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Income Tax Appellate Tribunal, NAGPUR BENCH, NAGPUR
Before: SHRI V. DURGA RAO & SHRI K.M. ROY, ACCOUNTANT, MEMBER
Date of Hearing – 10/10/2024 Date of Order – 30/10/2024
O R D E R PER K.M. ROY, A.M.
This appeal has been filed by the Revenue challenging the impugned order dated 31/08/2020, passed by the learned Commissioner of Income Tax (Appeals)–1, Nagpur, [“learned CIT(A)”], for the assessment year 2015–16.
2. In its appeal, the Revenue has raised following grounds:
– “1. On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) has erred in allowing loss on sale of NPA to asset reconstruction company(ARC) of Rs. 10,40,79,321/- in contravention to provisions of section 36(1)(viia) of the Act.
2. On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) has erred in treating revaluation of assets by Asset Reconstruction Company of NPA as loss or bad debts written off without appreciating the facts of the case.
2 The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020
On the facts and circumstances of the case and in law, the Ld. CIT(Appeals) has erred in overlooking the provisions of I.T. Act contained in section 36(1)(viia) of the Act, resulting in miscarriage of justice.
Any other ground which may be taken at the time of hearing with the permission of Hon'ble ITAT.”
3. Facts in Brief:– The assessee is a Scheduled Co-operative Bank engaged in the activities of banking within the purview of Banking Regulation Act. The assessee filed its return of income on 30/09/2015, disclosing total income of ` nil, as the assessee has reported loss for assessment year 2015– 16 at ` 12,39,52,307. The assessee has claimed carry forward of business loss along with unabsorbed depreciation for current year as well as preceding year. The assessee filed its revised return on 01/10/2015, claiming TDS which remained to be claimed in original return of income. There were no changes in income insofar as other claims are concerned. The case was selected for Scrutiny under CASS. The Assessing Officer concluded by passing order dated 27/12/2017, under section 143(3) of the Income Tax Act, 1961 ("the Act") on total loss of ` (-) 1,84,80,597, by making addition of ` 10,54,71,710, on account of disallowance of loss on sale of NPAs to Asset Reconstruction Company and also made disallowance of expenses aggregating to ` 13,92,389, being 30% of ` 46,41,297, on which TDS was not deducted. Such disallowance was made under section 40(a)(ia) of the Act. Effectively, the business loss to be carried forward for subsequent years was reduced. Being aggrieved, appeal was preferred.
3 The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020
4. The learned CIT(A) elaborately dealt with the issue vide Para–5.1 to 5.3.3 of his order and granted relief on the issue of loss of NPAs by holding as under:– “5.1 During the assessment proceedings it was noticed that the assessee has claimed Loss on Sale of NPA to Securitisation Company at Rs. 10,40,79,321/- Explanation was sought from the assessee vide letter dated 11.12.2017. The assessee was required to justify that if NPAs converted in Security Receipts are valid for 5 years then why the loss claimed should be allowed and how the recoveries made from these sold NPAs are going to be accounted for. The assessee was also asked to furnish modus operandi. Assessee vide written submission dated 15.12.2017 submitted that the assets in the possession are mortgaged or transferred to Asset Reconstruction Company (ARC). ARC pays some part in cash and balance is paid in the form of Security Receipts (SR). From the documents supplied by the assessee it appears that the assets are transferred to a Trust ie. Special Purpose Vehicle (SPV) created for the specific purpose of buying and managing the NPA sold by the assessee bank and assessee bank too is a part of that trust (SPV). This means that ARC has held NPA of the assessee as a separate pool under a trust, and the assessee bank subscribing to SRs of their own assets. In other words, the assessee bank'simply removed the bad assets i.e. NPA from their loan books and bringing them back as good assets through their investment books i.e. SRs. Thus, what has been claimed as a loss by the assessee bank is not a loss at all. The assessee in its submission has admitted that "In case all the SRs are not got redeemed by ARC, unredeemed SRs are given back to ARC and the NPA gets restored for usual treatment". The model adopted by the assessee bank is clear that after certain period if no recoveries are made the assets will be transferred back to the assessee. The assessee vehemently supported his case relying upon the Hon'ble Mumbai ITAT decision dated 08/11/2017 in ITA no. 2833/Mum./2015 Asst year 2009-10 in the case of Bank of India, Mumbai Vs. Dy.CIT, Mumbai. However, in the said decision there is no mention of what was the treatment given to NPA by the Bank of India and whether these NPAs were to reverted back to the Bank of India after specific period or not. Further the Bank of India is a nationalised bank and assessee a multi-state cooperative bank, there may be vast difference in modalities of NPA sale as well as applicability of provisions of Income Tax Act, 1961. In spite of specific query to the assessee to elaborate how the claim is allowable, the assessee filed reply in brief without any tangible reason being offered in support of the claim. Moreover, there is no reference whether it wanted to write off the said balances as less or Bad Debts. Yet looking at the facts of the claim, it is neither a loss nor Bad Debts. Without the loss or bad debt being written off in the books of accounts, which is primary condition as per I. T. Act, 1961, no such claim can be allowed. In view of the above discussion the loss claimed by the assessee at Rs. 10,40,79,321/- is disallowed and added to the total income of the assessee. As the assessee has furnished inaccurate particulars of the 4 The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020 income by way of wrong claim penal proceedings u/s 271(1)(c) of the Income Tax Act, 1961 are initiated." 