2015 (6) TMI 200 - AT - Income Tax

Disallowance of deduction of premium written off on Govt. Securities - CIT(A) deleted the addition - Held that - The assessee invests in Govt. Securities and other financial documents as other co-operative banks as per the guidelines of the RBI and so as per the RBI Master Circular No.DBOD.BP.BC.13/21.04.141/2012-13 dated July 2,2012, containing consolidated instructions/guidelines issued to banks till June 30, 2012, on matters relating to prudential norms for classification, valuation and operation of investment portfolio by banks, Investments classified under HTM (Held To Maturity) need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortized over the period remaining to maturity. The book value of the security should continue to be reduced to the extent of the amount amortized during the relevant accounting period. And as held in the case Indian Rayon and Industries Ltd. (2010 (3) TMI 299 - BOMBAY HIGH COURT ) it was held that discount on bonds and premiums on redemptions of debentures are allowable as expense proportionately spread over the period of security. So therefore we are of the considered view that this issue needs to be remanded back to the file of the AO to verify whether the assessee has claimed the expenses proportionately i.e. the premium amount which is in addition to the face value proportionately spread over the life of security and if it is so computed and claimed it be allowed - Decided in favour of revenue for statistical purposes. Claim u/s. 36(1)(viia) - assessee is a Co-operative Society and was claiming deduction u/s 80P(2)(a)(i) of the Act up to A Y 2006-07 @ 100% - Held that - assessee has made the provisions of ₹ 3,66,33,543/- for bad and doubtful debts in its Profit & Loss A/c but by mistake while submitting the return the same was taken as ₹ 1,35,28,498/- instead of ₹ 3,66,33,543/-. We find that section 36(1)(viia) was amended by Finance Act, 2007, with effect from 01.04.2007, by which the words or a cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank were inserted. This amendment is applicable to assessment year 2007-08 onwards and for the year under consideration. Accordingly, it applies to the case of the assessee for this year. We find that this issue has not been adjudicated on merits by the AO. Therefore, we think it fit to restore the matter back to the file of the AO to adjudicate the admissibility of the amount u/s 36(1)(viia) on merits. Decided in favour of revenue for statistical purposes. Accrued interest on NPA - CIT(A) deleted the addition - Held that - considerable cogency in the finding of the Ld. CIT(A) regarding the notional interest income that the same has not been received by the assessee and as such the AO was not justified to make the addition on the basis of notional interest because of the mercantile system of accounting only and accordingly, the addition was rightly deleted by the CIT(A). - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of deduction of premium written off on Government Securities.
2. Direction to AO to examine the assessee's claim under section 36(1)(viia).
3. Deletion of addition on account of accrued interest on NPAs.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Deduction of Premium Written Off on Government Securities:
The Revenue challenged the deletion of the addition of Rs. 1,43,13,391/- made by the AO due to disallowance of deduction of premium written off on Government Securities. The assessee, a Cooperative Bank, argued that the premium paid on Government Securities is a business expenditure and should be allowed as a revenue expenditure. The AO disallowed the premium expenditure, viewing it as capital expenditure. The CIT(A) allowed the deduction, stating that the premium is proportionately claimed over the life of the security, aligning with RBI norms. The Tribunal found that the AO failed to establish how the consistent accounting policy followed by the assessee adversely impacted revenue. The Tribunal remanded the issue back to the AO to verify if the premium was proportionately spread over the security's life and, if so, to allow the deduction.

2. Direction to AO to Examine the Assessee's Claim under Section 36(1)(viia):
The Revenue contested the deletion of addition of Rs. 2,46,73,078/- under section 36(1)(viia). The assessee, a Cooperative Society, claimed deduction under section 80P(2)(a)(i) until AY 2006-07. Post AY 2006-07, the deduction was withdrawn for urban Cooperative Societies, and a new provision under section 36(1)(viia) was introduced for bad and doubtful debts. The assessee failed to claim this deduction in the original return due to unawareness of the change in law but claimed it during assessment proceedings. The AO disallowed the claim citing the Goetze India Ltd. case, which mandates claims to be made through revised returns. The Tribunal noted that the AO should not take advantage of the assessee's ignorance and must allow genuine claims. The Tribunal restored the matter to the AO to adjudicate the admissibility of the amount under section 36(1)(viia) on merits.

3. Deletion of Addition on Account of Accrued Interest on NPAs:
The Revenue disputed the deletion of addition of Rs. 4,08,38,822/- made by the AO on account of accrued interest on NPAs. The AO treated the interest income on NPAs as taxable under the mercantile system of accounting. The assessee argued that since the loans became bad, no real income accrued, and the interest was not received. The CIT(A) and the Tribunal agreed with the assessee, emphasizing that only real income is taxable, not hypothetical income. The Tribunal cited various case laws supporting the principle that income tax is levied on real income, not on notional or hypothetical income. The Tribunal upheld the CIT(A)'s decision to delete the addition, concluding that the AO was not justified in taxing the notional interest based on the mercantile system alone.

Conclusion:
The appeal of the Revenue was allowed for statistical purposes, with specific issues remanded back to the AO for verification and adjudication on merits. The Tribunal emphasized the adherence to RBI guidelines and the principle of taxing real income over hypothetical income. The judgment underscores the importance of consistent accounting policies and the necessity for the AO to consider genuine claims made by the assessee during assessment proceedings.