PUNJAB STATE COOP. BANK LTD.,CHANDIGARH vs. ACIT, CL-2(1), CHANDIGARH

आयकर अपीलीय अिधकरण,च"ीगढ़ "ायपीठ “बी” , च"ीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH HEARING THROUGH: PHYSICAL MODE "ी िव"म िसंह यादव, लेखा सद" एवं "ी परेश म. जोशी, "ाियक सद" BEFORE: SHRI. VIKRAM SINGH YADAV, AM & SHRI. PARESH M. JOSHI, JM आयकर अपील सं./ ITA NO. 293/Chd/2023 िनधा"रण वष" / Assessment Year : 2013-14 Punjab State Cooperative Bank The ACIT बनाम Limited Circle-2(1) SCO 175-187, Sector 34-A, Chandigarh Chandigarh-160022 "ायी लेखा सं./PAN NO: AAAAP0253B अपीलाथ"/Appellant ""थ"/Respondent िनधा"रती की ओर से/Assessee by : Shri Atul Goyal, C.A राज" की ओर से/ Revenue by : Shri Dharam Vir, JCIT, Sr. DR सुनवाई की तारीख/Date of Hearing : 07/08/2024 उदघोषणा की तारीख/Date of Pronouncement : 21/08/2024 आदेश/Order PER PARESH M. JOSHI, J.M. :

This is an appeal filed by the Assesee The Punjab State Cooperative Bank Ld. For the Assessment Year 2013-14. The corresponding previous year is from 01/04/2012 to 31/03/2013. The appeal is filed under section 253 of the Income Tax Act, 1961 as and by way of second appeal under the Act. The assessee is aggrieved by order No. ITBA/NFAC/250/2022-23/1050740589(1) dt. 14/03/2023 of the Ld. CIT(A) passed under section 250 of the Income Tax Act, which is hereinafter referred to as the “impugned order”. FACTUAL MATRIX

Tax Department through the Assistant Commissioner of Income Tax Circle 2(1) Chandigarh.

Kindly refer to your office notice dated 17-02-2023 for filing the written submissions in the above said appeal by 23-02-2023. The assessment proceedings in the case were finalized under the provisions of Section 143(3) of the income Tax Act 1961 by the worthy Assessing Officer by making following additions: a) Disallowance of premium paid on government securities Rs. 12,39,000/- holding the same to be capital expenditure. b) Loss on sale of vehicles Rs.22,940/-. c) Rs.7,43,000/- on the basis of the audit report of the Chartered Account considering the same as being depicted in the Sundries Miscellaneous on account of OTS scheme.

The addition made by the assessing officer is against the facts and the provisions of law. Hence the assessee filed an appeal. The issue at a) was decided in the favour of the assessee by the CIT(A) and matter at (c) was decided against the assessee. Both assessee as well the department filed the appeal before the Hon'ble ITAT whereas the appeal of the department in relation to the issue a) was dismissed by ITAT and the assessee's appeal on issue (c) was remanded back to the file of the CIT(A) on the basis of the additional evidence filed by the assessee during the proceedings before the Hon'ble ITAT in respect of 2 grounds of appeal: a) Taxability of interest income of Rs. 1,20,87,000/- already taxed during FY 2015- 16 relevant to AY 2016-17 b) Taxability of amount of Rs. 743,000 received by the assessee under OTS(One Time Settlement scheme) with regard to NPA accounts (Non Performing Assets) The assessee submits as under: a) Disallowance of Rs.12,39,000/- being premium paid on issue of Government securities The issue has been decided by the CIT(A) in favour of the assessee in Appeal No 293/2015-16 and the appeal of the department before the Hon'ble ITAT has been dismissed in Appeal no 867/CHD/2019 VIDEORDER DATED 5th September 2019. b) Rs.7,43,000 on the basis of the Notes of accounts considering the same as being depicted in the Sundries Miscellaneous on account of OTS scheme. The assessee had filed additional evidence before the Hon'ble ITAT on the basis of which the matter was remanded to the CIT(A). The documents filed before the Hon'ble IT AT are again filed before your good self. Sir, we require to understand the procedure for accounting for the recovery under OTS scheme. The OTS scheme is available in respect of the loan and advances which have become NPA (Non performing assets). The banks are required to make provision for the accounts in accordance with master circular issued by RBI in respect of Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances" in the books o faccounts. Under the provisions of Section 36(1)(viia) of the Income Tax Act 1961the provisions so created in the books of the assessee is restricted to 7.5% or 10%of the Net profit of the assessee before making such provision in the books. The assessee banking society launched an OTS (One Time Settlement) scheme. The borrowers who availed the scheme deposited an amount by way of token money with the bank for consideration of their proposal of OTS, which can either be accepted or rejected by the bank and in case of the rejection of the proposal, the amount received is liable to be returned to the borrower. Therefore, the amount received by the bank is not credited to the account of the borrower but is kept in a separate account under the head "sundries". The amount is credited to the account of the assessee after the acceptance of the OTS proposal and the deposit of the entire amount by the borrower to the bank. Upon credit, the amount is firstly adjusted against the principal amount due from the borrower and the excess if any after that is shown by the banks as interest income and assessed to tax in the year of adjustment as per the provisions of Section 43D of the Income Tax Act 1961. The same uniform

accounting principle is followed by the banks in India for accounting of amount received under OTS. Sir, the assessing officer has disallowed the amount Rs.7,43,000/- as income of the assessee by holding as under: The assessee claims NPA as an expenditure under the Income Tax Act 1961. However, it has failed to show the amount as income which has been recovered from the NPAs. Therefore, the amount of Rs.743,000/- is added to the Income of the assessee. Further the amount has not been shown in the Notes of accounts of the assessee but was covered in the Long Form Audit report which is enclosed.

Sir, the Assessing Officer's claim that the NPA is claimed as expenditure is wrong, The assessee is allowed deduction on account of provision for bad and doubtful debts and deduction allowable is subject to the ceiling of 7.5% of the total income of the assessee. On receipt of the amount from the defaulter the amount is credited to his account and the provision for NPA is reduced by the Banking Company. Therefore, merely because an amount is received cannot be considered as income of the bank. The amount of any interest received by the bank is considered as income of the bank. Therefore the Assessing Officer has erred in considering the amount received under OTS scheme as income of the assessee society. Further, the amount received under the OTS scheme is adjusted against the advance only after the approval from the appropriate authority and till that time the amount is reflected by the Bank in the Sundries (Misc) Account. The detail of the customers opting for OTS scheme in FY 2012-13 (AY 2013-14) is enclosed. The assessee had initially received a sum of Rs.7,50,110/- dun'ng the year under consideration. The statutory auditor in the LFAR has taken the amount at Rs.7.43 Lacs (calculation enclosed),, the calculation and basis of calculation of the same is also enclosed. Out of the customers who opted for OTS during the FY 2012-13, accounts of 6 customers (Rs. 4,54,013/-) were settled during the FY 2012-13 (AY 2013-14) itself in respect of which advance of Rs.4,06,490/- had been shown and the provision thereon has been written back and their copy of accounts are enclosed. In respect of remaining amount, details of which are enclosed along with the year of settlement is also provided along with their respective copy of accounts. The details of the advances received and period of charging to profit and loss account are as under:

