 and engaged in the business of providing banking and credit facilities to its account holders. It is governed under the Banking Regulation Act, 1949. For AY 2013- 14, the assessee e-filed its return of income on 01.10.2023 declaring total income at Rs.3,50,79,049/- and after set off of brought forward losses, the balance taxable income is arrived at Rs. Nil. The return was processed u/s 143(1) of the Income Tax Act, 1961 (the “Act”). Subsequently, the case was selected for scrutiny under CASS and the assessment u/s 143(3) of the Act was completed by the Ld. Assessing Officer (“AO”) on 29.01.2016 assessing total income of the assessee at Rs.7,00,83,018/-. The Pr. CIT-2, Aurangabad observed that the following issues remained to be verified during the course of assessment made u/s 143(3) of the Act : "On verification of balance sheet and profit and loss account it is noticed that the assessee has made the provision on account of overdue interest of Rs.34,94,01,000/-. However, there is no provision of income tax Act under which any provision is allowed as expenses. Therefore, provision for overdue interest is not allowable as expenditure and hence same should have been disallowed."
1 The Ld. Pr. CIT therefore invoked the provisions of section 263 of the Act holding that the impugned assessment is erroneous and prejudicial to the interest of the revenue. Statutory notice u/s 143(2) of the Act was duly issued and served upon the assessee. During the subsequent assessment proceedings, the assessee filed submissions before the Ld. AO which were not found tenable by him. He proceeded to make an addition on account of overdue interest on NPA accounts amounting to Rs.34,94,01,100/- on the ground that this provision is not applicable to the Co-operative Banks and rejected the reliance placed by the assessee on the decision of the Aurangabad Bench of the Hon'ble assessment u/s 143(3) r.w.s.263 of the Act on 30.12.2018 by disallowing the claim of deduction u/s 43D of the Act to the tune of Rs.34,94,01,100/-.
Aggrieved, the assessee filed an appeal before the Ld. CIT(A), vide his order dated 30.12.2018 deleted the addition made by the Ld. AO by recording his findings and observations as under :
"
Observation and Decision: In ground No. 1, the Appellant has contested the order u/s 143(3) r.w.s.263 of the IT Act, 1961 dated 30/12/2018 for the A.Y. 2013-14 of the AO of making an addition of RS. 34,94,01,100/- by disallowing the claim of deduction u/s 43B of the Act. I have carefully considered the submissions made by the Appellant. It is observed that the AO disallowed the provision on account of overdue interest of Rs 34,94,01,100/- as there is no provision of Income Tax Act under which any provision is allowed as expensed. The Hon'ble High Court of Bombay in CIT vs. Deogiri Nagari Sahakari Bank Ltd in 79 taxmann.com 396 (Bombay) [2017] dated 22-01-2015 has held as under:
“8. The Income-tax Appellate Tribunal has referred the case of CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 (TR 440/196 Тахтап 169/[2010] 8 taxmann.com 145 (Delhi). In this case, the Revenue relied upon the decision of the hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra). The learned Income-tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of Southern Technologies Ltd. (supra). The assessee herein being a co-operative bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the co- operative banks. The hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) held that the provisions of section 45Q of the Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, section 45Q of the Reserve Bank of India Act shall have the overriding effect over the income recognition principle followed by co-operative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India Directions, 1998, as held by the hon'ble Supreme Court.
The honourable apex court in the case of UCO Bank's case (supra) had an occasion to consider the nature of the Central Board of Direct Taxes Circular and the hon'ble apex court has thus held that the Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Further, a similar issue was raised about interest accrued on a "sticky" loan which was not recovered by the assessee-bank for the last three years and transferred to the suspense account, would or would not be included in the income of the assessee for the particular assessment year. The hon'ble apex court has observed that: "The method of accounting which is followed by the assessee-bank is the mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues but only when it is realised. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice... The assessee's method of accounting, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice up to the assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier Circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978. The new procedure under the Circular of October 9, 1984, will be applicable for and from the assessment year, 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the Central Board of Direct Taxes's Circular of October 6, 1952 would be applicable; while from the assessment year 1979-80, the Central Board of Direct Taxes's Circular of October 9, 1984 is made applicable. In the present case, the assessment was made on the basis of the Central Board of Direct Taxes's Circular on October 9,1984, since the assessment pertains to the assessment year 1981-82 to which the Circular of October 9, 1984, is applicable If, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officer's 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 of the Income-tax Act. Such a circular is binding under section 119. The Circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a 'sticky' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under 4. Dissatisfied, the Revenue is in appeal before the Tribunal, raising the following solitary ground of appeal : "On the facts and circumstances of the case and in law, the CIT(A), NFAC erred in deleting the addition of Rs.34,94,01,000/- in light of the provisions of section 43D of the Income Tax Act, 1961.”
At the outset, the Ld. AR submitted that the impugned issue is covered in favour of the assessee by the Co-ordinate Bench of the Tribunal in assessee's own case for earlier AYs.2007-08 and 2008-09. The Ld. AR also submitted that the impugned issue stands covered by the decision of the Pune Bench of the Tribunal in the case of Solapur District Central Co-op. Bank Ltd. Vs. ACIT, (2014) in ITA No. 495/PUN/2012, dated 29.09.2014 reported in 152 ITD 335 (Pune-Trib.) and in the case of The Solapur District Central Co- operative Bank Ltd. Vs. ITO in ITA No. 1732/PN/2014, dated 06.05.2016. 6. The Ld. DR relied on the order of the Ld. AO.
