THE COMMISSIONER OF INCOME TAX vs. THE RADDI SAHAKARA BANK NIYAMITHA

1/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 30TH DAY OF JANUARY 2017 PRESENT THE HON’BLE DR. JUSTICE VINEET KOTHARI AND THE HON’BLE MR. JUSTICE SREENIVAS HARISH KUMAR I.T.A.No. 100026 OF 2014 (TIT) C/w. I.T.A.No. 100025 OF 2014 (TIT) BETWEEN: 1. THE COMMISSIONER OF INCOME TAX NAVANAGAR, HUBLI. 2. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2 (1), HUBLI ... APPELLANTS (COMMON) (BY SRI. Y. V. RAVIRAJ, ADVOCATE) AND: THE RADDI SAHAKARA BANK NIYAMITHA BANK ROAD, DHARWAD – 580 001 PAN AAAAT 3297K ... RESPONDENT (COMMON) (BY SRI. K. R. KAMBIYAVAR AND S. PARTHASARTHI, ADVOCATES)

2/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha I.T.A. NO.100026/2014 IS FILED UNDER SECTION 260A OF THE INCOME-TAX ACT, 1961 PRAYING TO SET ASIDE THE ORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B' IN I.T.A.NO.890/BANG/2012 DATED 31.12.2013 AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1), HUBLI. I.T.A. NO.100025/2014 IS FILED UNDER SECTION 260A OF THE INCOME-TAX ACT, 1961 PRAYING TO SET ASIDE THE ORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B' IN I.T.A.NO.876/BANG/2012 DATED 31.12.2013 AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1), HUBLI. THESE APPEALS COMING ON FOR FINAL HEARING THIS DAY, Dr.VINEET KOTHARI. J, DELIVERED THE FOLLOWING: COMMON JUDGMENT Mr. Y. V. Raviraj, Advocate for appellants Mr. H. R. Kambiyavar & S. Parthasarthi, Advocates for respondent 1. These two appeals have been filed by the Revenue against the orders passed by the learned Income Tax Appellate Tribunal, Bangalore Bench ‘B’ (hereinafter referred to as ‘the Tribunal’, for short) on

3/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha 31.12.2013, deleting the addition made in the hands of the petitioner-assessee, which is the Co-operative Bank, under Section 41(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act, for short), to the extent of Rs.73,58,708/- for A.Y.2007-08. 2. The learned Assessing Authority has made the said addition in the income of the petitioner-assessee on the ground of Demand Drafts and Pay Orders payable as on the last date of the Financial Year, which were not so far encashed by the concerned customers. Therefore treating the same as cessation of liability under Section 41(1) of the Act, the learned Assessing Authority added back the said amount to the declared income of the assessee. 3. The learned Tribunal’s findings in this regard as recorded in para 8.5.1. are quoted below for ready reference:

4/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha “8.5.1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited on either side. The Assessing Officer has invoked the provisions of Section 41(1) of the Act to bring the amount of Rs.73,58,708 received for making drafts and pay orders to tax in the hands of the assessee in the period under consideration. Section 41(1) of the Act, specifically deals with amounts that were allowed as a deduction in the past assessments as trading liabilities which in a later year ceases OR are remitted by the creditors. If and when in a later year there is evidence to show that the liability is remitted, it can be brought to tax. In order to invoke section 41(1) of the Act, it must be first established that the assessee had obtained some benefit in respect of a trading liability which was earlier allowed as a deduction. It is not enough if the assessee derives some benefit in respect of such liability, but it is essential that such benefit arises by way of ‘remission’ or ‘cessation’ of liability. In

5/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha Sugauli Sugar Works (P) Ltd reported in (1999) 234 ITR 518 (SC) it was held that a unilateral action cannot bring about a cessation or remission as a ‘remission’ can only be granted by a creditor and ‘cessation’ can only occur either by operation of law or the debtor by unequivocally declaring intention not to honour his liability when payment is demanded by the creditor. In the case on hand, taking into account the facts and circumstances involved, we find merit in the arguments put forth by the learned Authorised Representative since the outstandingly liability of Rs.73,58,708 on account of Demand Drafts and pay orders is still reflected in the books of accounts of the assessee as on 31.3.2007 and therefore the same stands acknowledged by the assessee and the liability subsists. In this view of the matter, we find that the authorities below have failed to establish the primary requisite for invoking the provisions of Section 41(1) of the Act and hold that the provisions of Section 41(1) of the Act would not be attracted in the

6/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha case on hand in respect of the outstanding liability of Rs.73,58,708. 8.5.2 As per the RBI Circular referred to by the assessee it is required to keep the amounts related to such stale drafts / pay orders as a liability in the books of account for ten years after which the amount would be transferred to the RBI. A reading of this Circular would indicate that there is no cessation of liability in favour of the bank at all. For ten years the stale DDs/Pay orders remain as a liability of the concerned persons, in the books of the bank and thereafter it gets transferred to the RBI.

