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TMI Blog2015 (1) TMI 514X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessee. Claim of deduction under section 36(1)(viia)denied - Held that:- Tthe orders of the lower authorities deserve to be upheld inasmuch 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, and therefore, in our view, the lower authorities were justified in restricting the deduction to ₹ 50,00,000/- , being the amount of Provision actually made in the books of account. - Decided Against assessee. - ITA No. 1295/PN/2013 - - - Dated:- 30-12-2014 - Shri G. S. Pannu And Ms. Sushma Chowla,JJ. For the Petitioner : Shri S.N. Puranik For the Respondent : Shri M.S. Verma ORDER Per G. S. Pannu, A.M. The captioned appeal by the assessee is directed against an order of the Commissioner of Income Tax (Appeals)-III, Pune, dated 19th October 2012, which in turn, has arisen from an order dated 29th December 2011, passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short the Act ), pertaining to the assessment year 2009-10. 2. In this appeal, the assessee has raised the following gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming assets (in short NPAs ). At the time of hearing, it was a common ground between the parties that the facts and circumstances with respect to the said dispute are similar to those considered by the Tribunal in the assessee s own case for the assessment year 2008-09, vide ITA no.495/PN/2012, order dated 29th September 2014. It was also a common point that the rival contentions in the instant year remain the same as were considered by the Tribunal vide its order dated 29th September 2014 (supra). In the above background, in order to impart completeness to this order, the following portion of the order of the Tribunal dated 29th September 2014 (supra) with respect to the aforesaid issue is reproduced hereinafter:- 4. The first dispute is in terms of Grounds of Appeal No.1 to 3 which relate to an addition of ₹ 47,01,85,366/- on account of interest on Non Performing Assets (in short NPAs ). As noted earlier, assessee is a co-operative bank carrying on banking business in terms of a license issued by Reserve Bank of India (RBI). Therefore, assessee is governed by the Circulars and Guidelines issued by the RBI, in particular relating to Prudential Norms, Income Recognit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The assessee is registered as a co-operative society and is carrying on the banking business. For the financial year 2007-08 corresponding to the assessment year under consideration it filed a return of income which was accompanied by, inter-alia, audited Balance-Sheet and Profit Loss Account. In the consolidated Profit Loss Account for the financial year under consideration, a copy of which is at page 51 of the Paper Book, on the credit side under the heading Interest Received , interest from Society Loan and from Individual Loans have been reflected at ₹ 167,02,91,981/- and ₹ 13,66,79,692/- respectively. It has been explained that the aforesaid interest income credited in the Profit Loss Account include ₹ 46,30,12,177/- and ₹ 71,73,189/- on account of Society Loans and Individual Loans respectively which are relatable to loans/advances to customers classified as NPAs as per RBI norms. Similarly, on the debit side of the Profit Loss Account under the heading Interest Paid , sums of ₹ 46,30,12,177/- and ₹ 71,73,189/- are put under sub-headings Overdue interest from Society Loans and Overdue interest from Individual Loans respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Balance Sheet under the heading Interest Receivable and sub heading On Society Loans and On Individual Loan. The bank submits that the said amount of ₹ 82,81,68,339.10 is not appearing on Liability side of the Balance Sheet under the heading Reserves and Other Funds but is separately disclosed as Overdue Interest. Similarly in the Profit and Loss Account the amount of ₹ 47,01,85,366.04 [being the interest on N.P.A. during the year] is not appearing under the heading Provisions but is debited under the heading Interest Paid as overdue interest on loans of Societies and Individuals as a contra entry. 4. The bank most respectfully submits that a careful and dispassionate study of the final accounts of the bank would reveal that it has never created any provision or reserve in respect of Overdue Interest on N.P.A. as alleged by the tax authorities. The entries as appearing in the Profit and Loss Account and the Balance Sheet for the F.Y. 2007-08 appear to have created some confusion in the minds of the learned Assessing Officer. It is false and incorrect to say that the bank has created a Reserve/ Provision in respect of the overdue interest on N.P.A. which has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Maharashtra Co-operative Societies Act, 1960 which prescribes the manner in which the net profit or loss is required to be computed in the financial statement. It was therefore contended that presentation in the Annual financial statements would not justify the income-tax authorities to treat the claim of the assessee differently than an assessee who would have netted the interest on loans. 11. We have carefully considered the rival submissions. As noted earlier, the crux of the controversy is with regard to assessee s claim that income with respect to the Interest on NPAs classified as per RBI norms is not assessable on accrual basis but is liable to be taxed as and when received. As per the Revenue, in the present case, assessee has credited gross interest in its Profit Loss Account which is inclusive of the interest relatable to the NPAs, and crediting of such interest in the Profit Loss Account shows that assessee has perceived such income to have been accrued, because assessee is following the mercantile system of accounting. 12. Undisputedly, the assessee bank is following the mercantile system of accounting. However, with regard to the recognition of income on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption contained in the Banking Regulation Act, 1949 (as applicable to Co-operative Societies), a statute under which assessee is bound to carry out its banking business. 