THE COMMISSINER OF INCOME TAX (APPEALS) AND ANR vs. THE BIJAPUR DISTRICT CENTRAL

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 4 In ITA No.200013/2015 Between: 1. The Commissioner of Income Tax (Appeals), Dr.B.R. Ambedkar Road, Belagavi. 2. Assistant Commissioner of Income Tax, Circle-1, Vijayapura. …Appellants (By Sri Ameet Kumar Deshpande, Advocate) And: The Bijapur District Central, Co-Op. Bank Ltd., Vijayapura-586101, PAN : AAAAB0694E. … Respondent (By Sri A Shankar and Sri M. Lava, Advocates) This Appeal is filed under Section 260A of the Income Tax Act, praying to formulate the substantial question of law stated above. Allow the appeal and set aside the orders passed by the Income Tax Appellate Tribunal, “C” Bench, Bangalore, in ITA No.1711/BANG/2013, dated 31.12.2014 for the Assessment Year 2009-10 and confirm the order passed by the Joint Commissioner of Income Tax, Bijapur Range Bijapur. These appeals coming on for Admission this day, VINEET KOTHARI J., delivered the following:

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 5 J U D G M E N T Mr. Ameet Kumar Deshpande, Advocate for Appellants- Revenue Mr. A Shankar and Sri M. Lava, Advocates for Respondent-Assessee 1. These four appeals filed by the Revenue are being disposed of by common order. The appeals pertain to Assessment Years 2009-10 and 2010-11 against the respondent-Assessee the Bijapur District Central Co-operative Bank Limited, Vijayapur. 2. Two issues which are sought to be raised by this Court, under Section 260A of the Income Tax Act in the form of substantial questions of law arising out of the order of the learned Income Tax Appellate Tribunal are as under. 3. That the respondent-Co-operative Society engaged in the activities of Co-operative Bank for these Assessment Years in question failed to deduct tax at

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 6 source under the provisions of Section 194A (1) of the Income Tax Act, 1961 from the interest paid to its member over Rs.10,000/- during the said years and therefore a disallowance of such interest paid to the members without TDS, was liable to be made as per the provisions of Section 40 (a) (ia) of the Act. 4. Both the learned counsel at Bar fairly submitted that the said issue is no longer res-integra in view of the CBTD Circular No.19/2015 holding that such Co-operative Banks are not required to deduct tax at source an interest paid on one time deposits by its members, paid or credited on or before 01.06.2015. 5. On the basis of the said Circular No.19/2015, this Court has already disposed of some appeals filed by the Income Tax Department and one such order in ITA No.100060/2016, CIT vs.

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 7 Karnataka Vikas Grameena Bank decided on 07.06.2017, is cited at Bar by the learned counsels. 6. This Court in the aforesaid case of CIT vs. Karnataka Vikas Grameena Bank held as under : “1. The learned counsel for the department – Revenue Mr. Y.V.Raviraj, submits that the controversy is no longer res integra and is covered by the decision of the Co-ordinate Bench i.e. The Commissioner of Income Tax and another Vs. The Ilkal Co-Operative Bank Ltd., The Co-ordinate Bench in the said case has held as below: “In this appeal by the Revenue, the issue involved is for consideration whether the Co-operative Bank was required to deduct tax while paying interest to its members on time deposits under Section 194-A of the Income Tax Act.

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 8 2. The Ministry of Finance, Government of India vide Circular No.19/2015 in F.No.142/14/2015-TPL, has held that the Co- operative Banks are not required to deduct tax at source on time deposits of its members paid or credited on or before 1.6.2015. The relevant portion of the circular reads as under: “42.5 In view of this, the provisions of the section 194A(3)(v) of the Income-tax Act have been amended so as to expressly provide that the exemption provided from deduction of tax from payment of interest to members by a co- operative society under section 194A(3)(v) of the Income-tax Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members. As this amendment is effective from the prospective date of 1st June, 2015, the co-operative bank shall be required to deduct tax from the payment of interest on time deposits of its members,

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 9 on or after the 1st June, 2015. Hence, a cooperative bank was not required to deduct tax from the payment of interest on time deposits of its members paid or credited before 1st June, 2015.” In view of the aforesaid Circular, this appeal does not survive for consideration and is accordingly dismissed. No costs. 3. In view of the same, the present appeal filed by Revenue is also disposed of, in the same terms.” 7. In view of the aforesaid reasons of this Court and Ministry’s Instructions, we do not find any substantial question of law to be arising for our consideration of the present appeals filed by the Revenue on the said issue.

