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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 ..... s activity and the premium expenditure is a normal business expenditure - CIT(A) deleted the addition - Held that:- CIT(A) was right in granting relief to the assessee on this issue as to when the assessee cooperative bank is holding government securities till its maturity, the premium paid by the assessee cooperative bank thereon is a necessary expenditure for the purpose of business of the assessee cooperative bank and thus, the same is an allowable expenditure under the provisions of the Act and the first appellate authority was correct in granting relief to the assessee. - Decided against revenue - I.T.A.No.3310/Del/2012 - - - Dated:- 16-10-2015 - SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER For The Appellant : Shri R.C. Danday, ACIT DR For The Respondent : Shri M.K. Bhatt, Advocate ORDER PER CHANDRAMOHAN GARG, J.M. This appeal by the revenue has been directed against the order of the CIT(A)-XXV, New Delhi dated 19.4.2012 in Appeal No.153/2011-12 for AY 2009-10. 2. The Revenue has raised mainly following two grounds in this appeal:- 1. On the facts and in circumstances of the case, Ld. CIT(A) XXV, New Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on accrual basis. 5. On careful consideration of above submissions, from the impugned order of the CIT(A), we note that the CIT(A) noted the following facts and contentions of the assessee in para 4.1 and 4.2 of the impugned order which read as under:- 4.1. The facts emanating from the order of the AO and the submissions of the assessee is that the assessee is a Co-operative Bank and is engaged in banking business and the assessee was claiming deduction u/s 80P(2)(a)(i) up to AY 2006-07 @ 100%. It is submitted that the assessee has claimed the interest income amount of ₹ 4,04,16,564/- as interest income from the NPA (Non-performing assets) but since the loans/principal amounts have become bad the assessee has neither received the loan amount nor the interest income. The assessee has treated the interest amount as interest receivable in the debit side of the balance sheet and as a liability under the head overdue interest reserve account in the credit side of the balance sheet. The AO has treated the interest income from the NP As as a normal business income on the ground that in the mercantile system of accounting the accrued income is to be treated as income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that since the assessee has not actually received the income as the loan/principal amount itself has become bad and as such the AO is not justified to treat the notional interest as income of the assessee. A perusal of the case laws cited by the assessee also supports the case of the assessee that only the real income is taxable and not the hypothetical income in view of the real income theory as no real income is actually received by the assessee and the same view has been held by the Hon'ble Supreme Court in the case of CIT Vs Shoorji Vallabhdas Co, 46 ITR 144 (SC) [1962] and the head note of the case reads as under :- Held, that the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of a gift by the assessee to the managed companies of a portion of income which 'had already accrued, but an agreement to receive a lesser remuneration that what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and circumstances of the case, I am of the view that there is 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 AO is not justified to make the addition on the basis of notional interest income only and accordingly, the addition made by the AO is deleted. 7. During the argument, ld. Counsel of the assessee submitted various orders and judgments of the Tribunal including judgment of ITAT Delhi Bench H in the case of assessee s cooperative bank in I.T.A. No. 5549/D/12 dated 21.6.13 for Assessment Year 2009-10 in the case of DCIT vs Vaish Cooperative New Bank Ltd. wherein the issue of notional interest on non-performing assets (NPA) has been decided in favour of the assessee with following observations and conclusion:- 5. Before the Ld. CIT (A) assessee submitted that Assessing Officer was not justified to make the addition in this case as the loan/Principal amount has become bad (NPA) and at the same time the assessee had not received any interest income and as such no real income has accrued to the assessee. The assessee further placed reliance upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the guidelines of RBI and Circulars are not binding upon the income tax authorities as urban cooperative banks are bound to follow income recognition policy decided by the RBI and when RBI has made it clear that cooperative banks should not take to income account interest on performing assets on accrual basis, then it is not appropriate for the cooperative banks to recognise interest on non-performing assets as their income on national basis. Therefore, basis of the action of the AO is not sustainable and in accordance with the provisions of the Act. We further note that where no income has resulted in the hands of the assessee cooperative bank as interest on NPA, then the same cannot be held as income accrued to the assessee merely on the ground that the assessee had been following the mercantile system of accounting. We are unable to agree with the conclusion of the CIT(A) that if no income has materialised in the hands of the assessee as actual accrual of interest from NPA, then there can be no liability to tax on hypothetical income. It is not a hypothetical accrual income based on mercantile