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TMI Blog2015 (3) TMI 936X X X X Extracts X X X X X X X X Extracts X X X X ..... me. The explanation of the assessee before the AO was by placing reliance on the decision of UCO Bank (1999 (5) TMI 3 - SUPREME Court). It is thus clear that the claim of the assessee before the AO was that interest accrued not accounted for in its books of account are in relation to sticky loans & advances. The assessee has not furnished any explanation as to how the loans on which interest income was not offered to tax had become sticky? It was for this reason that the AO had made the impugned addition. We are of the view that the reference to the provisions of section 43D and its non-applicability to a cooperative bank is not relevant, because section 43D of the Act only statutorily recognizes the right of certain categories of assessees to account for interest on sticky loans, either in the year in which they choose to do so by credit the P&L account or the year of receipt. The said provisions will not affect any other assessee who is otherwise able to show that the interest income relates to loans which have become doubtful of recovery need not be accounted for as income. We therefore set aside the order of CIT(A) and remand the issue to the AO for fresh consideration - Decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above, we set aside the order of the CIT(A) on this issue and remand the issue with regard to taxing the sum of ₹ 1,65,96,812 to the AO for fresh consideration - Decided in favour of assessee for statistical purposes. Disallowance of deduction being amount transferred from NPA Reserve, which represents the accumulated income of earlier years - Held that:- the assessee has started the computation of total income with profit as per P&L account and added and reduced certain sums. One such sum so reduced is ₹ 80 lakhs on account of amount transferred from NPA reserve created out of earlier year profits. The net loss for the year after such additions and reductions is a loss of ₹ 61,14,560. The AO has computed total income in the order of assessment fro the loss declared in the computation of total income of (-) ₹ 61,14,560. There is no further addition of ₹ 80 lakhs in the order of assessment. Therefore, the claim of the assessee for deduction of ₹ 80 lakhs has been accepted by the AO. Since the sum of ₹ 80 lakhs was already allowed as deduction by the AO, there can be no grievance by the assessee and the ground of appeal raised by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank v. CIT, 237 ITR 889 (SC) and accepted the fact that as per the aforesaid decision, interest on sticky loans need not be offered to tax. 4. The AO also, referred to the provisions of section 43D which was introduced w.e.f. 1.4.1991. As per provisions of section 43D, income by way of interest in relation to such categories of bad and doubtful debts as are prescribed having regard to guidelines issued by RBI, can be brought to tax only when such income is credited in the P L account or the year in which it is actually received by the assessee. According to the AO, the aforesaid provisions are applicable only to public financial institutions, scheduled bank, state financial corporation and public company, who derive income by way of interest and where such interest pertains to bad or doubtful debts, which are prescribed having regard to the guidelines issued by National Housing Bank in relation to such debts. The aforesaid provisions are not applicable to a cooperative bank such as the assessee. The AO was therefore of the view that the sum of ₹ 94,06,565 was accrued interest and ought to have been taxed. Accordingly, he brought the same to tax as interest income accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the assets side of balance sheet as on 31.3.2006 showed a sum of ₹ 6,61,50,558 as overdue interest. The overdue interest as on 31.3.2007 was ₹ 8,16,25,582. The difference between the two was a sum of ₹ 1,54,78,024. This interest ought to have been accounted by the assessee in its books of account, as admittedly, as per mercantile system of accounting, interest income to this extent is deemed to have accrued to the assessee. In the computation of total income, the assessee had only added a sum of ₹ 60,71,459. The remaining interest income of ₹ 94,06,565 ought to have been accounted as interest income. The explanation of the assessee before the AO was by placing reliance on the decision of UCO Bank (supra). It is thus clear that the claim of the assessee before the AO was that interest accrued not accounted for in its books of account are in relation to sticky loans advances. The assessee has not furnished any explanation as to how the loans on which interest income was not offered to tax had become sticky? It was for this reason that the AO had made the impugned addition. We are of the view that the reference to the provisions of section 43D and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a claim for such a deduction u/s. 36(1)(viia) of the Act. The relevant provisions of section 36(1)(viia) as substituted by the IT (Amendment) Act, 1986 by the Finance Act, 1985 and as amended from time to time reads as follows:- SECTION 36- OTHER DEDUCTIONS Other deductions.