ACIT, BIJAPUR vs. THE BAGALKOT DISTRICT CENTRAL CO-OP BANK LTD.,, BAGALKOT

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ B ” BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. No.1528/Bang/2013 (Assessment Year : 2009-10) Asst. Commissioner of Income Tax, Circle 1, Bijapur. …. Appellant Vs. The Bagalkot District Central Co-op. Bank Ltd., Near Basaveshwar Circle, Bagalkot. ….. Respondent. PAN AAAAT 7937N Appellant By : Shri P.K. Srihari, Addl. CIT (D.R) Respondent By : Shri S. Ramasubramanian, C.A. Date of Hearing : 20.01.2015. Date of Pronouncement : 13.2.2015. O R D E R Per Shri Jason P. Boaz : This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals), Belgaum dt.16.9.2013 for Assessment Year 2009-10. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is a co-operative bank carrying on banking business as per the provisions of the Karnataka Co-operative Societies Act, 1939 and the Banking Regulation Act, 1949. For Assessment Year 2009-10, the assessee filed its return of income on 7.10.2009 declaring total

ITA No.1528/Bang/2013 2 income of Rs.6,28,54,130. The case was taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer observed that the assessee is following hybrid system of accounting or mixed system of accounting; viz. ‘Mercantile System of Accounting & Income recognition as per RBI Rules, which is in contravention of the provisions of section 145 of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The Assessing Officer observed that the assessee accounts for interest income on receipt basis and all other incomes on accrual basis. The Assessing Officer held that interest accrued / receivable on standard assets, investments, loans and advances amounting to Rs.2,15,18,000 but not credited to the profit and loss account is to be treated as the assessee's income for the relevant assessment year and accordingly brought the same to tax in the assessee's hands. Apart from this, the Assessing Officer was of the view that the assessee was liable, but failed to deduct tax at source on interest payment on term deposits to both members and non-members in excess of Rs.10,000, as per the provisions of section 194A(3)(v) of the Act, to the tune of Rs.1,29,19,176 and therefore disallowed this amount under Section 40(a)(ia) of the Act. The assessment was accordingly completed under Section 143(3) of the Act by order dt.20.12.2011. 2.2 Aggrieved by the order of assessment for Assessment Year 2009-10 dt.20.2.2011, the assessee preferred an appeal before the learned CIT(A), Belgaum. The learned CIT(A) disposed off the assessee's appeal vide order dt.16.9.2013, allowing the assessee partial relief. The learned CIT(A) deleted the addition of Rs.2,15,18,000 on account of interest receivable on NPA’s following the decision of the co-ordinate bench of this Tribunal in the case of ITO,

ITA No.1528/Bang/2013 3 Shimoga V Shiva Sahakari Bank Niyamitha in ITA No. 257/Bang/2012 dt.21.12.2012, which followed the decision of Hon'ble Karnataka High Court in the case of JCIT V Canfin Homes Ltd. in ITA No.801/2006. The learned CIT(A), however, upheld the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act amounting to Rs.1,29,19,176. 3. Aggrieved by the order of the CIT (Appeals), Belgaum for Assessment Year 2009-10 dt.16.9.2013, the Revenue has preferred this appeal, raising the following grounds :- “1. The CIT (Appeals) erred in law and on facts, in deleting the addition of Rs.2,15,18,000 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 Tax Corp (DT) 49593, ignoring the provisions of section 43D of the I.T. Act, 1961 ? 2. On the facts and in law the CIT (Appeals) 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 assessee's but do not provide such benefit to the assessee bank and as such, the provisions of section 43D amended w.e.f. 1.4.2000 overruled the Court decisions / Circulars ? “ 4. Ground Nos.1 & 2 : Accrued Interest on loans classified as NPAs :- 4.1 The sum and substance of the grounds raised by revenue are that the learned CIT(A), in the impugned order, erred in deleting the addition of Rs.2,15,18,000 on account of accrued interest on NPAs relying on the decision of the Hon'ble Karnataka High Court in the case of Canfin Homes Ltd. (2011) 5 Tax Corp. (DT) 49593, while ignoring the provisions of section 43D of the Act which do not apply or provide benefit to the assessee. The learned Departmental Representative was heard, and he reiterated the arguments / contentions raised in the grounds of appeal.

