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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
PER D. KARUNAKARA RAO, AM :
This appeal is filed by the Revenue against the order of CIT(A)-7, Pune, dated 23-03-2016 for the Assessment Year 2012-13.
Grounds raised by the Revenue read as under :
“1. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) Pune has erred in deleting the addition of Rs.54,67,569/- made by the A.O., on account of accrued interest on Non Performing Assets u/s. 43D of the I.T Act. 1961. 2. The learned CIT(A) ought to have appreciated the fact that the assessee is a co-operative bank and not a Scheduled Bank. 3. The learned CIT(A), ought to have held that the provisions of section 43D are only applicable to Financial Institutions and a Scheduled Bank. Thus, the assessee being a non-scheduled bank could not take the benefit of section 43D of the Act. Therefore, the learned CIT(A) on this count itself ought to have dismissed the appeal of the assessee, confirming the addition made by the A.O. 4. On the facts and in the circumstances of the case, the learned CIT(A), erred in appreciating the provisions of section 145 of the Act in its correct perspective. The learned CIT(A) ought to have held that the provisions of
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section 145 permits the assessee to either follow either Mercantile system of accounting or Cash system of accounting. The assessee is not permitted to use the Mixed or Hybrid system of accounting. Thus, on this count itself the learned CIT(A) should have upheld the addition made by the AO on account of interest on NP A.
The learned CIT(A) ought to have appreciated that the Hon'ble Supreme Court in Southern Technologies Limited Vs. JCIT 320 ITR 577 (SC) had held that the RBI directions under RBI Act are prudential norms but have nothing to do with computation of taxability of provisions of NP A under the I.T.Act, 1961. Even though the RBI directions deviate from the accounting practice as provided by the Companies Act, they do not override the provisions of I.T. Act, 1961. RBI directions and Income Tax Act, 1961 operate in different fields. Therefore, the order of the AO deserves to be upheld.
The learned CIT(A) ought to have held that the assessee does not satisfy the two conditions in the CBDT's Circular No.F-201/81/84 ITA-II dated 09/10/1984 and hence could not avail the benefits of the circular. The appellant herein reproduces the two conditions of the Circular.
(a) The assessee should be Banking Company. (b) Such interest should have remained uncovered for consecutively for three previous years.
The learned CIT(A) erred in placing reliance on the decision of ITAT in the case of in the case of Omerga Janata Sahakari Bank Ltd. in ITA No.350/PN/2013 dated 31.10.2013.While delivering the said judgement the reliance has been placed on the judgement in the case of Durga Co.operative Bank Ltd. ,held that provisions of section 43D were applicable in the case of assessee co-operative bank unless accrued interest was routed through P&L Account. However, the above decision has not been accepted by the CIT, Aurangabad and appeal u/s. 260A has been filed with the Hon'ble High Court of Bombay, Bench at Aurangabad. Further, appeals u/s. 260A on the similar issue have also been filed by the Hon'ble Pr.CIT-6 Pune in the case of Shankarrao Mohite Patil Sahakari Bank Ltd., Akluj Dist.:-Solapur for A.Y 2009-10 and A.Y 2010-11 wherein similar issue of accrued interest on NPA has been involved.
On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A)-7, Pune erred in deleting the addition of Rs. 7,031/-, made by the AO on account of amortization of premium on investments.
The Hon'ble CIT(A)-7, Pune ought to have appreciated the fact that the securities held under the category "Held to Maturity" (HTM) are in the nature of capital assets and for the purpose of income tax, the securities held under HTM has to be valued at cost only and no part thereof can be claimed as revenue expenditure in computing the total income.
The very fact that the premium paid on Govt. Securities was amortized in the books of account clearly shows that the securities were held as HTM securities by the assessee bank on capital account. Therefore, the said securities are permanent securities in the nature of capital assets and the same cannot be segregated from the cost and claimed as deduction.
The Hon'ble CIT(A)-7, Pune ought to have appreciated that the CBDT instruction No. 17/2008 was issued prior to the decision of the Apex court in the case of Southern Technologies Ltd wherein it is held that the RBI Guidelines or prudential norms issued by RBI are not intended to regulate income tax laws. There is no provision under the I.T Act to allow amortization of premium as deduction either in the year of acquisition of HTM securities for cover the period of maturity on deferred basis. Thus on this count itself, the Tribunal should have dismissed the appeal of the assessee.