- (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - . viia) in respect of any provision for bad and doubtful debts made by- (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner; (b) . Explanation : For the purposes of this clause- (vi) co-operative bank , primary agricultural credit socie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Ltd. v. DCIT, 126 ITD 172, wherein it was held that provisions of section 36(1)(viia) of the Act are not applicable to cooperative banks and are applicable only to scheduled and non-scheduled banks. 17. Aggrieved by the order of the CIT(A), the assessee has raised grounds 2 to 4 before the Tribunal. 18. We have heard the rival submissions. The ld. counsel for the assessee brought to our notice the decision relied upon by the CIT(Appeals) was in relation to the assessment year prior to the amendment of the provisions of section 36(1)(viia) by the Finance Act, 2007 w.e.f. 1.4.2007. According to him, as per law as it exists as on the 1st day of the previous year, the assessee was entitled to claim deduction u/s. 36(1)(viia) of the Act. He, however, submitted that the quantum of deduction requires fresh consideration by the AO, as neither the AO nor the CIT(A) has gone into the correctness of the quantum of deduction claimed by the assessee. 19. The ld. DR relied on the order of the CIT(Appeals). 20. We have considered the rival submissions. We are of the view that the plea put forth by the ld. counsel for the assessee deserves to be accepted. As rightly contended by him, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest income on receipt basis. According to the assessee, interest income has to be accounted only on receipt basis, as per the Karnataka Co-operative Societies Rules, 1960. Therefore, the assessee accounted for interest income on receipt basis. This was the method consistently followed by the assessee. The assessee pointed out that accounting interest income either on accrual basis or receipt basis had no impact under the Income Tax Act, 1961, till A.Y. 2006-07, because u/s. 80P(2)(a)(i), income of a cooperative society derived from the business of banking was exempt from taxation. However, section 80P(4) which came into effect from 1.4.2007 provided that provisions of Sec.80P will not apply to a co-operative Bank. The assessee, thus, pointed out that interest income which accrues or arises during the previous year relevant to A.Y. 2007-08 alone can be taxed. Interest income that accrues or arises for the period earlier to previous year relevant to A.Y. 2007-08 cannot be brought to tax, just because the same is recorded in the books of account of previous year relevant to A.Y. 2007-08 on receipt basis. 23. The AO held that interest income of ₹ 1,65,96,812 was interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasing trend, correspondingly interest on loans and advances also increased from ₹ 8.26 lakhs to ₹ 9.10 lakhs. If interest of ₹ 1,65,96,812/- to be reduced from ₹ 9,10,13,106/-, net interest would be ₹ 7,44,16,294/- which is less than interest declared in the assessment year 2005-06 i.e., ₹ 7,74,03,010/-. In view of this fact there is no merit in the appellant s contention that income pertains to the financial year relevant to the assessment year 2006-07. 14. The appellant following mercantile system of accounting, shows following facts and figures - Y.E. on 31.03.2005 Y.E. on 31.03.2006 Y,E. on 31.03.2007 Interest receivable on overdue 4,84,08,853 6,61,50,558 8,16,28,582 Interest receivable on investment 34,15,500 34,00,000 -- 15. A verification of the return of income for the assessment year 2005-06 and 2006-07 reveals that no adjustments were made on account of interest pertaining to earlier. It means that entire interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such conclusions cannot be sustained. The claim made by the assessee in this regard about the nature of interest income and its time of accrual has to be accepted. The conclusions of the CIT(A) in para 13 of his order, in our view, is again based on surmises and cannot be sustained. Neither the AO nor the CIT(A) called upon the Assessee to explain as to whether the interest income in question is interest on sticky loans which was accounted for as income only on receipt basis. As we have already observed, accounting entries in the books of the assessee regarding interest income assumed significance only after A.Y. 2006-07 when interest income became taxable in view of insertion of section 80P(4) to the Act w.e.f. 1.4.2007. Therefore, there is no merit in the observations of the CIT(A) regarding lack of entries in the books of account of the assessee for A.Y. 2005-06 and 2006-07. We are therefore of the view that it would it would just and proper to direct the Assessee to furnish evidence before the AO to show as to how the interest income in question is not interest on sticky loans which was accounted for as income only on receipt basis. For the reasons stated above, we set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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