ITA No.1528/Bang/2013 4 4.2 Per contra, the learned Authorised Representative of the assessee supported the impugned order of the learned CIT (Appeals) on this issue. It was submitted by the learned Authorised Representative that the learned CIT(A) in a detailed finding in the impugned order had decided the issue in favour of the assessee and deleted the addition of Rs.2,15,18,000 on account of interest accrued / receivable on NPA’s made by the Assessing Officer following the decisions of the Hon'ble High Court of Karnataka in the case of Canfin Homes Ltd., in ITA No.801 of 2006 and the decision of the co-ordinate bench of this Tribunal in the case of ITO V Shiva Sahakari Bank Niyamitha in ITA No.257/Bang/2012 dt.21.12.2012. It was further submitted by the learned Authorised Representative that the learned CIT(A), following the decision of the ITAT, Ahmedabad Bench in the case of Karnavati Co-op. Bank Ltd. V DCIT (2012) 14 ITR (Trib.) 175 held that co-operative banks are governed by RBI Guidelines and hence the provisions of section 43D of the Act are also applicable to co-operative banks and that there is nothing in the phraseology of section 43D of the Act which makes the interest income of co-operative banks from NPA’s taxable on accrual / receivable basis. The learned Authorised Representative prayed that, in view of the factual and legal position as laid out above, this issue is covered in favour of the assessee by the above cited decisions and therefore revenue’s appeal ought to be dismissed. 4.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited and placed reliance upon. On an appreciation of the material on record, we find that the assessee is in the banking business and governed by

ITA No.1528/Bang/2013 5 RBI Guidelines and Regulations. The question for consideration and adjudication before us is whether the interest accrued in NPAs which are doubtful of being recovered should be recognised as the assessed income on accrual or on receipt basis. On perusal of the impugned order, we find that the learned CIT(A) has rendered a detailed finding at para 5.2.4 to 5.2.9 thereof while deciding the issue in favour of the assessee and deleting the addition of Rs.2,15,18,000 on account of interest accrual / receivable on NPAs, by following the decisions of the Hon'ble Karnataka High Court in the case of Canfin Homes Ltd. (supra) and of the co- ordinate bench of this Tribunal in the case of Shiva Sahakari Bank Niyamitha (supra) for Assessment Year 2008-09. It is also seen that the learned CIT(A), following the decision in the case of Karnavati Co-operative Bank Ltd. (supra) held that co-operative banks being governed by RBI Guidelines, the provisions of section 43D of the Act are also applicable to co- operative banks like the assessee and that there is nothing in section 43D of the Act which makes the interest income of the co-operative bank from NPA’s taxable on accrual basis. Before us, Revenue has not been able to controvert these findings of the learned CIT(A) in the impugned order. 4.3.2 Coming to the judicial pronouncements relied on by the assessee, we find that co- ordinate bench in the case of Shiva Sahakari Bank Niyamitha (supra) at paras 8 and 9 thereof has held as under :- “ 8……... We 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 :-

ITA No.1528/Bang/2013 6 “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 guidelines issued by the National Housing Bank, the income from non-performing asset should be recognised only when it is actually received. That is what the Tribunal held in the instant case. Therefore, the contention of the revenue that in respect of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. In that view of the matter, the second substantial question framed is answered against the revenue and in favour of the assessee.” 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.” 4.3.3 Respectfully following the decision of the Hon'ble High Court of Karnataka in the case of Canfin Homes Ltd. (supra) and of the co-ordinate bench of this Tribunal in the case of Shiva Sahakari Bank Niyamitha (supra), we hold that the learned CIT(A) has rightly deleted the addition of Rs.2,15,18,000 on account of interest accrued/receivable on NPA’s. Following the decision of the ITAT, Ahmedabad Bench in the case of Karnavati Co-operative Bank Ltd. (supra), we concur with the finding of the learned CIT(A) that co-operative banks being governed by RBI Guidelines, the provisions of section 43D of the Act are applicable to co- operative banks, like the assessee in the case on hand and there is nothing in the recital of

ITA No.1528/Bang/2013 7 Section 43D of the Act which mandated that interest income of co-operative banks from NPA’s are taxable on accrual / receivable basis. In this view of the matter, we uphold the order of the learned CIT(A) on this issue and consequently, dismiss the grounds raised by Revenue. 5. In the result, Revenue’s appeal for Assessment Year 2009-10 is dismissed. Order pronounced in the open court on 13th Feb., 2015. Sd/- Sd/- (RAJPAL YADAV) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore