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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI S. RIFAUR RAHMAN
Per N.V. Vasudevan, Judicial Member is an appeal by the Revenue against the order dated 16.8.2013 of the CIT(Appeals), Mysore relating to assessment year 2010-11.
Ground No. 1 is general in nature and calls for no adjudication. Ground Nos. 2 & 3 reads as follows:-
“2. The learned CIT(A) ought to have upheld the decision of the Assessing Officer in respect of the addition made in the case of interest income on account of method of accounting followed by the assessee as the assessee has neither followed mercantile nor cash system but followed hybrid system. By virtue of the provisions of section 145 of the Income Tax Act, the assessee is required to follow either cash or mercantile system of accounting to compute the real income. No adjustment could be made to the income assessed on accrual basis.
3. The learned CIT(A) has erred in deleting the addition on account of interest on non performing assets as the assessee has already identified and accounted the interest on NPAs and as such it can be clearly held that this interest on NPAs has also accrued to the assessee as on 31-03-2010 and is taxable. The learned CIT(A) has relied upon the decision of Hon’ble Jurisdictional High court in the case of CIT Vs Canfin Homes Ltd (2011) 5 Tax Corp (DT) 49593, reported in 347 ITR 382 on this issue despite the fact that the Department has challenged this decision before the Hon’ble Supreme Court and the SLP is pending in this case.”
The assessee is a cooperative society engaged in the business of banking and providing credit facilities to its members. In the course of assessment proceedings, the Assessing Officer noticed that the system of accounting followed by the assessee was ‘mercantile system of accounting’. The AO further noticed that the assessee had accounted interest income on accrual as well as cash basis as follows:-
4. Though in the books of accounts the Assessee had accounted for income receivable on standard loans and interest receivable on Non- Performing Assets (NPA), in the return of income the Assessee did not offer the aforesaid sums to tax on the ground that the same will be offered to tax only when received. According to the AO, as per provisions of section 145(1) of the Act, the assessee cannot follow mixed system of accounting i.e., both cash as well as mercantile systems. He was therefore of the view that the assessee ought to have accounted for interest receivable on standard loans as well as interest receivable on Non- Performing Assets (NPA) to taxation on mercantile system of accounting.
He accordingly brought to tax a sum of Rs.19,05,85,839 to tax towards interest accrued to the assessee on the mercantile system of accounting.
Aggrieved by the aforesaid order of the AO, the assessee filed appeal before the CIT(Appeals).
6. Before the CIT(A), the assessee placed reliance on the decision of the Hon’ble High Court of Karnataka in CIT v. Canfin Homes, 347 ITR 382 (Karn) wherein it was held that once a particular asset is shown to be a NPA, then it does not yield any revenue. When there is no yield of revenue, there was no question of any accrual of income under the mercantile system of accounting. Following the aforesaid decision, the CIT(Appeals) was of the view that interest on NPA to the extent of Rs.16.89 lakhs cannot be brought to tax.
7. Aggrieved by the order of CIT(Appeals), the Revenue has raised grounds 2 & 3 before the Tribunal.
8. As can be seen from the grounds raised, the Revenue does not dispute the proposition of law laid down by the Hon’ble High Court of Karnataka in Canfin Homes (supra) and the fact that the said ratio is applicable to the case of the assessee. The only grievance of the Revenue appears to be that a SLP has been filed against the decision of the Hon’ble High Court and therefore the issue is being agitated before the Tribunal.
We are of the view that in light of the pronouncement of Hon’ble High Court of Karnataka in the case of Canfin Homes (supra), there can be no question of accrual of income on NPA and therefore even under the mercantile system of accounting, it cannot be said that income has accrued or arisen to the assessee. The fact that the Revenue has preferred SLP against the decision of the Hon’ble High Court cannot be a ground to take any different view on the issue. We therefore uphold the order of CIT(Appeals) and dismiss ground Nos.2 & 3.
Ground No.4 reads as follows:-
“The Ld. CIT(Appeals) ought to have upheld the decision of the Assessing Officer in disallowing the expenses relating to earlier years. As the assessee is following mercantile system of accounting according to which the actual claim on payment basis made by the assessee which does not pertain to the previous year relevant to the A.Y.2010-11 but it pertains to the A.Y.2009-10 cannot be claimed on payment basis during the A.Y.2010-11. The said expenses should have been claimed in the A.Y.2009-10.”
As we have already seen, the assessee is a cooperative society engaged in the business of providing credit facilities to its members. On going through the accounts, it was noticed by the AO that the assessee has made a claim for deduction while computing income of Rs,6,16,00,000/- under the head provision for NABARD sub-venation to PACs. This claim was made vide schedule 20 - Other Expenses - to the P&L Account for the year ending 31.3.2010. The assessee was asked to explain the same and justify the claim.