We have heard the Ld. Representatives of the parties and perused the material on record. We have also perused the decisions of the Co-ordinate Bench of the Pune Tribunal cited by the Ld. AR and finds that the impugned issue is covered in favour of the assessee in assessee's own case (supra) for AYs.2007-08 and 2008-09. The relevant findings and observations of the Tribunal in the said case are reproduced below :
"
We find that similar issue as before us arose in ITO Vs. Kolhapur Mahila Sahakari Bank Ltd. in ITA No.01/PN/2013, relating to assessment year 2009-10, in ITA No.795/PN/2011, order dated 31. 08.2012, held as under:- "
The assessee is a Co-operative Bank engaged in the business of accepting deposits from members and giving loans to members. It has filed its return of income on 11.09.2009 for the year under consideration declaring total income at ≈ 14,57,840/-. In the scrutiny assessment, the Assessing Officer noticed that the assessee had not credited interest receivable or accrued on non-performing assets (hereinafter referred to as NPA) to its profit and loss account for financial year 2008-09. The Assessing Officer after rejecting the various contentions of the assessee has held that the RBI guidelines are not intended to regulate the income tax law and the assessee was liable to be assessed on accrual basis u/s.5 of I.T. Act for the reasons (i) benefits extended to schedule bank, public financial institutions, public companies for the purpose of section 43D were not extended to a co-operative bank and (ii) the assessee was following mercantile system of accounting and not cash system. Ultimately the Assessing Officer taxed on accrued interest of ₹ 25,20,022/- advance claimed to be NPA account. The matter was carried before the first appellate authority wherein, following the Osmanabad Janta Sahakari Bank Ltd. in ITA No.795/PN/2011, the CIT(A) has decided the issue in favour of the assessee and the same has been opposed before us on behalf of revenue.
1 After going through the rival submissions and material on record, we find that in Osmanabad Janta Sahakari Bank Ltd. (supra) the Tribunal has decided the issue in favour of assessee by observing as under:
"
In the case before us, admittedly, assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit & Loss Account. Moreover, the issue of the taxability of the interest on the sticky losses/advances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Cooperative Urban Bank Ltd., Vijayawada (supra) and Karnavati Cooperative Bank Ltd. (supra). We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue's ground is dismissed." The above decision has been followed in (i) ACIT, Circle-3, Nanded V/s Bhagyalaxmi Mahila Sahakar Bank Ltd. ITA No.793/PN/2011, (ii) ACIT, Circle -3 V/s Sidheshwar Sahakari Bank Ltd. ITA No.794/PN/2011, (iii) ACIT (Central) V/s Latur Urban Co-operative Bank Ltd. ITA No. 792/PN/2011 and (iv) Asst. CIT, Circle -1 V/s Deogiri Nagari Sahakari Bank Ltd. ITA No.817 & 1114/PN/2011."
The Hon'ble Bombay High Court in CIT Vs. M/s. Deogiri Nagari Sahakari Bank Ltd. in Income Tax Appeal No.53 of 2014 & Ors. has laid down the proposition that the interest accrued on NPAs is not taxable in the hands of assessee, in view of the guidelines issued by the RBI.
The issue in ground of appeal No.2 arising before us is identical to the issue before the Hon'ble Bombay High Court in CIT Vs. M/s. Deogiri Nagari Sahakari Assessing Officer to delete the addition of Rs.19,10,80,000/-. The ground of appeal No.2 raised by the assessee is thus, allowed.
The only issue raised by the Revenue is against the assessability of interest on NPAs.
The assessee had made provision on account of interest on the NPAs which were not due, but the same was recognized, in view of mercantile system of accounting being followed by the assessee and the amount was debited to the Profit & Loss Account as per the RBI guidelines.
The issue is identical to the issue in ground of appeal No.2 raised by the assessee in assessment year 2008-09. Following the same parity of reasoning, we dismiss the grounds of appeal raised by the Revenue. The grounds of appeal raised by the Revenue are thus, dismissed.”
1 Also, in the case of Solapur District Central Co-op. Bank Ltd. Vs. ACIT for the AY 2008-09 (supra), the Pune Tribunal decided the impugned issue in favour of the assessee by observing as under :
“4. The first dispute is in terms of Grounds of Appeal No.1 to 3 which relate to an addition of Rs.47,01,85,366/- on account of interest on Non Performing Assets (in short "NPAs”). As noted earlier, assessee is a co-operative bank carrying on banking business in terms of a license issued by Reserve Bank of India (RBI). Therefore, assessee is governed by the Circulars and Guidelines issued by the RBI, in particular relating to Prudential Norms, Income Recognition, Asset Classification, Provisioning and other related matters. In terms of such Prudential Norms of RBI, assessee asserts that it did not recognize interest income on account of NPAs i.e. the loans/advances to customers which have been classified as NPAs following the Prudential Norms of RBI. The pertinent dispute in the Grounds of Appeal No.1 to 3 relates to non-recognition of income of Rs.47,01,85,366/- in respect of advances/loans to customers, which have been classified as NPAs.
The controversy with respect to non-recognition of income on accrual basis Tribunal. Apart therefrom, the Hon'ble Bombay High Court in the case of CIT vs. M/s KEC Holdings Limited vide Incoте Тах Аррeal No.221 of 2012 dated 11.06.2014 has also approved the proposition that the interest income on NPAs is not recognizable on accrual basis. The aforesaid matrix is not challenged by the Revenue also. So however, in the present case, the case setup by the Revenue is that assessee had indeed credited such income in its Profit & Loss Account and there is an equivalent amount of Provision made by the assessee by way of debit in the Profit & Loss Account. In essence, the stand of the Revenue is that the impugned income, though relatable to NPAs, is deemed to have accrued since assessee has credited it in its Profit & Loss Account, and the corresponding debit in the Profit & Loss Account is only a Provision for overdue interest and it is not an allowable deduction.
In the above background, we have considered the rival stands. The assessee has also furnished an affidavit on oath dated 05.10.2013 епиmerating the various factual aspects and in response the Revenue has also furnished its say in terms of written comments dated 18.11.2013 by the Assistant Commissioner of Income Tax, Circle-2, Solapur, the Assessing Officer in this case. Before dwelling on the rival arguments on the objections raised by the Revenue we consider it appropriate to briefly cull out the necessary facts having regard to the orders of the authorities below as well as the material on record.