5.2 It can be observed that while the appellant had sought the allowability of its claim placing reliance upon the decision of Hon ITAT Mumbai in the case of Bank of India, Mumbai vs. DCIT in ITA No. 2833/Mum. 2015 for AY 2009-10 vide order dated 08/11/2017, the AO did not accept the contention of the appellant holding that there was no mention of the treatment given to NPAs by Bank of India and whether these NPAs were reverted back to bank after specific period. The AO further distinguished the appellant's case from Bank of India's case stating being a nationalized bank there may be vast difference in modalities of NPA sale as well as applicability of provisions of Income Tax Act. The AO also observed that the claim of the appellant is neither a loss nor bad debt being written off in books of accounts, which is a primary condition as per the Act for allowability of such a claim. Hence, he disallowed the same Detailed working of the claim of the appellant and the relevant accounting treatment is given in preceding para 4.0 under submission dated 07/08/2020. 5.3 The first issue in this regard is to determine if the procedure of sale of NPAs is at par for Nationalised Banks as well as Multi-State co- operative Banks. Reference is Income made to preceding para 4.0. The provisions of Section 2 indicate that subsection (c) thereof defines "bank" as: of the SARAFESI Act 2002 (i) a banking company; or (ii) a corresponding new bank; or (iii) the State Bank of India; or (iv) a subsidiary bank; or (iva) a multi–State co-operative bank; or] (v) such other bank which the Central Government may, by notification, specify for the purposes of this Act; 4. Ins. by Act 1 of 2013, s. 2 (w.e.f. 15-1-2013)." 5.3.1 Further, as per section 5 of the above referred Act: "5. Acquisition of rights or interest in financial assets. (1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any asset reconstruction company may acquire financial assets of any bank or financial institution- 5.3.2 The applicability of the SARAFESI Act to Multi-State Co-operative Banks has also been upheld by Hon'ble Supreme Court vide order dated 05/05/2020 in Civil Appeal No. 5674 Of 2009 Pandurang Ganpati Chaugule Versus Vishwasrao Patil Murgud Sahakari Bank. Thus one part of the apprehensions raised by the AO regarding parity of Nationalised Banks with Multi-State Cooperative banks is addressed. For the remaining factors considered by AO in disallowance of this loss, reference is first made to the relevant portion of the order of Hon'ble
The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020 ITAT Mumbai in the case of Bank of India, Mumbai vs. DCIT in ITA No. 2833/Mum./2015 for AY 2009-10 vide order dated 08/11/2017: "13. Disallowance of loss of Rs. 49.35 crores, on sale of assets to Asset Reconstruction Company of India Ltd. (ARCIL), is the subject matter of ground number eight. During the assessment proceedings, the AO directed the assessee to file details on account of loss claimed. As per the AO, the assessee had only submitted that the deduction had been claimed on account of sale of NPAs to ARCIL, that it did not provide any other justification in support of the claim. He held that provisions of section 36(1)(viia)dealt with non-performing assets, that there was no justification for allowing the loss on sale of NPA.s when provision for the same had been allowed in the earlier years. He held that there was no actual loss arising on sale of assets to ARCIL. Finally, he disallowed the amount claimed by the assessee. 13.1. During the appellate proceedings, before the FAA, the assessee argued that loss had arisen on account of sale of advances to ARCIL enterprise less than the Book value, that some was not debited to P&L account as per the guidelines of the RBI, that the resultant loss had to be adjusted against the provisions held, that the loss had occurred in the course of carrying on banking business. After considering the available material, he held that the assessee had not debited the said claim of loss in its profit and loss account, that no material evidences were furnished to establish that the claim made by the assessee was genuine. Finally, upholding the order of the AO, he dismissed the ground, raised by the assessee. 13.2. Before us, the AR contended that the assessee had sold its assets, that it had incurred that selling of assets was part of the normal business activity to ARCIL. The DR Supported the order of the FAA and stated the claim was made in the computation of Ancome, that it was not part of the profit and loss account. 