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TMI Blog2011 (11) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... harges Rs. 2,56,309 (b) Services charges of F&F Rs. 1,46,079 (c) Accrued interest on NPA Rs. 18,35,338 2.2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought not to have confirmed the above disallowances/additions." Ground 2.1(a) Clearing House Charges Rs. 2,56,309/- 2.1 In respect of the addition of Rs. 2,56,309/- under the head "Clearing House Charges", facts in brief as stated in the order passed u/s.143(3) dated 30/12/2009 were that assessee is a Co-operative Bank engaged in banking business. During the course of assessment proceedings, the issue of allowance of expenditure made on account of MICR cheque clearing charges debited by clearing agent the Bhagyodaya Co-op. Bank Ltd. had come up. The Assessing Officer has examined the debit vouchers issued by the Bhagyodaya Co-op. Bank Ltd. for providing the services in the capacity of "Clearing House Agent". The Assessing Officer has examined the processing charges in respect of certain branches of the assessee and it was noted that there was no deduction of tax at source on payment to the Bhagyodaya Co-op. Bank Ltd. as a "Clearing House Agent". The Assessing Officer has found that in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk Ltd. has paid tax on the receipts the AO should not have again asked for tax. This argument of the appellant is not applicable because in the case of Hindustan Coca-Cola beverages private Ltd. (supra), the honorable Supreme Court was giving decision as to whether if the deductee had paid the tax, then whether the TDS can be again collected from the deductor. In the present case, the issue is of disallowance under section 40(a)(ia). The appellant was required to deduct TDS, and since it has failed to do so, the disallowance made by the AO is correct. This ground of appeal is therefore, dismissed." 4.1 From the side of the assessee, ld.AR Mr. S.N. Divatia appeared and stated that no bank charges were directly paid by the assessee to Bank of Baroda. The bank charges were paid by the Bhagyodaya Co-op. Bank Ltd. and therefore TDS was deducted by the said Bank on payment of MICR charges to Bank of Baroda. The assessee was only required to reimburse the bank charges to the Bhagyodaya Co-op. Bank Ltd. For this proposition, he has placed reliance on the following case laws:- 1. KLM Royal Dutch Airlines v. Asstt.CIT [1998] 62 TTJ (Delhi) 268/[1999] 104 Taxman 46 (Delhi)(Mag.) 2. Expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard, the legal proposition as settled by the Co-ordinate Bench "E" Delhi in the case of KLM Royal Dutch Airlines (supra) were that in a situation where the assessee is reimbursing its employees' conveyance expenditure, then non-inclusion of the said reimbursement in salary for the purpose of TDS u/s.192 was held as a bona fide belief that on the said reimbursement amount no TDS was required to be deducted. The Respected Bench has held that there was no material to indicate that the conduct of the assessee was not bona fide. Our attention has also been drawn on an another decision of ITAT Delhi "F" Bench in the case of Expeditors International (India) (P) Ltd. (supra), wherein certain charges were reimbursed by the assessee-company to its parent company. After considering the facts, it was held that those charges were not in the nature of fee for technical services and being reimbursed therefore not liable for deduction at source, hence, the invocation of the provisions of section 40(a)(i) were held as not sustainable. We, therefore, conclude that since the MICR charges were merely reimbursed by the assessee and that there was no payment by member of the bank to clearing age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the other hand, no interest on accrual basis was offered on Non- Performing Assets (in short 'NPA'). The explanation of the assessee was that there was no chargeability of accrued interest on NPA of Rs. 12,16,703/-. It was clarified that the said amount of interest was neither debited to borrower's account nor credited to the interest income. It has further been clarified that even the interest was not shown under 'suspense-account'. On one hand, the Revenue has stated that the decision of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC) is to be applied where it was held that interest accrued is chargeable to tax. On the other hand, the assessee has placed reliance on a subsequent decision of Hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889/104 Taxman 547 (SC), wherein a Circular issued by the Board was considered and held that in respect of doubtful debts even in the case of banks it is not required to credit the interest though maintaining mercantile system of accounting. The Assessing Officer was not convinced and held that in terms of Section 5 of IT Act the scope of total income is defined that all income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed CIT(Appeals) that the decision of UCO Bank (supra) was wrongly relied upon by the assessee because the said decision was prior to the amendment in the statute through which the provisions of section 43D were introduced on 01/04/1991. It has also been held by the Learned CIT(Appeals) that the RBI Act and Income tax Act operate in different fields. The Learned CIT(Appeals) has also made an observation that it cannot be held that the provisions made in the accounts of the assessee in respect of NPA should be treated as sufficient compliance with the provisions of section 36(1)(vii) of the I.T. Act so as to allow the provision for bad or doubtful debts as a permissible deduction. The Learned CIT(Appeals) has concluded that the assessee-bank had considered certain loans as NPA merely when second or third installment could not be recovered. In his opinion those loans should not be claimed as sticky or bad loans. He has also held that the assessee-company a Cooperative therefore not covered by the provisions of IT Act applicable on scheduled banks. The action of the Assessing Officer was confirmed. 