The assessee is registered as a co-operative society and is carrying on the banking business. For the financial year 2007-08 corresponding to the assessment year under consideration it filed a return of income which was accompanied by, inter-alia, audited Balance-Sheet and Profit & Loss Account. In the consolidated Profit & Loss Account for the financial year under consideration, a copy of which is at page 51 of the Paper Book, on the credit side under the heading 'Interest Received', interest from Society Loan and from Individual Loans have been reflected at Rs.167,02,91,981/- and Rs.13,66,79,692/- respectively. It has been explained that the aforesaid interest income credited in the Profit & Loss Account include Rs.46,30,12,177/- and Rs.71,73,189/- on account of Society Loans and Individual Loans respectively which are relatable to loans/advances to customers classified as NPAs as per RBI norms. Similarly, on the debit side of the Profit & Loss Account under the heading ‘Interest Paid', sums of Rs.46,30,12,177/- and Rs.71,73,189/- are put under sub-headings ‘Overdue interest from Society Loans’and‘Overdue interest from Individual Loans' respectively. Similarly, on the Liabilities side of the Balance-Sheet an entry of Rs.82,81,68,339/- styled as ‘Overdue Interest Reserve'appears. It has been explained that the term Reserve has been mistakenly used and in-fact the said amount reflects a contra entry for Interest Receivable on NPAs, which is appearing on the ‘Assets side' on the Balance-Sheet under the heading ‘Interest Receivable', with sub-headings On Society Loans' and 'On Individual Loans'.
Due to the aforesaid depiction in financial statements, the case of the Revenue is that the interest on NPAs have been credited in the Profit & Loss Account and thus its accrual has been accepted by the assessee; and that the contra entry by way of debit in the Profit & Loss Account is to be understood as a mere Provision and, since a Provision is not an allowable deduction, the amount of Rs.47,01,85,366/- has been added to the total income.
The claim of the assessee is that it is incorrect to say that it has created a Reserve/Provision in respect of the Overdue Interest on NPAs. It is explained that instead of netting of the interest on loans, the bank has shown the gross interest on credit side of the Profit & Loss Account and on the debit side of the Profit & Loss Account the amount of interest on NPAs has been separately shown. It is further pointed out that amount on the debit side of the Profit & Loss Account is not appearing as a Provision. Further, even in the Balance-Sheet, it is pointed out that amount of Rs.82,81,68,339/- on the 'Liabilities' side of the Balance-Sheet does not appear under the head ‘Reserve and Other Funds' but is separately disclosed as ‘Overdue Interest Reserve'. It is also pointed out that the treatment in the financial statement of the assessee would show that it has never created in a Provision or a Reserve in respect of Overdue Interest on NPAs as sought to be made out by the income-tax authorities. In this context, the following averments in the affidavit are relevant :- "
It is respectfully submitted that in the Balance Sheet as on 31/03/2008 [in English copy] on the Liability side there appears an entry for Rs.82,81,68,339.10 styled as Overdue Interest Reserve. The bank submits that the term Reserve is mistakenly used and is erroneous and in fact it is a Contra Entry for Interest Receivable on N.P.A. which is appearing on Asset side of the Balance Sheet under the heading Interest Receivable and sub heading On Society Loans and On Individual Loan. The bank submits that the said amount of Rs.82,81,68,339.10 is not appearing on Liability side of the Balance Sheet under the heading Reserves and Other Funds but is separately disclosed as Overdue Interest. Similarly in the Profit and Loss Account the amount of Rs.47,01,85,366.04 [being the interest on N.P.A. during the year] is not appearing under the heading Provisions but is debited under the heading Interest Paid as overdue interest on loans of Societies and Individuals as a contra entry.
The bank most respectfully submits that a careful and dispassionate study of the final accounts of the bank would reveal that it has never created any provision or reserve in respect of Overdue Interest on N.P.A. as alleged by the tax authorities. The entries as appearing in the Profit and Loss Account and the Balance Sheet for the F.Y. 2007-08 appear to have created some confusion in the minds of the learned Assessing Officer. It is false and incorrect to say that the bank has created a Reserve/ Provision in respect of the overdue interest on N.P.A. which has been treated as Interest accrued in the books of account of the bank for the relevant year.
The bank most respectfully submits that instead of netting of the interest on loans, the bank has shown the gross interest on credit side of the Profit and Loss Account and simultaneously shown on debit side of the Profit and Loss Account the amount of interest on N.P.A. which is in accordance with the Accounting Standard [AS] 9 issued by the I.C.A.I.
The bank most respectfully submits that as on 31/03/2008 it had 214 branches. At the time of preparation of consolidated Profit and Loss Account and Balance Sheet as on 31/03/2008 [the copies of which are filed before the various tax authorities] solely with a view to make a disclosure of Gross Interest that would have been received by the bank, the interest on N.P.A. is disclosed on credit side of the Profit and Loss Account and a contra entry is made on debit side under the head Interest Paid. This accounting treatment does not by any logic convert the interest on N.P.A. in to interest accrued within the meaning of the provisions of the I.T. Act 1961 or cannot be called as recognition of income by the bank.
The interest on N.P.A. advances can never be recognized as income accrued to the bank merely by placing reliance in isolation on the presentation of Profit and Loss Account and dehors of entries in the Balance Sheet which show that the same is simultaneously debited to Interest Receivable on N.P.A. Account [on Asset side] and a contra credit entry is made in Overdue Interest Account [on Liability side]
The bank most respectfully submits that the aforesaid factual position was explained by it to the learned Assessing Officer during the assessment proceedings as well as to the learned C.I.T.[A] during the appellate proceedings. However both the authorities have failed to appreciate the facts in the proper perspective.
The bank most respectfully submits that entries made while presentation of final accounts to the shareholders for better understanding of the various issues shall not convert the true character and nature of income.
Apart therefrom, it has also been pointed out that the gross interest reflected on the credit side of the Profit & Loss Account and the Overdue Interest on NPAs shown on the debit side of the Profit & Loss Account is as per the requirements of section 65 of the Maharashtra Co-operative Societies Act, 1960 which prescribes the manner in which the net profit or loss is required to be computed in the financial statement. It was therefore contended that presentation in the Annual financial statements would not justify the income-tax authorities to treat the claim of the assessee differently than an assessee who would have netted the interest on loans.