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 10 8. On another issue raised by the Revenue in the present appeals about the taxability of the interest on the bad debts/doubtful debts or NPA (Non- Performing Assets) by the respondent-Co-operative Bank, without such interest being actually credited in the Profit and Loss Account of the respondent-Assessee, in the books of accounts for the relevant Assessment Year or such interest actually having been received by the respondent-Assessee, the said question also stand covered by the Division Bench of this Court in the case of CIT vs. Canfin Homes Limited (2012) 347 ITR 382 (Karnataka). In the aforesaid case, a Co-ordinate Bench of this Court held as under : “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

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 11 because the said amount accrued was not realized 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

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 12 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. For the aforesaid reasons we do not see any merit in the appeal. Accordingly, the appeals is dismissed. ” 9. Section 43D of the Income Tax Act, which was originally inserted on the statute book by the Finance Act, 1991, with effect from 01.04.1991, reads as under: “43D. Special provision in case of income of public financial institutions, etc.- Notwithstanding anything to the contrary contained

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 13 in any other provision of this Act, in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation, whichever is earlier. Explanation.—For the purposes of this section,— (a) “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (b) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36;

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 14 (c) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (d) “State industrial investment corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and approved by the Central Government under clause (viii) of sub-section (1) of section 36. The said provision as substituted by Finance Act, 1999, with effect from 01.04.2000, reads as under:- “43D. Special provision in case of income of public financial institutions, public companies, etc.—Notwithstanding anything to the contrary contained in any other provision of this Act, — (a) in the case of a public financial institution or a scheduled bank or [a co-

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 15 operative bank other than a primary agricultural credit society or] a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts; (b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or [a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or] the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 16 which it is actually received by that institution or bank or corporation, whichever is earlier. Explanation.—For the purposes of this section,— (a) National Housing Bank” means the National Housing Bank established under section 3 of the National Housing Bank Act, 1987 (53 of 1987); (b) “public company” means a company,—

(i) which is a public company within the meaning of section 3 of the Companies Act, 1956 (1 of 1956);

(ii) whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; and

(iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989, given under section 30 and section 31 of the National Housing Bank Act, 1987 (53 of 1987);

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 17 (c) “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (d) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36; (e) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (f) “State industrial investment corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects]. (g) “co-operative bank”, “primary agricultural credit society” and “primary co-operative

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 18 agricultural and rural development bank” shall have the meaning respectively assigned to them in the Explanation to sub-section (4) of section 80P]” 10. The said provisions of Section 43D of the Act were further amended by Finance Act, 2017, with effect from 01.04.2018 and the Co-operative Banks were also brought at par with the Public Financial Institutions or Schedule Banks. 11. Under Section 43D of the Act itself clearly provided that interest on such bad debts/doubtful debts cannot be taxed, unless the concerned Financial Institutions or Schedule Banks or Co-operative Banks credits such interest in its Profit and Loss Account for that year or actually receives such interest from the borrowers.

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 19 12. The purpose of such protection given to these Financial Instructions or Banks was not to allow taxability of the interest on bad debts/doubtful debts or Non-Performing Assets (NPA’s) unless they actually received such interest income or such interest income was credited in their Profit and Loss Account by the concerned Financial Institution or the Schedule Bank or the Co-operative Banks after 01.04.2018. 13. Thus the provisions of Section 43D of the Act itself excludes the taxability of the such interest income. 14. Even without recourse to the concept of non- taxability of interest in such cases under Section 43D of the Act, the Division Bench in the case of CIT vs. Canfin Homes Limited (supra) on the basis of the interpretation given to Section 145 providing for “Method of Accounting” in the Act held that such interest income on bad debts/doubtful debt cannot be

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 20 taxed, unless it is actually received or credited in the Profit and Loss Account of the assessee concerned in that year. 15. Another Co-ordinate Bench of this Court in ITA No.471/2013 CIT vs. Urban Co-operative Bank Limited, Shimoga has followed the aforesaid decision of the Division Bench in the case of CIT vs. Canfin Homes Limited in its judgment rendered on 30.06.2014, in the case of a Co-operative Bank also. Though the learned counsel for Revenue submitted before us that in Special Leave Petition filed by the Revenue against the said decision dated 30.06.2014, was dismissed by the Hon’ble Supreme Court on 12.01.2015, the question of law was left open. However, we do not find any reasons to take a different view from the one taken by the Division Bench of this Court in the case of CIT vs. Canfin Homes Limited, even in the case of Co-Operative Banks as well.

Date of order: 23.03.2018 ITA No.200014/2015 C/W ITA Nos.200016/2015, 200015/2015 & 200013/2015 The Commissioner of Income Tax (Appeals) & another vs The Bijapur District Central Co-Op. Bank Ltd., 21 16. We are in respectful agreement with the view expressed by the Co-ordinate Bench in the case of CIT vs. Canfin Homes Limited (supra). Since the said controversy therefore stands concluded by the Division Bench of this Court, in our considered opinion, no substantial question of law arises on the said issue also sought to be raised by the Revenue in the present appeals. 17. Thus, no substantial question of law arises in these appeals filed by the Revenue and therefore they are liable to be dismissed at the threshold of admission stage. We accordingly dismiss these appeals. No costs. Sd/- Sd/- JUDGE JUDGE RSP