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TMI Blog2014 (10) TMI 613X X X X Extracts X X X X X X X X Extracts X X X X ..... enial of claim of deduction u/s 36(1)(viia) – Restriction of claim of provision for bad debts - Held that:- Creation of provision for bad and doubtful debts equal to the amount mentioned in section 36(1)(viia) is a must for claiming such deduction - As the assessee has not made a Provision for bad and doubtful debts in the books of account equal to the amount of deduction sought to be claimed under Section 36(1)(viia) of the Act, Following the decision in Shri Mahalaxmi Co-op Bank Ltd. Versus ITO, Ward 1 (1), Kolhapur [2014 (1) TMI 1366 - ITAT PUNE] - the claim of the assessee for deduction u/s 36(1)(viia) of the Act is liable to be restricted to the actual amount of Provision for bad and doubtful debts made in the books of account - the income-tax authorities have rightly allowed the deduction u/s 36(1)(viia) of the Act – Decided against assessee. Addition of interest income on sticky advances/Non- Performing Asset advances – Held that:- The assessee is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India - the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) erred in holding that the grant received constituted waiver of loan by the State Govt. and hence, it was an income in the hands of the appellant bank. 4] The learned CIT(A) failed to appreciate that - a. The grant received of ₹ 110 Crs. from the State Govt. was in the nature of capital receipt and thus, it could not be treated as an income. b. The grant given by the State Govt. had to be treated as a financial aid to the appellant bank and therefore, it was a capital receipt. c. Even assuming without admitting that the grant constituted waiver of loan given earlier by the State Govt., the loan sanctioned was for the purposes of making an FDR to maintain the SLR and not for meeting the day to day trading expenses and thus, the loan was on capital account and its waiver did not constitute income in the hands of the appellant bank. d. The decision of Bombay H.C. in the case of Solid Containers was not applicable to the facts of this case. 5. The learned CIT(A) erred in disallowing the deduction u/s 36(1)(viia) of ₹ 10,32,12,700/- 5.1] The learned CIT(A) failed to appreciate that the above deduction was allowable to the appellant bank even if, no prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of Reserve Bank of India so as to enable the assessee bank to carry out its banking activities. According to the learned counsel, assessee is a non-scheduled District Co-operative Bank whose services are majorly used by the farmers and small depositors in smaller towns of Maharashtra. The learned counsel submitted that the action of the Government of Maharashtra is a welfare step to help the farmers and small the depositors of the assessee bank and the grant has been specifically given to maintain the SLR ratio with the Reserve Bank of India. In sum and substance, the stand of the appellant is that the objective of the Government was to help the farmers and small depositors of Nanded, and the grant enabled assessee-bank to maintain the SLR ratio with the Reserve Bank of India so that assessee bank could carry out its business of banking activity. It is sought to be made out on the basis of the material furnished in the Paper Book, which we shall advert to a little later, that the grant by Government of Maharashtra is an encumbered receipt inasmuch as the same is to be utilized only to be put in as SLR security with Reserve Bank of India. It was therefore contended that the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, whereby assessee was restricted from accepting fresh deposits and also allowing withdrawals from existing accounts. The incurrence of expenditure was also restrained in accordance with such direction, a copy of which has been placed at pages 1 to 2 of the Paper. Thereafter, on 28.03.2007 the Government of Maharashtra agreed to provide ₹ 20 crores to the bank as Government share capital. The infusion of such share capital was subject to certain terms and conditions, as can be seen from a copy of such order dated 28.08.2007, placed in the Paper Book at pages 6 to 7. The bank was required to open a separate fund- Repayment of Share Capital Fund and the capital introduced by the Government of Maharashtra was to be repaid out of such fund in yearly installments of ₹ 2 crores after expiry of 3 years from the date of receipt of the share capital. It is also provided that in case of any default in repayment of share capital, Government of Maharashtra was entitled to interest @ 12%. Similarly, in terms of a decision of the Government of Maharashtra dated 14.03.2008, the assessee bank was sanctioned a loan of ₹ 100 crores carrying interest @ 6%. While sanctioning suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Act. b. Rate of Interest - 6.00% p.a. c. Repayment schedule is as follows : 1st installment of ₹ 25 crore due to 31.03.2009 2nd installment of ₹ 25 crore due on 31.03.2010 3rd installment of ₹ 50 crore due on 31.03.2011 d. The amount of ₹ 100.00 crores is to be kept with Maharashtra State Co-operative Bank Ltd. in a separate ESCROW account styled as - SLR of The Nanded District Central Co-operative Bank Ltd. e. The repayment of ₹ 100.00 crores and interest thereon the separate ESCROW account has to be maintained. iii. The Nanded District Central Co-operative Bank Ltd. has prepared and submitted Action Plan to Government of India, for granting exemption under the provisions of Section 11(1) of the Banking Regulation Act, 1949 for the year 2008 to 2012. The said plan was vetted by Maharashtra State Co-operative Bank, approved by Government of Maharashtra and is recommended by NABARD to Reserve Bank of India. iv. It is to be noted that as per the 'Action Plan', Nanded Dist. Central Cooperative Bank is required to maintain SLR investment as under : 31.03.2008 64.27 crores 31.03.2009 89.27 crores 31.03.