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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ B ’
Before: SHRI GEORGE GEORGE K & SHRI JASON P BOAZ
O R D E R Per Shri Jason P Boaz, A.M. : These are cross appeals, by the assessee and revenue, directed against the order of Commissioner of Income Tax (Appeals), Hubli Dt.9.6.2014 for the Assessment Year 2011-12.
Briefly stated, the facts of the case are as under :
2 & 1093/Bang/2014 2.1 The assessee is a District Central Co-operative Bank engaged in providing loans to Primary Agricultural Co-op. Societies. For the Assessment Year 2010-11, the assessee filed its return of income on 14.09.2010 declaring loss of Rs.26,16,474. The return was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under Section 143(3) of the Act vide order dt.28.3.2013, wherein the assessee's income was determined at Rs.5,42,13,209 as against the returned loss of Rs.26,16,474 in view of the following additions / disallowances : i) Accrued interest : Rs.2,14,36,541. ii) Interest accrued on Bank FDs : Rs.4,500. iii) Provision for NPAs : Rs.3,00,00,000. iv) Bank Reconciliation provision : Rs.50,00,000. v) Provision for RO & SAO : Rs.3,69,142. vi) Rent paid : Rs.24,000.
2.1 Aggrieved by the order of assessment dt.28.3.2013 for Assessment Year 2010-11, the assessee preferred an appeal before the CIT (Appeals), Hubli. The learned CIT (Appeals) vide order dt.9.6.2014 disposed off the appeal allowing the assessee partial relief.
Both revenue and the assessee, being aggrieved by the order of the CIT (Appeals), Hubli dt.9.6.2014 for Assessment Year 2010-11, have Revenue’s appeal ( A.Y. 2010-11)
The grounds raised by revenue in its appeal are as under :
5. Grounds at S.Nos.1, 7 & 8, being general in nature, no adjudication is called for thereon.
6.1 In the course of assessment proceedings the Assessing Officer observed that the assessee had debited an amount of Rs.3 Crores as provision for NPAs. The assessee claimed that such a provision was mandated as per the Prudential Norms of RBI and therefore is an allowable deduction under Section 36(1)(viia) of the Act. The Assessing Officer, however, was of the view that such a provision is liable to be treated as the assessee's income and that if at all any deduction is to be claimed, the assessee has to claim it as bad and doubtful debts. The Assessing Officer was also of the view that since the assessee had not claimed the said deduction in the return of income for Assessment Year 2010-11, it was not eligible for being allowed the same.
6.2 On appeal, the learned CIT (Appeals) deleted the aforesaid addition / disallowance on the ground that the assessee was entitled for deduction equivalent to 10% of rural advances and 7.5% of the total income towards bad and doubtful debts and the assessee's claim for deduction was less than what it was eligible for.
6.3.1 We have heard the rival submissions, perused and carefully considered the material on record; including the judicial pronouncements cited. As submitted by the learned Authorised Representative of the assessee, we find that this issue was considered and adjudicated upon by a co-ordinate bench of this Tribunal in assessee's own case for Assessment Years 2007-08 & 2008-09 in its 5 & 1093/Bang/2014 orders in ITA No.889 & 894/Bang/2012 dt.10.10.2014 & 31.12.2014 respectively. In its order in assessee's own case for Assessment Year 2008-09 (supra), the co-ordinate bench at paras 6.3.1 & 6.3.2 thereof has held as under :
“ 6.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited and relied on. The issue raised is with reference to the assessee's claim for deduction under the head “Provision for NPAs”. The Assessing Officer did not allow the assessee's claim for the reason that it was not written off in the books of account, as is required by section 36(1)(viia) of the Act. The learned Authorised Representative of the assessee contended that the provision for NPAs was made as per the RBI’s Guidelines, which are binding on the assessee and therefore it should be allowed as a deduction under the Act. It was submitted that provision for NPAs is made only when recovery is difficult or may not be possible and therefore the same should be allowed as deduction.
6.3.2 Section 36(1)(viia) of the Act provides for allowance of any provision for bad and doubtful debts. Although the assessee has used the nomenclature for the provision as “Provision for NPAs”, but in pith and substance the provision has been created for bad and doubtful debts and in doing so, the assessee has followed the RBI Guidelines. In the light of the above discussions of this issue and the decision of the Hon'ble Apex Court in the case of UCO Bank Ltd. (supra), we concur with and do not find it necessary to interfere with the decision of the learned CIT (Appeals) in allowing the assessee's claim of deduction on account of provision for NPA. Consequently the grounds raised at S.Nos.6 & 7 are dismissed.”
6.3.2 Following the aforesaid decisions of the co-ordinate benches of this Tribunal cited supra, we uphold the order of the learned CIT (Appeals) in allowing the assessee's claim for deduction on account of NPAs. Consequently ground Nos.2 to 4 of revenue’s appeal are dismissed.
