2016 (3) TMI 720 - AT - Income Tax

Addition on account of accrued interest on NPA accounts - Held that - There is no dispute that the assessee/Co-operative Bank has not recognized the impugned accrued interest of ₹ 1.36crores overdue on non performing assets as its income by following real income principal. Ld. co-ordinate bench of the tribunal in Karnavati Co-op. Bank Ltd ( 2011(11) TMI 367 - ITAT AHMEDABAD ) already holds in case of a similar Co-operative Bank that no income accrues in an instance of crediting of overdue interest from NPAs to P&L account and debited as per RBI guidelines, since there is no ultimate credit in P&L account. The Revenue is unable to point out any distinction on facts or law after being granted adequate opportunity. We confirm CIT(A) s appeal s findings accordingly deleting the impugned addition of ₹ 1,36,09,737/- on account of accrued interest on NPA accounts. - Decided in favour of assessee Section 14A r.w.r. 8D disallowance - Held that - There is no dispute that the Assessing Officer invoked Rule 8D for computing the impugned disallowance. Applicability of this Rule is no more res integra since the hon ble Bombay high court in Godrej Boyce Mfg. Company Limited Vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT holds that the same applies w.e.f. A.Y. 2008-09 only. This course of action adopted is accordingly held as not sustainable. We come to CIT(A) s findings that the assessee s interest free funds as well as interest income (supra) exceeds its interest expenditure (not utilized in tax free investment in question) and the tax free investments as well. The hon ble jurisdictional high court (supra) as well as Bombay high court in CIT vs. Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ) hold that a presumption can be drawn in such cases that the assessee has utilized its interest free funds only. - Decided in favour of assessee Disallowance of bad debts written off u/s.36(1)(viia) - CIT(A) deleted the disallowance - Held that - The CIT(A) construes Section 36(1)(viia) as to envisage 5% entitlement of bad debts deduction as on last day of the year and not the net figure as taken by the Assessing Officer. There can be no dispute that this one is a deduction provision. The Revenue fails to take us to a different construction thereof in the course of arguments that the net figure has to be adopted instead of the one appearing on last day of year. We find no reason to interfere with CIT(A) findings accordingly - Decided against revenue Addition on account of amortization of premium paid on investments - Held that - There is hardly any dispute about the fact that the assessee has held the securities in question, paid premium amounts and amortize the same in the manners stated hereinabove. Hon ble jurisdiction high court in a recent decision of CIT vs. Rajkot District Central Co-operative Bank Ltd. 2014 (3) TMI 110 - GUJARAT HIGH COURT has allowed a similar amortization claim pertaining to held to maturity category securities premium by taking into account paragraph VII of the CBDT s Circular No.17 of 2008 dated 26.11.2008 clarifying that investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value in which the premium should be amortized over the period remaining to maturity. The Revenue fails in pointing out any distinction on facts or law thereto - Decided against revenue Disallowance of depreciation on investment - CIT(A) allowed claim - Held that - We find that hon ble Karnataka high court in case of CIT vs. Vijaya Bank (2013 (10) TMI 1030 - KARNATAKA HIGH COURT ) upholds tribunal s action thereby observing that it was correct in allowing depreciation claimed on held to maturity investment by treating it as stock in trade despite the same not being traded on a regular basis in accordance with RBI and CBDT Circulars. Similarly, hon ble Bombay high court in CIT vs. Bank of Baroda 2003 (3) TMI 80 - BOMBAY High Court observes that the said bank valued its investments in the form of shares and securities at cost or market price, whichever is lower. And that it was entitled to deduction on account of depreciation in value of investments involving debiting of loss to P&L account as reflected in the nature of provision for liability in balance sheet and in case of shares and securities valued at cost on assets side. The Revenue does not refer to any case law to the contrary. We draw support therefrom for upholding the CIT(A) s findings accordingly - Decided against revenue Administrative expenditure disallowance - CIT(A) restricts the same to 1% of the exempt income - Held that - We find that Rule 8D(2)(iii) envisages the same to be 0.5% of the average value of the investment in question. The CIT(A) s findings under challenge do not take into account this specific clause. We accept assessee s arguments accordingly and direct the Assessing Officer to proceed afresh for necessary computation of the impugned disallowance. - Decided against revenue

Summary

Issues Involved:
1. Accrued interest on NPA accounts.
2. Disallowance under Section 14A r.w.r. 8D.
3. Disallowance of bad debts written off under Section 36(1)(viia).
4. Amortization of premium paid on investments.
5. Depreciation on investment.

Issue-wise Detailed Analysis:

1. Accrued Interest on NPA Accounts:
The Revenue challenged the deletion of accrued interest on NPA accounts for various assessment years. The assessee, a Co-operative Bank, did not recognize the accrued interest on NPAs as income, citing RBI guidelines and the principle of real income. The CIT(A) and ITAT upheld the assessee's stance, referencing judicial precedents and noting that the RBI guidelines and CBDT Circular No.201/21 of 1984 support the non-recognition of interest on NPAs until actually received. The ITAT confirmed that for Co-operative Banks, the accrued interest on NPAs should not be taxed, aligning with the principle of real income and RBI guidelines.

2. Disallowance under Section 14A r.w.r. 8D:
The Revenue's disallowance under Section 14A r.w.r. 8D was challenged by the assessee. The CIT(A) noted that the assessee had sufficient interest-free funds and reserves, which were more than the tax-free investments. The CIT(A) and ITAT referenced the jurisdictional High Court's decision in CIT vs. Gujarat State Fertilizer & Chemical Ltd., which held that if the assessee has sufficient interest-free funds, no disallowance under Section 14A is warranted. The ITAT upheld the CIT(A)'s findings, confirming that the disallowance was not sustainable as the assessee had not utilized borrowed funds for the tax-free investments.

3. Disallowance of Bad Debts Written Off under Section 36(1)(viia):
For A.Y. 2008-09, the Revenue challenged the deletion of disallowance of bad debts written off. The CIT(A) held that the deduction under Section 36(1)(viia) should be 5% of the bad debts as on the last day of the previous year, not the net figure after reducing the reserve for bad debts. The ITAT upheld the CIT(A)'s interpretation, stating that the statutory provision allows for a deduction based on the total bad debts figure, not a net figure.

4. Amortization of Premium Paid on Investments:
The Revenue's disallowance of amortization of premium paid on investments was contested. The CIT(A) and ITAT referenced the CBDT Circular No.17 of 2008 and the jurisdictional High Court's decision in CIT vs. Rajkot District Co-operative Bank Ltd., which allow for the amortization of premium on HTM securities over the period remaining to maturity. The ITAT confirmed that the assessee's claim for amortization was justified as per the RBI and CBDT guidelines.

5. Depreciation on Investment:
The Revenue challenged the deletion of disallowance of depreciation on investments. The CIT(A) and ITAT noted that the assessee valued its investments at market value as per RBI guidelines and CBDT Circular No.599. The ITAT upheld the CIT(A)'s findings, referencing judicial precedents that support the valuation of investments at market value and the allowance of depreciation on such investments.

Conclusion:
The ITAT dismissed the Revenue's appeals for all assessment years and allowed the assessee's Cross Objection for statistical purposes, affirming the CIT(A)'s decisions on all issues. The judgments consistently upheld the principles of real income, proper application of statutory provisions, and adherence to RBI and CBDT guidelines.