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The order of the Hon'ble CIT(A)-7 Pune be vacated and that of AO be restored. 13. The appellant craves to add, alter, amend, substitute or delete any of the grounds of appeal urged herein above as and when found necessary.”
From the above, it is evident that Ground Nos. 1 to 7 relates to the
recognition of interest relatable to sticky loans/bad or doubtful debts of the
assessee u/s.43D of the I.T. Act. Further, Ground Nos. 8 to 11 relates to
addition on account of amortization of premium on Government securities
held under the category “Held to Maturity’.
Briefly stated relevant facts are that assessee is a Cooperative Society
(an AOP) and is engaged in the business of banking. Assessee filed the
return of income on 25-09-2012 declaring total income of Rs.59,80,338/-.
During the assessment proceedings, AO noticed from the balance sheet,
that the assessee shown NPA interest income of Rs.54,67,569/- receivable
from various parties. However, assessee did not offer the said sum for
taxation. Eventually, the AO made addition of Rs.54,67,569/- to the total
income treating the said sum as income of the assessee.
It was further noticed that assessee debited an amount of Rs.7,031/-
towards amortization of premium on securities ‘Held To Maturity’. Assessee
submitted that as on 31-03-2012, assessee bank holds Rs.2,96,64,500/-
worth securities in Govt. of India securities. When these securities were
purchased, the entire premium paid on purchase of securities was not
booked to expenditure account. Therefore, the same is required to be
amortized over the period until their maturity. Assessee claimed
Rs.7,031/- as Revenue expenditure. However, the AO opined that ‘AFS’
and ‘HFT’ are in the nature of stock in trade while the ‘HTM’ securities are
in the nature of capital assets. For the purpose of income-tax, the
valuation in respect of ‘AFS’ and ‘HFT’ securities are to be valued at cost or
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market, whichever is less whereas ‘HTM’ securities have to be valued at
cost only and not at ‘cost of market whichever is less’. At the end of the
assessment proceedings u/s.143(3) of the Act, the AO disallowed the sum
of Rs.7,031/-. Eventually, with the said additions, the AO computed the
assessed income at Rs.1,14,54,940/- against the returned income of
Rs.59,80,338/-.
In the First Appellate proceedings, with regard to allowing of interest
of NPA, the CIT(A) relying on the decisions of Tribunal in the case of
Osmanabad Janta Sahakari Bank Ltd. in ITA No.795/PN/2011, dated 31-
08-2012, Omerga Janta Sahakari Bank Ltd. in ITA No.350/PN/2013 & CO
No.61/PN/2013, dated 31-10-2013, judgment of Hon’ble Bombay High
Court in the case of CIT, Aurangabad Vs. M/s. Deogiri Nagari Sahakari
Bank Ltd. 128 DTR 0209, dated 22-01-2015 and others and deleted the
addition of Rs.54,67,569/-.
Regarding the other issue of amortisation of premium on securities
amounting to Rs.7,031/- also, the CIT(A) relying on the decision of Pune
Bench of the Tribunal in the case of Lokmangal Co-operative Bank Ltd. –
ITA No.1540/PN/2014 for A.Y. 2009-10 & ITA No.1541/PN/2014 for A.Y.
2010-11, dated 28-11-2014 allowed the issue in favour of the assessee.
Contents of Para No.7.4 to 7.5 of the order of CIT(A) are relevant on this
issue.
Aggrieved with the order of CIT(A), the Revenue filed the present
appeal before the Tribunal challenging the above two issues with the
grounds extracted above.
Ld. DR for the Revenue relied on the argumentative grounds raised
by the Revenue in the appeal and relied on the order of AO.
ITA No.1240/PUN/2016 Sharad Nagari Sah. Bank Ltd.,
Before us, on the first issue of recognition of interest accrued on NPA,
Ld. Counsel for the assessee submitted that the interest on NPAs is not to
be taxed as income of the assessee in view of the prudential guideline
issued by the RBI on one side and Supreme Court judgments on the other.
In this regard, Ld. Counsel for the assessee filed the judgment of Hon’ble
Bombay High Court in the case of CIT Vs. M/s. Deogiri Nagari Sahakari
Bank Ltd., Aurangabad in Income Tax Appeal No.53/2014 and others dated
22-01-2015 and submitted that the order of CIT(A) is fair and reasonable
and it should not be disturbed.
