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2015 (10) TMI 598 - AT - Income TaxAccrual of income - addition made in the case of interest income on non performing assets on account of method of accounting followed by the assessee - assessee has neither followed mercantile nor cash system but followed hybrid system - assessee is a cooperative society engaged in the business of banking and providing credit facilities to its members - CIT(A) delted theaddition - Held that - In light of the pronouncement of Hon ble High Court of Karnataka in the case of Canfin Homes (2011 (8) TMI 178 - KARNATAKA HIGH COURT) there can be no question of accrual of income on NPA and therefore even under the mercantile system of accounting, it cannot be said that income has accrued or arisen to the assessee. The fact that the Revenue has preferred SLP against the decision of the Hon ble High Court cannot be a ground to take any different view on the issue. We therefore uphold the order of CIT(Appeals) - Decided in favour of assessee. Accrual of liability - disallowance of expenses relating to earlier years - Held that - It is clear from the facts as it emanates from the record that announcement of schemes by NABARD happened during the previous year. Therefore accrual of liability as far as assessee is concerned is only when subvention percentage is announced by NABARD. Till such time, the assessee s liability cannot be said to have accrued. Since liability relates to the previous year in which subvention is announced by NABARD, we are of the view that accrual of liability occurs only when the subvention percentage is announced by NABARD and it is only thereafter that the Assessee can know what is the liability on account of sub-vention that it has to bear. In that view of the matter we find no infirmity in the order of the CIT(A). We therefore confirm the order of the CIT(Appeals) - Decided in favour of assessee. Additions made on account of non-business expenditure - whether expenditure is incurred as per the directions of its controlling authority and no documentary evidence was furnished before the A.O. to prove to his satisfaction that on account of this expenditure, the assessee derived certain income or benefits? - CIT(Appeals) observed that though the expenditure is made on account of directive from NABARD, there is also commercial exigency, and the assessee could fairly establish that there was sufficient mobilization of loans and advances and deposits directly relatable to this expenditure and directed AO to delete the expenditure - Held that - The key aspect to be seen is relationship between the expenses incurred and carrying on of the business of the assessee. If there is a benefit to the assessee, then the expenditure has to be regarded as incurred for the purpose of business of the assessee and allowed as a deduction. The Hon ble Rajasthan High Court followed the decision of the Hon ble Supreme Court in the case of Sasoon J. David & Co. P. Ltd. v. CIT, (1979 (5) TMI 3 - SUPREME Court ) wherein reference was made to the expression wholly or exclusively used in section 37(1) of the Act and was of the view that the expression used is not necessarily . In light of the legal position as explained in the judicial pronouncements and keeping in view the facts of the present case, we are of the view that the order of CIT(Appeals) does not call for any interference - Decided in favour of assessee. Amortization of premium paid on government securities - CIT(A) deleted the addition - Held that - Assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue. See Catholic Syrian Bank Ltd., v. ACIT 2009 (8) TMI 858 - ITAT COCHIN Addition made on account of interest accrued on investments - CIT(A) deleted the addition - Held that - In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the revenue in the past. In view of the aforesaid decision, we are of the view that the order of the CIT(A) does not call for any interference. Consequently, the relevant grounds of appeal raised by the revenue are dismissed.
Issues Involved:
1. Addition of interest income based on method of accounting. 2. Addition on account of interest on Non-Performing Assets (NPAs). 3. Disallowance of expenses related to earlier years. 4. Disallowance of non-business expenditure. 5. Disallowance of amortization of premium paid on government securities. 6. Addition of interest accrued on investments. Detailed Analysis: 1. Addition of Interest Income Based on Method of Accounting: The Revenue contended that the assessee followed a hybrid system of accounting, which is not permissible under Section 145 of the Income Tax Act, and hence, interest income should be taxed on an accrual basis. The Tribunal upheld the CIT(A)'s decision, which relied on the Karnataka High Court ruling in Canfin Homes Ltd., stating that income on NPAs cannot be taxed on an accrual basis as it does not yield revenue. 2. Addition on Account of Interest on Non-Performing Assets (NPAs): The Revenue argued that interest on NPAs should be taxable on an accrual basis. However, the Tribunal upheld the CIT(A)'s decision, which followed the Karnataka High Court's ruling in Canfin Homes Ltd., determining that interest on NPAs does not accrue as income under the mercantile system of accounting. The Tribunal noted that the Revenue's pending SLP against the High Court's decision does not warrant a different view. 3. Disallowance of Expenses Related to Earlier Years: The AO disallowed expenses related to the previous year, arguing that they should have been claimed in the relevant year. The CIT(A) allowed the expenses, noting that the liability arose only when the claims were made by PACs, which happened in the subsequent year. The Tribunal upheld this view, emphasizing that the liability accrues when the subvention percentage is announced by NABARD. 4. Disallowance of Non-Business Expenditure: The AO disallowed expenses incurred towards Navodaya Grama Vikas Charitable Trust, arguing they were not related to taxable income. The CIT(A) allowed the expenses, citing commercial expediency and the generation of substantial income and deposits from SHGs. The Tribunal upheld this decision, referencing the Rajasthan High Court's ruling in Rajasthan Spinning and Weaving Mills Ltd., which supports the deduction of expenses incurred for business purposes, even if no direct profit is shown. 5. Disallowance of Amortization of Premium Paid on Government Securities: The AO disallowed the amortization of premium on government securities held to maturity, considering them as capital investments. The CIT(A) allowed the deduction, following the Tribunal's decision in M. Visweswaraya Co-operative Bank Ltd., which recognized amortization of premium as an allowable expense. The Tribunal upheld this view, noting that the RBI guidelines and consistent accounting practices support the deduction. 6. Addition of Interest Accrued on Investments: The AO added interest accrued on investments on an accrual basis, despite the assessee following the cash basis. The CIT(A) deleted the addition, referencing the Karnataka High Court's ruling in Karnataka Bank Ltd., which held that interest on securities is taxable only when due and payable. The Tribunal upheld this decision, citing similar rulings from the Madras and Kerala High Courts, and noting the consistent accounting practice followed by the assessee. Conclusion: The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on all grounds. The judgments emphasized adherence to judicial precedents, consistent accounting practices, and the principles of accrual of liability and commercial expediency.
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