In reply dated 14.08.2012, the assessee stated as under:-
“The claim for interest sub-vention of 2% front the Central Govt. is also like in interest subsidy from the State Govt. It is prepared at the member PACs level. ‘This claim is inclusive of Bank funding and own funding of the PACs. The Central Govt. makes the payment of this interest sub-vention to the Bank through Apex Bank. The Bank has received interest sub-vention of Rs. 2,60,13,000/- from the Central Govt. for the financial year 2009- 10. The Bank has made a payment of Rs. 6,34,81,506/- to the PACs as per the claim from the member level. Rs. 2,60,13,000/- (inclusive of both interest subsidy on bank funding and own funds of PACs) was received from the Central Govt., on 28.01.2011 and the Bank has paid a sum of Rs. 6,34,81,506/- to the PACS on the same day. The difference of Rs. 3,74,68,506/- (Rs. 6,34,81,506 – Rs. 2,60,13,000) is an expenditure to the Bank. This liability was ascertained during the year 2009-10. Out of this ascertained liability, the Bank has made a provision for Rs. 1,99,29,238/- under the head Provision for NABARD subvention to PACS in the Income & Expenditure a/c under the head other expenditure on 31.03.2010.”
From the explanation filed by the assessee, the AO was of the view that it was very clear that there was liability of the Bank to pay a sum of Rs.7,08,43,762/- to the PACs towards interest sub-vention due from Central Government calculated at 2% on the short term agricultural loans advanced by the Bank and also interest sub-vention on own funding of PACs. This liability is for the Financial Year 2008-09 relevant to the Asst. Year 2009-10. The assessee has received a sum Rs.2,91,73,000/- out of the above referred Rs. 7,08,43,762/- in the Financial Year 2009-10. The balance amount of Rs. 4,16,70,762/- was claimed, by the assessee as actual expenditure made to the PACs during the F.Y. 2009-10 i.e. A.Y. 2010-11. From the above, it is clear that the actual claim on payment basis made by the assessee amounting to Rs. 4,16,70,762/- does not pertain to the previous year relevant to the Asst. Year 2010-11. These expenditures pertains to prior period i.e., for the Asst. Year 2009-10.
In view of the above and also considering the fact thàt the assessee is following mercantile system of accounting, according to the AO, the expenses cannot be claimed on payment basis in the AY 2010-11 and the same should have been claimed in the Asst. Year 2009-l0. Accordingly, a sum of Rs. 4,16,70,762/- was disallowed and added to the total income of assessee.
The CIT(Appeals) observed that the assessee has made a claim of Rs. 6,16,00,000/- under the head provision of NABARD sub-vention to PACs. This is basically a subsidy given by NABARD on the advances made to primary agricultural co-operative societies (PACs). NABARD has framed certain schemes where, it charges loan at concessional rate on agricultural loans granted to targeted sections of agriculturists. As per the scheme, initially the banks are required to charge the normal rate of interest. After the year end, the primary agricultural co-operative societies (PAC) would submit a claim for interest sub-vention. Based on this claim and after approval of NABARD, the assessee bank has to make the interest subvention payments to PACs. The assessee accounts for the interest subvention only in the year in which the claims have been made. It was observed by the AO that the assessee was liable to pay a sum of Rs. 7,08,43,762/- at 2% to PACs which is a liability pertaining to AY 2009-10.
The assessee has received a sum of Rs. 2,91,73,000/- out of the above referred amount in the 2009-10 relevant to the AY 2010-11, the balance amount of Rs. 4,16,70,762/- was claimed by the appellant as accrued expenditure during the AY 2010-11.
Before the CIT(Appeals), it was argued by the assessee that the liability arises only when the claims are made by PACs. The PACs have to verify the eligibility and submit their bills to the assessee. After scrutiny by the assessee, the payments are made. Hence, it was submitted that though the basis of arriving at the expenditure is the disbursement of loans, in the earlier years, the quantum of expenditure and also the liability arises in the subsequent year based on the announcement of scheme by NABARD and also the percentage approved by NABARD. Hence, this is expenditure pertaining to current year and not earlier years. Reliance was placed on the decision of Hon’ble Chhattisgarh High Court in CIT vs. Beekay Engineering Corporation 323 ITR 252, wherein it was held that the expenditure is to be deducted in the year in which the bills are received.
Further, relying on the decision of Hon’ble Delhi High Court in CIT vs. Jagatjit Industries Ltd 339 ITR 382, it was argued that the method of accounting consistently followed in respect of this expenditure should not be disturbed.
