M/S.CHITRADURGA DISTRICT CO-OP. CENTRAL BANK LTD.,,CHITRADURGA vs. DEPUTY COMMISSIONER OF INCOME-TAX, DAVANGERE

Ground No.1 is general in nature and do not require any specific adjudication.

Ground Nos.2 to 4 are regarding addition made on account of interest accrued on Non-Performing Assets (NPAs). The assessee is a district central co-operative bank formed under the Karnataka Co- operative Societies Act. During the course of assessment proceedings, 3 1523,1548 & 1549/Bang/2016 the Assessing Officer noted that the assessee has followed hybrid system of accounting and has omitted to admit the income of Rs.53,29,000 being accrued interest receivable which was not accounted as per the Mercantile System of Accounting. The assessee explained and contended before the Assessing Officer that this amount of Rs.53,29,000 is interest on NPAs therefore when the principal itself is treated as non- recoverable then there is no question of earning interest on the said advances. The Assessing Officer held that the interest accrued/receivable by the assessee has to be added to the income reported and accordingly brought to tax. On appeal, the CIT (Appeals) deleted the addition partially by following the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Canfin Homes 347 ITR 382. He has also relied upon the Hon'ble jurisdictional High Court in the case of CIT Vs. Siddeshwar Co-operative Bank Limited reported in 388 ITR 588. 5. We have heard the learned Departmental Representative as well as learned Authoised Representative and considered the relevant material on record. At the outset, we note that this issue is covered by the Hon'ble jurisdictional High Court in the case of CIT Vs. Canfin Homes (supra) however, the CIT (Appeals) has bifurcated NPAs by classifying the some of the NPAs as highly sticky loans and others are only sticky loans and allowed the claim of the assessee only in respect of highly sticky loan to the extent of Rs.25.87 lakhs accrued interest. Thus addition to the extent of Rs.27,32,000 was sustained by the CIT (Appeals). We are of the view that there is no basis for reclassification of NPAs into highly sticky and sticky loans once the assessee has treated the loan in the category of 4 1523,1548 & 1549/Bang/2016 NPAs as per the RBI Guidelines then the interest on these NPAs cannot be treated as income of the assessee. We further note that for the Assessment Year 2010-11 the CIT (Appeals) allowed full claim of the assessee without any reclassification. The Hon'ble High Court reiterated its view in case of CIT Vs. Shri Siddeshwar Co-op Bank Ltd. (supra) in para 5 as under : “ 5. One other substantial question of law framed is, "Whether interest receivable from non-performing assets, bad and doubtful debts though the actual expression used is interest payable and not reflected in the profit and loss account, could be deducted?" In this regard, the learned counsel for the assessee has produced a judgment of this Court in CIT v. Canfin Homes Ltd. [2012] 347 ITR 382/[2011] 201 Taxman 273/13 taxmann.com 43 with reference to non-performing assets. The Division Bench of this Court has held as follows: "Therefore, it is clear, if an assessee adopts the 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 be 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 recognised 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 matter, the second substantial question framed is answered against the Revenue and in favour of the assessee." At this, the learned counsel for the revenue would submit that the decision only refers to non-performing assets and it is not evident that non-performing assets would also 5 1523,1548 & 1549/Bang/2016 cover other classification of loans and advances. In this regard, the learned counsel for the assessee would point out that non-performing assets would include the other categories of substandard assets, doubtful assets, loss assets, etc., all of which would come within the purview of non-performing assets. In this regard, he would draw attention to the prudential norms for income recognition, asset classification and provisioning pertaining to advances. Volume I of 'Tannan's Banking Law and Practice in India', has extracted these prudential norms in line with the international practices and as per the recommendations of the Narasimham Committee on the financial system, the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the Banks so as to move towards greater consistency and transparency in the published accounts. The definition of non-performing assets is as follows: '1. Non-performing assets: An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A "non-performing asset" (NPA) is a loan or an advance where: (i) the interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan; (ii) the account remains "out of order" for a period of more than 90 days as indicated below, in respect of an Overdraft/Cash Credit (OD/CC); (iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted; (iv) the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops; (v) the instalment of principal or interest thereon remains overdue for one crop seasons for long duration crops.

