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2015 (3) TMI 936 - AT - Income TaxInterest accrued - interest accounted as income by the assessee - sticky loans & advances - CIT(A) deleting the disallowance on account of accrued interest which is not credited to the P and L account treating it as double taxation - Held that - The order of the CIT(A) is not clear as to how the interest receivable which are overdue have been accounted for by the assessee in its books of account. Admittedly, the assets side of balance sheet as on 31.3.2006 showed a sum of ₹ 6,61,50,558 as overdue interest. The overdue interest as on 31.3.2007 was ₹ 8,16,25,582. The difference between the two was a sum of ₹ 1,54,78,024. This interest ought to have been accounted by the assessee in its books of account, as admittedly, as per mercantile system of accounting, interest income to this extent is deemed to have accrued to the assessee. In the computation of total income, the assessee had only added a sum of ₹ 60,71,459. The remaining interest income of ₹ 94,06,565 ought to have been accounted as interest income. The explanation of the assessee before the AO was by placing reliance on the decision of UCO Bank (1999 (5) TMI 3 - SUPREME Court). It is thus clear that the claim of the assessee before the AO was that interest accrued not accounted for in its books of account are in relation to sticky loans & advances. The assessee has not furnished any explanation as to how the loans on which interest income was not offered to tax had become sticky? It was for this reason that the AO had made the impugned addition. We are of the view that the reference to the provisions of section 43D and its non-applicability to a cooperative bank is not relevant, because section 43D of the Act only statutorily recognizes the right of certain categories of assessees to account for interest on sticky loans, either in the year in which they choose to do so by credit the P&L account or the year of receipt. The said provisions will not affect any other assessee who is otherwise able to show that the interest income relates to loans which have become doubtful of recovery need not be accounted for as income. We therefore set aside the order of CIT(A) and remand the issue to the AO for fresh consideration - Decided in favour of revenue for statistical purposes. Disallowance of deductions for creation BAD AND DOUBTFUL RESERVE U/s 36(1) (viia) - whether the appellant bank does not come under the definition of SCHEDULED BANK or NONSCHEDULED BANK as per explanation (ia) of section 36(1) (viia)? - Held that - As rightly contended by assessee as per law as it prevailed as on 1.4.2007 applicable to A.Y. 2007-08, the assessee which is a cooperative bank was entitled to deduction on account of provision for bad and doubtful debts. The AO as well as CIT(Appeals) have overlooked this aspect. We are, however, of the view that quantum of deduction to be allowed has to be worked out by the AO afresh, after affording opportunity of being heard to the assessee. We may also clarify that the deduction has to be computed in the manner laid down in the provisions and to the extent the provision is created in the books of account of the assessee. - Decided in favour of assessee for statistical purposes. Disallowance of deduction on Interest on loans - Held that - The AO has proceeded on the basis that since interest has to be accounted on receipt basis under the Karnataka Cooperative Societies Rules, 1960, the loans in question were sticky loans. In our view, such conclusions cannot be sustained. The claim made by the assessee in this regard about the nature of interest income and its time of accrual has to be accepted. The conclusions of the CIT(A) is again based on surmises and cannot be sustained. Neither the AO nor the CIT(A) called upon the Assessee to explain as to whether the interest income in question is interest on sticky loans which was accounted for as income only on receipt basis. As we have already observed, accounting entries in the books of the assessee regarding interest income assumed significance only after A.Y. 2006-07 when interest income became taxable in view of insertion of section 80P(4) to the Act w.e.f. 1.4.2007. Therefore, there is no merit in the observations of the CIT(A) regarding lack of entries in the books of account of the assessee for A.Y. 2005-06 and 2006-07. We are therefore of the view that it would it would just and proper to direct the Assessee to furnish evidence before the AO to show as to how the interest income in question is not interest on sticky loans which was accounted for as income only on receipt basis. For the reasons stated above, we set aside the order of the CIT(A) on this issue and remand the issue with regard to taxing the sum of ₹ 1,65,96,812 to the AO for fresh consideration - Decided in favour of assessee for statistical purposes. Disallowance of deduction being amount transferred from NPA Reserve, which represents the accumulated income of earlier years - Held that - the assessee has started the computation of total income with profit as per P&L account and added and reduced certain sums. One such sum so reduced is ₹ 80 lakhs on account of amount transferred from NPA reserve created out of earlier year profits. The net loss for the year after such additions and reductions is a loss of ₹ 61,14,560. The AO has computed total income in the order of assessment fro the loss declared in the computation of total income of (-) ₹ 61,14,560. There is no further addition of ₹ 80 lakhs in the order of assessment. Therefore, the claim of the assessee for deduction of ₹ 80 lakhs has been accepted by the AO. Since the sum of ₹ 80 lakhs was already allowed as deduction by the AO, there can be no grievance by the assessee and the ground of appeal raised by the assessee before the CIT(A) in this regard is also held to be not arising out of the order of the AO - Decided against assessee.