The ld. CIT(Appeals) found strength in the argument of the assessee that though the basis of calculation for arriving at the expenditure is based on the disbursement of loans to targeted sections of agriculturists, the liability for the same arises in the year of raising of bills by PACs which happens in the subsequent years counting the disbursement upto the year end. Hence, he held that it was the expenditure relatable to previous year and accordingly directed the AO to allow the same.
Aggrieved by the order of CIT(Appeals), the Revenue has raised ground No.4 before the Tribunal.
We have heard the submissions of the ld. DR, who relied on the order of Assessing Officer. The ld. counsel for the assessee relied on the order of CIT(Appeals).
We have given a very careful consideration to the rival submissions.
It is clear from the facts as it emanates from the record that announcement of schemes by NABARD happened during the previous year. Therefore accrual of liability as far as assessee is concerned is only when subvention percentage is announced by NABARD. Till such time, the assessee’s liability cannot be said to have accrued. Since liability relates to the previous year in which subvention is announced by NABARD, we are of the view that accrual of liability occurs only when the subvention percentage is announced by NABARD and it is only thereafter that the Assessee can know what is the liability on account of sub-vention that it has to bear. In that view of the matter we find no infirmity in the order of the CIT(A). We therefore confirm the order of the CIT(Appeals) and dismiss ground No.4.
Ground Nos. 5 to 8 raised by the Revenue reads as follows:-
“5. The learned CIT(A) ought to have upheld the decision of the Assessing Officer towards additions made on account of non- business expenditure as this expenditure is incurred as per the directions of its controlling authority and no documentary evidence was furnished before the A.O. to prove to his satisfaction that on account of this expenditure, the assessee derived certain income or benefits.
6. The Ld. CIT(Appeals) has relied on the decision of Hon’ble Supreme Court in the case of Sir Venkata Sathyanarayana Rice Mills Vs CIT (223) ITR 101. The Ld. CIT(Appeals) has failed to appreciate that the facts and circumstances of the quoted case are different for the instant case.
7. Ld.CIT(Appeals) has relied on the decision of the Hon’ble Madras High Court in CIT Vs Velumanickam Lodge (317) ITR 338. The Ld. CIT(Appeals) has failed to appreciate that the facts and circumstances of the quoted case are different for the instant case.
8. Ld.CIT(Appeals) relied on the decision of Hon’ble Rajasthan High Court in Addl. Commissioner of Income Tax Vs Rajasthan Spinning and Weaving Mills Ltd. 274 ITR 465. The Ld. CIT(Appeals) has failed to appreciate that the facts and circumstances of the quoted case are different for the instant case.”
On going through the assessee’s claim of other expenditure amounting to Rs.2,81,57,340/-, the AO noticed that the assessee has made payments of Rs. 6,51,200/- each for six months and Rs. 9,11,000/- each for the remaining six months during the financial year relevant to the Asst. Year 2010-11 to M/s Navodaya Grama Vikasa Charitable Trust with a description NGVCT Animator salary.
When the assessee was asked to explain how this expenditure is an allowable expenditure under the Act, the assessee in his letter dated 05.02.2013 stated as under:-
“We have been asked to provide the details of the amounts paid to Navodaya Grama Vikas Charitable Trust (Regd) and debited to Other Expenditure Account. Navodaya Grama Vikas Charitable Trust is a registered Trust formed as per the directions of our controlling authority — NABARD. Through the said Trust the bank is promoting the formation of Self Help Groups in the districts of Dakshina Kannada and Udupi. The bank has been advancing loans to those self help groups for generating income. The loans are given to SHGs for home industries like Candle making, soap making and such other activities. The income generated by such self help groups come back to our bank as deposits. Under this Micro Financing scheme rural poor and uneducated people get to know banking, learn to handle finance and increase their income level. They also develop the habit of thrift and rural poor learn to save money. The scheme has a great vision of upliftment of the rural poor through these activities. With this object in view, NABARD, our controlling authority has thrust this responsibility on us. The expenses made by us are in respect of the remuneration paid each month to 250 Animators and 8 coordinators. Such Animators and coordinators do the work of liaisoning, training, monitoring and guiding such SHGs. They are also promoting various loan products of our bank and are also work as the persons canvassing for the deposits of the bank. At present there are 250 Animators and 8 coordinators working under this scheme. Since inception in 2004, the bank has advanced various loans amounting to over Rs. 500 crores. The present advance outstanding balance of various advances to different SHGs is over Rs.100 crores with very high recovery rate. The SHGs are prompt payers of the loan installments. The present deposits of such SHGs with us is over Rs.85 crores. The expenditure incurred is as per the MOU made between the Bank and the said Trust. A copy of the MOU is enclosed herewith. The Registrar of Cooperative Societies has also granted permission to us for such expenditures. A copy of the order of the Registrar of Coop Societies is also enclosed.”
