2017 (3) TMI 1819 - AT - Income Tax

Interest accrued on NPA - Accrual of income - HELD THAT - Assessee was bound to follow classification of NPA in accordance with prudential norms prescribed by Reserve Bank of India. It is not disputed that the assessee had not shown any income accrual of interest on non-performing assets in its accounts. Hon'ble Bombay High Court in the case of Deogiri Nagari Sahakari Bank Ltd. 2015 (1) TMI 1218 - BOMBAY HIGH COURT held that Tribunal has rightly dealt with this issue and observed that, unclaimed dividend in question amounts to excess provisions for dividend made by the Assessee on an earlier occasion which has been reversed by the Assessee in the year under consideration and transferred to a reserve account. The provisions for dividend made earlier was not a charge action profits but it was appropriation of the profits available post-taxation. It may be true that Section 43D of the Act would not be applicable to the assessee since it was a co-operative bank. However, by virtue of the judgment of Hon'ble Bombay High Court, reproduced above, primacy has been given to Section 45Q of the RBI Act. We are, therefore, of the opinion that interest on NPA could not have been added to the income of the assessee. In taking this view, we are also fortified by the judgment in the case of CIT v. Shri Siddeswar Co-operative Bank Ltd. 2016 (6) TMI 1129 - KARNATAKA HIGH COURT where their Lordship had made an analysis of the provisions considering the importance of prudential norms of RBI based on Vol.I of Tannans Banking Law Practice in India. We, therefore, delete such an addition. Provision for bad debt - only pleading of the assessee is that it should be given a chance for working out average aggregate rural advance for the purpose of application of Section 36(1)(viia) - HELD THAT - CIT(Appeals) himself noted at para 6.4 of his order that when figures of aggregate average advances are correctly furnished by the assessee, the deduction of provision can be re-worked and allowed. Considering these facts, we are of the opinion that the matter can be revisited by the Assessing Officer. We set aside the orders of the lower authorities with regard to disallowance of provision for bad and doubtful debts and remit the issue back to A.O. to consider afresh in accordance with law. Assessee is directed to furnish the information called for by the Assessing Officer with regard to average aggregate rural advances of its rural branches correctly. Ex-gratia payment - HELD THAT - It is not disputed that these payments were made to the employees of the assessee, who were not covered by payment of bonus under Bonus Act. It is also not the case of the Revenue that the employees of the assessee, who were paid the ex-gratia, were shareholders or persons entitled for share of profits or dividend. This being the case, in our opinion, such ex-gratia to employees who were not covered under the payment of Bonus Act, could not be considered as paid for a purpose which was not wholly for the purpose of assessee s business. Section 36(1)(ii) of the Act has no applicability to payments made to employees who were not eligible for share of profits or dividend. Disallowance of payment to Gratuity Fund of LIC - amount added back by the assessee in its computation is mentioned by the A.O. in the assessment order - HELD THAT - As per the A.O., assessee could not give clarification details of the payment. Though a ground in this regard has been raised by the assessee before the CIT(Appeals), Ld. CIT(Appeals) had not given any specific finding. Assessment order itself was very cryptic on this issue and had not given any details regarding payment of Gratuity and why it was being disallowed. Question regarding allowance of Gratuity payment requires a fresh look by the A.O. We set aside orders of the authorities below in this regard and remit the issue regarding payment of Gratuity, back to the file of the AO for consideration afresh, in accordance with law.

Summary

Issues Involved:
1. Addition of interest on non-performing assets (NPA).
2. Disallowance of provision for bad and doubtful debts.
3. Disallowance of ex-gratia payment to employees not covered by the Payment of Bonus Act.
4. Disallowance of employees' gratuity-related payment to LIC for the assessment year 2009-10.

Detailed Analysis:

1. Addition of Interest on Non-Performing Assets (NPA):
The assessee, a co-operative bank, did not account for accrued income on NPAs based on the prudential norms of the Reserve Bank of India (RBI). The CIT(A) added ?18,16,42,584/- as overdue interest on NPAs, arguing that Section 43D of the Income-tax Act did not apply to the assessee since it was not a scheduled bank. However, the tribunal noted that Section 45Q of the RBI Act, which has an overriding effect, should be considered. Citing the Bombay High Court's decision in CIT v. Deogiri Nagiri Sahakari Bank Ltd., the tribunal held that interest on NPAs should not be added to the income of the assessee. The tribunal deleted the addition, emphasizing the importance of RBI's prudential norms.

2. Disallowance of Provision for Bad and Doubtful Debts:
The CIT(A) disallowed the provision for bad debts, stating that the assessee did not correctly work out the average aggregate rural advances. The tribunal noted that the CIT(A) had acknowledged that the provision could be reconsidered if the correct figures were provided. Consequently, the tribunal remitted the issue back to the Assessing Officer (A.O.) for fresh consideration, directing the assessee to furnish the correct information regarding average aggregate rural advances.

3. Disallowance of Ex-Gratia Payment to Employees:
The CIT(A) disallowed the ex-gratia payments made to employees not covered by the Payment of Bonus Act, citing the Supreme Court's decision in Southern Technologies Ltd. The tribunal, however, found that these payments were necessary for maintaining cordial relations with employees and were not made to shareholders or those entitled to share profits or dividends. Therefore, the tribunal held that Section 36(1)(ii) of the Act did not apply and allowed the claim for ex-gratia payments.

4. Disallowance of Employees' Gratuity-Related Payment to LIC (Assessment Year 2009-10):
The A.O. disallowed ?1,40,60,607/- paid to the Gratuity Fund of LIC due to a lack of detailed clarification from the assessee. The CIT(A) did not provide a specific finding on this issue. The tribunal found the assessment order cryptic and lacking details. Thus, it remitted the issue back to the A.O. for fresh consideration and directed the assessee to provide the necessary details.

Conclusion:
The appeals for all assessment years were partly allowed for statistical purposes. The tribunal directed the A.O. to reconsider the provision for bad debts and the gratuity payment issues afresh, while the additions for interest on NPAs and disallowance of ex-gratia payments were deleted.