2015 (4) TMI 1161 - AT - Income Tax

Changing the status of assessee from Cooperative Society to Company - Held that - We have gone through the original assessment order framed u/s. 143(3) of the Act dated 07.08.2006 wherein the status of the assessee was assessed as cooperative society. We have also gone through the impugned assessment order framed by AO u/s. 147 read with section 143(3) of the Act wherein the status of the assessee is taken as company without any basis. Change of status is not permissible under the law unless and until a cogent reasoned order is passed on the same. Here the assessee s change of status from a cooperative society to company is without any basis. Hence we restore the status of the assessee as cooperative society and this issue of assessee s appeal is allowed. Validity of rectification order passed by AO - disallowing the provisions for overdue interest and provision for standard assets invoking the provisions of section 36(1)(viia) - Held that - Assessee is engaged in the business of banking and regulated by the Banking Regulation Act 1949. The assessee is maintaining its Balance Sheet and P & L Account as required by Banking Regulations Act. The assessee statutorily required to prepare its Balance Sheet and P&L Account and as per said guidelines NPAs where interest has not been realized in cash as a prudential norm it is not debiting the said account by interest accrued in subsequent quarters and taking this interest amount as income of the bank as the said interest has not been realized. In case of assessee if interest is debited to borrowed account but for any reason interest has not actually realized account is to be treated as NPA as per the guidelines issued by RBI. In that eventuality the amount is unrealized the unrealized interest so taken to income should be reversed by debiting to the P&L Account and crediting to overdue interest reserve account. It was the claim of the assessee that during the year unrealized interest taken to income has been reversed by debiting the P&L Account and crediting to provision for overdue interest account following the guidelines issued by RBI. We find that this issue is highly debatable and it cannot be adjudicated while acting u/s. 154 of the Act. The AO should have made disallowance only while framing regular assessment or reassessment which was made prior to resorting to this rectification. This disallowance cannot be made while acting u/s. 154 of the Act reason being this is not a prima facie mistake it is a highly debatable issue - Decided in favour of assessee

Summary

Issues:
1. Change of status of assessee from Cooperative Society to Company.
2. Disallowance of provisions for overdue interest and provision for standard assets under section 36(1)(viia) of the Income Tax Act.

Issue 1: Change of status of assessee from Cooperative Society to Company:
The Appellate Tribunal considered the appeal regarding the change in the status of the assessee from a Cooperative Society to a Company. The assessee challenged the action of the Assessing Officer (AO) in changing the status without proper basis. The Tribunal noted that the original assessment had classified the assessee as a cooperative society. However, in the impugned assessment, the status was changed to a company without any valid reasoning. The Tribunal emphasized that a change in status must be supported by a well-founded order. As the change lacked a valid basis, the Tribunal restored the status of the assessee as a cooperative society, ruling in favor of the assessee.

Issue 2: Disallowance of provisions for overdue interest and provision for standard assets under section 36(1)(viia) of the Income Tax Act:
The Tribunal examined the AO's disallowance of provisions for overdue interest and standard assets under section 36(1)(viia) of the Act. The AO disallowed these provisions citing the assessee's use of the mercantile system of accounting. The CIT(A) upheld the disallowance, stating that such provisions were not allowable under the Act. However, the Tribunal noted that the assessee, a banking entity regulated by the Banking Regulation Act, 1949, followed specific guidelines for provisioning. The Tribunal highlighted that the treatment of NPAs and unrealized interest was in compliance with RBI guidelines. It concluded that the disallowance made under section 154 of the Act was inappropriate as the issue was complex and required detailed examination during regular assessment. Therefore, the Tribunal allowed the appeal on this issue, emphasizing the debatable nature of the matter.

In summary, the Appellate Tribunal's judgment addressed the issues of changing the assessee's status from a Cooperative Society to a Company and the disallowance of provisions for overdue interest and standard assets. The Tribunal ruled in favor of the assessee, restoring the cooperative society status and allowing the appeal regarding the disallowance of provisions due to the complex nature of the matter and the need for detailed assessment.