The AO, from the above explanation of the assessee, observed that it was clear that the assessee has incurred the expenditure towards the above referred Trust mainly as per the directions of their controlling authority viz., NABARD. The AO further noticed that the assessee has further stated that since the inception of the Trust the bank has advanced huge loans. The assessee also relied on the MOU between the Bank and the said Trust to justify the claim. He was of the view that in order to qualify for a deduction/allowance under the Act, the expenditure incurred and claimed by the assessee should have nexus to the taxable income of the assessee. He noted that if any expenses are incurred and claimed, which are in connection with any exempted income, the same is also not an allowable expenditure. Under the Act, for allowing an expenditure, it should have been incurred by the assessee for earning taxable income and it should be in the nature of revenue. According to the AO, though this expenditure is in the nature of revenue, this is not an allowable expenditure, as this has no relevance to the taxable income and as admitted by the assessee, this expenditure is incurred as per the directions of its controlling authority. The AO also observed that the assessee has also not proved with documentary evidence that on account of this expenditure, the assessee derived certain income or benefits. The MOU relied on by the assessee has no relevance to this issue. Considering the above, a sum of Rs. 93,73,200/- was disallowed by the AO treating the same as non-business expenditure.
Before the CIT(Appeals), the assessee reiterated the submissions made before the AO. It was further argued that it is not correct to say that there is no generation of income because of this expenditure as, firstly, the assessee has no choice but to incur this expenditure since it is a directive from NABARD and it is a kind of mandatory expenditure. Secondly, the assessee could generate loan disbursements to the tune of Rs.500 crores and deposit mobilization of Rs.85 crores from these SHGs. There was no adverse findings on these facts by the AO. The assessee has no exempted income.
The assessee relied on the decision of Sri Venkata Sathyanarayana Rice Mills Vs CIT (223) ITR 101 wherein it was observed that ‘What is to be seen is not whether it was compulsory for the assessee to make the payment or not but whether it was expended out of consideration of commercial expediency. As long as the payment is made for the purpose of business and the payment made is not by way of penalty for infraction of any law, the same would be allowable as deduction’ (head notes). It was submitted that the Hon’ble Supreme Court in the above case held that the donation made by the assessee to the District Welfare Fund with which the District Collector was associated is allowable as business expenditure. It was held that requiring payment to be made for just cause which has entitled a business man to obtain a license or permit could not be recorded as being against the public policy and the expenditure has been motivated purely by commercial consideration. Applying the ratio of the above decision to the facts of the present case, it was submitted that the expenditure has been motivated purely by commercial consideration. The assessee has established as to how it is in its business and commercial interest to ensure the wellbeing of Self-Help Groups. Hence, the expenditure was for the purpose of business. The assessee also relied on the decisions of Hon’ble Madras High Court in CIT v. Velumanickam Lodge, 317 ITR 338 (Mad) and the Hon’ble Rajasthan High Court in Addl.
CIT v. Rajasthan Spinning & Weaving Mills Ltd, 274 ITR 465 in support of its claim.
From the detailed submissions as above, the CIT(Appeals) observed that though the expenditure is made on account of directive from NABARD, there is also commercial exigency, and the assessee could fairly establish that there was sufficient mobilization of loans and advances and deposits directly relatable to this expenditure. There was no adverse findings to this effect. Keeping in view the decisions cited by the assessee, the CIT(A) was of the view that expenditure has relevance to the business of the assessee and also generated substantial income though the objective is also laudable which may not be relevant for business. Under these circumstances, he directed the AO to delete the addition.
Aggrieved by the order of CIT(Appeals), the Revenue has raised grounds No.5 & 6 before the Tribunal.
We have heard the submissions of the ld. DR, who relied on the order of AO and the grounds of appeal. The ld. counsel for the assessee relied on the order of CIT(Appeals).
We have given a careful consideration to the rival submissions. Navodaya Grama Vikas Charitable Trust is a registered Trust formed as
per the directions of the Assessee’s controlling authority, NABARD.
