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2017 (9) TMI 1897 - AT - Income TaxAccrual of income - system of accounting - addition made an account of Interest accrued on Non-performing Assets (NPA) - assessee is a district central co-operative bank formed under the Karnataka Cooperative Societies Act - HELD THAT - There is no basis for reclassification of NPAs into highly sticky and sticky loans once the assessee has treated the loan in the category of NPAs as per the RBI Guidelines then the interest on these NPAs cannot be treated as income of the assessee. We further note that for the Assessment Year 2010-11 the CIT (Appeals) allowed full claim of the assessee without any reclassification. Mere nomenclature adopted with reference to the bad loans and advances receivable would refer to all non-performing assets of any nature of whatever category it was placed as a non-performing asset and therefore the decision of this court in Canfin Homes Ltd. s case 2011 (8) TMI 178 - KARNATAKA HIGH COURT would squarely apply. Accordingly the above question of law also stands answered. - Decided in favour of assessee. Disallowance of deduction u/s 36(1)(viia) towards the provisions made in respect of rural branches - AO noted that the assessee has made provision for NPAs and provision for contingent liability debited the same to the profit and loss account - AO disallowed the claim on these both accounts due to the reason that the provision is not an allowable expenditure and claim of deduction @ 10% of aggregate advances made to the rural branches was reflected as the details were not furnished - CIT (Appeals) has partly allowed the claim of the assessee after considering the details of the advances of the rural branches as filed by the assessee - HELD THAT - In the facts and circumstances of the case when these details were not available before the AO then this issue is set aside to the record of the Assessing Officer for verification of the relevant details. In case the claim of the assessee is found within the allowable deduction of permissible limit of 10% of aggregate average of rural advances the same shall be allowed. Interest receivable from Government - Whether CIT (Appeals) is not right in holding that the interest receivable from Government is a capital receipts towards debt waiver - HELD THAT - Assessee is only an intermediary in receiving the said amount from the central government and passing on the same to the Primary Agriculture Co-operative Societies. The claim of the Primary Agriculture Co-operative Societies was to be forwarded through the assessee and therefore the waiver amount was also to be routed through the assessee-bank. Hence this is only a contra entry and cannot par take the character of income of the assessee as this amount does not belong to the assessee. The assessee was playing the role to assist the central government in receiving the claim from the Primary Agriculture Co-operative Societies and disbursement of the amount of loan waiver under the scheme of Govt. of India. No error or illegality in the impugned order of the CIT (Appeals) Addition of provision for contingent liability which is factually a provision for bad debts only - HELD THAT - We find that the assessee subsequently revised its claim and computation by adding this amount in the deduction under Section36(1)(vii). However the authorities did not accept this claim of the assessee. We find that if the claim of the assessee is in the nature of a provision of bad and doubtful debts then the deduction under Section 36(1)(viia) can be considered subject to the verification that the claim would not exceed the permissible limit of 10% of aggregate average rural advances. Accordingly we set aside this issue to the record of the Assessing Officer to verify the details and then adjudicate the same after affording an opportunity of hearing to the assessee.
Issues Involved:
1. Addition made on account of interest accrued on Non-Performing Assets (NPAs). 2. Disallowance of deduction under Section 36(1)(viia) towards provisions made in respect of rural branches. 3. Classification of interest receivable from Government under Loan Waiver Scheme as capital receipts. 4. Provision for contingent liability. Detailed Analysis: 1. Addition made on account of interest accrued on Non-Performing Assets (NPAs): The revenue challenged the CIT (Appeals) decision that allowed the assessee to follow a received system of accounting for interest accrued on NPAs. The Assessing Officer had added ?53,29,000 as accrued interest receivable, which the assessee did not account for, arguing that interest on NPAs should not be treated as income when the principal is non-recoverable. The CIT (Appeals) partially deleted the addition, relying on the High Court’s decisions in CIT Vs. Canfin Homes and CIT Vs. Siddeshwar Co-operative Bank Limited. The Tribunal upheld the CIT (Appeals) decision, stating that once a loan is classified as an NPA per RBI guidelines, interest on these NPAs cannot be treated as income. This issue was decided in favor of the assessee. 2. Disallowance of deduction under Section 36(1)(viia) towards provisions made in respect of rural branches: The revenue contended that the CIT (Appeals) wrongly granted relief to the assessee without allowing the Assessing Officer to verify the evidences. The Assessing Officer disallowed the provision for NPAs and contingent liability as the assessee did not furnish details to verify if the claim fell within the permissible limit of 10% of aggregate advances to rural branches. The CIT (Appeals) allowed part of the claim based on details provided by the assessee. The Tribunal set aside this issue for verification by the Assessing Officer, stating that if the claim is within the allowable limit, it should be allowed. 3. Classification of interest receivable from Government under Loan Waiver Scheme as capital receipts: For the Assessment Year 2010-11, the revenue challenged the CIT (Appeals) decision that classified interest receivable from the Government under the Loan Waiver Scheme as capital receipts. The Assessing Officer had added ?15,39,900 to the assessee’s income, arguing that it should be credited to the profit and loss account. The assessee explained that it acted as an intermediary for the loan waiver amount, which was to be disbursed to Primary Agriculture Co-operative Societies. The Tribunal upheld the CIT (Appeals) decision, agreeing that the amount did not belong to the assessee and was merely a contra entry. 4. Provision for contingent liability: The assessee's appeal included a ground regarding the disallowance of ?2,51,056 as provision for contingent liability, which was claimed as a provision for bad debts. The Tribunal noted that the assessee did not press this ground, and it was dismissed as not pressed. For the Assessment Year 2010-11, the assessee raised a similar ground for ?3,74,715. The Tribunal set aside this issue to the Assessing Officer to verify if the claim falls within the allowable limit of 10% of aggregate average rural advances, and if so, to allow the deduction. Conclusion: The Tribunal’s judgment addressed the issues comprehensively, upholding the CIT (Appeals) decisions where appropriate and setting aside issues for further verification by the Assessing Officer where necessary. The appeals were partly allowed for both assessment years.
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