9911796707
TMI Blog2015 (6) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... ion actually made in the books of account. Consequently, we uphold the order of CIT(A) - Decided against assessee. Disallowance of claim of interest on NPAs - Held that:- In view of the ratio laid down by the Pune Bench of the Tribunal in ACIT Vs. Maharashtra Nagri Sahakari Bank Ltd. (supra) and the jurisdictional High Court in CIT Vs. HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT ), we hold that the interest accruing on NPAs is not includable in the hands of the assessee as income for the year under consideration. Accordingly, we direct the Assessing Officer to delete the addition of ₹ 2,55,60,841/-. - Decided in favour of assessee. Disallowance of claim made on account of "Contingent provision for standard assets" - Held that:- RBI Guidelines or prudential norms issued by RBI are not intended to regulate income-tax laws. The admissibility or otherwise of a particular deduction in computing the total income under the Income Tax Act has to be decide d under the provisions of the Act itself. The fact of the matter is that the provision in question being in the nature of purely a contingent one and there is no provision under the IT Act to allow such contingent pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt. The appellant Bank correctly followed RBI Guidelines in this respect and also decisions of various coordinate Benches of ITAT and especially jurisdictional Pune Bench Judgments and CBDT Instructions. 4) On the facts and circumstances of the case and in law the Ld. CIT(A) was not justified in confirming the disallowance ₹ 5,00,000/- made by the A.O. which claim was made by the appellant-Bank relating to Standard Assets as the appellant Bank is obliged to follow the prudential norms circulated by the Reserve Bank of India. The same be allowed. 5) On the facts and circumstances of the case and in law the main plank of the arguments of the Department in making the disallowances in respect of this appellant Bank was that the Reserve Bank Guidelines issued by it under RBI Act, 1934 cannot override the provisions of Special Law like Income-tax. This analogy is contrary to various judicial precedents pronounced by Hon'ble Supreme Court and various High Courts and also instructions of CBDT. The analogy canvassed by the Deptt. is not in consonance with various judicial precedents arrived at after proper interpretations of the provisions of both the laws keeping in view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had relied upon the ratio laid down by the Pune Bench of the Tribunal in Janata Sahakari Bank Ltd. in ITA No.819/PN/2010 decided on 31.05.2013 for the proposition that premium paid on acquisition of HTM securities was the part of composite cost and its valuation at the end of the year should be as per consistent method followed by the assessee for valuation of inventory i.e. cost or market price, whichever was lower, but no separate treatment could be given to the premium paid over and above the face value of securities. 8. In rejoinder, the learned Authorized Representative for the assessee submitted that the issue is squarely covered by the order of Tribunal in assessee's own case in ITA Nos. 1515 2194/PN/2012 relating to assessment years 2008-09 and 2009-10, order dated 31.01.2014 and also covered by the judgment of jurisdictional High Court in CIT Vs. HDFC Bank Ltd. (supra). 9. We have heard the rival contentions and perused the record. The issue in the present appeal is in relation to the allowability of expenditure on account of amortization of premium on HTM securities. We find that the Pune Bench of the Tribunal in The Ahmednagar Merchants Co-operative Bank Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the A.O, but the assessee Bank succeeded before the CIT(A). The Tribunal confirmed the order of the CIT(A). The Revenue carried the issue before the Hon'ble High Court. The core issue was the method of valuation adopted by the assessee Bank for valuing the stock of the Securities. The Hon'ble High Court followed the decision of Hon'ble Supreme Court in the case of United Commercial Bank (Supra). 15. In the case of United Commercial Bank (Supra), even the issue of valuation of the stock in trade of the investment was before the Hon'ble Supreme Court. In the case of the assessee, the issue is regarding allowability of the loss on the sale of the Securities. Merely because the Securities are kept under the head till the maturity, the said Security cannot be treated as a purely investment. Law is well settled that the Securities held by the Bank are in the nature of Stock-in-Trade. We may like to quote here the decision of the Hon'ble High Court of Kerala in the case of CIT Vs. Nedungadi Bank Ltd., 264 ITR 545. In the said case, the Hon'ble High Court has held that the securities held by the Bank are in the nature of stock-in-trade. Both the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Co-operative Bank Limited Vs. JCIT (supra), in assessee's own case relating to assessment years 2008-09 and 2009-10 (supra) and before the Hon'ble Bombay High Court in CIT Vs. M/s. Gajanan Nagari Sahakari Bank Ltd. (supra) and following the same parity of reasoning, we hold that the assessee is entitled to the expenditure incurred on account of amortization of premium on HTM securities. Thus, the ground of appeal No.1 raised by the assessee is allowed. 12. The issue in ground of appeal No.2 raised by the assessee is against the disallowance under section 36(1)(viia) of the Act. 13. Briefly, the facts relating to the issue are that the Assessing Officer on going through the revised computation of income noted that the assessee had claimed ₹ 12,84,606/- being 7.5% of total income of ₹ 1,71,28,080/- and ₹ 2,19,94,335/- being 10% of rural advances of ₹ 21,99,43,351/- as deductible under section 36(1)(viia) of the Act on account of provision for bad doubtful debts. On verification of the Profit Loss Account, it was noted that the provision on this account has been made for sum of ₹ 50 lakhs only. Thus, the assessee was asked to explain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings, a higher claim of deduction of ₹ 2.32 crores had been claimed as per internal calculation by the CIT(A). The CIT(A) thus, observed that any provision made by the assessee after the previous year was over, cannot be allowed, in turn relying on the CBDT Instruction No.17/2008. Further, reliance was placed on the decision of Bangalore Bench of the Tribunal in ITA Nos.708 709/Bang/2010 in the case of DCIT Vs. Syndicate Bank for assessment years 2006-07 and 2007-08, order dated 09.06.2003, wherein it reversed its earlier decision in the very same assessee's case for the assessment year 1987-88 (reported in 78 ITD 103) wherein it has been held that irrespective of the quantum of provision for bad doubtful debts created in the books of account, an assessee was entitled to claim deduction by way of provision of 10% of the average rural advances. In doing so, it has followed the subsequent jurisdictional Tribunal decision in the case of Canara Bank in ITA No.58/Bang/2004 dated 09.06.2006, which considered its earlier decisions in Syndicate Bank and Punjab and Haryana High Court decision rendered in the case of State Bank of Patiala (supra). The CIT(A) thus, dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by or under the laws of a country outside India] or a non-scheduled bank [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 VIA) 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 : 10. A bare perusal of aforesaid section clearly brings out that the deduction specified therein is in respect of any provision for bad and doubtful debts made by .. an eligible assessee. The presence of the aforesaid expression in the section supports the plea of the Revenue, 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Haryana High Court, in our view, the position sought to be canvassed by the assessee deserves to be repelled. We reproduce hereinafter the relevant portion of the order of the Hon'ble High Court, which reads as under:- 5. Sec.36(1)(viia) of the Act as applicable to the asst. yr. 1985-86, reads as under : in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of cl.(viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) or an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account. 12. The learned counsel for the assessee has cited certain decision in support of his proposition that the claim of deduction under Section 36(1)(viia) of the Act is not linked to making of a Provision in the account books. At the outset, we may observe that the decisions relied upon by the assessee are of various Benches of the Tribunal and not of any High Court. Therefore, the judgement of the Hon'ble High Court in the case of State Bank of Patiala (supra), which is contrary to the decisions of the Tribunal relied upon by the assessee; and being solitary judgement of a High Court, is required to be applied, having regard to the established norms of judicial discipline. For the said reason, we refrain from discussing each of the decisions of the Tribunal relied by the assessee before us. 18. The issue before us is identical to the issue before the Pune Bench of the Tribunal in Mahalaxmi Co-op. Bank Ltd. vs. ITO (supra) and following the same parity of reasoning, we hold that the assessee having failed to make full provision, is only entitled to the claim of deduction to the extent of ₹ 50 lakhs being the amount of provision actually made in the books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontra had passed an entry by reversing the same to the reserve account. As per the guidelines of RBI, the interest on such NPAs is to be recognized only on receipt basis and admittedly, during the year under consideration the assessee had not received any interest on such NPAs from any person. In view thereof, we find no merit in the orders of authorities below in holding that since the assessee had recognized the accrual of income, the same is taxable in the hands of the assessee. The assessee has also passed contra entry in its books of account transferring the same to Reserve account. Such accrual of interest on NPAs is not to be recognized as income in the hands of the assessee, in view of various decisions of the Pune Bench of the Tribunal. We find that the Pune Bench of the Tribunal in ACIT Vs. Maharashtra Nagri Sahakari Bank Ltd. in ITA No.2138/PN/2013, relating