13.3. We have heard the rival submissions and perused the material before us. We find the assessee had sold NPA.s to ARCIL, that as per the RBI instructions it did not claim the loss in the profit and loss account, that the claim was made before the Department authorities that it had suffered a loss on sale of NPA.s, that the AO and the FAA held that the assessee had not suffered real loss ie. it was notional loss only. There is no doubt about selling of assets to ARCIL, that ARRIL is not a fake or bogus entity, that the sale has not been doubted by the AO/FAA, that the entry in the books of accounts have been made as per the instructions of the RBI. In our opinion, following of RBI instruction by a banking company cannot be basis for denying or allowing any claim. It is said that the entries in the books of accounts are not conclusive proof of taxability of any income. What has to be seen is the substance of the transaction. Considering the fact that the assessee had suffered loss while carrying out normal business activity i.e. selling its assets. Therefore, we hold that there was no justification for disallowing the loss suffered in the transaction. Reversing the order of the FAA, we decide Ground no.8 in favour of the assessee. 5.3.3 It is observed that the facts of the present case are similar to the above referred case wherein the Hon ITAT has held in at para 13.3 of the above-referred order that it is the substance of the transaction that was the conclusive proof of taxability as against entries in books of accounts. As discussed at preceding para 4.0, the appellant suffered a loss as its NPAs valued at Rs. 5284.23 lakhs were sold to ARC for Rs. 4200.00 lakhs. To further rule out any possibility of excess claim, the The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020 appellant was asked during the appeal proceedings to justify the claim of this loss with respect to the deduction claimed and allowed to it u/s36(1)(viia) of the Act. The appellant furnished the working as summarized below, along with copies of computation of income filed with returns of respective AYs:
Amount allowed Amount debited Computation at Assessment / claimed u/s to PL Account Page no. of this Year 36(1)/(viia) of and added back submission the Act 2007–08 1,10,00,000 53,49,835 9–10 2008–09 7,00,00,000 1,02,17,425 11–12 2009–10 10,00,00,000 1,45,26,224 13–14 2010–11 4,91,00,000 48,65,805 15–16 2011–12 4,50,00,000 89,60,765 17–19 2012–13 6,70,00,000 1,94,88,933 20–21 No claim being 2013–14 16,74,00,000 22–23 loss No claim being 2014–15 4,50,00,000 24–25 loss No claim being 2015–16 18,50,00,000 26–27 loss
5.3.4 It was observed that the amount allowed by the department from AY 2007-08 to i.e Rs. 6,31,41,885/- is considered while claiming loss for the assessment year 2013- 14. Thus what has been allowed by the department is already reduced in AY 2013-14 while allowing loss leaving no balance to be considered for subsequent AYs. Therefore, in view of the above-discussed facts and respectfully following the decision of Hon ITAT as discussed at preceding para 5.3.2, the claim of loss of appellant on the sale of NPAs to Asset Reconstruction Company amounting to ` 10,40,79,321/– stands allowed.”
Before us, the learned Departmental Representative vehemently submitted that the loss is only contingent and did not crystalize, because collection from advances was in progress. Reliance on the decision of the Co– ordinate Bench of the Tribunal, Mumbai Bench, was misplaced, as the learned D.R. felt that the facts were different and distinct there was no discussion on the issue whether loss can be claimed without recourse of provisions of section 36(1)(viia) of the Act with reference to non–performing assets. He strongly buttressed upon the point that for banks claiming of loss can only be made after exhausting existing provisions for doubtful debts.
7 The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020
Per contra, Shri Dhiren Gandhi, learned Counsel, ably assisted by Shri S.G. Gandhi, appearing for the assessee, strenuously argued that the watertight order passed by the learned CIT(A) need not be disturbed with. He submitted that the Assessing Officer had made the addition of ` 10,40,79,732, on the following premises:– “1) The assessee is a co-operative bank and the modus operandi of business of nationalized bank and co-operative bank may be different (as assesse had relied upon a decision of Hon'ble Mumbai ITAT in the case of Bank of India v Dy. CIT in for ay 2009- 10). 2) The provisions of SARFAESI ACT 2002 are not applicable to co-op. bank? 3) Sale of NPAs worth Rs.52.84 crores for Rs.39.90 crores is conversion of bad asset into good asset. 4) Deduction on account of provision is already allowed to Assessee under section 36(1)(viia) of the Act. On all the issues assessee made necessary submission before AO during assessment proceeding which the AO did not find to his satisfaction. In appellate proceeding before Commissioner of Income Tax (Appeals) assessee made same submissions in principle. The copies of submissions made before CIT(A) are part of assessee's paper book submitted before Hon'ble ITAT on 12-09-2024 (PB page no. 36-50, 51- 53, 54-93 and 94-125). The assessee submitted before CIT(A) computations of income for AY 2007- 08 to AY 2015-16 in order to establish by claiming a loss on sale of NPA, bank did not claim double deduction. CIT(A) after giving due consideration to the submissions made time to time and discussion during personal hearings, allowed a deduction Against the order of CIT(A) dt.31/08/2020 the "Department" filed an appeal before Hon'ble ITAT which is under present consideration.”