system of accounting followed by the assessee that has to be taken into account but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the revenue being devoid of merits is dismissed. Ground No.2 11. Apropos ground no. 2 of the revenue, ld. DR submitted that the CIT(A) erred in deleting the addition of ₹ 6,20,669/- made by the AO under the head premium expenditure on Govt. securities on the basis of that the buy and sale of the Govt. securities is a normal business activity and the premium expenditure is a normal business expenditure Ld. DR supporting the action of the Assessing Officer submitted that premium paid on government securities was an expenditure being admissible in nature which was not allowable, therefore, the Assessing Officer rightly made addition in this regard. Ld. Counsel vehemently pointed out that CIT(A) granted relief to the assessee without any justified reason and basis, therefore, the same may be set aside by restoring that of the Assessing Officer. 12. Replying to the above, ld. Counsel of the assessee submitted that the Assessing Officer was not justified in disallowing the genuine premium expenditure which was a normal business expenditure and the same was allowable as the same was incurred for the purpose of business of the assessee. On behalf of the assessee, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is in appeal against the order of the learned CIT(A). The A.R. pointed out that the issue in the present appeal is squarely covered by the ratio laid down by the Tribunal, Pune Bench, in the case of Pune District Central Co. Operative Bank Ltd., ITA No.1796/PN/2013, vide order dated 28th November 2014, relating to assessment year 2009-10 and Hon ble Bombay High Court in CIT v/s HDFC Bank Ltd., 366 ITR 505 (Bom.). 9. The A.R. for the Revenue placed reliance on the order of the CIT(A). 10. We have heard the rival contention and perused the record. The issue arising in the present appeal is with regard to amortization of premium on HTM securities. The case of the assessee was the Banks were given permission to shift securities from AFS to HTM on or before 31st March 2005. For the purpose, year and valuation of AFS was done and price paid for the HTMs over the face value was amortized for a period of five years and booked as expenditure, as per RBI norms. The case of the Revenue was that the HTM securities were held on capital account and the premium paid forms integral part of the cost of capital asset and the same cannot be segregated from the cost and claimed as deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with the advent of section 80P(4) w.e.f. A.Y, 2007-08 has closed the doors for cooperative banks for claiming the benefit of deduction u/s.80P(2)(a)(i) from this total income. However, the cooperative society should now be entitled to be assessed as normal banking company. The clause (4) inserted in section 80P has taken away the benefit of the erstwhile deduction available to cooperative society in carrying on business of banking or providing credit facility to its members. The new clause (4) inserted by the Finance Act, 2006 w.e.f. 01-04-2007 reads as under: The provision of the section was not in relation to any cooperative bank other than agricultural credit society or primary cooperative agricultural and rural development bank . 5. The intention of the provision may be derived more precisely from relevant Para 166 of the budget speech which stated that : Co-operative banks, like any other bank, are lending institutions and should pay tax on their profits, Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Bank (PCARDB) stand on a special footing and will continue to be exempt under section 80P of the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of premium paid in excess of face value of securities held to maturity (HTM) category or period remaining till 9 The Satara District Central Co. Op. Bank Ltd. maturity was found reasonable by the CIT(A). Accordingly addition of ₹ 17,91,659/- made by the Assessing Officer by disallowing amount towards amortization of Government Securities (HMT) was deleted. This reasoned factual and legal finding of the CIT(A) needs no interference from our side. We uphold the same. 9. As a result, the appeal filed by the Revenue is dismissed . 10.1 Respectfully following the decision of the Coordinate Bench of the Tribunal and in absence of any contrary material brought to our notice against the above cited decision we find no infirmity in the order of the Ld.CIT(A) deleting the addition. Accordingly, the order of the Ld.CIT(A) is upheld and the grounds raised by the Revenue are dismissed. 2.2 Nothing contrary has been brought to our knowledge on behalf of the Revenue. Facts being similar, so following the same reasoning we hold that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity In the case of HFT and AFS securities forming stock-in-trade of the bank, the depreciation/appreciation is to be aggregated scrip-wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims. 16. On the basis of foregoing discussion, we reach to a logical conclusion that the CIT(A) was right in granting relief to the assessee on this issue as to when the assessee cooperative bank is holding government securities till its maturity, the premium paid by the assessee cooperative bank thereon is a necessary expenditure for the purpose of business of the assessee cooperative bank and thus, the same is an allowable expenditure under the provisions of the Act and the first appellate authority was corre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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