Regarding the second issue of amortization of premium on Govt.
securities under the category “Held to Maturity”, Ld. Counsel for the
assessee relied on the order of CIT(A). Further, he submitted that the
Hon’ble Jurisdictional High Court in the case of CIT Vs. M/s. Gajanan
Nagari Sahakari Bank Ltd. in Income Tax Appeal No.39 of 2014 had an
occasion to decide the identical issue in favour of the assessee and against
the Revenue. Ld. Counsel filed the copies of the said judgments.
We heard both the parties and perused the orders of the Revenue and
the decisions relied on by the Ld. Counsel for the assessee. Regarding the
issue of allowing of interest accrued on NPA amounting to Rs.54,67,569/-,
we perused the contents of Para No. 6.1 to 6.4 in general and Para No. 6.4
of the order of CIT(A) in particular and find the issue now stands covered in
favour of the assessee. For the sake of completeness, we find it relevant to
extract the said operational para and the same reads as under :
“6.4 Respectfully following the decision of the ITAT Pune in the case of Omerga Janta Sahakari Bank Ltd. (supra) and Jurisdictional Bombay High Court in the case of Deogiri Sahakari Bank Ltd. (supra) the amount of Rs.54,67,569/- directly taken into the balance sheet is not to be taxed in the year under consideration. Therefore, the Ground No. 1,2, 3, and 5 of the appeal is allowed.”
ITA No.1240/PUN/2016 Sharad Nagari Sah. Bank Ltd.,
10.1 We find the Hon’ble Bombay High Court in the case of CIT Vs. M/s.
Deogiri Nagari Sahakari Bank Ltd. (supra) decided the issue under
consideration in favour of the assessee and against the Revenue by holding
as under :
“9. The Income Tax Appellate Tribunal has referred the case of M/s. Vasisth Chay Vyapar Limited 330 ITR 440 (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 M/s. Southern Technologies Limited 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 Limited supra held that provisions of section 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative 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 case (supra) had an occasion to consider the nature of CBDT Circular and Hon’ble Apex Court has thus held that 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 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 learned counsel for respondent has placed reliance 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 is liable to be taxed under Income Tax Act, 1961 in respect of the interest on doubtful advances credited to the 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.
Learned Counsel for the appellants/revenue placed reliance on the judgment in the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, Coimbatore reported in 2010 (2) SCC 548. However, this judgment pertains to non Banking financial companies. Uco Bank case (supra) and Mercantile Bank (supra) case squarely applies to the facts of the present case and issued 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.”
ITA No.1240/PUN/2016 Sharad Nagari Sah. Bank Ltd.,
From the above, it is evident that the Hon’ble Jurisdictional High
Court has analysed the applicability of the ratio of the judgment of
Supreme Court in the case of Southern Technologies Ltd. and found
inapplicable to the non-banking financial companies. It is also evident that
overriding effect of the provisions of the RBI Act in matters of recognition of
interest income relating to sticky loans is also decided in favour of the
assessee in view of other Supreme Court judgments in the case of Uco
Bank and Mercantile Bank (supra). CIT(A) also followed the ITAT’s
decisions while giving relief to the assessee. Therefore, in our opinion, we
find no reason to interfere with the conclusions of the CIT(A) in this regard.
We therefore uphold the order of CIT(A) and direct the AO to delete the
addition. Accordingly, the ground Nos. 1 to 7 raised by the Revenue are
dismissed.
Regarding the second issue of amortisation of premium on securities
amounting to Rs.7,031/-, we heard both the sides and perused the orders
of the Revenue. On going through the same, we find this issue also is of
covered nature by virtue of the order of Pune Bench of the Tribunal in the
case of Lokmangal Co-operative Bank Ltd. (supra). For the sake of
completeness, we proceed to reproduce the finding given by the CIT(A) on
this issue here as under :
“15. The CIT(A) has also affirmed the aforesaid stand of the Assessing Officer. The CIT(A) followed the judgement of the Hon'ble Rajasthan High Court in the case of Bank of Rajasthan Ltd. (supra), which had dissented from the judgement of the Hon'ble Bombay High Court in the case of American Express International Banking Corporation vs. CIT, 258 ITR 601 (Bom), by relying on the Hon'ble Supreme Court in the case of Vijaya Bank Ltd. (supra). Against such decision of the CIT(A), assessee is in appeal by way of cross- objection before us.