Through the said Trust the Assessee is promoting the formation of Self Help Groups in the districts of Dakshina Kannada and Udupi. The Assessee has been advancing loans to those self help groups for generating income. The loans are given to SHGs for home industries like Candle making, soap making and such other activities. The income generated by such self help groups come back to the Assessee as deposits. Under this Micro Financing scheme rural poor and uneducated people get to know banking, learn to handle finance and increase their income level. They also develop the habit of thrift and rural poor learn to save money. The scheme has a great vision of upliftment of the rural poor through these activities. With this object in view, NABARD, has thrust the responsibility of making payments to Navodaya Trust. The expenses in question are in respect of the remuneration paid each month to 250 Animators and 8 coordinators. Such Animators and coordinators do the work of liaisoning, training, monitoring and guiding such SHGs. They are also promoting various loan products of the Assessee’s bank and are also work as the persons canvassing for the deposits of the bank. Further it is clear from the factual finding rendered by the CIT(Appeals) that the assessee could generate disbursements to the tune of Rs.500 crores and deposit mobilization to the extent of Rs.85 crores from the Self Help Groups. It is also clear that the expenditure in question was incurred by the assessee keeping in mind the commercial exigency. The decision of the Hon’ble Rajasthan High Court in Rajasthan Spinning and Weaving Mills Ltd. cited supra clearly support the conclusions arrived at by the CIT(Appeals). In the aforesaid decision, the Hon’ble Rajasthan High Court held that it is not necessary to show that the expenses were not profitable or no benefit was actually derived. The receipt of actual benefit is also not necessary. The key aspect to be seen is relationship between the expenses incurred and carrying on of the business of the assessee. If there is a benefit to the assessee, then the expenditure has to be regarded as incurred for the purpose of business of the assessee and allowed as a deduction. The Hon’ble Rajasthan High Court followed the decision of the Hon’ble Supreme Court in the case of Sasoon J. David & Co. P. Ltd. v. CIT, 118 ITR 261 (SC) wherein reference was made to the expression “wholly or exclusively” used in section 37(1) of the Act and was of the view that the expression used is not “necessarily”. In light of the legal position as explained in the judicial pronouncements and keeping in view the facts of the present case, we are of the view that the order of CIT(Appeals) does not call for any interference. Accordingly, grounds No.5 to 8 raised by the Revenue are dismissed.
Ground No.9 raised read as follows:-
“9. The Ld. CIT(Appeals) has erred in deleting the addition made in respect of amortization of premium paid on government securities. Amortization of premium paid on government securities claimed by the assessee as deduction is not an allowable deduction as in the assessee’s case the securities classified as “Held to Maturity” are permanent long term investment made by the assessee bank, which are predominantly capital in nature. Ratio of the decision of Hon’ble Madras High Court judgement in TN Power Finance & Infrastructure Development Corporation Ltd. vs JCIT (2006) 280 ITR 491 (Mad) wherein, it is held that RBI guidelines cannot override the mandatory provisions of income tax is applicable in this case.”
The AO noticed that the assessee has reduced a sum of Rs.26,63,034/- from the gross interest received from non-statutory liquidate Ratio (non-SLR) and Rs.4,28,49,794 from the gross interest from statutory liquidatory ratio (SLR) received during the year relevant to AY 2010-11. The amounts so reduced was termed by the assessee as ‘Amortised Amount’. In short, from the total interest, the assessee has claimed a sum of Rs. 4,55,12,828/- towards Amortisation and claimed the same as a deduction and offered the remaining interest for taxation. The AO vide requisition dated 25.6.2012 asked the assessee to justify this claim as under:
“To file detail of amortization expenses, giving detail of govt. security on which this premium was paid. Please explain as to how the amortization expenses is a revenue expenses.”
The assessee in its reply dated 14.08.2012 has stated as under:-
“This method of amortization of premium on investment is in line with the guidance notes on audit of the Banks given by the Institute of Chartered Accountants of India. The Bank has followed the normal method of accounting and writing off of the premium which is being followed by the banking sector as a whole. A copy of relevant page from the Guidance Note on Audit of the Banks is also enclosed.”
The AO noted that the assessee mainly relied on Reserve Bank of India’s guidelines. All the Government securities purchased are required to be categorized under (a) Held to Maturity (b) Held for Trading (c) Available for Sale; as per circular/instruction from RBI. Such purchases of securities involve payment of premiums over the face value at the time of acquiring the, security. The premium so paid is added to the value of security cost. When such securities are held under the category Held to Maturity, the premiums so paid s equally spread over maturity date and amortised annually as per RBI guidelines. Such premiums amortised and pertaining to the current year is debited to the Profit and Loss Account as expenditure. As per the RBI Norms, the amortisation of premium is charged as an expenditure for that year.
According to the AO, Amortisation of Premium is the element arrived at by calculating the premium it paid on certain investments classified as “Held to Maturity’ by the assessee bank. These securities classified as “Held to Maturity” are permanent long term investments made by the assessee bank, so it is clearly understood that these cannot be treated as “Stock-in-Trade” of the assessee like “Available for Sale” and “Held for Trading” category. So once it is established that these are not stock-in- trade no charge can be made on revenue. But, however, at the time of disposing off the asset, relevant capital gain or loss can be booked.
The AO was of the view that in the instant case, the securities classified as ‘Held to Maturity’ are permanent long term investment made by the assessee bank, which are predominantly capital in nature. Ratio of the decisions of the Hon’ble High Court of Madras in the case of TN Power Finance and Infrastructure Development Corporation Ltd. (supra), wherein it is held that RBI guidelines cannot override the mandatory provisions of the Income Tax Act, is applicable to this case. Therefore, the assessee’s claim of Amortisation of premium paid in Government Securities held in the permanent category of ‘Held to Maturity’ was disallowed and a sum of Rs. 4,55,12,828/- added to the total income of the assessee.
On appeal by the assessee, the CIT(Appeals) deleted the addition made by the AO observing as under:-
“7.2 In appeal, the appellant relied on the binding decision of Jurisdictional Hon’ble ITAT Bangalore Bench in Sri M. Visweswraya Co-operative Bank Ltd vs JCIT in wherein, it is held that the amortized premium is allowable as expenditure / deduction. Hon’ble ITAT also relied on Board instruction no. 17/208 which also states that amortization premium is to be allowed as deduction. 7.4 I have perused the order of the Hon’ble ITAT cited by the appellant. In that case, that AO also relied on Madras High Court decision cited by the AO. After analyzing various case laws, Hon’ble ITAT held that this expenditure is an allowable expenditure. 7.5 Respectfully following the jurisdictional ITAT order cited supra, I direct the AO to delete the addition.”
Aggrieved by the order of the CIT(A), the revenue has preferred the aforesaid ground before the Tribunal.
We have heard the rival submissions. The issue raised by the assessee in ground No.8 & 9 is no longer res integra and has been decided by this Tribunal in the case of M/s. Sir M. Visweswaraya Cooperative Bank Ltd. Vs. JCIT, for AY 07-08 order dated 11.5.2012. The following were the relevant observations of the Tribunal:
“03. Let us first take up the issue relating to amortization of premium on investment in government securities. Relevant grounds read as under : " i) The learned Commissioner (Appeals) ought to have appreciated that the appellant has to invest surplus fund in Government Securities as per RBI guidelines and the premium paid while investing in Government Securities that are bought in open market would have to be amortized till the maturity date of the security and thus the premium was written off was liable to be allowed as depreciation of value of securities ; ii) The learned Commissioner (A) ought to have appreciated that the classification of securities for RBI purposes would not take away the benefit which the appellant was entitled to and he ought to have appreciated that the case law referred were distinguishable and accordingly he ought to have allowed the deduction as claimed in full."
The brief facts pertaining to this issue are that while framing the assessment u/s.143(3) of the IT Act, for the assessment year 2007-08, the Assessing Officer noticed that the assessee has claimed a sum of Rs.26,40,237/- under amortization of premium on investments and the assessee had no explanation for the claim. Hence, he disallowed the same. While disallowing the same, the Assessing Officer followed the decision of the Madras High Court in the case of TN Power Finance and Infrastructure Development Corporation Ltd., v. JCIT (2006) 280 ITR 491. Aggrieved, the assessee moved the matter in appeal before the first appellate authority. 05. The learned Commissioner of Income-tax (Appeals) after considering the submissions made before him and following the decision of the Madras High Court cited supra, came to the conclusion that the Hon'ble Madras High Court has that merely because the RBI had directed the assessee to provide for non- performing assets, that direction cannot override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate for deduction not exceeding 5 per cent of the total income only in respect of the provision for bad and doubtful debts which are predominantly revenue in nature or trade related and not for provision for non-performing assets which are of predominantly capital nature. Thus, he was of the view that the assessee was not entitled to deduction of amortization of premium on investments u/s.36(1)(vii). Aggrieved, the assessee is in second appeal before us with this issue.
The learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) had failed to see the reason that a issue similar to that of the present one had been allowed by various benches of the Hon'ble Tribunals, namely : • Catholic Syrian Bank Ltd., v. ACIT – Cochin (2010) 38 SOT 553 ; • Khanapur Coop.Bank Ltd., v. ITO in ITA.141/PNJ/2011 (Panaji); • Corporation Bank v. ACIT, M'lore in ITA.112/Bang/2008 (Bang)
The learned counsel also placed reliance on Board's Instructions No.17 of 2008(vii) and pleaded that the claim of the assessee be allowed as the assessee had the powers to debit in its P&L account a sum of Rs.29,02 lakhs of amortization of premium.
Per contra, the learned DR was unable to controvert to the submissions of the learned counsel for the assessee.
We have carefully considered the rival submissions and perused the relevant facts and materials on record. We have also considered the findings of the various benches of the Tribunal, as under : (i) Catholic Syrian Bank Ltd v. ACIT – (2010) 38 SOT 553 (Coch) :
An identical issue to that of the subject matter under consideration had arisen before the Cochin Bench. After analyzing the issue in depth, the bench has observed that with regard to amortization of premium on purchase of Government securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortization of premium on government securities. United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 ; (1999) 240 ITR 355 (SC) and South Indian Bank Ltd., (ITA No.126/Coch/2004, dated.___ Sept, 2005 followed."
(ii) The Khanapur Co-op Bank Ltd v. ITO – dated.8.9.2011 : The Hon'ble Bench of Panaji Tribunal had recorded its findings that "6. Likewise, the premium amortized at Rs.1,78,098/- is claimed to be in respect of securities held under the category 'held to maturity'. The Assessing Officer has taken them as long term investments. In other words, he has accepted the assessee's claim that the securities are 'held to maturity'. That being so and having regard to the CBDT Instruction No.17 of 2008 dated.26.11.2008 as reproduced herein above, the premium paid on such government securities is required to be amortized over the period remaining to maturity ………." (iii) In the case of Corporation Bank v. ACIT, M'lore in ITA.112/Bang/2008 (Bang), for the assessment year 2004-05, the earlier bench had also held a similar view. In the light of the above discussion and the case laws discussed supra, taking into account the totality of the facts and materials, we are of the considered view that the assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue.”
We are of the view that in the light of the decision on the issue considered by the Tribunal, the claim made by the assessee was rightly allowed by CIT(A). Accordingly, the relevant ground of appeal is dismissed.
41. Thus, appeal by the Revenue is dismissed. is also an appeal by the Revenue against the 42. order dated 18.3.2014 relating to AY 2011-12. Ground No.1 is general in nature and calls for no adjudication.
43. Ground Nos.2 & 3 are identical to ground Nos. 2 & 3 raised by the Revenue in for the AY 2010-11. For the reasons stated therein while deciding the aforesaid grounds, we dismiss ground Nos. 2 & 3 raised by the Revenue in this appeal also.
44. Ground Nos. 4.1 & 4.2 read as follows:-
“4.1 The Ld. CIT(A) erred in deleting the addition made on account of interest accrued on investments ignoring the fact that the assessee is following the Mercantile system of accounting as stated in Form 3CD. 4.2 Ld.CIT(Appeals) has erred in deleting the addition on accrued investment relying on the decision of Hon’ble Karnataka High Court in CIT vs The Karnataka Bank Ltd. without appreciating the fact that the Department has not accepted the decision and since the SLP filed has been dismissed without going into the merits of the case, the question of law continues to remain unsettled.”
On perusal of the assessee’s P&L A/c, the AO noticed that an amount of Rs. 35,77,41,170/- has been credited to the P&L A/c. When specifically asked as to why this amount had not been offered on accrual basis, the assessee stated as under:-
“(b) Interest on Investments: In addition to the above, we were asked to file details of interest accrued on investment. As is the case of interest on advances, the assessee has been offering the interest income from investments of cash basis. The same has also been accepted by the Learned JC1T during the course of Assessing Proceedings for the Assessment Year 2010-l1. We are of the opinion that the department may accept the accounting treatment adopted by the Assessee Bank since the same has been followed consistently. However, as required by you we are herewith annexing to this letter working in relation to interest accrued on investments. The amount of interest accrued on investments for the year ended 31- March-2011 in Rs. 15,08,94,552/-. Furthermore, we would also wish to bring to your notice that the same method of accounting for interest is adopted by the assessee every year. Thus, the income which is not offered to tax in this year on accrual basis is definitely offered to tax in the subsequent Assessment Year. Therefore, there is no loss of revenue to the Department whatsoever. In the instance that the same is added to the income of the assessee and brought to tax for the Assessment Year 2011-12, it will lead to a situation where the same income is being taxed in the hands of the assessee in two different Assessment Years since the income is already offered to tax on cash basis for the Assessment Year 2012-13...” 6.1.27 As can be observed, the assessee has stated that income from interest on investments has also been offered on cash basis and it should not be added as the same had been accepted by the Ld. JCIT during the course of assessment proceedings for A.Y. 2011-11 and the same would lead to double taxation as the same income has been offered on cash basis for A.Y. 2012-13. 6.1.28 At the cost of repetition, it is to be noted that each assessment year is to be treated as an independent unit and merely on the basis of the fact that a particular issue was not investigated in the previous year, it cannot be asserted by the assessee that no addition should be made in respect of that issue. Moreover, the assessee is free to make a claim during the assessment proceedings for A.Y. 2012-13 in case any part of income that is added back for A.Y. 2011-12 on mercantile basis forms a part of the income offered for A.Y.2012-13 on cash basis. Therefore, the question of double taxation does not arise. 6.1.29 In view of the above, an amount of Rs. 15,08,94,552/- being interest accrued on investments for A.Y. 2011-12 is added to the income.”
In appeal before the CIT(Appeals), it was argued by the assessee that the interest accrues on bonds on the due date specified at the time of issuing the bond which has fallen due after the previous year. Hon’ble High Court of Karnataka in the case of CIT vs. The Karnataka Bank Ltd., held that the taxing authority have no right to tax interest on investment unless it becomes due and payable as per provisions of section 5 of the IT Act.
The CIT(Appeals) was of the opinion that the Hon’ble High Court of Karnataka in the case law cited above, has clearly held that if the interest does not become due and not liable to pay such part of interest, it cannot be said that the interest has become accrued. Hence, it was held that the broken period interest on the government securities in the above case were not taxable. Hence the addition was directed to be deleted.
Aggrieved by the order of CIT(Appeals), the Revenue has raised ground Nos.4.1 & 4.2 before the Tribunal.
We have heard the rival submissions. We have given a careful consideration to the rival submissions. At the time of hearing before us, it was agreed by the parties that the issue raised by the revenue in this appeal has already been decided by the Hon’ble Madras High Court in the case of CIT v. Tamil Nadu Mercantile Bank Ltd., 291 ITR 137 (Mad). The question of law before the Hon’ble Madras High Court was as follows:-
“Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that interest on securities is taxable only on specified dates when it became due for payment and not on accrued basis?" The Hon’ble Madras High Court held as follows:-
" In view of the deletion of section 18 of the Income-tax Act, 1961, with effect from 1st April, 1989, the third proviso to section 145(1) was inserted with effect from April 1, 1989, which is a saving clause. Although the amendment was with effect from April 1, 1989, it clearly provides that any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee only where no method of accounting is regularly employed by the assessee. In other words, if the assessee is maintaining cash system of accounting, the aforesaid proviso would not apply. The legislative intent is that when the assessee is maintaining the cash system of accounting, income by way of interest on securities will have to be charged to tax only when the assessee actually receives the interest and not on the date on which interest on such securities might become due. The assessee, while filing the return of income for the assessment years 1989-90 and 1990-91, claimed exclusion of the sums representing the accrued interest for the periods till March 31, 1989, and till March, 31, 1990, for the respective assessment years, in respect of the securities held by it on the ground that it did not become due in the respective previous years and that even after the omission of section 18, the interest on securities should be charged only when it became due for payment as it did not accrue on day-to-day basis. The Assessing Officer, however, disallowed the claims of the assessee, holding that after the omission of section 18 of the Act, i.e., after July 8, 1988, interest is to be assessed under the head “Business” or “Other Sources” as the case may be, and therefore, the interest which accrued up to the end of the accounting year became taxable as the income of the previous year. The Commissioner of Income-tax (Appeals) held that the Assessing Officer was not justified in holding that the interest accrued up to the last day of the accounting year should be subjected to tax. This was upheld by the Tribunal.
On appeal to the High Court: Held, dismissing the appeal that even though section 18 of the Act was deleted, the assessee was taxable for interest on securities only on specified dates when it became due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years.”
It is not in dispute before us that identical decision has also been rendered by the Hon’ble High Court of Kerala in the case of CIT v.
Federal Bank, 301 ITR 188 (Ker) and the Hon’ble Karnataka High Court in the case of Karnataka Bank Ltd. in dated 12.9.2013.
In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the revenue in the past. In view of the aforesaid decision, we are of the view that the order of the CIT(A) does not call for any interference. Consequently, the relevant grounds of appeal raised by the revenue are dismissed.
52. Ground No.5 is identical to ground No.4 raised by the Revenue for AY 2010-11. For the reasons stated therein, this ground is dismissed.
53. Ground Nos.6.4 is identical to ground Nos. 5 to 8 raised by the Revenue for AY 2010-11 in ITA No.34/B/14. For the reasons stated therein, this ground is also dismissed.
Consequently, the appeal is dismissed.
In the result, both the appeals by the Revenue are dismissed.
Pronounced in the open court on this 4th day of September, 2015.