We have carefully considered the rival submissions. As noted earlier, the crux of the controversy is with regard to assessee's claim that income with respect to the Interest on NPAs classified as per RBI norms is not assessable on accrual basis but is liable to be taxed as and when received. As per the Revenue, in the present case, assessee has credited gross interest in its Profit & Loss Account which is inclusive of the interest relatable to the NPAs, and crediting of such interest in the Profit & Loss Account shows that assessee has perceived such income to have been accrued, because assessee is following the mercantile system of accounting.
Undisputedly, the assessee bank is following the mercantile system of accounting. However, with regard to the recognition of income on NPAs, it has applied the RBI guidelines which say that such income is not to be recognized on accrual basis but is to be recognized as income only when it is actually received. The RBI guidelines also prescribe the manner in which the interest in relation to NPAs is to be shown in the Annual financial statements. In terms of the Master Circular on Income Recognition, Asset Classification, Provisioning & Other Related Matters issued by the RBI on 4th July, 2004 in chapter 4 of ‘Income Recognition' in para 4.5.1 it is advised that the accrued interest in relation to NPAs should be computed and shown separately, though not accounted as income of the bank for the relevant period. Further, in para 4.5.3, with a view to ensuring uniformity in accounting the accrued interest in respect of both the performing and non- performing assets, the RBI guidelines inter-alia, prescribe that interest accrued in respect of NPAs 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 the ‘Overdue Interest Reserve Account' on the ‘Capital and Liabilities' side of the Balance-Sheet. In-fact, as a preface in para 4.5.3 the RBI has laid down that the aforesaid guideline be adopted notwithstanding the existing provisions in the respective State Co- operative Societies Act. Notably, the Balance-Sheet format prescribed under the Third Schedule to the Banking Regulation Act, 1949 (as applicable to Co-operative Societies) specifically requires the banks to show ‘Overdue Interest Reserve' as a distinct item on the ‘Capital and Liabilities' side of the Balance-Sheet. Thus, it is evident that ‘Overdue Interest Reserve Account' cannot be regarded as a ‘reserve’ or a part of the owned funds of the bank, as it is not created out of the real income received by the bank.
As a compliance to the aforesaid RBI guidelines, we find that the assessee has not debited the interest on NPAs to the accounts of the respective borrowals but it has been shown separately under ‘Interest Receivable Account' on the ‘Property and Assets' side of the Balance-Sheet. and corresponding amount has been shown under ‘Overdue Interest Reserve Account' on the ‘Capital and Liabilities' side of the Balance-Sheet. Thus, the depiction in the Balance-Sheet is in adherence to the prescription contained in the Banking Regulation Act, 1949 (as applicable to Co-operative Societies), a statute under which assessee is bound to carry out its banking business.
Now, we may come to the plea of the Revenue with reference to the depiction of impugned interest on NPAs in the Profit & Loss Account prepared by the assessee. As has been succinctly noted by us in the earlier paras, assessee has credited its Profit & Loss Account with gross interest which, inter-alia, includes the impugned interest on NPAs. On the debit side, assessee has shown the impugned interest on NPAs under the heading ‘Interest paid' and sub-headings ‘Overdue Interest from Society Loans’and ‘Overdue Interest from Individual Loans'. In other words, instead of netting of the interest the two amounts have been shown separately one on the credit side and other on the debit side. The net effect of the said presentation is the same. Therefore, in our view, the lower authorities have misguided themselves in rejecting the claim of the assessee for non-recognition of interest income on NPAs.
In view of the aforesaid, we set-aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs.47,01,85,366/-. Thus, on Grounds of Appeal No.1 and 2 assessee succeeds. The Ground of Appeal No.3 is only an alternative Ground raised, in case assessee does not succeed on Grounds of Appeal No.1 and 2. Since assessee has succeeded on Grounds of Appeal No.1 and 2, Ground of Appeal No.3 is dismissed as infructuous.”
2 Further, in the case of The Solapur District Central Co-operative Bank Ltd. Vs. ITO for the AY 2010-11 (supra), the Pune Tribunal once again decided the impugned issue in favour of the assessee following its decision for earlier AYs 2008-09 and 2009-10 by observing as under :
“8. Since the Tribunal has already decided the issue in favour the assessee by deleting the disallowance of overdue interest on NPA in A.Yrs.2008-09 and 2009- 10, therefore, following the order of the Tribunal in assessee's own case in the preceding 2 years and in absence of any contrary material brought to our notice by the Ld. Departmental Representative against the order of the Tribunal, the order of the CIT(A) on this issue is set aside and the grounds raised by the assessee are allowed."
In the light of the facts and circumstances of the case enumerated above, and respectfully following the decision(s) of the Co-ordinate Bench of the Tribunal (supra) and in the absence of any contrary material/judicial precedent brought on record by the Revenue, we do not find any infirmity in the order of the Ld. CIT(A) and therefore uphold the same. The solitary ground raised by the Revenue is accordingly dismissed.
In the result, the appeal of the Revenue in ITA No. 800/PUN/2024 is dismissed. ITA No. 801/PUN/2024, AY 2014-15. 10. For AY 2014-15, the assessee filed its return of income on 30.11.2014 declaring total income at Rs.6,55,94,650/-. The return was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS. Statutory notice(s) u/s 143(2)/142(1) were issued and duly served upon the assessee. In response thereto, the assessee attended before the Ld. AO and filed submission(s) from time to time. During the course of assessment proceedings, on verification of the balance sheet and profit and loss account, the Ld. AO found that the assessee has made the provision on account of overdue interest at Rs.34,13,94,000/-. Before the Ld. AO, the Ld. AR of the assessee submitted that the assessee is following mercantile system of accounting. However, assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues but in the year in which it is realized. This method of accounting adopted by the assessee is in accordance with accounting practice. Accordingly, the ITAT, Pune Bench has allowed this identical overdue interest provision issue for the AYs 2008-09, 2009-10 and 2011-12 in the case of the assessee itself. The Ld. AO, however, did not accept the above contention of the assessee and completed the assessment on 30.12.2016 by making an addition of Rs.34,13,94,000/- on account of overdue interest disallowing the claim of the assessee u/s 43D of the Act.
