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TMI Blog2015 (11) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... rities is a normal business activity and the premium expenditure is a normal business expenditure". Ground No.1 3. Apropos ground no.1, we have heard arguments of both the sides and carefully perused the relevant material placed on record, inter alia assessment order, impugned order and other relevant orders of Hon'ble High Court and Tribunal including paper book of the assessee spread over 100 pages. Ld. DR submitted that the AO was correct in making addition under the head 'income from non-performing assets' (NPA) because circular or any other guidelines issued by RBI cannot override the express provisions of Income Tax Act, 1961 (for short the Act) and are not binding upon the income tax authorities. Secondly, Form No. 3CD of the tax audit report furnished by the assessee clearly mentions that the assessee follows mercantile system of accounting. Ld. DR also pointed out that the CIT(A) deleted the addition by wrongly holding that the income from NPA has not been actually received by the assessee, therefore, impugned order may be set aside by restoring that of the AO. 4. Replying to the above, ld. Counsel of the assessee took us through the relevant operative part of the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest account is credited in the P&L account and since the interest is actually not received a reverse entry is passed at the year-end by which the P&L account is debited and the overdue interest account is credited. It is also submitted that the assessee has maintained the books of accounts on the NP A and its interest on the basis of the RBI guidelines and since the income has not been received by the assessee, the AO is not justified to treat the same as income of the assessee. It is also submitted that when the interest income finally recovered or received in future the same is accounted for and offered as income of the assessee in the relevant FY. It is also submitted that only the real income of the assessee may be taxed and not the notional income. The assessee also submitted that no interest would be said to have accrued to the assessee on the loans of doubtful recovery and the assessee also relied on various case laws some of which are as under:- (1) CIT Vs Shoorji Vallabhdas & Co, 46 ITR 144 (SC) [1962] (2) CIT Vs Vasisth Chay Vyapar Ltd, 330 ITR 440 (Delhi), 2011 (3) DIT Vs Brahmaputra Capital Financial Services Ltd, 335 ITR 182 (Delhi), 2011 (4) TRO Vs Cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Decision of the Bombay High Court in Commissioner of Income-tax v. Shoorji Vallabhdas & Co. [1959] 36 I.T.R. 25 affirmed. Commissioner of Income-tax v. Chamanlal Mangaldas & Co. [1960] 39 I.T.R. 8 (S.C.) followed." 4.4. It has also been held in the case of CIT Vs Motor Credit Co P Ltd, 127 ITR 572 (Mad) [1981] that only the real income is to be taxed and the head-note of the case reads as under :- "The regular mode of accounting determines only the mode of computing the taxable income and the point of time at which the tax liability is attracted. It cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted it cannot be said that income has accrued merely on the ground that the assessee had been following the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nital Bank Ltd, 309 ITR 335 (Uttarakhand) (7) CIT Vs. Elgi Finance Ltd, 293 ITR 357 (Mad) (8) CIT Vs. Motor Credit Co. P. Ltd. 127 ITR 572 (Mad) [1981] (9) CIT Vs. Coimbatore Lakshmi Inv. & Finance Co. Ltd. 331 ITR 229 (Mad) [2011]" 6. Upon consideration of the above, the Ld. CIT(A) opined that he was of the view that there was considerable merit in the submission of the assessee regarding the notional interest income which has not been actually received by the assessee and as such the Assessing Officer is not justified to make the addition on the basis of notional interest income only and accordingly, the addition made by the Assessing Officer was deleted. 7. Against the above order, revenue is in appeal before us. We have heard both the counsels and perused the records. We find that the interest in this case was due on non-performing assets (NPA). As per the RBI guideline in this regard, interest on NPAs is not to be recognized. Accounting standard 9 issued by the Institute of Chartered Accountant of India also provides that income is to be recognized only when there is some reasonable certainty about the receipt of the income. We, further, find that this view is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cognition - Policy 4.1.1 The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis." 9. It is pertinent to mention that all cooperative banks including the assessee are bound to follow RBI Circular (supra) for recognition of income from NPA and in derivation therefrom may create serious problems for the violating bank. Hence, conclusion of the AO was not correct that RBI guidelines/Circulars are not binding on the income tax authorities. Per contra, when the assessee cooperative bank is following income recognition policy set out by the RBI, then it cannot be compelled to follow other method of recognition and income tax authorities have to consider this aspect before making any disallowance or addition in this regard. 