12. From the side of the assessee, ld.AR Mr. S.N. Divatia appeared and his first plank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration 2007-08). The Assessing Officer has held that in terms of the provisions of Section 5 of IT Act, since the interest income had accrued to the assessee therefore assessable to tax in its hands. Reliance was placed on State Bank of Travancore (supra). The Assessing Officer has also mentioned that by the substitution in the provisions of Section 43D of the I.T. Act since the assessee being neither a public financial institution nor a scheduled bank or state financial corporation, therefore accrued interest should have been offered to tax. The Assessing Officer has placed reliance on New India Industries Ltd. (supra), wherein the issue was about the claim of bad debt and it was held that the non-banking financial corporations (in short 'NBFC') are not entitled for allowance of "bad debt" so long as the amount of claim is not debited to Profit & Loss account, but only a provision in respect of NPA is made. The Assessing Officer has therefore held that the assessee has merely made the provision of bad debt as per the advisory guidelines issued by the RBI and since it was held that the claim of bad debt is not admissible, therefore there was an element of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvation is that Section 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The words "credited" and "actually received" has been highlighted hereinabove while reproducing the section in question. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is actually received. The Act says that the incidence of 'credit' or "actually received", whichever is earlier is to be taken into account for the purpose of chargeability of income by way of interest. Simultaneously, it is noteworthy that this section is an overriding section because the opening w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 56 ITR 198(SC) and K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC). In the land-mark decision, the Hon'ble Supreme Court in the case of UCO Bank (supra) has therefore held, first, that a beneficial circular is not to be treated as inconsistent with the provisions of statute and binding on the authorities. Second, that in respect of interest on "sticky advances" interest income is to be taxed only when actually received as prescribed by CBDT Circular. However, in the past an interesting turn had taken place by an order of the Hon'ble Kerala High Court in the case of State Bank of Travancore v. CIT [1977] 110 ITR 336 (Ker.), wherein it was held that the assessee, a banking company, did not credit in its account the interest that had accrued on "sticky advances" because the assessee felt that the interest could not to be realised. It credited the interest to a separate account known as "interest suspense account". On reference, the Hon'ble Court has held that there was an accrual of income liable to income-tax and the assessee was not justified in not crediting the interest income on such "stick advances" it its accounts. However, later on at the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. ... To say that the court could not resort to the so-called "equitable construction" of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation, another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes." We can therefore safely draw a conclusion that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. section 43-D has to be applied in its letter and spirit. It is pertinent to mention that later on, in the case of CIT v. Bank of America N.T. & S.A. [2003] 262 ITR 504/133 Taxman 648 (Bom.) the question of interest on "sticky loans" was decided in favour of the assessee and held that the question is to be answered in favour of the assessee following the decision of UCO Bank (supra), United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC). Likewise, in an another case of CIT v. State Bank of India [2003] 262 ITR 662/129 Taxman 409 (Bom.) again it was held that the amount credited to the interest suspense account was not taxable fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o public interest and viability of the NBFC. The Guidelines never intended for taking the interest income accrued as per section 5 out of the scope of the Act. If the contention of assessee was accepted, it would amount to insertion of 'NBFC' in section 43D, that too by a Guideline issued for different purposes by an authority other than the Parliament In other words, the doctrine of 'Casus Omissus' will deem to have been applied which is contrary to law of land." Unquote. The basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of the Respected Tribunal was that if the contention of the assessee was to be accepted, then it would amount to insertion of "NBFC" in section 43-D of the I.T. Act. As against that, as far as the assessee is concerned, it is an accepted fact that the assessee is a cooperative bank and not a non-banking financial company and this noteworthy distinction has already been appreciated by us in one of the paragraphs above. There is one more decision of the Hon'ble Apex Court which is yet to be mentioned while d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007] 293 ITR 357 (Mad.) has taken a view that the assessee is a company engaged in the business of lease, finance and hire purchase and that the principle of accrual comes into play without income was recognized and that the assessee had classified its assets on the basis of notification issued by R.B.I. and found that certain assets came under the category of NPA and that from such NPA the assessee had not recognized any income in consonance with the notification issued by RBI and AS-9 issued by ICAI and that the assessee was justified in not recognizing such income. The Court had further expressed that there was no occasion to consider whether the principle of accrual would arise or not, nevertheless, the interest from such NPA would be taxed in the appropriate assessment year on the basis of actual receipt. It is worth to mention that for this decision, the Hon'ble Madras High Court has relied upon an another decision of the same High Court pronounced in the case of CIT v. India Equipment Leasing Ltd. [2007] 293 ITR 350 (Mad.). To conclude the issue, we deem it important to discuss the decision of India Equipment Leasing Ltd. (supra) for the sake of completeness of our ju ..... X X X X Extracts X X X X X X X X Extracts X X X X
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