14. Now, we may come to the plea of the Revenue with reference to the depiction of impugned interest on NPAs in the Profit Loss Account prepared by the assessee. As has been succinctly noted by us in the earlier paras, assessee has credited its Profit Loss Account with gross interest which, inter-alia, includes the impugned interest on NPAs. On the debit side, assessee has shown the impugned interest on NPAs under the heading Interest paid and subheadings Overdue Interest from Society Loans and Overdue Interest from Individual Loans . The assessee is a society registered under the Maharashtra Co-operative Societies Act, 1960 and it is also governed by the Maharashtra Cooperative Societies Rules, 1961. Section 65 of the Maharashtra Societies Act, 1960 deals with Ascertainment and appropriation of profits by a society. Subsection (1) of section 65 of the Maharashtra Co-operate Societies Act, 1960 lays down that a society shall construct its relevant annual financial statements to arrive at its consequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, the crediting of gross interest in the Profit Loss Account, which includes interest on NPAs cannot be taken as a proof that such income has accrued to the assessee unless the statutory guidelines applicable on the said subject are ignored. Obviously, when the banking institutions following mercantile system accounting are permitted to treat the income on NPAs as assessable on receipt basis, such a position cannot be ignored in the case of present assessee merely because of a presentation in the annual financial statements. Even otherwise, we notice that the RBI guidelines permit that interest income on NPAs be parked in a suspense account and it is not necessary that it has to be brought to the Profit Loss Account by the assessee. However, in the present case, as seen earlier, assessee has credited the gross amount of interest on credit side of the Profit Loss Account and simultaneously shown on the debit side of the Profit Loss Account, the amount of interest on NPAs. In other words, instead of netting of the interest the two amounts have been shown separately one on the credit side and other on the debit side. The net effect of the said presentation is the same. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on claimed by the assessee under section 36(1)(viia) of the Act to the actual amount of Provision made in the books of account for bad and doubtful debts amounting to ₹ 15,37,76,000/- as against assessee s claim for deduction of ₹ 65,35,21,900. 11. On this ground also, it was a common point between the parties that similar issue had come up before the Tribunal in the case of Mahalaxmi Co- Operative Bank Ltd. v/s ACIT, ITA no.1658/PN/2011, order dated 29th October 2013, wherein the issue was decided against the assessee. 12. However, in order to appreciate the controversy, the following discussion is relevant. The assessee being a co-operative bank, engaged in the business of banking, was eligible for deduction under section 36(1)(viia) of the Act in respect of any Provision for bad and doubtful debts made on account of aggregate average advances made by the rural branches of the assessee bank. Section 36(1)(viia) provides that such deduction shall not exceed 7.5% of the total income (computed before making any deduction under this clause and Chapter-VIA of the Act) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue, which is to the effect that the deduction allowable under Section 36(1)(viia) of the Act is in respect of the provision made by the assessee. In our considered opinion, the judgement of the Hon ble Punjab Haryana High Court in the case of State Bank of Patiala (supra) clearly covers the controversy in favour of the Revenue and belies the interpretation sought to be canvassed by the assessee. In the case before the Hon ble High Court, assessee-bank had originally filed its return of income for assessment year 1985-86 claiming deduction under Section 36(1)(viia) of the Act at ₹ 1,90,36,000/-. After filing of the return the provisions of Section 36(1)(viia) of the Act were amended by Finance Act, 1985 whereby deduction was enhanced to 10% of the profit or 2% of the aggregate average advances made by rural branches of the bank, whichever was higher. On account of the amended provisions, assessee filed a revised return of income on 24.04.1986 enhancing the claim for deduction from ₹ 1,90,36,000/- to ₹ 1,94,21,000/-. The Assessing Officer restricted the deduction under Section 36(1)(viia) of the Act to ₹ 1,90,36,000/- only and disallowed the balance on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank, computed in the prescribed manner, whichever is higher. 6. A bare perusal of the above shows that the deduction allowable under the above provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debts equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to cl.(vii) of s.36(1) of the Act, which reads as under : Provided that in the case of an assessee to which cl.(viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. 7. This also clearly shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under s. 36(1)(viia) of the Act. The Tribunal has distinguished various authorities relied upon by the assessee wherein deductions had been allowed under various provisions which also required creation of reserve after the assessee had crea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The other plea of the assessee was that the contents of the CBDT Circular dated 26.11.2008 (supra) is contrary to the provisions of Section 36(1)(viia) of the Act and therefore the same should be disregarded. In our view, the following explanation in respect of Section 36(1)(viia) of the Act rendered by the CBDT in Circular dated 26.11.2008 (supra) by way of para 2(iii)(b) as under :- (b) The deduction for provision for bad and doubtful debts should be restricted to the amount of such provision actually created in the books of the assessee in the relevant year or the amount calculated as per provisions of section 36(1)(viia), whichever is less. is in line with the interpretation of the section rendered by the Hon ble Punjab Haryana High Court and cannot be said to be contrary to the provisions of the Act. Therefore, the reliance placed by the lower authorities on the CBDT Circular dated 26.11.2008 (supra) cannot be faulted. 14. Before parting, we may refer to the decision of the Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) relied upon by the assessee and also the decision of our co-ordinate Bench in the case of Jaysingpur Udgaon Sahakari Bank Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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