1 The Ld. AO also disallowed the provisions made towards robbery amounting to Rs.5,10,000/- and provision made towards fraud amounting to Rs.1,59,83,000/- u/s 37 of the Act observing that these are not legitimate business expenses. Before the Ld. AO, the Ld. AR for the assessee made the following submission in respect of the impugned issue, which were not accepted by the Ld. AO : "Robbery: There was robbery to the tune of Rs.5,10,000/- for which FIR is lodged. Copy of the FIR is enclosed herewith for your reference. Hence, provision for this is made in the books of accounts. Fraud: There were various types of frauds done by bank officials to the tune of Rs.5,92,66,764/- out of this amount Rs.1,33,79,075/- was recovered by the Bank. Bank has lodged FIR against the persons involved in the fraud cases on various dates. I have enclosed herewith list of frauds done by ban employees.
Hence following prudence policy, assessee has made provision for the same".
2 The Ld. AO further observed that the assessee has written off IT refund receivable amounting to Rs.22,17,000/- which is not allowable as per provisions of section 40(a)(ii) of the Act. He, therefore, made an addition of Rs.1,87,10,000/- (Rs.22,17,000/- + Rs.5,10,000/- +Rs.1,59,83,000/-) to the total income of the assessee.
3 Thus, the Ld. AO completed the assessment on 30.12.2016 u/s 143(3) of the Act at total income of Rs.42,56,98,650/- by making an addition on account of overdue interest on NPA amounting to Rs.34,13,94,000/- and addition on account of disallowance of expenses towards robbery and fraud provisions and IT refund receivable amounting to Rs.1,87,10,000/- to the income of Rs.6,55,94,650/- returned by the assessee.
Aggrieved, the assessee went in appeal before the Ld. CIT(A) who deleted both the above additions made by the Ld. AO on account of overdue interest on NPA amounting to Rs.34,13,94,000/- u/s 43D and disallowance of expenses u/s 37 towards robbery and fraud provisions amounting to Rs.1,64,93,000/-. The relevant findings and observations of the Ld. CIT(A) are reproduced below :
"
Observation and Decision: In ground No. 1, the Appellant has contested the order u/s 143(3) of the IT Act, 1961 dated_30/12/2016 for the A.Y. 2014-15 of the AO of making an addition of Rs.34,13,94,000/-by disallowing the claim of deduction u/s 43B of Act. I have carefully considered the submissions made by the Appellant. It is observed that the AO disallowed the provision on account of overdue interest of Rs 34,13,94,000/- as there is no provision of Income tax under which any provision is allowed as expenses. The Hon'ble High Court of Bombay in CIT vs. Deogiri Nagari Sahakari Bank Ltd in 79 taxmann.com 396 (Bombay) [2017] dated 22-01-2015 has held as under:
"
The Income-tax Appellate Tribunal has referred the case of CIT ν. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440/196 Taхтап 169/[2010] 8 taxmann.com 145 (Delhi). In this case, the Revenue relied upon the decision of the hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra). The learned Income-tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of Southern Technologies Ltd. (supra). The assessee herein being a co- operative bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the co-operative banks. The hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) held that the provisions of section 45Q of the Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, section 45Q of the Reserve Bank of India Act shall have the overriding effect over the income recognition principle followed by co-operative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India Directions, 1998, as held by the hon'ble Supreme Court.
The honourable apex court in the case of UCO Bank's case (supra) had an occasion to consider the nature of the Central Board of Direct Taxes Circular and the hon'ble apex court has thus held that the Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Further, a similar issue was raised about interest accrued on a "sticky" loan which was not recovered by the assessee-bank for the last three years and transferred to the suspense account, would or would not be included in the income of the assessee for the particular assessment year. The hon'ble apex court has observed that: "The method of accounting which is followed by the assessee-bank is the mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues but only when it is realised. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice... The assessee's method of accounting, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice up to the assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier Circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978. The new procedure under the Circular of October 9, 1984, will be applicable for and from the assessment year, 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the Central Board of Direct Taxes's Circular of October 6, 1952 would be applicable; while from the assessment year 1979-80, the Central Board of Direct Taxes's Circular of October 9, 1984 is made applicable. In the present case, the assessment was made on the basis of the Central Board of Direct Taxes's Circular on October 9,1984, since the assessment pertains to the assessment year 1981-82 to which the Circular of October 9, 1984, is applicable If, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officer's 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 of the Income- tax Act. Such a circular is binding under section 119. The Circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a 'sticky' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The Circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or 'sticky' loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. There is no inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the department The relevant circulars of Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act."
The learned counsel for the respondent has placed reliance in a case of Mercantile Bank Ltd. v. CIT [2006] 283 ITR 84/153 Taxman 97 (SC), where similar question was raised before the apex court. The question was whether the assessee is liable to be taxed under the Income-tax Act, 1961, in respect of the interest on doubtful advances credited to the interest suspense account. In this case, UCO Bank's case (supra) was also referred and the hon'ble apex court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent co-operative banks, as understood by section 43C of the Income-tax Act on the scheduled bank.
Learned counsel for the appellants-Revenue placed reliance on the judgment in the case of Southern Technologies Ltd. (supra). However, this judgment pertains to non-banking financial companies. UCO Bank's case (supra) and Mercantile Bank Ltd. (supra) case squarely applies to the facts of the present case and issues involved. We, therefore, do not find it necessary to interfere in the judgment of the Appellate Tribunal. We hold that no substantial question of law arises in these appeals. In view of the Judgement of the Juri ictional High Court, the addition made by the AO is hereby deleted. This ground is allowed.”
Dissatisfied, the Revenue is in appeal before the Tribunal raising the following grounds of appeal :
"
On the facts and circumstances of the case and in law, the CIT(A), NFAC erred in deleting the addition of Rs.34,13,94,000/- in light of the provisions of section 43D of the Income Tax Act, 1961. 02. On the facts of the case and in the circumstances, Ld. CIT(A) has erred in considering the amount of Rs.1,64,93,000/- as ascertained liability ignoring the fact that the same were previous years losses and thus not allowable in A. Y. under consideration.
