2015 (4) TMI 99 - AT - Income Tax

Disallowance of deduction of premium written off on Govt. Securities - CIT(A) deleted the addition - Held that - Assessee invests in Govt. Securities and other financial documents as other co-operative banks as per the guidelines of the RBI and so as per the RBI Master Circular No.DBOD.BP.BC.13/21.04.141/2012-13 dated July 2, 2012 containing consolidated instructions/guidelines issued to banks till June 30 2012 on matters relating to prudential norms for classification valuation and operation of investment portfolio by banks Investments classified under HTM (Held To Maturity) need not be marked to market and will be carried at acquisition cost unless it is more than the face value in which case the premium should be amortized over the period remaining to maturity. The book value of the security should continue to be reduced to the extent of the amount amortized during the relevant accounting period. And as held in the case of CIT Vs. Himachal Finance Corporation 2008 (5) TMI 633 - HIMACHAL PRADESH and Indian Rayon and Industries Ltd. 2010 (3) TMI 299 - BOMBAY HIGH COURT it was held that discount on bonds and premiums on redemptions of debentures are allowable as expense proportionately spread over the period of security. So therefore we are of the considered view that this issue needs to be remanded back to the file of the AO to verify whether the assessee has claimed the expenses proportionately i.e. the premium amount which is in addition to the face value proportionately spread over the life of security and if it is so computed and claimed it be allowed. - Decided in favour of revenue statistical purposes. Provision for bad 3, 66, 33, 543/- for bad and doubtful debts in its Profit 1, 35, 28, 498/- instead of 3, 66, 33, 543/-. We find that section 36(1)(viia) was amended by Finance Act 2007 with effect from 01.04.2007 by which the words or a cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank were inserted. This amendment is applicable to assessment year 2007-08 onwards and for the year under consideration. Accordingly it applies to the case of the assessee for this year. We find that this issue has not been adjudicated on merits by the AO. Therefore we think it fit to restore the matter back to the file of the AO to adjudicate the admissibility of the amount u/s 36(1)(viia) on merits - Decided in favour of revenue statistical purposes. Accrued interest on NPA - CIT(A) deleted the addition - Held that - We find considerable cogency in the finding of the Ld. CIT(A) regarding the notional interest income that the same has not been received by the assessee and as such the AO was not justified to make the addition on the basis of notional interest because of the mercantile system of accounting only and accordingly the addition was rightly deleted by the CIT(A). In the background of the aforesaid discussions and precedent relied upon we are of the considered view that no interference is called for in the well reasoned order passed by the Ld. CIT(A) hence we uphold the same by rejecting this ground of appeal raised by the Revenue in the aforesaid manner. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,43,13,391/- on account of disallowance of deduction of premium written off on Government Securities.
2. Direction to AO to examine the assessee's claim under Section 36(1)(viia) despite the Supreme Court verdict in Goetze India (P) Ltd. vs. CIT.
3. Deletion of addition of Rs. 4,08,38,822/- on account of accrued interest on NPAs.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 1,43,13,391/- on Account of Disallowance of Deduction of Premium Written Off on Government Securities:
The assessee, a Cooperative Bank, purchased Government Securities (G-Sec) and Bonds at a premium, which it claimed as a revenue expenditure. The AO disallowed this claim, treating it as a capital expenditure. The CIT(A) allowed the claim, stating that the premium paid was a business expenditure. The Tribunal noted that the assessee consistently followed the same accounting policy and complied with RBI guidelines. The Tribunal remanded the issue back to the AO to verify if the premium was proportionately spread over the life of the security and, if so, to allow the claim.

2. Direction to AO to Examine the Assessee's Claim under Section 36(1)(viia) Despite the Supreme Court Verdict in Goetze India (P) Ltd. vs. CIT:
The assessee claimed a deduction under Section 36(1)(viia) for bad and doubtful debts during assessment proceedings, which was not initially claimed in the return. The AO disallowed the claim citing the Supreme Court verdict in Goetze India (P) Ltd. vs. CIT, which mandates that claims not made through a revised return cannot be entertained. The CIT(A) directed the AO to allow the claim, considering it a genuine mistake. The Tribunal restored the matter to the AO to adjudicate the claim on its merits, emphasizing that the AO should not take advantage of the assessee's ignorance and should allow genuine claims.

3. Deletion of Addition of Rs. 4,08,38,822/- on Account of Accrued Interest on NPAs:
The AO added Rs. 4,08,38,822/- as accrued interest on NPAs, treating it as income under the mercantile system of accounting. The CIT(A) deleted the addition, stating that no real income had accrued as the loans had become bad. The Tribunal upheld the CIT(A)'s decision, emphasizing that only real income, not hypothetical income, should be taxed. The Tribunal referred to the Supreme Court's ruling in CIT vs. Shoorji Vallabhdas & Co., which supports the principle that income tax is a levy on real income, not on hypothetical entries in the books.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes, remanding the issues back to the AO for further verification and adjudication on merits. The Tribunal emphasized the need for the AO to consider genuine claims and adhere to the principle of taxing real income.