2018 (7) TMI 1876 - AT - Income Tax

Accrual of income - Income recognition - interest on accounts classified as NPA has in fact accrued or not? - Held that - Reasonable certainty on the basis of objective material and available information as to the ultimate realizability of the income is a pre-condition for recognition of income for which reference may be made to Accounting Standard (AS) 9 issued by the ICAI also adverted to in Vasisth Chay Vyapar Ltd. 2010 (11) TMI 88 - DELHI HIGH COURT . The same being missing there is no accrual of income i.e. on facts the obligation to pay interest under the loan contract notwithstanding. We say so as the Revenue has not at any stage challenged the said uncertainty or contended of the income recognition norms stated to be followed by the assessee as either not relevant or not having a direct bearing on the said uncertainty. Rather we find it queer that on one hand the Revenue itself notifies accounting standards which provide primacy to prudence while on the other objects when the assessee in pursuance to those norms refrains from booking income No hesitation in accepting the assessee s claim directing the deletion of the amount of interest income. There is we may though add no question of the Revenue being not entitled to proceed in the matter in the absence of non-rejection of accounts. - Decided in favour of assessee Disallowance of fuel and hire charges u/s. 37(1) - Held that - The (statutory) obligation was by itself not sufficient if the purpose of the expenditure was not for the benefit of or the running of the assessee s business. In the instant case we find neither of these two conditions being satisfied; the former being in fact incidental in-as-much as a voluntary expenditure shown to be for the purpose of the assessee s business would qualify for deduction. In our considered view therefore the impugned expenditure does not meet the test of section 37(1) and stands rightly disallowed by the Revenue. We decide accordingly and the Revenue succeeds. Income from other sources on account of non payment of dividend distribution tax by the assessee-company which in fact claims to be not liable for the said tax - CIT-A deleted the addition - Held that - We find no basis for the said addition. Even assuming for the sake of argument that the dividend distribution tax was indeed payable by the assessee-company the Revenue can only proceed under law to exact the same. It does not in any manner lead to the inference of any income having accrued to the assessee as a result. Rather the said tax where paid would stand to be debited to its operating statement (P L A/c) for the year. We decide accordingly. Disallowance of the provision on standard assets made by the assessee-bank at the rate of 0.25% on the ground it being only a contingent liability - CIT-A deleted the addition - Held that - The assessee has not been shown to us as falling within the excluded categories which we note to be the same as those saved u/s. 80P(4). As such clearly either of the two sections i.e. 36(1)(viia) or section 80P shall apply to the assessee who cannot take an ambivalent stand with regard to its status. The parameters of a primary agricultural credit society or a primary cooperative agricultural and rural development bank i.e. two specified excluded categories are well settled. The AO shall accordingly examine the matter and decide the same issuing definite findings of fact of course after hearing the assessee in the matter. In fact as it appears the assessee has not claimed deduction u/s. 80P for otherwise this itself would have been the subject matter of dispute between the parties with the AO clearly adverting to section 80P(4) excluding the assessee from the purview of section 80P. Why in that case i.e. of the assessee being considered as eligible for deduction u/s. 80P even for AY 2007-08 onwards all the other issues would get subsumed therein as the assessee s entire income from banking business would get deducted u/s. 80P(1) r.w.s. 80P(2)(a)(i). As such it is rather the AO who appears to be ambivalent by denying the assessee deduction u/s. 36(1)(viia) as well as u/s. 80P. We decide accordingly. Addition of interest - assessee Under-charged as well as over-charged interest to its customers (i.e. on loans) as well as its depositors - Held that - AO added the entire excess interest i.e. at 1, 27, 980. He as apparent has taken only a part of the auditor s observation per their report. Taken in totality it would imply that the income would stand reduced by 48, 691. The ld. CIT(A) accordingly held that there was no ground for making the impugned addition and directed its deletion. The facts are not in dispute and we find no infirmity in the adjudication by the ld. CIT(A). We decide accordingly and the assessee succeeds Disallowance of provision (at the rate of 0.25% on standard loans) - Held that - for AY 2007-08 accepted the assessee s claim as in his view there was nothing to show that the claim was not covered by the provision of section 36(1)(viia). The provision against standard loans being only a provision for bad and doubtful debts would stand to be covered u/s. 36(1)(viia). That being the case we find no reason for the Revenue impugning the provision against standard assets. Thus subject to the limit prescribed u/s. 36(1) (viia) i.e. 7.5% of the income being not breached the assessee would be entitled to the provision against standard assets. Assessee s claim u/s. 36(1)(viia) - Held that - assessee has to specify the provision where-under the said claim is admissible. Why the ld. AR on being queried by the Bench during hearing in this regard was unable to specify the same or even the nature of the articles stated to have since perished or even if the said article stood included in the assessee s block of assets. That is their accounting treatment. While therefore no case for a set aside is made out we yet in the interest of justice consider it proper to allow the assessee