In these circumstances, the liability would not become the income of the assessee bank. 8.5.3 In the case on hand, the fact that the assessee has not credited the amount of Rs.73,58,708 received for making of Drafts and Pay Orders to its profit and loss account in the period under consideration, is not in dispute. In fact, the said amount admittedly appeared as an outstanding liability towards

7/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha drafts and pay orders in the Balance Sheet of the assessee as on 31.3.2007. We, therefore find merit in the arguments put forth by the learned Authorised Representative which is further fortified by the decisions rendered by the co-ordinate bench of this Tribunal in the cases of Canara Bank (ITA No.390/Bang/2011 dt.8.6.2012) and Vijay Bank (ITA No.455/Bang/2011 dt.22.4.2012). Following, the aforesaid decisions of the co- ordinate bench of the Tribunal (supra), we delete this addition of Rs.73,58,708 made by the Assessing Officer under Section 41(1) of the Act as being unsustainable.” 4. The learned counsels at bar submitted before the Court that this controversy is no longer res integra and the Division Bench of this Court in The Commissioner of Income Tax Vs. Karnataka Vikas Grameen Bank in ITA No.100014/2014 and connected case, decided on 14.12.2015, has held, following the decision of the Hon’ble Supreme Court in the case of T.

8/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha V. Sundaram Iyengar and Sons Limited reported in (1996) 222 ITR 344, that such an addition cannot be made under Section 41(1) of the Act, since the liability of the assessee Bank to pay back the amounts to the customers in respect of such stale Demand Drafts and Pay Orders does not cease in law. The relevant extract from the judgment of the Division Bench of the Court as contained in para 18 thereof including the extract from the decision of the Hon’ble Supreme Court is quoted below for ready reference: “18. A careful perusal of the above provision leads us to infer that Section 41(1) can be pressed into service when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. In the instant case, the sum of Rs.58,38,581/- has remained with the assessee owing to the fact that the payees or holders of the draft/pay orders had not encashed them.

9/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha The language employed by the legislature being unambiguous, it would be incongruous to construe the said sum as either a loss, expenditure or trading liability incurred by the assessee. While dealing with a situation of unclaimed amount, the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar1, has held as follows:- “12. We are unable to uphold the decision of the Tribunal. The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constitutents. As it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The CIT(A) found that the assessee wrote back the amounts to its P&L a/c because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was

1 (1996) 222 ITR 344

10/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha taken to its P&L a/c. The CIT(A) held that these amounts were not revenue receipts but were of capital nature. The provisions of s.41(1) were not attracted in the facts of this case because the assessee’s liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view." (underlining is by us) 19. The Tribunal adverting to the above ruling has rightly deleted the sum of Rs.58,38,581/- added by the assessing authority by holding it as unsustainable in law.” 5. Having perused the record, we are in respectful agreement with the aforesaid decision of the Division Bench of this Court and we do not find any reason to take a different view of the matter and in view of the aforesaid, we do not find any substantial question of law arising in the present case.

11/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha 6. Further, the learned counsel for the Revenue also pointed out that with regard to another substantial question of law as stated in the memorandum of appeal filed by the Revenue about the taxability of the accrued interest on the non-performing assets of the borrowers, this Court in the case of The Commissioner of Income Tax Vs. Shri. Siddeshwar Co-operative Bank Limited (ITA No.200002/2015 along with other connected appeals, decided on 22.06.2016, following the previous decisions of this Court in the case of Commissioner of Income Tax and another Vs. Canfin Homes Ltd., reported in (2012) 347 ITR 382 (Karn), has held that such accrued interest on non-performing assets cannot be brought to tax in the hands of the assessee. The relevant portion of the judgment of the Division bench of this Court in Commissioner of Income Tax Vs. Shri. Siddeshwar Co- Operative Bank Limited (supra) is also quoted below for ready reference:

12/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha “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 Commissioner of Income-Tax and another vs. Canfin Homes Ltd. (2012) 347 ITR 382 (Karn) 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

13/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha 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, were 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-

14/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha 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 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

15/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha 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:

16/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha An asset including a leased asset, becomes non-performing when it ceases to generate income from the bank. A “non-performing asset” (NPA)is a loan or an advance where; (i) The interest and/or installment 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 installment of principal or interest thereon remains overdue for two crop seasons for short duration crops; (v) the installment 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

17/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha 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: “Banks are required to classify non- performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: (a) Sub-standard assets: (b) Doubtful Assets: (c) Loss assets: Therefore, it is evident that the mere nomenclature adopted with reference to the bad loans and advances receivable, would refer to all non-performing assets of any nature, of whatever category it was placed as a non- performing asset and therefore, the decision of this court in Canfin Homes would squarely apply. Accordingly, the above question of law also stands answered.

18/18 Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014 The Commissioner of Income Tax & Another Vs. The Raddi Sahakara Bank Niyamitha Accordingly, the appeals stand disposed of.” 7. In view of this, we are of the opinion that no substantial question of law now arises for further consideration by this Court and the questions of law as stated in the memorandum of appeal also stand covered by the decisions of this Court as noted above. 8. Therefore, the present appeals filed by the Revenue deserve to be dismissed. The appeals are accordingly dismissed. No costs. Sd/- JUDGE Sd/- JUDGE gab