The Ld. AR and Ld. DR both conceded that the first issue relating to the addition made by the Ld. AO and deleted by the Ld. CIT(A) on account of overdue interest is covered by the decision of the Co-ordinate Bench of the Pune Tribunal in assessee's own case for earlier years and also other decisions on the impugned issue cited above.
1 As regards the second issue relating to disallowance of robbery and fraud provisions, the Ld. DR submitted that the Ld. CIT(A) has passed a very sketchy order on this issue and simply deleted the addition made by the Ld. AO for the reason that the said provisions are not contingent but based on ascertained liabilities without carrying out any verification. The Ld. CIT(A) has therefore erred in considering the amount of Rs.1,64,93,000/- as ascertained liabilities ignoring the fact that the same were previous year losses and thus not allowable in the year under consideration.
2 The Ld. AR supported the order of the Ld. CIT(A) and reiterated the submissions made before him and submitted the fraud has been made by the employees of the assessee's bank due to which the bank has suffered loss which has impacted the profit of the bank and therefore the same is an allowable expenses u/s 37 of the Act. He submitted that the assessee had filed FIR against all the employees involved in the fraud and the copies of the same were produced before the Ld. AO. On specifically being asked by the Bench as to when the alleged fraud took place, the Ld. AR submitted that the fraud has taken place from 1986 to 2013. 14. We have heard the Ld. Representatives of the parties and perused the material on record. So far as the first issue relating to claim of deduction u/s 43D of the Act on account of overdue interest is concerned, perusal of the record reveals that the impugned issue is squarely covered by the decision of the Co-ordinate Bench of the Tribunal in assessee's own case for AYs 2008-09, 2009-10 and 2011-12. The claim of the assessee also finds support from the decision(s) of the Pune Bench of the Tribunal in the case of Solapur District Central Co-op. Bank Ltd. (supra). Respectfully following these decisions and in the light of our observations and findings in ITA No. 800/PUN/2024, we hereby dismissed the ground No. 1 raised by the Revenue.
1 On the issue pertaining to the robbery and fraud provisions disallowed u/s 37 of the Act by the Ld. AO and allowed by the Ld. CIT(A) on appeal by the assessee, we notice that the Ld. CIT(A) has deleted the addition made on this account for the reasons reproduced above. Before the Ld. CIT(A), the assessee submitted that it had filed FIR against all the employees involved in the fraud and amount of fraud is shown as receivable from the employee in the books of account, however, due to remote possibility of receiving back of the same, the bank made the provision of the fraud amount in the books of account. The Ld. Counsel for the assessee before us has submitted that the fraud has taken place from the year 1986 to 2013. However, we notice that there is no finding by the Ld. CIT(A) or the Ld. AO as to when the fraud took place. In this view of the matter, we deem it fit to set aside the order of the Ld. CIT(A) on this issue and restore this issue back to the file of the Ld. AO with a direction to give a finding with respect to the above claim of the assessee and modify the assessment accordingly as a result of such finding after allowing due opportunity of hearing to the assessee. The assessee shall provide the requisite support in terms of submitting the relevant details/documentary evidence/submissions as may be required/called upon on the appointed date, failing which the Ld. AO shall be at liberty to pass appropriate order as per law. We direct and order accordingly. Thus, ground No. 2 raised by the Revenue is allowed for statistical purposes.
In the result, the appeal of the Revenue in ITA No. 801/PUN/2024 is partly allowed for statistical purposes. ITA No. 802/PUN/2024, AY 2015-16. 16. For AY 2015-16, the assessee filed its return of income on 31.10.2015 declaring total income at Rs.12,29,16,320/-. The return was processed u/s 143(1) of the Act. Subsequently, the case was selected for Compulsory Scrutiny on the basis of parameter ata Para 1(i) of the Manual Compulsory Guidelines of CBDT issued vide instruction No. 04/2016 dated 13.07.2016. Accordingly, statutory notice(s) u/s 143(2)/142(1) were issued and duly served upon the assessee. In response thereto, the assessee's authorized representative attended the proceedings before the Ld. AO and made written submissions before him from time to time. The Ld. AO after due verification of the information/material available on record and books of account of the assessee made an addition of Rs.12,86,33,000/- on account of overdue interest for the same reasons stated in ITA No. 800/PUN/2024 mentioned above. He rejected the submission of the assessee that this identical overdue interest provision issue has been decided by the Pune Bench of the Tribunal in favour in assessee's own case for AYs 2008-09, 2009-10 and 2011-12 and the decision of the Aurangabad Bench of the Hon'ble Bombay High Court in the fraud holding them to be non-business activity of the bank. He observed that the amount of Rs.1,80,35,500/- is only provision and not expense and hence the same is not allowable under the provisions of section 37 of the Act.
2 The Ld. AO on verification of profit and loss account of the assessee further found that the assessee has debited an amount of Rs.9,18,37,907/- on RBI penal interest and issued a show cause to the assessee as to why the same should not be disallowed being penal in nature as per the provisions of section 37 of the Act. In response, the assessee submitted that the instance is first instance of levy of penal interest by RBI and relied on the decision in the case of Dhanlaxmi Bank Ltd. rendered by the Cochin Bench of the Tribunal. The reply of the assessee was not found acceptable by the Ld. AO. Placing reliance on the decision of the Hon'ble Kerala High Court in the case of DCIT Vs. Dhanlaxmi Bank Ltd. (2002) 76 TTJ 439 (Coah), the Ld. AO rejected the above submission of the assessee. The Ld. AO further observed that the profit and loss account of the assessee clearly shows that the penal interest has been charged upon the assessee bank in the previous years and the same penalty has also been levied upon the assessee by RBI in AY 2012-13 and other
assessment years and therefore held that penal interest is not allowable as a deduction not being first instance of penalty. He also noticed that the RBI has rejected the application of the assessee dated 16.07.2014 for waiver of the penalty, which clearly ascertain/affirm that there was clear and repeated infraction of law and therefore the nature of interest is clearly penal. He, therefore, made an addition of Rs.9,18,37,907/- on account of disallowance of penal interest u/s 37(1) of the Act.
3 The Ld. AO accordingly completed the assessment u/s 143(3) of the Act for AY 2015-16 vide his order dated 28.12.2017 by making the above three additions with respect to (i) overdue interest of Rs.12,86,33,000/-; (ii) fraud provision of Rs.1,80,35,500/- and (iii) RBI penal interest of Rs.9,18,37,907/- to the income retuned by the assessee.
Aggrieved, the assessee filed appeal before the Ld. CIT(A) challenging the above addition(s) made by the Ld. AO. The Ld. CIT(A) deleted the addition made by the Ld. AO on account of overdue interest in view of the Aurangabad Bench of the Hon'ble Bombay High Court in the case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd. (supra). So far as the second issue relating to disallowance of fraud provision u/s 37 of the Act, the Ld. CIT(A) directed the Ld. AO to allow the deduction / expense observing that the said provisions are not contingent but based on ascertained liabilities.
1 On the issue relating to third addition made by the Ld. AO amounting to Rs.9,18,37,907/- on account of penal interest charged by the RBI for non- maintenance of CRR/SLR, the assessee submitted before the Ld. CIT(A) that this issue is covered in favour of the assessee for AY 2012-13 in assessee's own case. The Ld. CIT(A) observed that the Ld. AO has made this addition relying on the decision of the Hon'ble Kerala High Court in the case of DCIT Vs. Dhanlaxmi Bank Ltd. (supra), however, the impugned issue is covered by the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Bank of Baroda in ITA No. 4169 of 2009 in favour of the assessee and therefore allowed the claim of the assessee by observing as under: “In ground No. 3, the Appellant has contested the action of the AO in adding an amount of Rs 9,18,37,907/- on account of RBI Penal Interest. The AO relied in the Judgment of the Hon'ble Kerala High Court in the case of DCIT vs. Dhanlaxmi Bank Ltd [2002] 76 TTJ 439 (COAH). This issue is covered by the Judgment of the Juri ictional Hon'ble Bombay High Court in the case of CIT vs. Bank of Baroda [ITA No. 4169 of 2009, dated 15-02-201] wherein it has been held that : "The only question raised by the revenue in this appeal is, whether the interest paid by the assessee for non maintenance of the cash reserve ratio / statutory liquidity ratio as per Section 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of DCIT v/s. Dhanalakshmi Bank Lt. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (Supra) has been dismissed by the Apex Court as reported in [2005] 277 I.T.R. (ST)
In view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs. In view of the decision of the Juri ictional High Court, the addition made by the AO is hereby deleted. This ground is allowed.”
Dissatisfied, the Revenue is in appeal before the Tribunal raising the following grounds of appeal :- “01. On the facts and circumstances of the case and in law, the CIT(A), NFAC erred in deleting the addition of Rs.12,66,63,300/- in light of the provisions of section 43D of the Income Tax Act, 1961. 02. On the facts of the case and in the circumstances, Ld. CIT(A) has erred in considering the amount of Rs.1,80,35,500/- as ascertained liability ignoring the fact that the same were previous years losses and thus not allowable in A.Y. under consideration.
On the facts of the case and in the circumstances Ld. CIT(A) has erred in ignoring the fact that the penal interest charged by the RBI was for the subsequent default and thus was a penalty.”
The Ld. DR strongly supported the order of the Ld. AO and submitted that the penal interest was charged by the RBI for the subsequent default of the assessee and not the first instance of default as claimed by the Ld. AR and therefore it partakes the nature of penalty.
The Ld. AR, on the other hand, supported the order of the Ld. CIT(A). He advanced similar arguments mentioned in preceding paragraphs with respect to first two additions deleted by the Ld. CITA) pertaining to overdue interest and fraud provision.
1 As regards third addition relating to RBI penal interest, the ld. AR reiterated the above submissions which were made before the Ld. CIT(A). Referring to page 75 of the paper book, the Ld. AR submitted that the Reserve Bank of India levied the penalty u/s 24(8) of the Banking Regulation Act for default in maintenance of the SLR and CRR. This default was due to liquidity problems in bank between the period June 2011 to June 2013. During this period, Directors Board was dissolved by the Government and Administrator was appointed. Levy of interest due to default in maintaining SLR/CRR in banking parlance, it is additional interest termed as 'penal interest'. The said interest is compensatory in nature and not the penalty levied due to infraction of law.
2 The Ld. AR further submitted that the impugned issue is covered in favour of the assessee in its own case for AY 2012-13 in ACIT Vs. The Beed District Central Co-operative Bank Ltd., ITA No. 2987/PUN/2016, dated 09.09.2020 wherein the Tribunal dismissed the appeal of the Revenue and appeal(s) for AY 2013-14 and AY 2014-15 and therefore our finding therein will mutatis mutandis apply to the present appeal for AY 2015-16.
1 So far as the issue relating to RBI penal interest is concerned, we find that the Co-ordinate Bench of the Pune Tribunal in assessee's own case for AY 2012-13 has decided the impugned issue in favour of the assessee dismissing
the appeal filed by the Revenue and observing as under :
"
Against the order passed by the Assessing Officer u/s 143(3) of the Act, an appeal was preferred by the assessee before Ld. CIT(A), who entertained the claim of the assessee inter-alia, for deduction on account of penal interest charged by RBI for nonmaintenance of SLR and CRR and also allowed the same on merit for the following reasons given in paragraph Nos.9 and 10 of his impugned order. "
Sub-ground of Ground No.4 states that deduction of penal interest for nonmaintenance of a SLR and CRR paid to the RBI should be allowed as a deduction. The claim for deduction of this amount was made in the revised return filed on 25/02/2015 and the assessing officer had not considered the claim because the revised return was filed beyond the due date. During the course of appellate proceedings the assessee stated that this issue is covered in the favour of the assessee by the decision of the Hon'ble ITAT, Mumbai, Bench 'H' in the case of Bank of America, N.A. Vs. JCIT, Special Range32 for the assessment year 1997-98 in ITA No.4408/Mum/2000 dated 27/11/2013. In the aforesaid decision it has been held as under :
“7. Ground No.7 and 8 are regarding disallowance in respect of amount paid to RBI for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR). The AO disallowed a sum of Rs.3,74,704/- paid to RBI for shortfall in maintenance of CRR as well as an amount of Rs.9,30,377/- paid to RBI for not complying with the SLR requirements. These disallowances were made by AO on the ground that the payments are infraction of law and therefore, cannot be allowed u/s.36(1). The Id. CIT(A) has confirmed the disallowance made by Assessing Officer.