Financial Year Assessment Year No of Accounts Advance as per Statutory Account amount Auditor during FY 2012-13 received at the time of settlement of account(year of charging to profit and Loss) 2012-13 2013-14 6 406490 4,54,013/- 2013-14 2014-15 6 158719 6,34,874/- 2014-15 2015-16 1 11759 47,035/- 2018-19 2019-20 1 166075 6,64,299/- Total 7,43,042 18,00,221 On the aforesaid dates the amount is first adjusted against the principal amount any due from the defaulter and the excess if any is charged to Profit and Loss account being interest on loan. Further the assessee society reduced the provision for Bad and Doubtful debt in respect of the loan advanced to the parties. According to the Ld. AO the assessee claims NPA as expenditure under the Income Tax Act 1961, which is without any basis and is factually wrong. The assessee is instead allowed claim for the provision for NPA's and such claim is also restricted to 7.5% or 10% of the Net profits of the assessee before making such provision. The provision for NPA of the assessee as on 31st March 2013 is Rs.5179.04 Lakhs against the gross NPA of Rs.5689.47 Lakhs and whereas the provision for NPA claimed under the Income Tax Act 1961 is Rs.1350.10 Lakhs(Form A Balance Sheet Schedule 2(i)) as against provision of Rs. 5689.47 Lakhs. This clearly shows that against the NPA of Rs.5689.47 Lakhs, the assessee has merely claimed an amount of Rs. 1350.10 Lakhs under Section 36(1)(vii)(a) of the Income Tax Act 1961. Further, the provision allowed under the Income Tax Act 1961 under Section 36(1)(vii)(a) is not against specific advance the provisions for NPA provided by the bank is allowed only to the extent of the 7.5% or 10% of the net profit of the bank before adjusting for the provision. Further, at the time of receipt of the complete amount, the provision for bad debts is written back but is not shown separately but the fresh provision for bad and doubtful debts is debited to the profit and loss account after adjustment of the amount. The assessee only debits to the profit and loss account the proportion of the provision for bad debts which is allowable under the provisions of Section 36(1)(viia) of the Income Tax Act and the remaining amount is directly debited to the retained earnings of the assessee banking society. Therefore, it is clear from the above that the Ld. A.O. has erred in adding the amount of Rs. 743,000 as income of the assessee. Further, the Assessing Officer has failed to provide the provision of the Income Tax Act 1961 under which the amount has been considered as income of assessee as the amount allowed under the provisions of Section 36(1)(vii)(a) is not covered under the provisions of Section 41(4) which deals with the collection in bad debts accounts. The details of accounts along with the ledger accounts are also enclosed. Therefore, in light of the above the assessee requests that the addition of Rs. 7.43Lacs may kindly be deleted. The Hon'ble ITAT has remanded the matter back on issue of considering the amount of Rs. 120,87,000/- as income of the assessee. a) That the Hon'ble CIT(A) has erred on the facts as well as law while considering the amount of Rs. 1,20,87,000/-as income for the FY 2012-13 when the amount received was under dispute before the court and upon order of the court, the same has been subject to tax by the assessee during the relevant assessment year(s)

As regards the amount of Rs. 1,20,87,000/-, the assessee submits as under: Sir, it is respectfully submitted that provisions of Section 43 D have to be read in harmony with the provisions of Section 5 of the Income Tax Act and the guidelines

issued by the Reserve Bank of India in respect of IRAC norms and provisions of Section 45Q of the Reserve Bank of India 1934 which overrides the provisions of any other law. Mere receipt of amount cannot be treated as the income of the assessee. The same would depend upon the nature of receipt. In case the receipts are to be treated as income of the assessee, the same has to fall under revenue receipt and further the right to receive the payment must have accrued to the assessee. In the instant case, as per the LFAR report the assessee has received a sum of Rs. 173.73 Lacs as on 31.03.2014 and whole of the amount was lying under the head "Sundries Payable". Out of the same, the amount of Rs. 170,00,000/-pertains to the amount received from the sale of assets of the guarantor in a loan on 24.12.2012 and the guarantor had filed the proceedings in the court of law against sale of such asset which was settled by the lower court by its order dated 20.01.2015. Against which the party filed an appeal before the Hon'ble Punjab and Haryana High Court and when the Hon'ble High Court did not grant stay to the guarantor the amount was credited to the account of the customer M/s Heels and Toes Footwear Pvt Ltd on 13.05.2015 and the amount of Rs. 91,00,000/- was recognized as interest income by the assessee for the AY 2016- 17 and remaining amount of Rs. 79,00,000 was adjusted against the principal outstanding. Similarly the assessee also received a sum of Rs. 29,87,000/- from the customer M/s Heels and Toes Foot wears Pvt Ltd on 22.03.2013. The amount was credited to the account of customer on 31.03.2017 and the amount was shown as interest income of the assessee for the AY 2017-18. In light of the provisions of Section 5 read with Section 43D as mere receipt of the amount is not taxable, the income must accrue to the assessee before it is becomes taxable. Sir, the amount had been added by the Ld. CIT(A) through an / enhancement notice. The issue relates to AY 2014-15 where in the Ld. A.O. had made addition of Rs. 1.73 crores to the income of the assessee for provision for doubtful debts on the basis of the Long Form Audit Report (LFAR) of the bank and during original appellant proceedings the Ld. CIT(A) had allowed the principal amount to the assessee and since the amount of Rs. 12087000 was received by the assessee during the FY 2012-13 issued enhancement notice upon the assessee and added the amount of Rs.120,87,000 to the income of the assessee for AY 2013-14. The appeal for the AY 2014-15 has also been remanded back by the Hon'ble ITAT to the CIT(A). Therefore, the addition has no relevance and should be considered and dealt with after the decision for AY 2014-15 is adjudicated by the Ld. CIT(A).

The erstwhile the Ld. CIT(A) observed that the assessee society had recovered interest to the tune of Rs. 1,20,87,000/- and the same ought to have been offered to tax under section 43D of the Income Tax Act, 1961. Basis this erstwhile CIT(A) had enhanced income by the said amount. In the appellate proceedings before ITAT the assessee society contested that the said interest is offered to tax in the A.Y. 2015-16 and A.Y. 2016-17 and thus appeal for A.Y. 2014- 15 it was set aside. The assessee society submitted vide response dt. 24/02/2023 that it had received the said sum of money i.e; Rs. 1,20,87,000/- but it has treated them as liability because the guarantor / borrower has instituted litigation in Court of law and therefore the said some of Rs. 1,20,87,000/- was not actually accrued to it. The Ld. CIT(A) held that “The contention of the appellant has been perused but not found acceptable. As per master circular of RBI, the banks needs to consider income from NPA on receipt basis and not on accrual basis. In view of the above, I am of the considerate view that amount of NPA recovered should be offered to tax in the year of receipt. Therefore, the addition made by the learned AO is upheld.”

Record of Hearing

in relation to such category of bad and doubt debts as may be prescribed shall be chargeable to tax in the previous year in which it is credited by the bank to its profit and loss account for that year or as the case may be, in which it is actually received by that bank, whichever is earlier. The emphasis was made on the words “amount of interest income actually received by the Bank”. It was contended that mere receipts of money does not become income of the Assessee until the assessee appropriates the same to its income and therefore amount of Rs. 1,20,87,000/- is not exigible to tax during the A.Y. 2013-14. It was further contended that since the assessee society has voluntarily charged the amount to interest income during the A.Y 2016-17 and 2017-18, taxability of the amount during the A.Y. 2013-14 would amount to double taxation. It was contended that the Ld. CIT(A) has failed to take into consideration submissions made on the year of taxability and has erroneously held it to be for A.Y. 2013-14 and has rejected the appeal of the assessee society. The Ld. AR laid much emphasis on the year under consideration, the year of receipt and year of taxability and concluded his arguments.

