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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: Ms. Annapurna Gupta & Shri Siddhartha Nautiyal
आदेश/ORDER
PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
These appeals have been filed by the Department against the orders of Ld. CIT(Appeals) for assessment years 2012-13 and 2013-14. Since common issues are involved in both the years under consideration, both the appeals are being taken up together. We shall first deal with assessment year
I.T.A Nos. 101 & 102/Rjt/2017 A.Y. 2012-13 & 2013-14 Page No 2 ACIT vs. Citizens Co.Op Bank Ltd.
2012-13 and the observations made therein would also apply to assessment year 2013-14.
Assessment year 2012-13:
The assessee has taken the following grounds of appeal:
“1. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in deleting the additions made on account of Interest Accrued on NPA of Rs. 2,70,87,263/-. 2. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in deleting the disallowance made of deduction u/s. 36(l)(viia) of the I.T. Act of Rs. 22,98,782/-.”
Assessment Year 2013-14:
The assessee has taken the following grounds of appeal:
“1. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in deleting the disallowance made of deduction u/s. 36(l)(viia) of the I.T. Act of Rs. 33,07,845/-. 2. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in deleting the additions made on account of Interest Accrued on N PA of Rs. 31,63,599/-.”
We shall first take up assessment year 2012-13.
Ground Number 1: deleting the additions made on account of interest accrued on NPA of � 2,70,87,263/-
I.T.A Nos. 101 & 102/Rjt/2017 A.Y. 2012-13 & 2013-14 Page No 3 ACIT vs. Citizens Co.Op Bank Ltd.
The brief facts of the case are that assessee is a co-operative bank and during the course of assessment proceedings, the AO asked the assessee as to why interest accrued on NPA has not been offered for taxation by the assessee in the return of income. The assessee submitted that the assessee is a co-operative bank and was following the “Prudential Norms Directions” issued by the Reserve Bank of India and the accounting standards notified by the Central Government. The assessee further submitted that once there is a doubt regarding the realisation of the principal amount itself, it cannot be said that the interest on such amount accrued to the assessee even under the mercantile system of accounting. However, the AO did not agree with the contentions of the assessee and added a sum of � 2,70,87,263/- as interest which accrued on NPAs as taxable income in the hands of the assessee on accrual basis.
In appeal, Ld. CIT(Appeals) allowed the appeal of the assessee by following the decision of CIT (A)-1, Rajkot dated 08-07-2014 in the case of GondalNagrikSaharakari Bank Ltd. passed inter-alia relying on the decision of ITAT Ahmedabad in the case of Karnavati Cooperative Bank 17 Taxmann 239, which decision has also been followed by the ITAT Rajkot in subsequent decisions.
The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) deleting the additions on account of accrued interest on NPAs. In our considered view, the issue under consideration has been decided in favour of the assessee by various Courts, including the Apex Court of India and the Gujarat High Court, which have held that even if the
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assessee is following mercantile system of accounting, interest accrued on NPAs are only taxable on receipt basis. In the case of Jamnagar District Co-Operative Bank Ltd.[2018] 94 taxmann.com 300 (SC), Supreme Court dismissed the SLP filed by the Department against the order of the High Court holding in case of assessee-bank, interest on non-performing assets (NPAs) which were irrecoverable, sticky loans, or doubtful loans is not taxable on accrual basis looking to guidelines of Reserve Bank of India. In the case of Kutch District Central Co-Op. Bank Ltd.[2018] 94 taxmann.com 298 (Gujarat), the Gujarat High Court held that Interest on non-performing assets is not taxable on accrual basis looking to guidelines of Reserve Bank of India. In the case of Bhind District Cooperative Central Bank Ltd.[2019] 106 taxmann.com 396 (Madhya Pradesh), the MP High Court held that assessee, a non-banking institution, engaged in providing financial assistance to its customers, was not liable to pay tax in respect of interest earned on non-performing assets (NPA) on accrual basis. In the case of Davangere Urban Co-operative Bank Ltd. [2018] 93 taxmann.com 221 (Karnataka), the Karnataka High Court held that income from NPA should be assessed on cash basis and not on mercantile basis, despite assessee following mercantile system of accounting. In the case of Solapur District Central Co-op. Bank Ltd[2019] 102 taxmann.com 440 (Bombay), the Bombay High Court held that where income on NPA was actually not credited but was shown as receivable in balance sheet of assessee-co-operative bank, interest on NPA would be taxable in year when it would be actually received by assessee bank. In the case of SunderlalSawji Urban Co-op Bank Ltd.[2014] 42 taxmann.com 392 (Pune - Trib.), the assessee-co-operative bank had accrued interest on
