THE COMMISSIONER OF INCOME-TAX vs. M/S DAVANGERE DISTRICT CENTRAL CO-OPERATIVE BANK

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 4TH DAY OF FEBRUARY, 2021 PRESENT THE HON’BLE MR. JUSTICE SATISH CHANDRA SHARMA AND THE HON’BLE MR. JUSTICE V. SRISHANANDA I.T.A. NO.136/2015 BETWEEN 1. THE COMMISSIONER OF INCOME-TAX PARK VIEW BUILDING NO.284/1, 4TH MAIN P J EXTENSION DAVANAGERE 577 002 2. THE ASST. COMMISSIONER OF INCOME-TAX CIRCLE-1 PARK VIEW BUILDING NO.284/1, 4TH MAIN P J EXTENSION DAVANAGERE 577 002

...APPELLANTS (By SRI K V ARAVIND, ADVOCATE) AND M/S DAVANGERE DISTRICT CENTRAL CO-OPERATIVE BANK LIMITED D. C. OFFICE CIRCLE CHITRADURGA 577 501 PAN: AAATD 6617N

…RESPONDENT (BY SRI A.SHANKAR, SR. ADVOCATE FOR SRI M.LAVA, ADVOCATE) - - -

2 THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 03.12.2014 PASSED IN ITA NO.894/BANG/2012, FOR THE ASSESSMENT YEAR 2008-09 PRAYING TO (1)FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND (2) ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BANGALORE IN ITA NO.894/BANG/2012 DATED 03.12.2014 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-I, DAVANAGERE. THIS I.T.A COMING ON FOR HEARING THIS DAY, SATISH CHANDRA SHARMA J., DELIVERED THE FOLLOWING: JUDGMENT The present appeal is by the Revenue, arising against the order dated 3rd December, 2014 passed in ITA No.894/Bang/2012 by the Income Tax Appellate Tribunal confirming the order passed by the Assistant Commissioner of Income Tax Officer, Circle-1, Davanagere. 2. The statement of facts as stated by the appellants in the Memorandum of Income Tax Appeal reflects that the assessee claims to be a Co-operative Bank and filed their return of income for year under consideration. Assessment order came to be passed in the case of assessee under

3 section 143(3) of the Income Tax Act, 1961 (for short Act). In the order passed, the assessing authority made additions. The assessing authority calculated the interest on loans and advances (including NPA) following mercantile system of accounting and interest offered in the P/L following cash system of accounting were reduced and the difference amount was added to the income of the assessee. The next issue pertains to debiting provision for audit cost, which is less than the actual payment of audit cost. Hence, in the assessment order, the assessing authority restricted to actual payment and the provision was added back. Further the assessing authority disallowed certain amount under section 40(a)(ia). The assessing authority further refused to admit the debited amount in P/L A/c pertaining to provision for non-performing asset (NPA). The assessee challenged the said order passed by the assessing authority before Commissioner of Income Tax (CIT) of appeals. The CIT allowed the appeal and as such Revenue preferred appeal before the Tribunal. The Tribunal has dismissed the appeal. Hence, the present appeal has been preferred by Revenue.

4 3. This Court has framed the following substantial questions of law: ”1. "Whether on the facts and circumstances of the case, the Tribunal is right in law in deleting the interest accrued on non performing assets from the computation of taxable income for the assessment year under consideration despite the assessee maintaining mercantile system of accounting"? 2. "Whether on the facts and circumstances of the case, the Tribunal is right in holding that the provision for non performing assets made by assessee is proper as it is done as per RBI guidelines without appreciating that RBI guidelines cannot override the mandatory provision of section 145 of the I.T.Act which is a specific provision dealing with the method of accounting for determining income of particular year and the decision in the case of UCO Bank V/s.CIT (reported in 237 ITR page 889), the Supreme court has not given findings regarding this issue and as such the Tribunal is not right in relying on this ruling of Apex Court"? 3."Whether on the facts and circumstances of the case, the Tribunal is right in law upholding the provision made by assessee with regard to Audit Cost even when the provisions of Section 43B, the deductions in respect of any sum payable by the

5 assessee by way of duty, cess or fees by whatsoever name called, shall be given only on actual payment and in the instant case, only the provision for payment of audit cost made and not actually paid during the year"? 4. "Whether on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the order of CIT regarding remitting the issue pertaining to TDS to the assessing authority for re-verifying even when the assessing authority is rightly disallowed Rs.17,38,222 under section 40(a)(ia) by considering the available materials on record as well as provisions of the Act"?" 4. The learned counsel appearing for the appellants- revenue has fairly submitted before this court that so far as substantial question Nos.3 & 4 are concerned, he is not pressing for the same. 5. Learned counsel for the respondent assessee has drawn the attention of this court towards the judgment delivered in ITA No.137/2015 dated 13.11.2020. His contention is that the questions of law No.1 and 2 have already been answered by this Court in the aforesaid case. He has drawn the attention of this Court towards paragraphs