Issues Involved:
1. Taxability of overdue interest receivable. 2. Deduction under section 36(1)(viia) for bad and doubtful debts. 3. Taxability of interest on loans received during the year but pertaining to earlier years. 4. Deduction of amount transferred from NPA Reserve. Issue-wise Detailed Analysis: 1. Taxability of Overdue Interest Receivable: The assessee, a cooperative bank, added Rs. 60,71,459 as "interest receivable for the year 2006-07, but not received" in its total income. The AO observed that the difference between overdue interest as on 31.03.2007 and 31.03.2006 was Rs. 1,54,78,024 and added Rs. 94,06,565 (Rs. 1,54,78,024 minus Rs. 60,71,459) to the taxable income, arguing that the entire amount should be taxed under the mercantile system of accounting. The AO referenced UCO Bank v. CIT and section 43D, stating that these provisions do not apply to cooperative banks. The CIT(A) deleted this addition, stating that further addition would amount to double taxation. The Tribunal found the CIT(A)'s order unclear and remanded the issue to the AO for fresh consideration, directing the assessee to show why the interest income cannot be considered as accrued. 2. Deduction under Section 36(1)(viia) for Bad and Doubtful Debts: The assessee claimed a deduction under section 36(1)(viia) for bad and doubtful debts, debiting Rs. 1.50 crores in the P&L account. The AO denied this, stating that the assessee did not classify any debts as bad and doubtful and that section 36(1)(viia) applies only to scheduled and non-scheduled banks. The CIT(A) upheld the AO's decision, referencing a Tribunal decision applicable to an earlier assessment year. The Tribunal accepted the assessee's contention that the law as of 1.4.2007 allowed cooperative banks to claim this deduction and remanded the issue to the AO to compute the correct quantum of deduction. 3. Taxability of Interest on Loans Received During the Year but Pertaining to Earlier Years: The assessee deducted Rs. 1,65,96,812, representing interest received during the year but pertaining to earlier years, from its total income. The AO included this amount in the taxable income, arguing it was interest on sticky loans and thus taxable on receipt basis. The CIT(A) upheld the AO's decision, stating the assessee failed to prove the interest pertained to earlier years. The Tribunal found the AO's and CIT(A)'s conclusions unsustainable and remanded the issue to the AO for fresh consideration, directing the assessee to provide evidence that the interest was not on sticky loans. 4. Deduction of Amount Transferred from NPA Reserve: The assessee reduced Rs. 80 lakhs, transferred from NPA reserve created out of earlier year profits, in its computation of total income. The AO accepted this deduction, resulting in no further addition. The assessee, mistakenly believing the AO disallowed this deduction, raised a ground before the CIT(A), which was dismissed. The Tribunal clarified that the AO had already allowed the deduction, and thus, the grounds of appeal were dismissed as not arising from the AO's order. Conclusion: The Tribunal allowed the Revenue's appeal for statistical purposes, remanding the issue of overdue interest receivable to the AO. The assessee's appeal was partly allowed for statistical purposes, remanding the issues of deduction under section 36(1)(viia) and interest on loans received during the year but pertaining to earlier years to the AO for fresh consideration. The grounds related to the NPA reserve deduction were dismissed.
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