a final opportunity to present its case before the AO in the appeal effect giving proceedings. The AO shall where a case duly substantiated is made out by the assessee consider the assessee s contention and adjudicate per a speaking order. Without doubt the onus to prove its claim both on facts and in law would be on the assessee. Provision for bad and doubtful debts - assessee s claim is that the interest booked as income for fy. 2006-07 (AY 2007-08) being not realized even during fy. 2007-08 (AY 2008-09) was reversed - Held that - The assessee bank following accrual system of accounting had booked income for AY 2007-08 even as the interest was pending realization. The same having not been realized even during AY 2008-09 the current year the same was reversed. The assessee has itself claimed this reversal as a provision for bad and doubtful debts. If the income had been as claimed already booked as income (for AY 2007-08) all that needs to be done is to the debit the provision (for bad and doubtful debts) account with a corresponding credit to the respective debtors account/s whose account/s would have been debited on charge of interest for fy. 2006-07 (AY 2007-08). We find nothing wrong in the adjudication by the ld. CIT(A) nor could the ld. AR during hearing point out to any. Provision u/s. 36(1)(viia) at the rate of 7.5% of income working he provision it needs to be appreciated is against an asset i.e. recognizes the risk associated with its realisability and therefore is valid only with reference to the extant assets i.e. as obtaining at the relevant time. The provision as on 31.03.2008 (asset) would therefore have to be reckoned with reference to the advances (by rural branches of the bank speaking in the context of section 36(1)(viia)) as on 31.03.2008. The said provision may include that made during the earlier years i.e. where not reversed which thus would have to be taken into account while computing the upper limit specified qua rural advances u/s. 36(1)(viia). And in which case therefore the provision based on income (for each year u/s. 36(1)(viia) would have to be made accounted for and reckoned (for the breach of the limit specified in its respect) separately. The argument aforesaid appealing at first blush does not hold. Disallowance u/s. 37(1) - deposits in a scheme framed by LIC of India - assessments are to be proceeded with and framed on the basis that section 43B(f) - Held that - Exception is made for liabilities accruing during the relevant year where paid by the due date of filing the return of income u/s. 139(1) for that year. It is in this context that the ld. counsel was enquired by the Bench as to how the payment of premium stands accounted for which ought to be therefore adjusted against (debited to) the provision account. As it appears the assessee has made a provision of 200 lacs on account of liability toward staff leave encashment also paying this amount to the LIC of India (during the year). The assessee making the payment to LIC is in fact discharging its liability toward leave encashment. As such to the extent of payment the assessee s claim shall not be hit by section 43B(f). The matter for factual verification is restored back to the file of the AO who upon satisfaction shall allow the assessee s claim qua the said expenditure to the extent of payment made to LIC of India during the year i.e. in terms of section 43B. We say so as the provision made is not for the liability accruing during the year but that since accrued so that the deduction shall be restricted to the amount paid/discharged during the year. We decide accordingly. Disallowance of a payment of Annual Maintenance Charges (AMC) - Held that - True once a liability has accrued in terms of the liability to pay on the basis of a contract it cannot be said that the expenditure had not accrued. The expenditure however is for the purpose of the assessee s business i.e. for maintenance of CCTV cameras installed at the different branch offices of the bank. As such the payee is obliged under the contract to provide support services as envisaged under the contract for full one year i.e. a period of 365 days beginning 27.03.2010. The probability of this services being required which would be for regular (periodic) maintenance or on breakdown etc. spreads evenly throughout the year. It would be a different matter we may add where the benefit that stands to be derived from the expenditure incurred is tenuous or not liable to be suitably quantified. This is not so in the instance case as without doubt the contract is time based so that the benefit there-under inures only during the said period. It is in that sense similar to the estimate for liability to pay interest under a contract which arises only at the end of the account (contract) period. Interest expenditure over the period for which the interest bearing loan (liability) outstands during the relevant year can only be said to have accrued during the relevant year. That is the liability to interest irrespective of the contractual obligation in its respect arises on lapse/efflux of time. The assessee s having availed the benefit of the loan for a definite period of time during the year interest liability to the corresponding extent would independent of the contractual obligation as to payment be deductible on matching principle basis. We therefore find no infirmity in the orders by the Revenue Authorities on this issue. Why however we fail to understand should not the Revenue allow the balance amount (Rs.18.85 lacs) as deduction for the following year i.e. AY 2011-12 also in appeal before us. Though no ground in its respect has been taken by the assessee who does not appear to have raised this issue by way of rectification application u/s. 154 that would not detain us to state that the assessment for AY 2011-12 subject to verification by the AO the Revenue should have allowed the assessee s claim for the balance amount in the following year (AY 2011-12).