Basis above he has contended that the combined and cumulative reading of the above provisions it can be said that assessee society recognized the interest income of Rs. 1,20,87,000/- as not an income for A.Y. 2013-14 but for A.Y. 2016-17 and 2017-18. 13.3 The amount of Rs. 1,70,00,000/- pertains to the amount received from the sale of assets of a guarantor to the loan taken by the borrower on 24/12/2012 for which they had to file an execution application in a Civil Court. The Civil Court order in favour of the bank was contested before Punjab & Haryana High Court and upon refusal by the Punjab & Haryana High Court not to grant stay to the guarantor, the amount was credited into the account of borrower on 13/05/2015 and an amount of Rs. 91,00,000/- was appropriated and recognised as interest income by the assessee for the A.Y. 2016-17 and the remaining amount of Rs. 79,00,000/- was appropriated and adjusted against the principal outstanding sum. Similarly the assessee received sum of Rs. 29,87,000/- from the borrower M/s Heels and Toes Footwear Pvt. Ltd. on 22/03/2013 under OTS. The amount was appropriated, recognised and credited on 31/03/2017 and the amount was shown as interest income of the assessee for A.Y. 2017-18. In this factual backdrop it is contended by the Ld. AR that mere receipt of the aforesaid amount during the A.Y. 2013-14 the amount does not become taxable. The reliance was placed on the judgement of Hon’ble Supreme Court of India in case of CIT Vs. M/s Excel Industries Ltd. reported in (2013) 358 ITR 295 and in particular para 17 to 33 to draw a point that income tax is a levy on income. No doubt 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, but the substance of the matter is income. Basis above it was contended that Hon’ble Supreme Court has laid down three tests for deciding the year of taxability of income; (a) whether the income accrued to the assessee is real or hypothetical

(b) whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made (c) the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view

It was contended further that the assessee has received a sum of Rs. 1,70,00,000/- from the sale of immovable property and the amount of Rs. 29,87,000/- alongwith an application under one time settlement scheme (OTS). The whole of the amount is not income of the assessee. As per law only the interest income received by the assessee is taxable and not whole of the amount. The assessee has credited the amount in the account of Heels & Toes Rs. 1,70,00,000/- during F.Y. 2015-16 (A.Y. 2016-17 ) and Rs. 29,87,000/- in F.Y. 2016- 17 (A.Y. 2017-18 ) and therefore the amount cannot be taxed during A.Y. 2013- 14 further, the improbability existed due to the proceedings filed by the ‘guarantor’ against the order and since the proceedings against the order of Lower Court was decided by District Court on 20/01/2015 and the Hon’ble High Court had not granted any stay against the amount of Rs. 1,70 Crores same was credited into account of bank’s customer M/s Heels & Toes in July 2015 and the interest income of Rs. 91,00,000/- was realised by the assessee therefrom and same was assessed to tax as income of the assessee for A.Y. 2016-17. As regards the amount of Rs. 29,87,000/- the same was received on 22/03/2013 from borrower on account of OTS and same was credited into account of customer for A.Y. 2017-18 and taxed as interest income. It was finally contended that amount received by the assessee is not income but a portion of amount become income and same can be known only after credit of the amount into the account of borrower which was done during A.Y. 2016-17 and A.Y. 2017-18. By virtue of provision contained in section 43D there is a reference to the guidelines of RBI and by virtue of 3.3.2 it is provided that “ In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks

should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.” Reliance on AS-9 issued by ICAI with regard to recognition of Revenue vide para 13 which places importance on recognition when no significant uncertainty as to measurability or collectability exist was placed.

In the premises above we also hold that though amount was realised in the F.Y. 2013-14 but it was appropriated recognised and accounted as interest income in the A.Y. 2016-17 and A.Y. 2017-18 as the assessee has statutory obligation by virtue of section 43D of the Income Tax Act, 1961 to treat income by way of interest as per RBI guidelines too [ vide Master Circular No. RBI/2023-24 /06 dt. 01/04/2023 (DOR.STR.REC.3/21.04.048/2023-24) and Master Circular (DOR. STR.REC.4/21.04.048/20222-23) dt. 1/04/2022]. The bank has the right of appropriation recognition of recoveries with a rider that it should be uniform and consistent. Even otherwise under the Indian Contract Act, 1872 which deals with the appropriation of payments from Section 59 to 61; Section 60 gives right to bank (the creditor) “ where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, , whether its recovery is or is not barred by the law in force for the time being as to the limitations of suits.” We further therefore hold that even otherwise the bank has a right to appropriate and recognise the amount in the absence of any specific / express of instructions of debtor / the borrower. We also hold that money / amount realised by the bank by following due process of law as in the instant case is subject to the assesssee right to appropriate the same. The assessee