At the time of hearing, it was a common point between the parties that that Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd., 107 DTR 140 (Bom) has held that the 'broken period interest' is allowable as a deduction. It is also noteworthy that the Hon'ble Bombay High Court in thecase of HDFC Bank Ltd. (supra) considered the decisions of the Hon'ble Supreme Court in the case of Vijaya Bank Ltd. (supra) as also that of the Hon'ble Rajasthan High Court in the case of Bank of Rajasthan Ltd. (supra)
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and thereafter, it has upheld the stand of the assessee that 'broken period interest' is allowable as a deduction. In view of the aforesaid authoritative pronouncement by the Hon'ble Bombay High Court, we find no justification to uphold the stand of the income-tax authorities. Following the judgement of the Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (supra), we hereby set-aside the order of the CIT(A) and direct the Assessing Officer to delete the impugned addition.
“25. The only other remaining Ground in the cross-objection is with regard to the action of the CIT(A) in confirming the disallowance of Rs.3,70,913/- representing amortization of premium paid on acquisition of Held to Maturity (HTM) securities.
In this context, brief facts are that before the CIT(A) assessee claimed deduction of Rs.3,70,913/- on account of amortization of premium paid on Government Securities in the category of investments Held to Maturity (i.e. HTM). The said premium represented the excess of acquisition cost over the face value of the securities and the claim of the assessee was that the same was to be amortized over the remaining period of maturity of the securities. The claim of the assessee was based on the Master Circular dated 12.07.2006 issued by the Reserve Bank of India. The CIT(A) did not accept the plea of the assessee and sustained the disallowance of Rs.3,70,913/-. Against such a decision of the CIT(A), assessee is in appeal by way of cross- objection before us.
It was a common point between the parties that the said issue is no longer res-integra and has been adjudicated in favour of the assessee by the Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (supra). The Hon'ble Bombay High Court referred to its earlier decision in the case of CIT vs. Lord Krishna Bank Ltd. (2014) 107 DTR 138 (Bom) and decided the issue in favour of the assessee. In view of the aforesaid, the order of the CIT(A) is set-aside and the Assessing Officer is directed to delete an addition of Rs.3,70,913/- representing amortization of premium paid on HTM securities. Thus, the Ground of the assessee is allowed.”
7.5 I have carefully considered the facts of the case & law apparent from the records. Respectfully following the decision of ITAT as mentioned above the Amortization premium on HTM securities is allowable. Therefore, addition on account of amortization premium paid on HTM securities of Rs.7,301/- is deleted. Accordingly, the ground No.6 of the appeal is allowed.”
Similar view was taken by the Hon’ble Bombay High Court in the
case of The CIT Vs. Gajanan Nagari Sahakari Bank Ltd. in Income Tax
Appeal No.39 of 2014, dated 07-01-2015. For the sake of completeness, we
reproduce the operational paras as follows :
“3. As said above, in the appeal as well as before the Appellate Tribunal, it was held that the securities were stock in trade and so depreciation would amount to loss and not income. The authorities below held that this aspect is well settled through the judgment of this Court in the case of Commissioner of Income Tax Vs. Bank of Baroda, reported in (2003) 262 ITR 334 (Bombay) as well as in the judgment of the Supreme Court in the case of UCO Bank vs. The Commissioner of Income Tax, reported in 240 ITR 355 (SC)). The Supreme Court in the said judgment held that merely because the securities are kept under the head by the bank till the maturity, the said security
ITA No.1240/PUN/2016 Sharad Nagari Sah. Bank Ltd.,
cannot be treated as a purely investment. The security held by the bank is in the nature of stock in trade. 4. In view of the above, reliance placed by the department on the judgment in the case of Vijaya Bank Vs. Commissioner of Income Tax, reported in 187 ITR 541 (SC) is misplaced. Thus, the appeal does not raise any substantial question of law and the same is therefore, dismissed.”
In view of the above binding precedents, we hold that the addition on
account of amortization of premium on HTM securities is allowable in
favour of the assessee.
We therefore uphold the order of CIT(A) on account of both the
issues. Accordingly, the relevant ground Nos. 8 to 11 raised by the
Revenue are dismissed.’
In the result, appeal of the Revenue is dismissed.
Order pronounced on this 20th day of July, 2018.
Sd/- Sd/- (SUSHMA CHOWLA) (D.KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 20th July, 2018. Satish
आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to : अ�ेिषत
अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / The CIT(A)-7, Pune 3. आयकर आयु� / The Pr. CIT-6, Pune 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “A” / DR ‘A’, 5. ITAT, Pune; गाड� फाईल / Guard file. 6.
आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार
स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune