ACIT, BIJAPUR vs THE SINDAGI URBAN CO-OP BANK LTD.,, SINDAGI

Income Tax Appellate Tribunal, BANGALORE BENCH “ A ”

Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ

For Appellant: Shri P. Dhivahar, JCIT (D.R)

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ A ” BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. No.1530/Bang/2013 (Assessment Year : 2010-11) Asst. Commissioner of Income Tax, Vs. The Sindagi Urban Co-op. Bank Ltd., Circle 1, Bijapur. Sindagi. Appellant Respondent.

Appellant By : Shri P. Dhivahar, JCIT (D.R) Respondent By : Shri Sandeep C, C.A. Date of Hearing : 23.2.2015. Date of Pronouncement : 5.3.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This is an appeal by the Revenue against the order dt.17.9.2013 of CIT (A), Belgaum, relating to A. Y. 2011-11. The grounds of appeal raised by Revenue read as follows : "1. The CIT (A) erred in law and on facts, in deleting the addition of Rs.10,49,668/- on account of accrued interest on loans which are classified as "Non-performing Assets" relying on the Karnataka High Court decision in Canfin Homes Ltd (2011) 5 TaxCorp (DT) 49593, ignoring the provisions of section 43D of the I. T. Act, 1961 ? 2. On the facts and in law the CIT (A) erred in holding that income accrued to the assessee cannot be taken as income in the year ignoring the amended provisions of section 43D of the I. T. Act, 1961, which provides certain benefit to the certain class of assessees but do not provide such benefit to the assessee bank and as such, the

2 ITA No.1530/Bang/2013 provisions of section 43D amended w.e.f. 1.4.2000 overruled the Court decisions / circulars ?

The assessee is a cooperative bank engaged in carrying on the business of banking. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had not credited in the profit and loss account interest receivable to the extent of Rs.10,49,668/-. The Assessing Officer was of the view that the assessee was following mercantile system of accounting and therefore interest that has accrued on loans and advances had to be accounted as income in the books of account. The assessee was accordingly called upon to explain as to why interest receivable has not been credited to the profit and loss account. The assessee submitted that as per the norms prescribed by RBI interest on non-performing assets need not be recognized as income in the books of account. According to the assessee it was required to follow the norms prescribed by RBI and accordingly not accounted for interest receivables on non-performing assets. The assessee also pointed out that as and when the interest is realized it would be recognized as income. 03. The Assessing Officer did not agree with the aforesaid submissions made on behalf of the assessee. He held that the assessee was following mercantile system of accounting and therefore had to recognize income on the basis of accrual. The Assessing Officer also held that RBI norms regarding non-performing assets have nothing to do with computation of income under the Income-tax Act, 1961 (Act). Accordingly the Assessing Officer

3 ITA No.1530/Bang/2013 brought to tax a sum of Rs. 10,49,668/- as interest receivable on loans and investments on accrual basis. The Assessing Officer also made a reference to the provisions of Sec.43D of the Act which was substituted by Finance Act of 1999 w.e.f.1.4.2000 which gives the benefit of not recognizing interest income on non-performing assets to certain categories of assessees. According to Assessing Officer those provisions were not applicable to a cooperative bank. 04. On appeal by the assessee, CIT (A) following the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT (1999) 237 ITR 889, which was followed by the Hon'ble Karnataka High Court in the case of JCIT v. Canfin Homes Ltd (2011) 5 TaxCorp (DT) 49593, held that interest on non-performing assets cannot be treated as income accrued to an assessee. The CIT (A) was also of the view that the provisions of Sec.43D of the Act were applicable to cooperative banks and in this regard relied on the decision of Ahmedabad Bench of ITAT in the case of Karnavati Cooperative Bank v. DCIT (2012) 14 ITR (Trib) 175. 05. Aggrieved by the order of CIT (A), Belgaum dt.17.9.2013 for Assessment Year 2010-11, the Revenue has preferred the present appeal before the Tribunal. 06. The learned DR relied on the order of the Assessing Officer and reiterated the stand of the Revenue as reflected in the grounds of appeal filed before the Tribunal.

4 ITA No.1530/Bang/2013 07. The learned counsel for the assessee while relying on the order of CIT (A) also filed before us a copy of the decision of the ITAT, Bangalore Bench in the case of ITO v. Shiva Sahakari Bank Niyamitha in ITA No.257/Bang/2012 dt 21.12.2012 for the A. Y. 2008-09, wherein this Tribunal held that a cooperative bank carrying on the banking business need not recognize income on non-performing assets. 08. We have given a careful consideration to the rival submissions. Section 43D of the Act is reproduced below : 43-D: Special provision in case of income of public financial institutions, public companies, etc.-Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts; (b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. 09. Section 43D of the Act was brought in basically intended to overcome the decision of the Supreme Court in State Bank of Travancore Vs. CIT 158 ITR 102 (SC) wherein it

5 ITA No.1530/Bang/2013 was held that interest on doubtful advances credited to "interest suspense account" and not transferred to "profit and loss account" should be considered as accrued according to the mercantile system of accounting and was taxable as such. The benefit of exception from the said Supreme Court's decision was given through section 43D to--public financial institutions as defined in section 4A of the Companies Act, 1956,-scheduled banks as per Expln. (ii) to Section 36(1)(viia) of the Act, -State financial corporations established under section 3 or 3A of the State Financial Corporations Act, 1951 and institutions notified under section 46 of the said Act, and -State industrial investment corporations which are Government companies as per section 617 of the Companies Act, 1956 and which are engaged in providing long term finance for industrial projects and approved by the Central Government under Sec.36(1)(viii) of the Act. As per section 43D in the cases of above said institutions interest on sticky advances [falling under Health Codes 4 to 8] as per the guidelines issued by the Reserve Bank of India will be charged to tax either in the year in which the relevant interest is credited to the profit and loss account or the year of actual receipt of interest, whichever is earlier. Thus, so long as the interest is not received and so long as credits in respect of such interest are confined to "interest suspense account", such interest amounts will not be treated as income of the assessee in view of the non- obstante clause of section 43D even though the assessee is following mercantile system of accounting.

6 ITA No.1530/Bang/2013 10. In Karnavati Co-op. Bank Ltd. Vs. DCIT (2012) 14 ITR (Trib) 175 (Ahmedabad), the ITAT Ahmedabad Bench held that provisions of Sec.43D of the Act are applicable to Co- operative Banks also. The following were the relevant observations of the Tribunal:

“Sec. 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is actually received. The Act says that the incidence of ‘credit’ or "actually received", whichever is earlier is to be taken into account for the purpose of chargeability of income by way of interest. Simultaneously, it is noteworthy that this section is an overriding section because the opening words are "notwithstanding anything to the contrary contained in any other provisions of this Act". Therefore, in spite of anything contained in the Act, the provisions of this section shall override those provisions. Once the statute has categorically made a law in respect of public financial institutions that interest is chargeable to tax either in the year in which credited or actually received, whichever is earlier, then it is compulsory to abide by the said rule. No scope is left with the Revenue authorities to ignore these provisions due to unambiguous use of language in the section. As far as the status of the assessee is concerned, the AO has stated that the assessee-bank is a co-operative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an Expln. (d) r/w s. 36(1)(viia) annexed to s. 43D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, it is hereby held that the assessee is covered by one of the entities, hence the provisions of s. 43D are to be applied. Next issue is that whether a circular having effect of relaxing rigour of law can be treated as inconsistent with the provisions of a statute. In order to aid proper determination of the income of moneylenders and banks, the CBDT has issued a Circular dt. 6th Oct., 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee’s taxable income, provided the ITO is satisfied that recovery is practically improbable. The CBDT under s. 119 has power to issue circulars in exercise of its

7 ITA No.1530/Bang/2013 statutory powers. If the Board considers it necessary to lay down certain rules and then direct the sub-ordinate authorities, such directions are required to be followed and such circular would be binding on the Department unless and until held as ultra vires by a Court of law. The Board has powers to relax the severity or the strictness of law and the authorities are required to follow those instructions. As of now the law as laid down is that in terms of CBDT circular the interest is to be added as income only when actually received or credited in respect of the "sticky advances" while making assessment for a financial institution. It can safely be concluded that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. s. 43D has to be applied in its letter and spirit.”

10.

Besides the above, the Bangalore Bench of the ITAT in the case of Shiva Sahakari Bank Niyamitha (supra) has held as follows : "8. Having heard both the parties and having considered their rival contentions, we find that undisputedly the assessee is in the banking business and is also governed by the Banking regulations. Whether the interest accrued on NPA’s which are doubtful of being recovered, should be recognized as assessee’s income on accrual or on receipt basis is the question before us. Let us first consider the applicability of the decisions relied upon by the learned DR. The Hon’ble Supreme Court in the case of Southern Technologies Ltd was considering the issue of allowability of provisions of NPA u/s 36(1)(vii) of the Income-tax Act while the case before us is with regard to the accrual of interest on NPA’s and recognition of the same on receipt basis and not on accrual basis. Further, the Hon’ble Supreme Court, while holding that the RBI directions are only norms and act in a different field as against the Income-tax Act, has also observed that collectability of a receipt is different from accrual and hence in each case, the assessee has to prove that interest is not recognized or taken into account due to uncertainty in calculation of ITA No.257/B/12 the income and it is for the AO accept the claim of the assessee under the IT Act or not to accept it, in which case there will be added- back even under the real income theory. It was also observed that the Income-tax Act is tax on real income i.e the profits arrived at on commercial principles subject to the provisions of Act but a provision for doubtful debts is only a notional expense which is a debit to the P & L account which is expressly disallowed by explanation to sec.

8 ITA No.1530/Bang/2013 36(1)(vii) which if claimed has got to be added back to the total income of the assesse because Act seeks to tax the real income and for this purpose write off is a condition for allowance. It is, therefore, clear that the facts of the case before the Apex Court are entirely on a different set of facts and hence its finding on non-allowability of the provisions of NPA’s cannot be applied to the facts of the case before us but its observation that for recognizing the interest income on NPA’s, AO has to consider the facts of each case has relevance to the case before us. In view of the same, we hold that the decision of the Hon’ble Supreme Court is on a different set of facts. The second decision relied upon by the learned DR is that of Chennai Bench of the Tribunal in the case of India Equipment Leasing Ltd., which is on the same set of facts as before us, as it was held in favour of the Revenue. Coming to the decisions relied upon the learned AR, we ITA No.257/B/12 find that the decision of the Jurisdictional High Court in the case of Canfin Homes Ltd., is also on the same set facts as before us and is binding on this tribunal. In the said decision, at para 8 of the order, the Hon’ble High Court has held as under : “Therefore, it is clear if an assessee adopts 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 not realized immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated that though a particular income is due to him but 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 we are concerned with a non performing asset. As the definition of non performing asset shows an asset becomes non performing when it ceases to yield income. Non performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non performing asset then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy ITA No.257/B/12 guidelines issued by the National Housing Bank, the income from non performing asset should be recognized only when it is actually received. That is what the Tribunal held in the instant case. Therefore, the

9 ITA No.1530/Bang/2013 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.” 9. In view of the same, respectfully following the decision of the Hon’ble Jurisdictional High Court (cited Supra), the Revenue’s appeal is dismissed."

11.

In the light of the aforesaid decisions, based on which the CIT (A) has given relief to the assessee, we are of the view that the order of CIT (A) does not call for any interference. 12. In the result, appeal of the Revenue is dismissed. Order pronounced in open court on 5th March, 2015.

Sd/- Sd/- (N.V.VASUDEVAN) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, - A Bench. 6. Guard File. (True copy) By Order Asst. Registrar, ITAT, Bangalore

ACIT, BIJAPUR vs. THE SINDAGI URBAN CO-OP BANK LTD.,, SINDAGI