Ground Nos.5 & 6 – Provision for RO & SAOs cost (Rs.3,69,142)
7.1 In these grounds (supra), Revenue contends that the learned CIT (Appeals) allowed the assessee's claim in respect of provision for RO &
6 & 1093/Bang/2014 SAO’s cost by admitting fresh evidences which were not before the Assessing Officer; which is in clear violation of the provisions of Rule 46A of the I.T. Rules, 1962.
7.2 The Assessing Officer was of the opinion that the expenditure of Rs.3,69,142 debited by the assessee was in the nature of provision for bad and doubtful debts and therefore disallowed the same. On appeal, the learned CIT (Appeals) after examining the details submitted by the assessee was of the opinion that the same was in the nature of recovery expenses relating to the cost of RO’s and SAO’s and having regard to the quantum of advances, held the same to be commensurate and deleted the addition.
7.3 According to the learned Departmental Representative for Revenue, the finding rendered by the learned CIT (Appeals) was made on the basis of material / evidences which were made available to him by the assessee; which were not before the Assessing Officer in assessment proceedings. It is contended that the action of the learned CIT (Appeals) in deciding the issue without affording any opportunity to the Assessing Officer to put forth its objections / rebuttals, was in contravention of Rule 46A of the IT Rules, 1962 and therefore the decision of the learned CIT (Appeals) on this issue should be set aside and the matter restored to the file of the Assessing Officer for consideration afresh.
7.4 Per contra, the learned Authorised Representative for the assessee submitted that there was no proper enquiry conducted by the Assessing 7.5 We have heard the rival contentions and perused and carefully considered the material on record. On a perusal of the orders of the authorities below it is evident that the learned CIT (Appeals) has decided the issue on the basis of material which was not before the Assessing Officer in assessment proceedings and was placed before him for the first time, which is in violation of Rule 46A(3) of the IT Rules, 1962. In this factual matrix of the case, we find merit in the contentions of Revenue the provisions of Rule 46A were violated by the learned CIT (Appeals) while deciding this issue and therefore set aside the order of the learned CIT (Appeals) on this issue and remand the matter to the file of Assessing Officer for fresh consideration and adjudication thereon, after affording the assessee adequate opportunity of being heard and to file details / submissions required. Consequently, ground Nos.5 & 6 of Revenue’s appeal are treated as allowed for statistical purposes.
In the result, the Revenue’s appeal is partly allowed for statistical purposes.
Assessee's appeal in for A.Y. 2010-11.
In its appeal for Assessment Year 2010-11, the assessee has raised the following grounds :
8 & 1093/Bang/2014 “1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, facts and circumstances of the appellant's case.
2. The authorities below ought to have accepted the claim of the appellant that the entire income derived by the appellant was exempt under the concept of mutuality under the facts and in the circumstances of the appellant's case.
3. Without prejudice to the above, the authorities below are not justified in sustaining an addition of RS.2,14,36,541I - in respect of interest due but not received during the year having regard to the method of accounting regularly employed by the appellant under the facts and in the circumstances of the , appellant's case.
3.1 Without prejudice to the above, the computation of interest accrued is highly excessive and the same requires to be reduced substantially.
4. The learned CIT[A] is not justified in sustaining an addition of Rs.50,00,0001 - being the Branch Reconciliation Provisions made by the appellant as per the guidance of NABARD provided under the facts and in the circumstances of the appellant's case.
Without prejudice to the right to seek waiver with the Hon'ble CCIT / DG, the appellant denies itself liable to be charged to interest u/s. 234-B of the Act, which under the facts and in the circumstances of the appellant's case and the levy deserves to be cancelled.
For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs. ”
Ground No.2 11.1 This ground (supra) wherein the assessee contends that its entire income is exempt under the concept of mutuality has not been urged before us in the hearings and is therefore dismissed as not pressed.
Ground No.5 - Charging of interest u/s.234B.
12.1 In this ground (supra), the assessee denies itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition was upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala 252 ITR 1 (SC) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Section 234B of the Act, if any, while giving effect to this order.
Ground Nos.3 & 3.1 - Accrued Interest.
13.1 These grounds are raised in respect of the addition of Rs.2,14,36,541 by the Assessing Officer as interest accrued, but not accounted for. In the course of assessment proceedings, the Assessing Officer observed that the assessee is following the hybrid system of 10 & 1093/Bang/2014 accounting i.e. accounting for interest on receipt basis and others on accrual basis, which was in contravention of the provisions of Section 145 of the Act. According to the Assessing Officer, as per the provisions of Section 145 of the Act, the income chargeable under the head ‘profits and gains from business and profession’ shall be computed in accordance with either cash or Mercantile System of Accounting regularly employed by the assessee. In that view of the matter, the Assessing Officer held that interest which had accrued on loans and advances is to be treated as income for the relevant assessment year and accordingly brought to tax in the assessee's hands an amount of Rs.2,14,36,541 which in his estimation was the income that had accrued to the assessee and it failed to account for. On appeal, the CIT (Appeals) upheld this addition made by the Assessing Officer as he was of the view that the assessee had not followed the procedure laid down by the Hon'ble Apex Court in the case of UCO Bank Vs. CIT 237 ITR 889 (SC).