We have given our thoughtful attention to the issue. The entire factual gamut of the case is summarised below:–
The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020 “NOTE ON SECURITIZATION OF NON PERFORMING ASSETS ACCOUNTING OF SALE TRANSACTION AUCB Ltd. sold 18 of its NPA Accounts to Reliance Asset Reconstruction Company Ltd. (RARCL). Sale consideration was calculated on the basis of the total balance outstanding in these accounts on 30th April, 2014. The same amounted to Rs. 5,584.23 Lakhs. After valuation of the assets under consideration, RARCL offered to pay a consideration of Rs. 4200.00 Lakhs for the assets, which was accepted by the Bank. The consideration was agreed to be paid in the following manner: (Rs. In Lakhs) Particulars % Amount (`) Cash 5% 210.00 Security Receipts 95% 3,990.00 Total 100% 4,200.00 The consideration was paid by RARCL on 16th May, 2014. As per RBI Norms, 1. When banks invest in the security receipts issued by SC/RC in respect of the financial assets sold by them to the SC/RC, the sale shall be recognised in books of the banks at the lower of: a. The redemption value of the security receipts; and b. The NBV of the financial asset. Accordingly, the SRs received against sale of NPA Assets to RARCL have been valued at the NBV. Details are given below: (Rs. In Lakhs) Amount (`) Particulars Total NPA Securitised 5,284.23 Less: Provision 1,627.41 Less: Cash Consideration 210.00 Net Book Value (NBV(a) 3,446.82 Redemption Value of SR (b) 3,990.00 Lower of (a) & (b) 3,446.82
If the sale is for a value higher than the NBV, the excess provision will not be reversed but will be utilized to meet the shortfall / loss on account of sale of other financial assets to SC/RC. Accordingly, provision to the extent of Rs. 1,084.23 Lakhs (5284.23-210.00-3,990.00) was to be reversed. However, as the bank has reversed the total provision of Rs. 1,627.41 Lakhs, provision to the extent of Rs. 543.18 Lakhs has been created. The corresponding asset is created under the head “Excess Amt. of Sec Receipt Receivable A/c” which represents the balance amount of SRs receivable from RARCL. Accounting Entries passed by the bank are as follows:–
The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020
At Head Office Sr. Particulars Dr./Cr. ` ` no. Bad & Doubtful Debt Reserve A/c Dr. 1,627.41 Investment in SR A/c Dr. 3,446.82 Cash A/c Dr. 210.00 To Respective Branch A/c Cr. 5,284.23 1. (Being Consideration received against sale of NPA Assets transferred to respective Branches. As per RBI Norms, SR are to be valued at Redeemable Value or NBV of Assets Securitised, Whichever is less) Excess Amt. of Sec Receipt Dr. 543.18 Receivable A/c Provision of Excess Amt. of Sec Cr. 543.18 Receipt A/c (Being difference in Redeemable 2. value of SR (` 3,990 lakh) and NVV of Securitized assets (` 5284.23 lakh – ` 1,627.41 lakh = ` 3,446.82 lakh) booked as Excess Provision as per RBI Jorms) ` 3,990 lakh – ` 3,446.82 = ` 543.18 lakh At Respective Branches: Sr. Particulars Dr./Cr. Amount (`) no. HO A/c Dr. 5,284.23 1. Respective Advance Account Cr. 5,284.23 On crediting the NPA accounts by the NBV, the system considered it as a repayment and appropriated it against Interest Receivable A/c. Consequently, the Overdue Interest Reserve A/c was transferred to the P&L A/c and booked as income. However, the Bank has reversed such system generated entries by debiting the P&L A/c and transferring the income back to the Loan A/c. VALUATION OF SECURITY RECEIPTS The bank has obtained valuation certificate of the Security Receipts done by ICRA from RARCL. The valuation is done as on 31" December, 2014. As per the valuation certificate, the FV of SRs on the said date was Rs. 41.83 Crores as against the Issue Price of Rs.39.90 Crores. There is a net appreciation of "Rs. 1.95 Crores in the FV of the SRs as on 31" December, 2014. The bank has not obtained valuation of the SRs for 31th March, 2015 BALANCE CONFIRMATION As per the Status Report for the quarter ending 31" March, 2015 received from RARCL, value of SRs outstanding towards AUCB is Rs. 2,926.50 Lakhs.
