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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI SANDEEP GOSAIN, JM
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI SANDEEP GOSAIN, JM I.T.A. No.2874/Mum/2016 (Assessment Year: 2010-11) Dy. CIT-1(3)(2), M/s. Mahanagar Co-operative Bank Room NO. 540, 5th Floor, Limited (the successor entity of M/s. Aayakar Bhavan, M. K. Road, Vs. Agrasen Urban Co-op. Bank Ltd. Mumbai-400 020 1040, Raviwar Peth, Hamja Khan Chowk, Laxmi Road,Pune-411 002 PAN/GIR No. AABTA 2487 N (Appellant) : (Respondent) : Shri Pramod Nikalje Appellant by : Shri Suhas Bora Respondent by Date of Hearing : 19.09.2018 Date of Pronouncement : 03.10.2018 O R D E R Per Shamim Yahya, A. M.: This appeal by the Revenue is directed against the order by the learned
Commissioner of Income Tax (Appeals), Pune-5, (‘ld.CIT(A) for short) dated
25.01.2016 and pertains to the assessment year (A.Y.) 2010-11.
The grounds of appeal read as under:
“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs.6,94,21,449/- on account of accrued interest on Non Performing Assets, made by the Assessing Officer in the assessment order u/s. 143(3). 2. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs.5,48,611/- on account of claim of amortization of premium on investment in Govt. securities in the category of held to maturity.”
Apropos ground no.1: 3. The Assessing Officer (A.O. for short) on this issue made an addition of
Rs.6,94,21,449/- on account of interest accrued on non performing assets (NPA) on
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the ground that the interest on bad and doubtful debts/assets are to be recognized in
view of the provision of section 145 and 43D of the Income Tax Act, 1961 (‘the Act'
for short).
Upon the assessee’s appeal, the ld. CIT(A) deleted the addition referring to the
ITAT decision in the assessee’s own case and a catena of other decisions from the
Hon’ble High Courts.
Against this order, the Revenue is in appeal before us.
We have heard both the counsel and perused the records. Upon careful
consideration, we note that this issue now is squarely covered in favour of the
assessee vide several decisions of the Hon’ble High Courts including that of the
Hon'ble jurisdictional High Court in the case CIT vs. M/s. Deogiri Nagari Sahakari
Bank Ltd. and others (in ITA No. 54 of 2014 and others vide order dated 22.01.2015),
the Hon’ble High Court has elaborately considered the same issue and held as under:
The Income Tax Appellate Tribunal has reffered the case of M/s. Vasisth Chay Vyapar Limited 330 ITR 440(Delhi). In this case, the reven ue relied upon the decision of the Hon'ble Supreme Court in the case of SouthernTechnologies Ltd. supra. The learned Income Tax AppellateTribunal has reproduced the observations made by the DelhiHigh Court while referring the said case of M/s SouthernTechnologies Limited supra. The assessee herein being a Co operativeBank also governed by the Reserve Bank of Indiaand thus the directions with regard to the prudential normsissued by the Reserve Bank of India are equall y applicable to the Cooperative banks. The Hon'ble Supreme Court in the case ofSouthern Technologies Limited supra held that, provisions of Section 45Q of Reserve Bank of India Act has an overriding effect visavis income recognition principle under the Companies Act. Hence, Section 45Q of the RBIAct shall have overriding effect over the income re cognition principle followed by cooperative banks. Hence, the
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Assessing Officer has to follow the Reserve Bank of Indiadirections 1998, as held by the Hon'ble Supreme Court. 10. The Honourable Apex Court in the case of Uco Bank case (supra) had an occasion to consider the nature ofCBDT circular and Ho n'ble Apex Court has thus held thatBoard has power, inter alia, to tone down the ri gour of the law and ensure a fair enforcement of its provisions, byissuing circular in exercise of its statutory powers undersection 119 of act which are binding on the authorities in theadministration of the Act, it is a beneficial pow er given to theBoard for proper administration of fiscal law so that unduehardship may not be caused to the assessee and the fiscal bay High Court 7 ITA NOS.53, 54, 57, 58, 68.2014.odt Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court.