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NPA account of Rs. 1,32,49,730 out of which assessee had actually received Rs. 1,30,58,733 and same had been offered to tax. The assessee did not offer tax on balance interest. The addition was made on ground that assessee was following mercantile system of accounting and, hence, whole amount of accrued interest had to be brought to tax. In fact, assessee had been consistently following cash method of accounting recognizing income in respect of asset qualified as bad and doubtful debt (NPA) as per RBI guideline in view of provision of sections 145 and 43D.The ITAT held, following the case of Asstt. CIT v. Osmanabad Janta Sahari Bank Ltd. [2013] 32 taxmann.com 229 (Pune - Trib.), that assessee could offer to tax amount of interest received from bad and doubtful debts (NPA) on actual receipt basis as per RBI guideline, even though assessee was following mercantile system of accounting. In the case of Karnavati Co-op. Bank Ltd.[2012] 17 taxmann.com 239 (Ahd.), the assessee, a co-operative bank, was following mercantile system of accounting. It had neither credited in profit and loss account nor offered for taxation amount of interest that had accrued on non-performing assets [NPA].The Assessing Officer held that assessee was required to credit accrued interest on NPA to its profit and loss account and by not doing so it had infringed section 43D.The AO, accordingly, added accrued interest on NPA to income of assessee. The Ahmedabad ITAT held that in view of clear provisions of section 43D, the Assessing Officer was wrong in adding accrued interest on NPA to income of assessee. In our considered view, keeping in view of the decisions on this issue in favour of the assessee by the Supreme Court of India and the Gujarat High Court, we hold that Ld. CIT(Appeals) has not erred in facts
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and in law in deleting the additions made in the hands of the assessee on account of accrued interest on NPA.
In the result, ground number 1 of the Department’s appeal is dismissed.
Ground Number 2: deletion of addition relating to deduction u/s 36(1)(viia) of the Act:
During the assessment year, the assessee had claimed deduction of � 8. 22,98, 782/- under section 36(1)(viia) of the Act in respect of provision for bad and doubtful debts. In the assessment proceedings, the AO disallowed the claim of deduction of the assessee on the ground that section 36(1)(viia) of the Act applies only in cases where assessee has given rural advances. The AO held that deduction under section 36(1)(viia) of the Act is allowable only for rural advances and the aforesaid section provides a two-fold deduction: a) 7.5% of total income before making any deduction under section and Chapter- VIA and b) 10% of the average aggregate of rural advance
Therefore, the AO held that the Legislature in order to encourage banks to set up branches in rural areas, is allowing them 7.5% deduction of total income and further as an incentive it is allowing them deduction of 10% for advances given by rural banks. While holding so, the AO placed reliance on the case of Catholic Syrian bank [2012] 18 taxmann.com 282 (SC).
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In appeal, Ld. CIT(Appeals) allowed the assessee’s appeal. In appeal, Ld. CIT(Appeals) held that the Honourable Supreme Court in the case of Catholic Syrian bank was concerned with the issue whether the assessee bank could avail of deduction under section 36(1)(vii) of the Act and under section 36(1)(viia) of the Act simultaneously, and whether these amounted to double deduction. The Ld. CIT(Appeals) held that evidently there is no requirement in section 36(1)(viia) of the Act or the judgement cited by the AO in the assessment order that the deduction u/s. 36(1)(viia) is available only to banks having rural credits. While allowing the assessee’s appeal, the Ld. CIT(Appeals) made the following observations:
“3.3.4 Decision of Ground of Appeal No.3 Having considered the facts and circumstances of the case and rival contentions I find that the AO has applied the decision of Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. which in my view is distinguishable from facts of the instant case. The Hon'ble Supreme Court in the cited case was concerned with the issue whether the bank could avail of deduction of u/s. 36(1)(vii) and u/s. 36(1)(viia) simultaneously, and whether these amounted to double deduction. The Hon'ble Supreme Court has held that once an assessee has claimed a deduction of provision of bad debts under clause (viia) then by virtue of provision of clause (viia) the assessee could claim deduction of bad debts return off only to the extent of excess of right off over the amount standing to the credit in the account created under clause (viia) of section 36. From the above judgment of the Hon'ble Supreme Court the AO has inferred that deduction u/s.36(1 )(viia) is specifically for banks having rural branches and has concluded that the deduction u/s.36(1 )(viia) is not allowable to the bank which does not have rural branches. Such inference in my considered opinion is erroneous interpretation of the judgment and it is contrary to specific provision of section 36(1)(viia). There is no requirement in the section 36(1)(viia) or the cited judgment that the said deduction is available only the banks having rural credits. Therefore, it is held that the assessee is entitled to the deduction u/s. 36(1)(viia) it being co operative bank notwithstanding the fact that it has no rural
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advances. The AO is directed to delete the disallowance. Assessee succeeds on this ground. 4. For statistical purpose the appeal is to be treated as allowed.”