Banks should, classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.' Further, asset classification which is separately dealt with reference to categories of non-performing assets, as follows:

Ground No.5 of the revenue’(supra) appeal is regarding disallowance of deduction under Section 36(1)(viia) towards the provisions made in respect of rural branches. The Assessing Officer noted that the assessee has made provision for NPAs of Rs.26,87,569 and provision for contingent liability amounting to Rs.2,51,056 and debited the same to the profit and loss account. The Assessing Officer disallowed the claim on these both accounts due to the reason that the provision is not an allowable expenditure and claim of deduction @ 10% of aggregate advances made to the rural branches was reflected as the details were not furnished. Thus the provision for contingent liability was disallowed being not an allowable claim and further no details were furnished by the assessee. On appeal, the CIT (Appeals) allowed part 7 1523,1548 & 1549/Bang/2016 claim to the extent of Rs.11,93,405 out of the total provision of Rs.26,87,569 on account of provision for bad and doubtful debts under Section 36(1)(viia) of the Act. As regards the provision for contingent liability of Rs.2,51,056, the claim of the assessee was disallowed by the Assessing Officer and the CIT (Appeals) has upheld the action of the Assessing Officer.

Before us, the learned Departmental Representative has submitted that the Assessing Officer has disallowed the claim of the assessee by recording the reason that the assessee has not filed the details to compute whether the claim falls within the permissible limit of 10% of aggregate average of rural advances.

On the other hand, the learned Authorised Representative has submitted that all the details were available before the Assessing Officer and CIT (Appeals) has taken the figure from the record available. Therefore when no additional evidence was filed by the assessee then the decision of the CIT (Appeals) based on the material available on assessment record cannot be challenged on these grounds. He has further submitted that the assessee filed the branch-wise details before the CIT (Appeals) at page Nos.11 & 12 of the paper book.

We have considered the rival submissions as well as the relevant material on record. The Assessing Officer disallowed the claim of the assessee that the provisions for bad and doubtful debt is not an allowable claim and further the assessee did not file the relevant details to examine whether the claim of the assessee is within the permissible limit of 10% of aggregate average advances by the rural branches. The 8 ITA No.1522, 1523,1548 & 1549/Bang/2016 CIT (Appeals) has partly allowed the claim of the assessee after considering the details of the advances of the rural branches as filed by the assessee and placed at pages 11 & 12 of the paper book. Accordingly, in the facts and circumstances of the case when these details were not available before the Assessing Officer then this issue is set aside to the record of the Assessing Officer for verification of the relevant details. In case the claim of the assessee is found within the allowable deduction of permissible limit of 10% of aggregate average of rural advances, the same shall be allowed.

For the Assessment Year 2009-10, the assessee has raised the following grounds :

Ground Nos. 2 and 4 are regarding addition of interest on NPAs.

This issue is common to the issue raised by the revenue in Ground Nos.2 and 4, in view of our finding on this issue these grounds stand allowed.

Ground No.3 is regarding the disallowance of the provision for contingent liability of Rs.2,51,056.

At the time of hearing, the learned counsel for the assessee has stated at Bar that the assessee does not press Ground No. 3 and the same may be dismissed as not pressed. The learned Departmental Representative has raised no objection if the Ground No.3 is dismissed as not pressed. Accordingly, Ground No. 3 is dismissed being not pressed. Revenue’s Appeal for A.Y. 2010-11 16. Ground Nos.1 to 4 are common as raised in the Assessment Year 2009-10 and accordingly, the same stand disposed off in view of our finding for the Assessment Year 2009-10.

Ground No.5 is an extra ground for the Assessment Year 2010-11 which reads as under : “5. The CIT (Appeals) is not right in holding that the interest receivable from Government is a capital receipts towards debt waiver ?”