10. At this point, we respectfully take cognizance of the judgment of coordinate bench of Delhi 'H' Bench dated 21.6.13 in asessee's own group cooperative bank case (supra) wherein it has been expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooperative Bank Ltd. dated 23.8.2013 in ITA No. 2793/Ahd/2012 for AY 2009-10 and order of ITAT Bangalore 'A' Bench in the case of M/s Sir M. Visweswaraya Cooperative Bank Ltd. vs JCIT dated 11.5.12 in ITA No.1122/Bang/2010 for AY 2007-08 and submitted that the assessee is entitled to claim the expenditure on account of amortisation of premium held till maturity (HTM) government securities and therefore, the first appellate authority was quite correct in granting relief to the assessee on this issue. Ld. Counsel has also drawn our attention towards chart filed along with written submissions of the assessee dated 27.6.15 which explicitly clarify the details of government securities purchased at premium as on 31.3.2009 amounting to Rs. 6,20,669 wherein amortisation during financial period 2008-09 government security held till maturity has been submitted. Learned Departmental Representative has not disputed this fact that this chart along with relevant submissions was submitted to the authorities below by the assessee. 14. On careful consideration of rival submissions of both the sides, at the very outset, we find it appropriate to note proposition laid down by ITAT Pune Bench in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by payment of over and above the value of such securities. The learned Authorized Representative has pointed out that this issue is covered in favour of the assessee by order of the Hon'ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), wherein the Hon'ble Bombay High Court on similar issue, held as under: "As far as question (C) is concerned, we find that an identical question of law was framed and answered in favour of the assessee by this court in its judgment dated July 4, 2014, in Income Tax Appeal No.1079 of 2012, CIT v. Lord Krishna Bank Ltd. (now 7 The Satara District Central Co. Op. Bank Ltd. merged with HDFC Bank Ltd.) (2014) 366 ITR 416 (Bom). Mr. Suresh Kumar fairly stated that question (C) reproduced above is covered by the said order. In view thereof, we are of the view that even question (C) does not arise any substantial question of law that requires an answer from us." And a similar view has been taken by ITAT, Pune 'A' Bench in the case of Dy.CIT vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. in ITA No.449/PN/2012 and another by observing as under: "10. We have considered the rival arguments made by both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore a result of guidelines from both the controlling authorities. Ordinarily a deduction is not available to an assessee unless specifically provided under the Act. This is irrespective of accounting treatment provided by the assessee in its books of accounts. But at the same time it was well settled that deduction expressly mentioned under the Act are not exhaustive and profit is to be derived according to ordinary commercial principles. As per the extant RBI guidelines dated 01-07-2009 the investment portfolio of the banks is required to be classified under 3 categories viz., Held the maturity HTM), Held for Trading (HFT) and Available for Sale (AFS). The value of each kind of investment is to be done in the following manner: Sr.No. Classification Valuation Norms of Investment. 1..... 2..... 3..... 7. In para (vii) of the CBDT Instruction No.17 of 2008 dated 26.11.2008, on 'Assessment of Bank - check list for deduction, states as under: "As per RBI guidelines....." 8. The ITAT, Mumbai Bench, in the case of ACIT vs. The Bank of Rajasthan Ltd. (2011) TIOL-35- ITAT-Mumbai, has held that in case of banks, the premium paid in excess of face value of investments classified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of investments and amortization of premium on investments Held To Maturity on the ground of mandate of the RBI guidelines. The issue raised in the present appeal is identical to the issue before the Pune Bench of the Tribunal in the assessee's own case for assessment year 2008-09 and Hon'ble Bombay High Court in CIT Vs. HDFC Bank (supra). We hold that amortization of premium expenditure for securities Held To Maturity in view of RBI guidelines are allowable business expenditure in the case of assessee. The grounds of appeal No.1 and 2 raised by the assessee are thus, allowed." 10 The Satara District Central Co. Op. Bank Ltd. 11. Following the same parity of reasoning, we hold that the assessee is entitled to the claim of expenditure of Rs. 31,73,359/-, on account of amortization of premium on HTM securities. Thus, the ground of appeal no.1 raised by the assessee is allowed." 15. It is also relevant to note that as per Instruction No. 17/2008 dated 26.11.2008 of the Income Tax department, it has been directed to the revenue authorities that as per RBI guidelines dated 16.10.2000, the investment portfolio of the banks is required to be classified under three categories viz. held ..... X X X X Extracts X X X X X X X X Extracts X X X X
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