ACIT,NEW DELHI vs. M/S. THE DELHI STATE CO-OPERATIVE BANK LTD., NEW DELHI

ORDER PER C.M.Garg, J.M.

This appeal by the revenue has been directed against the order of the CIT(A) – XXV, dated 3.10.2013 passed in first appeal no. 20/2013-14 for AY 2010-11. 2. The grounds raised by the appellant reads as under : “1. On the facts and circumstances of the case, Ld. CIT (A) has erred in deleting addition of Rs. 99,42,761/- made on account of premium written off on Govt. Securities (G.Secs.)

2. On the facts and circumstances of the case, Ld. CIT(A) has erred in deleting addition of Rs. 1,08,80,188/- on account of deduction of provision on non-performing assets.”

2 The Delhi State Co-operative Bank Ltd. Ground no. 1 & 2

“6.2 We find that the assessee invests in Govt. Securities and other financial documents as other co-operative banks as per the guidelines of the RBI and so as per the RBI Master Circular No.DBOD.BP.BC.13/21.04.141/2012-13 dated July 2,2012, containing consolidated instructions/guidelines issued to banks till June 30, 2012, on matters relating to prudential norms for classification, valuation and operation of investment portfolio by banks, Investments classified under HTM (Held To Maturity) need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortized over the period remaining to maturity. The book value of the security should continue to be reduced to the extent of the amount amortized during the relevant accounting period. And as held in the case of CIT Vs. Himachal Finance Corporation (2010) 186 Taxmann

3 The Delhi State Co-operative Bank Ltd.

2005 (H.P.) and Indian Rayon and Industries Ltd. (2010) 38 DTR 313 (Bombay) it was held that discount on bonds and premiums on redemptions of debentures are allowable as expense proportionately spread over the period of security. So therefore we are of the considered view that this issue needs to be remanded back to the file of the AO to verify whether the assessee has claimed the expenses proportionately i.e. the premium amount which is in addition to the face value proportionately spread over the life of security and if it is so computed and claimed it be allowed. Therefore this ground is allowed for statistical purposes.

7. With regard to deletion of addition of Rs 2,46,73,078/- under the head deduction u/s 36(1)(viia) is concerned, we find that assessee is a Co- operative Society and was claiming deduction u/s 80P(2)(a)(i) of the Act up to A Y 2006-07 @ 100%. This benefit has been withdrawn in the case of urban Co-operative Society after A Y 2006-07 as provided u/s 80P( 4) as per the Finance Act, 2006. Since the benefit of deduction u/s 80P(2)(a)(i) has been withdrawn in the case of urban Co-operative societies, similar benefits of deduction of "provision for bad & doubtful debts" has been introduced and allowed from A Y 2007-08 u/s 36(1)(viia) as per the Finance Act, 2007. The co- operative societies were not allowed this benefit up to A Y 2006-07 as the deduction was allowed to them u/s 80P(2)(a)(i). The assessee has been claiming the benefit of 100% deduction of its income u/s 80P(2)(a)(i). And therefore the assessee was not aware of the change in law and so did not make the claim in respect of bad debt (N.P.) while filing the return. The assessee had filed the return income of Rs 30,43,17,299/- on 31/03/2010. During the course of assessment proceedings, the assessee detected the mistake and filed a revised computation claiming the deduction of Rs 2,46,73,078/- which is allowable u/s 36(l)(viia) @ 7.5% of the total NP. The AO has disallowed the claim of the assessee on the ground that filing time for revised return has expired uls 139(5) and the assessee was not entitled to make a fresh claim or deduction and the AO relied on the case of Goetze India Ltd Vs CIT, 284 ITR 323 (SC) [2006]. We find that the Ld. Counsel of the assessee submitted before the Ld. CIT(A) that AO

4 The Delhi State Co-operative Bank Ltd. was not justified to disallow the statutory and genuine claim of the assessee on technical grounds. He submitted that since new provisions were introduced for bad and doubtful debts inrespect of Cooperative Societies w.e.f. A Y 2007-08 u/s 36(1)(viia), the assessee was not able to keep track of the amended/new provisions and there was a bona fide mistake in not being able to make the correct claim of deduction in the original return. It was submitted by the ld AR that the AO is also duty bound to allow the genuine claim of the assessee as per the Board Circular No. 14 (XL-35) dated 11104/2005 & F.No. 81127/65-IT(B) dated 18/0511965 which states that the AO should not take advantage of the ignorance of the assessee and the AO should not act against the assessee in securing the genuine relief due to the assessee. It was also submitted that the case of the Goetze India Ltd (supra) has been decided in a different context in which the assessment was not pending whereas in the present case the assessment was pending and the assessee had made the genuine claim during the course of assessment proceedings itself through a revised computation. The ld AR relied on the following cases:-

- CIT Vs Bharat Aluminium Co Ltd, 303 ITR 256 (Del) [2008] - Chicago Pneumatic India Ltd Vs DCn Spl. Range-45, [2007] 15 SOT 252 (Mum) - Emerson Network Power India P Ltd Vs ACIT, [2009] 122TTJ 67 (ITAT Mum) 7.2 We find that the assessee has made the provisions of Rs.3,66,33,543/- for bad and doubtful debts in its Profit & Loss A/c but by mistake while submitting the return the same was taken as Rs.1,35,28,498/- instead of Rs.3,66,33,543/-. We find that section 36(1)(viia) was amended by Finance Act, 2007, with effect from 01.04.2007, by which the words "or a cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank" were inserted. This amendment is applicable to assessment year 2007-08 onwards and for the year under consideration. Accordingly, it applies to the case of the assessee for this year. We find that this issue has not been adjudicated on merits by 5 The Delhi State Co-operative Bank Ltd. the AO. Therefore, we think it fit to restore the matter back to the file of the AO to adjudicate the admissibility of the amount u/s 36(1)(viia) on merits. This ground is treated as allowed for statistical purposes.