10.The Honourable Apex Court in the case of UcoBank case (supra) had an occasi on to consider the nature ofCBDT circular and Hon'ble Apex Court has thus held t hat 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 undersection 119 of act which ar e binding on the authorities in theadministration of the Act, it is a beneficial power given to theBoard for proper administration of fiscal law so that unduehardship m ay not be caused to the assessee and the fiscallaws may be correctly applied. Furth er a similar issue was raised about interest accrued on a ‘sticky’ loan which was not recovered by the assesseebank for the last three yearsand transferred to the sus pense account, would or would notbe included in the income of the assessee for th e particular assessment year. Hon'ble Apex Court has observed that : “The method of accounting which is followed by the assesseebank is 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 realized. 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 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 6-10-1952, as the said circular was withdrawn only in June,1978. The new procedure under the Circular of 9-10-1984 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 CBDT’s Circular of 6-10-1952 would be applicable; while from the assessment year 1979-80, the CBDT’s Circular of 9- 10-1984 is made applicable. In the present case, the assessment was made on the basis of the CBDT’s Circular on 9- 10-1984, since the assessment pertains to the assessment year 1981-82 to which the Circular of 9- 10-1984 is applicable. If, the Board has considered it necessary to lay down a
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general test for deciding what is a doubtful debt, and directed that all Assessing 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 traveling 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 9-10-1984, therefore, provides a test for recognizing 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 P&L a/c 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 9-10-1984, 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 CBDT cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is
5 ITA No.2874/Mum/2016
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.” 11.The learned counsel for respondent has placedreliance in a case of Mercantile Bank Ltd., Bombay Vs. The Commissioner of Income Tax, Bombay City- III reported in (2006) 5 SCC 221, where similar question was raised before the Apex Court. The question was whether the assessee isliable to be taxed under I ncome Tax Act, 1961 in respect ofthe interest on doubtful advances credited to th interest suspense account. In this case, the 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 43 C of the Income Tax Act on the Scheduled Bank. 12. Learned counsel for the appellants/revenue placed reliance on the judgment in the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, Coimbtore reported in 2010 (2) SCC 548. However,this judgment pertains to non Banking financial companies.Uco Bank case (supra) and Mercantile Bank (su pra) casesquarely applies to the facts of the present case and issuesinvolved. We t herefore, do not find it necessary to interferein the judgment of the Appellate Trib unal. We hold that no substantial question of law arises in these appeals. 7. Since the identical issue has been decided by the Hon'ble jurisdictional High
Court in favour of the assessee, we do not find any infirmity in the order of the ld.
CIT(A), accordingly, we uphold the same.
Apropos ground no. 2:
On this issue, the A.O. had made the addition of Rs.5,48,611/- on account of
amortization of premium on investment in Government Securities in the category of
held to maturity.
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Upon the assessee’s appeal, the ld. CIT(A) referred to the order of the ITAT in
assessee’s own case wherein the issue has been elaborately dealt with and the issue
has been decided in favour of the assessee.
Against this order, the Revenue is in appeal before us.
We have heard both the counsel and perused the records. We find that the ld.
CIT(A) has decided the issue by referring to the ITAT decision on the impugned
subject wherein the issue has been elaborately dealt with. The order of the ld. CIT(A)
in this regard may be referred as under:
4.2 I have perused carefully the material, and the submissions of the appellant. . I find that the issue has been decided in appellant's own case by the Hon'ble ITAT Pune Bench 'B' Pune in the appellate order in ITA no. ;' 690/PN/2013 for AY 2009-10 dated 27-11-2013 in favour of the appellant, referring to the decision of the ITAT Pune Bench in the case of Nashik Merchant Co-op bank Ltd, in ITA no. 1254/PN/2011 wherein also the Tribunal had decided the issue in assessee's favour by observing as under:- " 4. After going through rival submissions and material on record we find that ; with the advent of section 80P(4) w.e.f. A.Y. 2007-08 has closed the doors for cooperative banks for claiming the benefit of deduction u/s.80P(2)(a)(i) from this total income. However, the cooperative society should now be entitled to be assessed as normal banking company. The clause (4) inserted in 1/28/2016 section SOP has taken away the benefit of the erstwhile I deduction available to cooperative society in carrying on business of banking or providing credit facility to its members. The new clause (4) inserted by the Finance Act, 2006 w.e.f. 01-04- 2007 reads as under: "The provision of the section was not in relation to any cooperative bank other than agricultural credit society or primary cooperative agricultural and rural development bank". 5. The intention of the provision may be derived more precisely from relevant Para 166 of the budget speech which stated that: "Cooperative banks, like any other bank, are lending institutions and should pay tax on their profits, Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Bank (PCARDB) stand on a
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special footing and will continue to be exempt under section SOP of the Income Tax Act. However, I propose to exclude all other cooperative banks from the scope of that section". Accordingly, section SOP is to be amended to give effect to the above proposal. It is also proposed to amend section 2(24) to provide that profits and gains of business of banking (Including providing credit facilities) carried on by a cooperative society with its members shall be included in the definition of 'income' (with effect from 1st April, 2007)".
Cooperative bank unlike other commercial banks are subjected to dual control from both RBI as well as from state cooperative department. The accounting treatment for a cooperative bank is therefore a result of guidelines from both the controlling authorities. Ordinarily a deduction is not available to an assesses unless specifically provided under the Act. This is irrespective of accounting treatment provided by the assessee in its books of accounts. But at the same time it was well settled that deduction expressly mentioned under the Act are not exhaustive and profit is to be derived according to ordinary commercial principles. As per the extant RBI guidelines dated 01072009 the investment portfolio of the banks is required to be classified under 3 categories viz., Held the maturity HTM), Held for Trading (HFT) and Available for Sale (AFS). The value of each kind of investment is to be done in the following manner; Sr. No. Classification - Valuation Norms of Investment
HTM - These are carried at acquisition cost unless the cost is more than the face value, in which case the premium should be amortized over the period remaining to maturity. The premium is required to be amortized over the period remaining to maturity. This apart, any permanent diminution in value shall FV shall go on to reduce cost of the investment. 2. AFS - The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. These investments are considered to form stock in trade of a bank and therefore are to be valued at cost or NRV, whichever is less. Fall in value below cost, therefore, is to be provided immediately, however any net appreciation in value is ignored and not recognized as income on the basis of conservatism. 3. HFT - The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. 7. In para (vii) of the CBDT Instruction No.17 of 2008 dated 26.11.2008, on Assessment of Bank checklist for deduction1, states as under; "As per RB1 guidelines dated 16th October, 2000, the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be
8 ITA No.2874/Mum/2016
amortized over the period remaining to maturity, in the case of HFT and AFS securities forming stock in trade of the bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims." 8. The 1TAT, Mumbai Bench, in the case of ACIT vs. The Bank of Rajasthan Ltd. (2011) TIOL35ITATMumbai, has held that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. It has also been held in the case of Catholic Syrian Bank Ltd. vs. ACIT that amortisation on purchase of Government securities was made as per prudential norms of the RBI and same was allowable deduction. In view of above, assessee was justified in contending for amortisation of premium paid in excess of face value of I securities held to maturity(HTM) category or period remaining till maturity it was found reasonable by the CIT(A).Accordingly addition of Rs.17,91,659/-made by the Assessing Officer by disallowing amount towards amortisation of Government Securities (HMT) was deleted. This reasoned factual and legal finding of the CIT(A) needs no interference from our side. We uphold the same. 9. As a result, the appeal filed by the Revenue is dismissed."
4.3 I also find that the Hon'ble Tribunal in appellant's own case in ITA no. 136/PN/2014 for AY 2010-11 dated 29-5-2015 had allowed the assessee's appeal referring to the aforesaid decision of the appellant for AY 2009-10. Respectfully following the above decisions of the jurisdictional Tribunal, I direct the AO to delete the addition of Rs. 5,48,6117- made by him towards amortization of premium on investment in Government Securities in this year. ground no. 3 raised by the appellant is accordingly allowed. 12. In view of the decision of the ITAT, we do not find any infirmity in the order of
the ld. CIT(A). Accordingly, we uphold the same.
In the result, the appeal by the Revenue stands dismissed. Order pronounced in the open court on 03.10.2018
Sd/- Sd/- (Sandeep Gosain) (Shamim Yahya) Judicial Member Accountant Member Mumbai; Dated : 03.10.2018
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Roshani, Sr. PS
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,
(Dy./Asstt. Registrar) ITAT, Mumbai