10 The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020 However, value of investment in SR as per the Banks balance sheet is Rs. 2,926.55 Lakhs (Investment in SR + Excess Provision.”
Pertinently to note that the Reserve Bank of India, vide its Circular dated 01/07/2013, had also clarified in Para–13.2 as follows:– “i) The bonds/ debentures received by the banks as sale consideration towards sale of financial assets to SC/RCs, will be classified as Non-SLR investments in the books of the banks and accordingly the valuation, classification and other norms applicable to Non-SLR investments of banks as prescribed by Reserve Bank from time to time, would be applicable to the instruments received by the banks by way of sale consideration from SC/ RC. UCBs are allowed to hold these investments, over and above the limit of 10% of its deposits as on 31 March of the previous year, for Non-SLR securities. UCBs are not permitted to make any direct investment in the security receipts, pass-through certificates, or bonds/ debentures issued by SC/RC. (ii) When a bank sells its financial assets to SC/RC, on transfer the same would be removed from the books of the bank. (iii) If the sale to SC/RC is at a price below the Net Book Value (NBV) (i.e. book value less the provision held), the shortfall should be written off/ debited to Profit & Loss Account of that year, subject to the provisions of co-operative societies acts/rules/administrative guidelines in regard to write-off of debts. (iv) If the sale is for a value higher than the NBV, the excess provision will not be reversed but will be utilized to meet the shortfall/loss on account of sale of other financial assets to SC/RC.”
The loan accounts which were sold to ARCL contained in Page–15 to 43 of the Paper Book were closed on 16/05/2014, and finally had nil balance. Additionally, the computation of income placed at Page–115 of the Paper Book for the assessment year 2013–14, was scrutinized which revealed that the entire provision for bad debts was written back in computation as claim for bad debts was reduced from ` 76.32 crore to ` 67.50 crore. Thus, the provision created for ` 6.31 crore hitherto claimed as a deduction in earlier years were suo–moto reversed. Hence, by even by the widest stretch of 11 The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020 imagination there is no double deduction of loss, as apprehended by the learned D.R., because the debts do not have any backing by way of provisions and are absolutely uncovered. The Bank could have claimed a higher loss but still on a conservative estimate, they have claimed a loss of ` 10.41 crore only. Upon meticulous and punctilious analysis of the evidences on record, it is firmly established that the bank is entitled to the loss claimed for ` 10.41 crore as a trading loss incidental to banking business. In fact, the Revenue has only challenged about the deduction of loss under section 36*\(1)(viia) of the Act. In view of the aforesaid discussion, we hold that the learned CIT(A) was justified in allowing loss on sale of NPA to asset reconstruction company (ARC) of ` 10,40,79,321, which was indeed in in accordance with the provisions of section 28 of the Act as it is a crystallized business loss and is revenue in nature. We are fortified by the order of the Hon’ble High Court of Delhi in case of Clix Finance India Pvt. Ltd., which has held that loss on sale of financial receivables had crystallized upon transfer of loan portfolios and hence fully deductible. It is further on record the pattern of working of nationalized bank and co-operative bank is same as both have to follow Banking Regulation Act and are monitored by Reserve Bank of India. 2) The provisions of SARFAESI Act 2002 are applicable to co-op. bank also. In support of this contention assessee submitted a copy of Hon'ble Supreme Court decision in the case of Pandurang Ganpati Chaugule v Vishwasrao Patil Murgad Sahakari Bank Ltd. (Civil Appeal no.5674 of 2009) decided on 05-05- 2020 before CIT (A). CIT(A) in para 5.3 of order reproduced Section 2(c)(iva) of the SARAFESI Act 2002 which states that "bank" includes "a multistate co-
12 The Akola Urban Co–operative Bank Ltd. ITA no.119/Nag./2020 operative bank". Assessee is also multistate co-op. bank. Sale of NPAs to ARC does not amount to conversion of bad loan into good loan. From computation of income from AY 2007-08 to 2015-16 it is evident that loss on sale of NPA does not amount double deduction. Accordingly, we uphold the order passed by the learned CIT(A) by dismissing the grounds raised by the Revenue.
In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open Court on 30/10/2024