Summary

Issues Involved:

1. Accrual of interest on Non-Performing Assets (NPA)
2. Disallowance of fuel and hire charges under section 37(1)
3. Addition of income from other sources due to non-payment of dividend distribution tax
4. Disallowance of provision on standard assets under section 36(1)(viia)
5. Addition due to under-charged and over-charged interest
6. Disallowance of leave encashment provision under section 43B(f)
7. Disallowance of Annual Maintenance Charges (AMC) for CCTV cameras

Issue-wise Detailed Analysis:

1. Accrual of Interest on Non-Performing Assets (NPA):
The core issue was whether interest on NPA accounts had accrued. The Tribunal noted that the assessee followed the cash system of accounting for interest on NPAs, which is impermissible post-AY 1997-98 due to section 145(1). However, the Tribunal found that the prudence and substance over form principles, as well as the real income theory, justified non-recognition of interest on NPAs. The Tribunal concluded that the assessee's method was consistent with section 145 and directed the deletion of the interest income addition.

2. Disallowance of Fuel and Hire Charges under Section 37(1):
The assessee incurred ?5,89,875 for vehicles used by the Department of Cooperative Societies, Punjab. The Tribunal upheld the disallowance, stating the expenditure was not for the assessee's business and lacked commercial expediency, thus failing the test under section 37(1).

3. Addition of Income from Other Sources due to Non-Payment of Dividend Distribution Tax:
The Tribunal found no basis for adding ?34,00,732 as income from other sources due to non-payment of dividend distribution tax. It clarified that even if the tax was payable, it would not result in income but rather an expense.

4. Disallowance of Provision on Standard Assets under Section 36(1)(viia):
The Tribunal upheld the provision for standard assets as deductible under section 36(1)(viia), subject to the statutory limit. It noted that section 36(1)(viia) applies to cooperative banks from AY 2007-08 and directed the AO to verify the deduction limits.

5. Addition Due to Under-Charged and Over-Charged Interest:
The AO added ?1,27,980 due to discrepancies in interest charged. The Tribunal found that considering both under-charged and over-charged interest, the net effect would reduce income by ?48,691. It upheld the deletion of the addition.

6. Disallowance of Leave Encashment Provision under Section 43B(f):
The Tribunal noted that section 43B(f) disallows unpaid leave encashment provisions. However, the assessee argued that the liability was insured with LIC, making section 43B(f) inapplicable. The Tribunal restored the matter to the AO for verification of payment to LIC and allowed the deduction to the extent of actual payment.

7. Disallowance of Annual Maintenance Charges (AMC) for CCTV Cameras:
The Tribunal upheld the disallowance of ?18,84,820 as prepaid AMC, stating that the benefit of the service extended beyond the current year. It directed the AO to allow the expense proportionately over the contract period.

Conclusion:
The Tribunal provided a detailed analysis and directed specific actions for the AO, ensuring compliance with statutory provisions and accounting principles. The assessee's appeals were partly allowed, and the Revenue's appeals were partly allowed for statistical purposes.