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2017 (6) TMI 822 - AT - Income TaxDeduction u/s 36(1)(viia) - Held that - Assessee has claimed 36(1)(viia) deduction @ 10% on rural advances in its computation of income and carried forward the loss from business. We find that information of provision for bad and doubtful debts are not placed on record before us. Therefore, it is appropriate to remit the matter back to the file of AO with a direction to find out whether assessee has created any provision for bad and doubtful debts and if so, following the judicial pronouncements, he is directed to allow deduction u/s 36(1)(viia) to the extent assessee has created provision for bad and doubtful debts in its books of account. Accordingly, grounds are allowed for statistical purposes. Deduction of interest which was not realized on NPAs - Held that - We direct the AO to delete the addition made towards interest on NPAs. Accordingly, this ground is allowed in all the AYs under consideration. Outstanding liability of dividend payable - Held that - We are in agreement with the ld. AR that dividend is appropriation of profit after subjected to tax and it is not a charge on P&L A/c. Therefore, the above outstanding liability cannot be treated as income of the assessee. Accordingly, we uphold the decision of the CIT(A) and dismiss the ground raised by the revenue in all the AYs under consideration. Disallowance not obtained the license from the RBI to run the bank as per the provision of section 22 of the Banking Regulation Act, 1949 - Held that - CIT(A) has not brought complete facts on record in his findings. Therefore, it needs to be examined properly by the lower authorities, hence, we remit this issue back to the file of the CIT(A) for further verification and adjudication of the issue. Accordingly, this ground is allowed for statistical purposes.
Issues Involved:
1. Deduction under Section 36(1)(viia). 2. Deduction of interest on Non-Performing Assets (NPAs). 3. Long outstanding liability of dividend payable. 4. Interest on investments. Issue-wise Detailed Analysis: 1. Deduction under Section 36(1)(viia): The primary issue was whether the assessee, a cooperative society engaged in banking, was entitled to the deduction under Section 36(1)(viia) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the deduction on the grounds that the assessee did not have a license from the Reserve Bank of India (RBI) to carry on banking business. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction, noting that the assessee had been in the banking business since before the Banking Regulation Act and had applied for a license, which was neither granted nor rejected by the RBI. The CIT(A) concluded that the cooperative society should be treated as a cooperative bank and thus entitled to the deduction. The Tribunal remitted the matter back to the AO to verify if the provision for bad and doubtful debts was created in the books of accounts and to allow the deduction accordingly. 2. Deduction of interest on Non-Performing Assets (NPAs): The assessee claimed a deduction for interest on loans and advances that had become NPAs. The AO disallowed this claim, arguing that the assessee followed a mercantile system of accounting and should recognize interest on an accrual basis. The CIT(A) allowed the deduction, relying on various judicial precedents that held interest on NPAs should not be recognized as income until realized. The Tribunal upheld the CIT(A)'s decision, citing consistent judicial pronouncements that interest on NPAs does not accrue and should not be taxed. 3. Long outstanding liability of dividend payable: The AO treated the outstanding liability of dividend payable as income, arguing that the liability had ceased to exist since the members were not traceable. The CIT(A) reversed this decision, stating that dividends are an appropriation of profit and not a charge on the Profit & Loss Account, thus subjecting them to tax would lead to double taxation. The Tribunal upheld the CIT(A)'s decision, agreeing that the outstanding liability could not be treated as income. 4. Interest on investments: The AO disallowed an expenditure claimed by the assessee towards interest on investments, which was shown as a contingent charge. The CIT(A) found that the amount was a rectification entry for an earlier mistake where funds received from the Government were wrongly credited as income instead of showing it as a liability. The Tribunal remitted this issue back to the CIT(A) for further verification and proper adjudication, as the CIT(A) had not brought complete facts on record. Conclusion: The Tribunal's judgment addressed multiple issues regarding the assessee's claims and deductions. It upheld the CIT(A)'s decisions on the deduction under Section 36(1)(viia), interest on NPAs, and the long outstanding liability of dividend payable. However, it remitted the issue of interest on investments back to the CIT(A) for further verification. The appeals for AYs 2007-08 and 2008-09 were dismissed, while the appeal for AY 2009-10 was partly allowed for statistical purposes.
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