13.2.1 We have heard the rival submissions, perused and carefully considered the material on record including the judicial pronouncements cited. As submitted by the learned Authorised Representative of the assessee, we find that this issue was considered and adjudicated upon by a co-ordinate bench of this Tribunal in assessee's own case for Assessment Years 2007-08 & 2008-09 in its orders in & 894/Bang/2012 dt.10.10.2014 & 31.12.2014 respectively. At paras 5.6.1 and 5.6.2 of its order for Assessment Year 2008-09 (supra), the co- ordinate bench held as under :
11 & 1093/Bang/2014 “ 5.6.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions placed reliance upon. It is not in dispute that the assessee is in the business of banking and is governed by the Banking Regulations Act, 1949. The question for consideration before us is whether the interest accrued on NPAs, which are doubtful of being recovered, should be recognised as income on accrual basis or on receipt basis. We find that this issue has been considered by the Hon'ble Karnataka High Court in the case of Urban Co-operative Bank Ltd. (supra). In that case, the question of law before the Hon'ble High Court was “whether the Tribunal was right in holding that the income from non- performing assets should be assessed on cash basis and not on mercantile basis, despite the assessee's maintaining mercantile system of accounting ? “ The Hon'ble Court at para 3 of its order observed as under :-
“3. The said question has been answered by this Court in the case of Commissioner of Income Tax, Central Circle, Bangalore Vs. Canfin Homes Limited [(2011) 201 Taxman 273/13 taxmann.com 43 (Karnataka)] at paragraph 8, which reads as under :-
8. Therefore, it is clear, if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realised immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the same, then it cannot said to have been accrued and the said amount cannot be brought to tax. In the instant case we are concerned with a non-performing asset. As the definition of non-performing asset shows an asset becomes non-performing when it ceases to yield income. Non-performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non-performing asset, then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the National Housing Bank, the income from non-performing asset should be recognized only when it is actually received. That is what, the Tribunal held in the instant case. Therefore, the contention of the revenue that in respect of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. In that view of the mater, the second substantial question frame is answered against, the revenue and in favour of the assessee.”
5.6.2 We find that the facts of the case on hand before us and the question of law raised in the above referred case are identical and therefore respectfully following the decision of the Hon'ble High Court of Karnataka in the case of Urban Co-operative Bank Ltd. (supra), we decide the issue in favour of the assessee. Consequently, grounds raised by revenue at S.Nos.3 and 5 are dismissed.”
13.2.2 Following the aforesaid decision of the co-ordinate bench in the assessee's own case for Assessment Year 2008-09 (supra), we delete the 12 & 1093/Bang/2014 additions made by the Assessing Officer in respect of interest accruing on NPAs which have not been accounted for. Consequently, ground Nos.3 & 3.1 of the assessee's appeal are allowed.
Ground No.5 - Addition on account of Bank Reconciliation Provisions.
14.1 In this ground (supra) the assessee challenges the order of the learned CIT (Appeals) in sustaining the addition of Rs.50 lakhs in respect of the Bank Reconciliation Provisions made by the assessee. According to the learned Authorised Representative for the assessee, the same was statutory in nature and made in accordance with the directions of the RBI. The learned Authorised Representative has also invited the attention of the Bench to the RBI Circular RPCD.RF.BC.No.59/ 07.37.02/ 2003-04 dt.5.1.2004 (copy placed at pages 26 to 28 of paper book) to submit that the Bank Reconciliation Provision was made in pursuance thereof and therefore requires to be allowed. It was further submitted that this balance was mainly on account of inter-branch balances and a write off of the same is in order and therefore the same ought to be allowed under Section 37(1) of the Act.
14.2 Per contra, the learned Departmental Representative supported the order / findings rendered by the learned CIT (Appeals) on this issue.
14.3 We have heard the rival submissions, perused and carefully considered the material on record. From a perusal of the impugned 13 & 1093/Bang/2014 order, it appears to us that the Assessing Officer has treated this as part of provision for NPAs and has not dealt with this issue in the light of the RBI Guidelines in this regard. Same is the position with the learned CIT (Appeals) in the impugned order. In this factual matrix of the case, we deem it appropriate to restore this issue back to the file of the Assessing Officer for fresh consideration and orders, after affording the assessee adequate opportunity of being heard in the matter. Consequently, Ground No.5 of assessee's appeal is treated as allowed for statistical purposes.
In the result, the assessee's appeal for Assessment Year 2010-11 is partly allowed.
To sum up, Revenue’s appeal for Assessment Year 2010-11 is partly allowed for statistical purposes and the assessee's cross appeal is partly allowed. Order pronounced in the open court on the 3rd day of Nov., 2017.