to assessment year 2009-10, order dated 31.010.2013, held as under:- 8. We find that a similar issue of taxability of interest on NPAs on accrual basis arose before the Pune Bench of the Tribunal in assessee's own case. The Tribunal in ITA No.1713/PN/2011 vide order dated 28.02.2013 in turn, relying on the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis of this section our first observation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Gautam vs. Union of India 108 CTR 304 (SC) 110 CTR 179 (SC); Navnitlal C.Zaveri 56 ITR 198(SC) and K.P.Varghese 131 ITR 597 (SC). In the land-mark decision, the Hon'ble Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC) 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 reported in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oritative construction by superior courts, they are presumed to have been used in the same sense when used in subsequent legislation in the same or similar context. 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 vs. Bank of America S.A. 262 ITR 504 (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 reported at 237 ITR 889(SC) 240 ITR 355 (SC). Likewise, in an another case of CIT vs. State Bank of India 262 ITR 662 (Bom.) again it was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of NBFC are for the purpose of control and supervision with respect to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax cannot be attracted. Now at present the situation is that the Hon'ble Madras High Court in the case of CIT vs. Elgi Finance Ltd. 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 Jt.CIT vs. India Equipment Leasing Ltd. 293 ITR 350. 7. In the case bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons as to why the contingent provision against Standard Assets amounting to ₹ 5,00,000/- should not be disallowed as there is no specific provision in the IT Act, 1961 in this regard. 9.2 The assessee bank has claimed this provision u/s.36 (1) (viia) of the I.T Act, 1961. The assessee bank has explained that as per the RBI guidelines it is obligatory for it to make a general provision on standard assets of a minimum of 25%. The RBI has defined the standard asset as, one which does not disclose any problem and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA. The provision is made as per RBI guidelines and circulars on standard assets and the amount of provision is debited to profit and loss a/c and it is shown as liability under the head Reserves Reserves fund. It is not a contingent liability, it is included in the total of the balance sheet of a Bank. Hence the provision for standard asset is allowable as normal expenditure on accrual basis. 9.3. The claim of the assessee is that this provision against Standard assets was made as per the guidelines of RBI vide circular No. 19/02/2007 and is an allowable ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of economic downturns. The nomenclature of the provision itself suggests that it is a contingent liability provided at a small percentage of the value of standard assets and not an ascertained and crystallized liability. The very fact that as per RBI Circular, the provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' in the balance sheet, clearly shows that it is not for diminution in the value of any assets but only to create a financial buffer in order to protect banks and NBFCs from the economic downturns. This is a liability which is contingent upon event i.e. standard assets likely to become bad, which may or may not happen. There is no provision under the IT Act to allow such contingent provision as deduction from taxable income. Thus, the provision for standard assets is only a contingent provision, which is not an allowable deduction under the IT Act. 29. The relevant findings of the CIT(A) are in paras 6 to 6.2, which read as under:- 6. The fifth ground relates to disallowance deduction claimed by the appellant of ₹ 5,00,000/- on account of standard assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The fact of the matter is that the provision in question being in the nature of purely a contingent one and there is no provision under the IT Act to allow such contingent provision as deduction from taxable income. Therefore, the Assessing Officer has rightly disallowed such contingent provision of ₹ 5,00,000/- and the action of the Assessing Officer is accordingly, upheld. Ground of appeal No. 5 fails. 30. The learned Authorized Representative for the assessee failed to controvert the findings of the CIT(A) in this regard and in the absence of same, we find no merit in the plea of assessee in allowing deduction on account of contingent liability. The ground of appeal No.4 raised by the assessee is dismissed. 31. The issue in ground of appeal No.5 raised by the assessee is with regard to the compliance to RBI guidelines and the entries made in the books of account, in view of the provisions of the Income-tax Act. 32. We have already considered the impact of RBI guidelines and decided the issue raised in grounds of appeal Nos.1 and 3 and in view thereof, we do not find it necessary to adjudicate the issue raised vide ground of appeal No.5 and the same is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