1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has submitted that this issue has been considered and decided by the Tribunal in Assessee's own case for the assessment year 1992-93 in ITA No.141/Bom/96_in favour of assessee. He has further submitted that an identical issue has been decided by the Hon'ble Juri ictional High Court in case of Bank of Baroda vide order dated 15.02.2011 in Income Tax appeal No.4169 of 2009. On the other hand the ld. DR has relied upon the orders of authorities below.
2 Having considered the rival submissions and careful perusal of record we note that this issue is covered by the decision of Hon'ble (supra), wherein the Hon'ble High Court has held as under :- "The only question raised by the revenue in this appeal is whether the interest paid by the assessee for non- maintenance of the cash reserve ratio / statutory liquidity ratio as per Section 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of DCIT_V/s Dhanalakshmi Bank Ltd. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 ITR (ST)
In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs."
3 Following the decision of the Hon'ble High Court we decide this issue in favour of the Assessee and against the Revenue."
Thus the decision in the case of Bank of America, N.A. (supra) is a direct decision on this issue and the Hon'ble Tribunal in that case had relied on the decision given by the Hon'ble juri ictional High Court in the case of Bank of Baroda vide order dated 15.02.2011 in Income Tax appeal No.4169 of 2009. Respectfully following the above decision I hold that amount paid to the RBI u/s.24 of the Banking Regulation Act for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR) is not a penalty which is required to be disallowed u/s.37 of the Act as the same is not a penalty for infraction of law. Accordingly, I direct the assessing officer to allow the claim of the assessee in respect of the amounts paid for shortfall in maintenance of CRR and SLR to the RBI is a legitimate business expenditure. This sub-ground of ground No.4 is allowed.
2 Also, in the case of CIT Vs. Bank of Baroda (supra) the Hon'ble Bombay High Court dismissed the appeal filed by the Revenue by observing as under :
"
The only question raised by the revenue in this appeal is, whether the interest paid by the assessee for non maintainance of the cash reserve ratio/statutory liquidity ratio as per Section 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of DCIT V/s. Dhanalakshmi Bank Ltd. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 I.T.R. (ST)
In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs."
3 We have also perused the order in the case of The Central Bank of India Vs. DCIT (supra) wherein the Hon'ble Bombay High Court relying on the decision in the case of CIT Vs. Bank of Baroda (supra) decided the assessee's appeal in its favour. The relevant findings and observations of the Hon'ble High Court is as under :
“4. The Appellant is a Scheduled Nationalised Bank. In the return of income for the assessment year 1990-91, the Appellant claimed the deduction of Rs.31164211 and Rs.6025430. The Appellant claimed these amounts in light of the interest charged by the Reserve Bank of India (RBI) under Section 42(3) of the R.B.I. Act. The Assessing Officer disallowed this deduction. The Appellant filed an appeal before the Commissioner of Incoте Тах (Аррeals), which was dismissed. Thereafter, the Appellant filed an appeal before the Income Tax Appellate Tribunal which was dismissed by the impugned order.
The Tribunal dismissed the Appeal observing thus:
"
We have carefully considered the rival submissions and perused the record. As per the A/R, on the CRR maintained by the assessee, interest is receivable @3% per annum whereas when there is a failure to maintain the CRR, the assessee is liable to pay penal interest @3% above the bank rate in respect of that fortnight and the rate of penal interest increases for every subsequent default. The penal interest charged by the R.B.I. as could be seen from page 3 of CIT (A)'s Order, would also show that it cannot, by any stretch of imagination be considered as a compensatory levy. The fact that the persons incharge and responsible for such an offence of non- maintenance of CRR ratio are liable to be punished, would also clearly go to prove that the interest charged u/s.42(3) was never intended 10 be compensatory in nature. Since these aspects were not properly appreciated by the ITAT in the aforesaid decisions, we respectfully differ from the view taken by the ITAT, Bangalore Benches and hold that the interest charged in the instant case is not allowable as deduction being penal in nature. The learned CIT (A) having given detailed reasons in coming to the conclusion that the interest is not compensatory in nature, we see no reason to interfere with his order."
The learned Counsel for the parties have placed before us the decision of this Court in the case of The Commissioner of Income Tax-2 vs. Bank of Baroda' wherein the Division Bench dismissed the Appeal filed by the Revenue by observing thus: "The only question raised by the revenue in this appeal is, whether the interest paid by the assessee for non-maintainance of the cash reserve ratio/statutory liquidity ratio as per Section 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of DCIT V/s. Dhanalakshmi Bank Ltd. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 I.T.R. (ST)
In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs."
In the light of the decision rendered in the case of Bank of Baroda as reproduced above, the question framed will have to be answered in favour of the Appellant and is accordingly, so answered in favour of the Appellant.”
4 Respectfully following the decisions (supra) of the Hon'ble Juri ictional Bombay High Court and also the decision of the Co-ordinate Bench of the Pune Tribunal in assessee's own case (supra) and in the absence of any contrary material / judicial precedent brought on record by the Revenue, we do not find any infirmity in the order of the Ld. CIT(A) on the impugned issue and accordingly dismiss the ground No. 3 raised by the Revenue.
In the result, the appeal of the Revenue in ITA No. 802/PUN/2024 is partly allowed for statistical purposes.
To sum up, the appeal by the Revenue in ITA No. 800/PUN/2024 is dismissed and the appeals by the Revenue in ITA Nos.801 & 802/PUN/2024 are partly allowed for statistical purposes. Order pronounced in the open court on 21st February, 2025. (R.K. Panda) VICE PRESIDENT (Astha Chandra) JUDICIAL MEMBER पुणे / Pune; दिनांक / Dated : 21st February, 2025. रवि आदेश की प्रतिलिपि अग्रेषित /