6 No.4 to 9 of the aforesaid judgment. Paras 4 to 9 of the said judgment are extracted hereunder: "4. When the matter was taken up today, learned counsel for the assessee submitted that first substantial question of law has already been answered by a bench of this court vide judgment dated 30.06.2014 passed in I.T.A.No.471/2013 (Commissioner of Income Tax vs. The Urban Co- operative Bank Ltd) and Special Leave Petition against the aforesaid order has been dismissed by Supreme Court vide order dated 12.01.2015 keeping the question of law open. The aforesaid aspect of the matter could not be disputed by the learned counsel for the revenue. For the reasons assigned in the judgment dated 30.06.2014 passed by this court in I.T.A.No.471/2013, the first substantial question of law is answered against the revenue and in favour of the assessee. 5. With regard to the second substantial question of law, learned counsel for the revenue submitted that the assessee had claimed the benefit under Section 36(1)(viia) of the Act and the assessee has to first set off the bad debt written off against the provision made under Section 36(1)(viia) of the Act. It is further submitted that if actual write off is in excess of provision made under Section 36(1)(viia) of the Act, then as per proviso to Section 36(1)(vii), actual write off in excess of provision of Section

7 36(1)(viia) would alone be allowed under Section 36(1)(vii). It is also argued that allowing the provision under Section 36(1)(viia) of the Act and on actual write off under Section 36(1)(vii) of the Act would amount to double deduction and the same is in contravention of the law laid down by the Supreme Court in CATHOLIC SYRIAN BANK LTD. VS. CIT (SC) 343 ITR 270. It is further submitted that the principle laid down in the aforesaid decision has not been taken note of by the tribunal and therefore, the matter requires re consideration. It is also urged that reliance placed on decision of this court in COMMISSIONER OF INCOME-TAX VS. CANFIN HOMES LTD., 347 ITR 382 is of no assistance to the assessee as in the aforesaid decision, the effect of Section 36(1)(viia) of the Act has not been considered. 6. On the other hand, learned counsel for the assessee submitted that tribunal was justified in holding that accounting interest income on non performing asset on cash basis by the assessee though it was following mercantile system of accounting was correct since, once a particular asset is shown to be a non performing asset then the assumption is that it is not yielding any revenue and therefore, the question of showing that revenue and paying tax would not arise. In support of aforesaid submissions, reliance has been placed on decisions in 'UCO BANK VS. CIT', 237 ITR 889 SC, 'CIT VS. CANFIN HOMES LTD.', 347 ITR 382 (KAR), CIT

8 VS. THE URBAN CO-OPERATIVE BANK IN ITA NO.471/2013 (KAR), CIT VIS THE URBAN CO- OPERATIVE BANK IN SLP NO.1066/2015 (SC) and 'UCO BANK VS. CIT', 360 ITR 567 (KOL). 7. We have considered the submissions made by learned counsel for the parties and have perused the record. In the course of assessment proceedings, it was noticed that assessee had debited Rs.1.5 Crores as provision for non performing asset but in the income computation sheet the same has not been added. The assessee was given an opportunity to explain why non performing asset provision has not added back to the total income, in the income computation sheet and again deduction 7.5% under Section 36(1)(viia) has not been claimed. The assessee thereupon submitted that a provision has been made as per the norms of the Reserve Bank of India and the details of non performing assets as well as provisions made were provided. The Commissioner of Income Tax (Appeals) held that deduction for provision for bad and doubtful debt is allowed under Section 36(1)(viia) of the Act in the light of the decision of the Supreme Court in UCO Bank Ltd. supra. The tribunal in its order dated 10.10.2014 inter alia has held that though the assessee has used the nomenclature as provision for non performing assets but in pith and substance, the provision has been created for bad and doubtful debts and in doing so the assessee has followed the

9 guidelines framed by Reserve Bank of India. The tribunal has therefore, affirmed the finding recorded by the Commissioner of Income Tax (Appeals). 8. This court in Canfin Homes Ltd. supra after taking note of Section 145 of the Act has held that once a particular asset is shown as non performing asset then the assumption that it is not yielding any revenue. When an asset is not yielding any revenue, the question of showing that revenue and paying tax would not arise. The contentions, which are sought to be raised by learned counsel for the revenue do not arise for consideration in the context of substantial question of law, which has been framed by this court. The concurrent findings have been recorded by the Commissioner of Income Tax (Appeals) as well as tribunal in this regard, which cannot be termed as perverse. 9. In view of preceding analysis, the second substantial question of law is answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.” 6. This court has carefully gone through the aforesaid judgment. The substantial questions of law Nos.1 & 2 have already been answered in respect of assessee for the

10 assessment year 2007-08 and the present appeal is in respect of the assessment year 2008-09. 7. In the light of the aforesaid judgment delivered by this court, the substantial questions of law are answered against the revenue and in favour of the assessee. With the aforesaid observation, the appeal is dismissed. No order as to costs. Sd/-

JUDGE Sd/- JUDGE PL*