6 The Delhi State Co-operative Bank Ltd. would be set to have accrued on the loans of doubtful recovery and the AR relied on various case laws which are as under:- (1) CIT V Shoorji Vallabhdas & Co, 46 ITR 144 (SC) [1962] (2) CIT Vs Vasisth Chay Vyapar Ltd, 330 ITR 440 (Delhi), 2011 (3) DIT Vs Brahmaputra Capital Financial Services Ltd, 335 ITR 182 (Delhi), 2011 (4) TRO Vs Custodian, 293 ITR 369 (Del) (5) Barkha Investment & Trading Co P Ltd Vs CIT, 281 ITR 31 (Guj) (6) CIT Vs Nanital Bank Ltd, 309 ITR 335 (Uttarakhand) (7) CIT Vs Elgi Finance Ltd, 293 ITR 357 (Mad) (8) CIT V s Motor Credit Co P Ltd, 127 ITR 572 (Mad) [1981] (9) CIT Vs Coimbatore Lakshmi Inv. & Finance Co Ltd, 331 ITR 229 (Mad) [2011] 8.1 We find that as per RBI prudential norms where the principal amount is doubtful of recovery and borrower is not paying, income from interest on such accounts should not be credited to its profit and loss account. The assessee is adopting the same accounting policies since long, so interest accrued on bad & doubtful loans cannot be considered its income. Where the chances of realization of principal by the appellant from its customers were far from remote even before the event of accrual of interest taking place, the question of treating the interest on such NPA loans on accrual basis as income does not arise. There is no loss of revenue, as the interest income on bad loans is accounted for on receipt basis, in the year when the loan is recovered /settled. The accounting policy adopted by the appellant is specifically and clearly mentioned, in the Income Tax Audit Report u/s 44AB and annual audited financial accounts. More over the Assessing Officer has also accepted the same accounting policy and never objected for the same. Generally Income of the assessee was assessed uls 143(3) of the Income Tax Act 1961 without any reference to change in accounting policy. 8.2 We find that the Ld. CIT(A) has observed that the assessee has not received the income as the loan amount itself has become bad and as such the AO is not justified to treat the notional interest as income of the assessee. A perusal of the case laws cited by the assessee also supports the case of the assessee that only the real income is taxable and not the hypothetical income in view of the real income theory as 7 The Delhi State Co-operative Bank Ltd. no real income is received by the assessee and the same view has been held by the Hon'ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co., 46 ITR 144 (Sc) [1962] and the head-note of the case reads as under:-

Held, that the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration that what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. Income tax is a levy on income. Though the Income Tax Act takes into account two points of time at which the liability to tax is attracted viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income which does not materialise. Where income has, in fact, been received and is subsequently given up 10 such circumstances that it remain the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Decision of the Bombay High Court in Commissioner of Income- tax v . Shoorji Vallabhdas & Co. [1959] 36 I.T.R. 25 affirmed. Commissioner of Income-tax v. Chamanlal Mangaldas & Co. [1960] 39 l.T.R. 8 (S.C.) followed.

8.3 In the case of CIT V Motor Credit Co P Ltd, 127 ITR 572 (Mad) [1981] that only the real income is to be taxed and the head-note of the case reads as under:-

8 The Delhi State Co-operative Bank Ltd.

The regular mode of accounting determines only the mode of computing the taxable income and the point of time at which the tax liability is attracted. It cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted it cannot be said that income has accrued merely on the ground that the assessee had been following the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has materialised, there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is whether the income has really materialised or resulted to the assessee. The question whether real income has materialised to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed and not with reference to his system of accounting.

8.4 In view of the above, we find considerable cogency in the finding of the Ld. CIT(A) regarding the notional interest income that the same has not been received by the assessee and as such the AO was not justified to make the addition on the basis of notional interest because of the mercantile system of accounting only and accordingly, the addition was rightly deleted by the CIT(A). In the background of the aforesaid discussions and precedent relied upon, we are of the considered view that no interference is called for in the well reasoned order passed by the Ld. CIT(A), hence, we uphold the same by rejecting this ground of appeal raised by the Revenue in the aforesaid manner.”

5. In view of above, we are include to hold that both the issues are squarely covered in form of the assessee and thus, in absence of any other materialfrom the Ld. DR, which could lead us to take a different view on both the issues, we uphold the conclusion of the CIT(A) supported by the Tribunal (Supra) for AY 2008-09.

9 The Delhi State Co-operative Bank Ltd.