The Assessing Officer noted that the interest receivable from the Govt. Loan Waiver Scheme is shown in the balance sheet at Rs.15,39,900 for the year ending 31.03.2010. However, the same has not been credited to the profit and loss account. Accordingly, the Assessing 10 1523,1548 & 1549/Bang/2016 Officer proposed to add back the said interest receivable from the Government to the income of the assessee. The assessee explained before the Assessing Officer that it has shown a sum of Rs.53.99 lakhs being principle and interest receivable from the Govt. of India on account of Waiver of Loan pertaining to the Primary Agriculture Co-operative Societies which were asked to prepare the Loan Waiver Bill and submit the same through District Co-operative Central Bank for reimbursement. Therefore the said amount to be released from the Central Government pertaining to the Primary Agriculture Co-operative Societies and the assessee is only an intermediary for receiving the said amount from the Central government and giving to the Primary Agriculture Co-operative Societies. Therefore the said amount receivable from the Govt. of India on account of Loan Waiver Scheme does not belong to the assessee and cannot be treated as income of the assessee. The Assessing Officer did not accept this explanation of the assessee and added the said amount to the income of the assessee. On appeal, the CIT (Appeals) deleted the addition made by the Assessing Officer by accepting the explanation of the assessee.

Before us, the learned Departmental Representative has submitted that when this amount was shown by the assessee in the balance sheet and it was not credited to the profit and loss account then as per the Mercantile System of Accounting this should have been credited to the profit and loss account and income of the assessee for the year under consideration and only when any amount is paid to the 11 1523,1548 & 1549/Bang/2016 Primary Agriculture Co-operative Society, the same can be claimed as an expenditure. He has relied upon the order of the authorities below.

On the other hand, the learned Authorised Representative has reiterated the contention as raised before the authorities below.

Having considered the rival submissions as well as the relevant material on record, we note that the Assessing Officer has not disputed that the amount in question shown in the balance sheet is the interest receivable from the Govt. of India under Loan Waiver Scheme for the year under consideration. The assessee’s role was only as a nodal district co-operative central bank to monitor the Primary Agriculture Co- operative Societies and therefore the loan waived by the central government was to be routed through the assessee under the supervision and monitoring of the assessee. Thus the assessee is only an intermediary in receiving the said amount from the central government and passing on the same to the Primary Agriculture Co-operative Societies. The claim of the Primary Agriculture Co-operative Societies was to be forwarded through the assessee and therefore, the waiver amount was also to be routed through the assessee-bank. Hence this is only a contra entry and cannot par take the character of income of the assessee as this amount does not belong to the assessee. The assessee was playing the role to assist the central government in receiving the claim from the Primary Agriculture Co-operative Societies and disbursement of the amount of loan waiver under the scheme of Govt. of India. Accordingly, we do not find any error or illegality in the impugned order of the CIT (Appeals) qua this issue.

This ground is common to the Assessment Year 2009-10. The learned Authorised Representative has submitted that initially the assessee claimed as provision on standard asset however subsequently the assessee claimed the deduction of this amount under Section 36(1)(vii) as provision for bad and doubtful debts. The learned Authorised Representative has further submitted tht when the claimed of the assessee is within the allowable limit of 10% of aggregate average rural advances then the same cannot be disallowed by treating it as a contingent liability. He has relied upon the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Shri Siddeswar Co-op Bank Ltd. (supra) 23. On the other hand, the learned Departmental Representative has submitted that for the Assessment Year 2009-10, the assessee has not pressed the issue and therefore as per the rule of consistency this ground is liable to be dismissed. He has relied upon the orders of the authorities below.

Having considered the rival submissions as well as the relevant material on record, we find that the assessee subsequently revised its claim and computation by adding this amount in the deduction under 13 1523,1548 & 1549/Bang/2016 Section36(1)(vii). However, the authorities did not accept this claim of the assessee. We find that if the claim of the assessee is in the nature of a provision of bad and doubtful debts then the deduction under Section 36(1)(viia) can be considered subject to the verification that the claim would not exceed the permissible limit of 10% of aggregate average rural advances. Accordingly, we set aside this issue to the record of the Assessing Officer to verify the details and then adjudicate the same after affording an opportunity of hearing to the assessee.

In the result, the cross appeals for both the years are partly allowed.