2013 (12) TMI 1609 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest received on loans relating to earlier years.
2. Addition of stale drafts/pay orders as income u/s 41(1).
3. Levy of interest u/s 234B & 234D.

Summary:

1. Disallowance of Interest Received on Loans Relating to Earlier Years:
The Revenue challenged the deletion of disallowance of Rs. 3,24,32,000 claimed by the assessee towards interest received during the period under consideration pertaining to earlier years. The Revenue contended that the assessee should follow either the cash system of accounting or mercantile system of accounting and not a hybrid system. The assessee argued that it followed the mercantile system except for interest on loans and non-performing assets, commission on bank guarantees, and locker rent, as per the Karnataka Co-operative Societies Act, 1939 and RBI Guidelines. The Tribunal upheld the CIT(Appeals)'s decision, noting that the assessee's method was consistent with the Karnataka Co-operative Societies Act and validated by the Hon'ble Apex Court in UCO Bank V CIT (237 ITR 889). The Tribunal found merit in the assessee's consistent accounting method and dismissed the Revenue's appeal.

2. Addition of Stale Drafts/Pay Orders as Income u/s 41(1):
The Assessing Officer treated Rs. 73,58,708 as income of the assessee under section 41(1) of the Act, considering it a cessation of liability. The CIT(Appeals) upheld this addition. The assessee argued that these amounts were held in trust and never treated as an allowance or deduction. The Tribunal noted that the amounts were still reflected as liabilities in the books of accounts and that the RBI Circular required these amounts to be kept as liabilities for ten years before transferring to the RBI. The Tribunal found that the primary requisite for invoking section 41(1) was not established and deleted the addition, following decisions in similar cases of Canara Bank Ltd. and Vijaya Bank Ltd.

3. Levy of Interest u/s 234B & 234D:
The assessee contested the interest levied under sections 234B & 234D. The Tribunal upheld the Assessing Officer's action, stating that the charging of interest is consequential and mandatory. The Assessing Officer was directed to recompute the interest, if any, chargeable while giving effect to this order.

Conclusion:
The Revenue's appeal for Assessment Year 2007-08 was dismissed, and the assessee's appeal was partly allowed. The Tribunal upheld the CIT(Appeals)'s decision on the disallowance of interest and deleted the addition of stale drafts/pay orders as income. The interest levied under sections 234B & 234D was upheld but required recomputation.