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment of Maharashtra and the loan proceeds so received were deposited by the assessee-bank in an Escrow account maintained with Maharashtra State Co-operative Bank Ltd.. The amount was kept in fixed deposits for the purpose of maintaining SLR investments, as is evident by a communication dated 28.03.2008 addressed to the Maharashtra State Co-operative Bank Ltd., a copy of which has been placed in the Paper Book at page 23. At this stage, we may also make a mention of the earlier amount of ₹ 20 crores infused by the Government of Maharashtra on 28.03.2007 as share capital in the assessee bank. In this connection, on 26.09.2008, NABARD informed the Government of Maharashtra that the share capital held by the Government in the assessee bank exceeded 25% and that the same should be restricted to 25%. As a result, the Government of Maharashtra vide letter dated 01.12.2008 informed the bank that out of ₹ 20 crores invested in the share capital, only ₹ 10 crores should be treated as part of share capital and the balance of ₹ 10 crores be taken as an interest-free deposit lying with the assessee bank, a copy of such communication is placed at page 25 of the Paper Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an of ₹ 100 cr. at the interest rate of 6% p.a. was granted to bank on the condition of repayment of loan amount before 31.03.2011. Now, the Government has agreed to convert this amount in Grant to assure proper functioning of bank with effect from 14.03.2008. [underlined for emphasis by us] 10. By way of the aforesaid decision, the sum of ₹ 10 crores kept with the assessee bank as interest-free deposit and the loan of ₹ 100 crores granted @ 6% per annum was converted into a grant as a measure of financial assistance. The receipt of such grant by the assessee bank from the State Government is the subject-matter of controversy before us. The aforesaid decision of the Government of Maharashtra clearly brings out that the assessee bank was facing financial hardships and it was put under restrictions by the Reserve Bank of India in terms of section 35A of the Banking Regulation Act, 1949 whereby assessee bank was restricted from accepting deposits or making payment of deposits from the customers. The net worth of the assessee-bank was eroded and therefore the restrictions u/s 35A of the Banking Regulation Act, 1949 were imposed by the RBI. The Government of Mah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refund of sales-tax was that assessee could set-up new business or expand the existing business. The aforesaid position urged by the assessee therein was dismissed on the basis of the analysis of the Subsidy Scheme therein, whereby it was found that subsidy was given by way of assistance in carrying on of the business and on facts, it was concluded that the subsidy given was to meet recurring expenses and not for acquiring capital asset. The Hon'ble Supreme Court also noted that subsidies were granted year after year only after setting-up of the new industry and after commencement of production and therefore such subsidy could be treated as an assistance given for the purpose of carrying on the business of the assessee. Under these circumstances, the subsidy therein was held to be on revenue account. 13. Subsequently, the Hon'ble Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd., (2008) 306 ITR 392 (SC) has considered and explained the earlier judgement in the case of Sahney Steel (supra). It has been explained that the judgement in the case of Sahney Steel (supra) laid down the basic test to be applied in judging the character of subsidy, which is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given. The underlying object of the Government was to safeguard the interest of farmers and small depositors, and this object was sought to be achieved by the mechanism of providing financial grant to the assessee-bank and regularizing its normal banking activity. In this manner, it has to be deduced that the subsidy/grant in question has not been received by the assessee-bank is the course of a trade but it is of capital nature. 15. In-fact, in a somewhat similar situation, the decision of the House of Lords in the case of Seaham Harbour Dock Co. vs. Crook (1931) 16 Tax Cases 333 (HL) is relevant. The import of the said judgement and its significance in the present fact-situation becomes aptly clear from the following discussion in the judgement of the Hon'ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd. (supra) :- 15. In the decision of the House of Lords in the case of Seaham Harbour Dock Co. vs. Crook (1931) 16 Tax Cases 333 (HL) the Harbour Dock Co. had applied for grants from the Unemployment Grants Committee from funds appropriated by Parliament. The said grants were paid as the work progressed the payments were made several times for some years. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. The said judgement shows that the mechanism through which a subsidy is paid is immaterial, and that what is of relevance is the purpose for the payment of assistance. The House of Lords noted that the Government provided assistance in the form of grant with the object that by its use, men might be kept in employment. As per the Hon'ble Supreme Court ordinarily, such-like payments would have been on revenue account but since the purpose of payment was to curtail/obliterate unemployment and dock extension, therefore the House of Lords held that the payment was of capital nature. 17. In the case before us also even if the grant received by the assessee bank has been used for meeting SLR requirements of RBI, which is relatable to its banking activity, yet the purpose of the payment made by the Government was to safeguard the interest of farmers and small depositors in the district Nanded. The strategy of providing financial assistance by way of the impugned grant was a mechanism devised by the Government of Maharashtra with the purpose of safeguarding the interest of farmers and depositors from the Nanded district, and the same clearly emerges from the Government decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erabad Tribunal, subsidy received by the assessee from the State Government was to meet part of the expenditure incurred for improvement of power lines damages due to cyclone. Having regard to the facts of the case, the Tribunal concluded that the aforesaid subsidy enabled the assessee to run its business profitably and therefore the amount of subsidy constituted revenue receipt. Clearly, the facts in the case before the Hyderabad Bench of the Tribunal are quite different from those before us inasmuch the object of the impugned grant paid by the Government is quite different than enabling the assessee to run its business profitably. 20. Since, we have adjudicated the issue by relying on the principles laid down by the Hon'ble Supreme Court in the aforesaid cases, we have refrained from discussing other decisions which were cited at Bar in the course of hearing before us. In any case, the principles formulated in the other decisions cited at Bar are not in conflict with the propositions considered by us in the earlier paragraphs, based on the judgements of the Hon'ble Supreme Court. 21. In conclusion, we therefore set-aside the order of the CIT(A) and direct the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered by the Pune Bench of the Tribunal in the case of Shri Mahalaxmi Co-op. Bank Ltd. vs. ITO vide ITA No.1658/PN/2011 order dated 29.10.2013. In the case of Shri Mahalaxmi Co- op. Bank Ltd. (supra) it has been held, following the judgement of the Hon'ble Punjab Haryana High Court in the case of State Bank of India vs. CIT, (2005) 272 ITR 54 (P H), that the deduction u/s 36(1)(viia) of the Act relating to the Provision for bad and doubtful debts was allowable to the extent of Provision actually created in the books of account in the relevant year or the amount calculated as per section 36(1)(viia) of the Act, whichever is lower. Following the said decision, which continues to hold the field as it has not been altered by any higher authority, the plea of the assessee on this ground has to fail. In order to impart completeness to this order, we hereby reproduce the following portion of the order of the Tribunal in the case of Shri Mahalaxmi Co-op. Bank Ltd. (supra) which shall elucidate the reasoning that weighed with the Bench to decide the issue :- 9. We have carefully considered the rival submissions. We have also anxiously perused the authorities cited at Bar in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant assessment year, assessee had made a Provision for bad and doubtful debts of ₹ 1,90,36,000/- only. The assessee argued that the Provision of ₹ 1,90,36,000/- was made in the Balance-Sheet finalized on 14.02.1985 which was as per the unamended provisions of Section 36(1)(viia) of the Act and that in view of the amendment of Section 36(1)(viia) of the Act permitting higher claim of deduction, the assessee could not have possibly made the higher Provision in the Balance-Sheet finalized on a prior date, but it made up the shortfall by making an adequate Provision in the Balance-Sheet of the subsequent assessment year. On this basis, it was sought to be made out that there was substantial compliance with the requirement of law of making Provision for bad and doubtful debts and therefore assessee justified the claim of deduction for the complete amount of ₹ 1,94,21,000/- and not restricted to ₹ 1,90,36,000/-. The CIT(A) as well as the Tribunal negated the plea of the assessee and accordingly, the matter was carried before the Hon'ble Punjab Haryana High Court. The Hon'ble High Court referred to the provisions of Section 36(1)(viia) of the Act and obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the completion of the assessment. It has been correctly pointed out that in all those cases, reserves/provisions had been made in the books of account of the same assessment year and not of the subsequent assessment year. 8. In the present case, the assessee has not made any provision in the books of account for the assessment year under consideration, i.e., 1985-86, by making supplementary entries and by revising its balance sheet. The provision has been made in the books of account of the subsequent year. 9. We are, therefore, satisfied that the Tribunal was right in holding that since the assessee had made a provision of ₹ 1,19,36,000 for bad and doubtful debts, its claim for deduction under s. 36(1)(viia) of the Act had to be restricted to that amount only. Since the language of the statute is clear and is not capable of any other interpretation, we are satisfied that no substantial question of law arises in this appeal for consideration by this Court. 