appropriated in A.Y. 2016-17 and A.Y. 2017-18 by which time clouds of uncertainties with regard to recover of bad debts were clear. Finally when stage came of some degree of certainty the assessee rightly exercised his right of appropriation u/s 60 of the Contract Act and so also by following the guidelines of RBI as mandated by Section 43D of the Income Tax Act, 1961 and appropriated it for A.Y. 2016-17 and A.Y 2017-18 respectively. The debtor’s amount so realised was not indicative to which debt the payment is to be applied i.e; principal or interest. The debtor had omitted to indicate and further there were no other circumstances indicating contrary. Be that as it may the Debtor / borrower/guarantors amount realised by assessee bank on receipt was silent on how it is to be appropriated. Hence following due process i.e; guidelines of RBI and law relating to appropriation of payment the amount was duly accounted as interest income for A.Y. 2016-17 and A.Y. 2017-18 despite the fact that money was received in A.Y. 2013-14 and accounted as sundry payable. We therefore hold that mere receiving the money is inconsequential unless and until assessee appropriates it towards the object and purpose for which it was received which is of relevance and substance. It is an act of appropriation which give money realised a colour of interest income which happened in A.Y. 2016-17 and A.Y. 2017-18. It is at that point of time the interest income was accounted as income and receipt of the same prior thereto of the guarantor was subject matter of litigation and no finality had reached. Further the amount received under OTS was subject to all necessary approval of Board and at material time it was contingent in nature looking to the scheme of OTS. The assessee is mandated by the RBI to follow a system which is even well recognised by Section 43D which is guidelines of RBI and the relevant guidelines says that “ In the absence of a clear agreement between the bank and the borrower for the purposes of appropriation of recoveries in NPAs (i.e; towards principal or interest due) banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent

manner”. We hold that assessee bank has followed Section 43D of Income Tax Act, 1961. We also hold that assessee has already brought to the return of income the amount of Rs. 91,00,000/-during A.Y. 2016-17 and Rs. 29,87,000/- during A.Y. 2017- 18 subjecting the amount to the return of income in A.Y. 2013-14 would certainly lead to double taxation. Further we hold that there is no change in the rate of tax for A.Y. 2013-14 or A.Y. 2016-17 and A.Y. 2017-18, the assessee in all these years was subject to tax @ 30% and the assessee had earned profit during each of the assessment year. Hence there would be no loss to the Revenue due to year of taxability. We gainfully refer to observation of Hon’ble Supreme Court in case of CIT, Central III Vs. Excel Industries Ltd. (2013) 358 ITR 215 held as under:

Order

Accordingly we hold that provisions of Section 43D of Income Tax Act, 1961 stands complied in overall facts and circumstances of the case as the word ‘credited’ or ‘received’ as used in Section 43D (supra) is required to be understood in the context of recognition and appropriation of payment by virtue of RBI guidelines (supra) and the Indian Contract Act, 1872 and so also by noting and appreciating the fact that recoveries were appropriated and recognised after the clouds of litigation got cleared. In the result the impugned order of Ld. CIT(A) is set aside and appeal of the assessee is allowed.

Order pronounced in the open Court on 21/08/2024. िव"म िसंह यादव परेश म. जोशी ( VIKRAM SINGH YADAV) (PARESH M. JOSHI) लेखा सद"/ ACCOUNTANT MEMBER "ाियक सद" / JUDICIAL MEMBER AG

आदेश क" "ितिलिप अ"ेिषत/ Copy of the order forwarded to : 1. अपीलाथ"/ The Appellant

आदेशानुसार/ By order, सहायक पंजीकार/