The Department is in appeal before us against the aforesaid additions being deleted by Ld. CIT(Appeals). In our view, there is no infirmity in the order passed by Ld. CIT(Appeals) and in our considered view, he has correctly concluded that the case cited by AO i.e. Catholic Syrian bank supra was on an unconnected and different issue. In the case of Sadhana Sahakari Bank Ltd.[2020] 118 taxmann.com 526 (Pune - Trib.), the ITAT held that assessee co-operative bank was entitled to claim deduction of provision made for bad and doubtful debts under section 36(1)(viia) even in absence of rural branches/rural advances. In the case of Bhagini Nivedita Sahakari Bank Ltd.[2018] 100 taxmann.com 375 (Pune - Trib.) a co- operative bank is entitled to claim deduction of bad debts provided in first part of section 36(1)(viia)(a) being 7.5 per cent of total income even in absence of rural branches. In the case of State Bank of Hyderabad[2015] 63 taxmann.com 322 (Hyderabad - Trib.), it was held that deduction under section 36(1)(viia) cannot be restricted to extent of provision for bad and doubtful debts relating to rural advances only. In the case of Chaitanya Godavari Grameena Bank[2018] 93 taxmann.com 400 (Visakhapatnam - Trib.), in order to allow assessee's claim under section 36(1)(viia), what is to be seen by Assessing Officer is as to whether provision for bad and doubtful debts is created, irrespective of whether it is in respect of rural or non-rural advances by debiting profit and loss account and, to extent provision for doubtful debts so created, assessee is entitled for deduction
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subject to upper limit of deduction laid down in said section. In the case of Kodungallur Town Co-op Bank Ltd.[2016] 72 taxmann.com 205 (Cochin - Trib.), a Cooperative Bank is entitled to claim deduction of bad debts provided in first part of clause (viia)(a) of section 36(1) being 7.5 per cent of total income and same cannot be denied linking it to rural advances. In the case of ING Vysya Bank Ltd[2014] 42 taxmann.com 303 (Bangalore - Trib.), the ITAT held that in order to allow assessee's claim under section 36(1)(viia), what has to be seen by Assessing Officer is as to whether provision for bad and doubtful debts (PBDD) is created irrespective of whether it is in respect of rural or non-rural advances by debiting profit and loss account and, to extent PBDD is so created, assessee is entitled to deduction subject to upper limit of deduction laid down in said section. In view of the above discussion and various judicial precedents on the subject, it is clear that the benefit of section 36(1)(viia) of the Act is available irrespective of whether the provision is created in respect of rural advances are not, subject to the prescribed limit specified in the said section.
In view of the above, ground number 2 of the Department’s appeal is dismissed.
In the combined result, the appeal of the Department is dismissed for assessment year 2012-13.
Assessment year 2013-14:
I.T.A Nos. 101 & 102/Rjt/2017 A.Y. 2012-13 & 2013-14 Page No 10 ACIT vs. Citizens Co.Op Bank Ltd.
Since the grounds and the issues for consideration are common for both assessment years 2012-13 and 2013-14, in view of the detailed discussion the preceding paragraphs, the appeal of the Department is dismissed for assessment year 2013-14.
In the combined result, the appeals of the Department are dismissed for both assessment years 2012-13 and 2013-14.
Order pronounced in the open court on 23-12-2022
Sd/- Sd/- (ANNAPURNA GUPTA) (SIDHHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 23/12/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order,
Assistant Registrar, Income Tax Appellate Tribunal, Rajkot