11. In view of the aforesaid interpretation of Section 36(1)(viia) of the Act by the Hon'ble Punjab Haryana High Court, the orders of the lower authorities deserve to be upheld inasmuch as the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refully perused the said decision and found that the issue before the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) was quite different; and, in any case none of the observations of the Hon'ble Supreme Court run contrary to the pronouncement of the Hon'ble Punjab Haryana High Court in the case of State Bank of Patiala (supra) to the effect that making of a Provision for bad and doubtful debts equal to the amount mentioned in Section 36(1)(viia) of the Act is must for claiming such deduction. Therefore, the judgement of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) does not help the assessee in the present controversy before us. Further, even in the case of Jaysingpur Udgaon Sahakari Bank Ltd. (supra), the Tribunal has merely set-aside the matter for adjudication afresh back to the file of the Assessing Officer and it does not contain any positive finding with respect to the controversy before us. 15. In the result, considering the aforesaid discussion, in our view, the orders of the authorities below on this aspect are liable to be upheld. We hold so. 25. Following the aforesaid reasoning in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming Asset advances. Briefly put, the controversy can be summarized as follows. The assessee is a non-scheduled Co-operative Bank carrying on banking business in terms of a license issued by Reserve Bank of India (RBI), and is thus governed by Circulars of RBI relating to Prudential Norms, Income Recognition, Asset Classification, Provisioning and other related matters. In terms of such Prudential Norms of RBI, assessee did not account for interest relating to Non-Performing Assets (NPAs) i.e. advances to customers which were classified as NPAs in terms of the RBI guidelines. The Assessing Officer was of the opinion that interest income even in relation to such NPAs was liable to be included in this year's total income, having regard to the mercantile system of accounting followed by the assessee. As per the Revenue, the provisions of section 43D of the Act, which provide that interest income relatable to NPAs classified as per the RBI guidelines shall be charged to tax in the year in which it is credited or received by the assessee, whichever is earlier, was not applicable to the assessee, since the assessee was not a scheduled bank or any other entity prescribed in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consideration. 9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Co-operative Bank operating under a license issued by RBI but was not a 'scheduled bank' so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The assessee, on the other hand, contended that having regard to the guidelines issued by RBI regarding accounting of interest on NPAs, no interest income accrued in respect of NPAs and that the same was to be taxed only on receipt basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognition and also extracted following relevant portion from the said accounting standard: 9. Effect of uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments. 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential cri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(i)(vii) of the Act. The Assessing Officer, however, did not bring to tax ₹ 20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to Income Recognition and held that income had to be recognized in terms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 45 (sic. 145) of the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the AO has to follow the Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute . 10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis- -vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. 10.1 Based on the prudential norms, the assessee herein did not admit the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxed on accrual basis and not in terms of RBI's guidelines. But the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon'ble Delhi High Court and the Hon'ble Madras High Court as noted by the Hon'ble Madras High Court in its order. 12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). 13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in the case of The Durga Cooperative Urban Bank Ltd. (supra) and accordingly the order of the CIT(A) is liable to the affirmed. We hold so. 14. In the result, the appeal of the Revenue is dismissed. 30. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X
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