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TMI Blog2016 (3) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... MI 77 - BOMBAY HIGH COURT ] holds that the same applies w.e.f. A.Y. 2008-09 only. This course of action adopted is accordingly held as not sustainable. We come to CIT(A)'s findings that the assessee's interest free funds as well as interest income (supra) exceeds its interest expenditure (not utilized in tax free investment in question) and the tax free investments as well. The hon'ble jurisdictional high court (supra) as well as Bombay high court in CIT vs. Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ) hold that a presumption can be drawn in such cases that the assessee has utilized its interest free funds only. - Decided in favour of assessee Disallowance of bad debts written off u/s.36(1)(viia) - CIT(A) deleted the disallowance - Held that:- The CIT(A) construes Section 36(1)(viia) as to envisage 5% entitlement of bad debts deduction as on last day of the year and not the net figure as taken by the Assessing Officer. There can be no dispute that this one is a deduction provision. The Revenue fails to take us to a different construction thereof in the course of arguments that the net figure has to be adopted instead of the one appearing on last day of ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs under challenge do not take into account this specific clause. We accept assessee's arguments accordingly and direct the Assessing Officer to proceed afresh for necessary computation of the impugned disallowance. - Decided against revenue X X X X Extracts X X X X X X X X Extracts X X X X ..... cussed and debated. The detailed legal position-which emerges on this issue is as under:- 1. That CBDT Circular dt. 9/10/1984 is in respect of bad and doubtful debts / irrecoverable loans and suspense account maintained for the purpose of interest thereon. However, this is in respect of banking companies. 2. S.43D has been specifically inserted in the Act w.e.f. 1/4/1991. S.43D lays down the principle that income by way of interest in respect of scheduled hank in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by RB1 in relation to such debts shall be chrgeable to tax in the year in which it is credited by the bank to its P&L account or the year in which it is actually received, whichever is earlier. 8.2 It is now necessary to consider the applicability of these sections to the appellant which is a co-operative bank. Scheduled hank has been defined in the explanation to s.43D as having meaning assigned lo it in clause (ii) of explanation 2 to s.36(1)(viia). As per this clause, co-operative banks arc nut covered in this definition. The appellant being a co-operative bank is not expressly covered by the S.43D. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 19/12/1991 clearly states that s.43D was inserted with a view to improving the viability of banks so as to provide that the interest on non-performing, assets or sticky loans would be charged to tax only in the year in which the i merest is actually received or credited to the P&L account. It is therefore held that the provisions of s.43D overrides the circular of CBDT dt. 9/10/1984. 8.4 This finding is also supported by various judicial pronouncements given by various Tribunals. The same have already been mentioned in the submission of the appellant. The Hon'ble Delhi High court in ease of Vashistha Vyapar Ltd. (2011) 330 ITR 440. While deciding on the issue in respect of interest on NPAs of NBFCs, has held as under:- "In this scenario, we have to examine the strength in the submission of learned counsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of Income-tax Act and was, therefore, exigible to tax our answer is in the negative and we give the following reasons in support : - (1) First of all we would discuss the matter in the light of the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest 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 (sura), United Commercial Bank v. CIT [199] 240 ITR 355/106 Taxman 601 (SC). Likewise, in an another case of CIT V. State Bank of India [2003] 262 ITR 662/129 Taxman 409 (Bom.) again it was held that the amount credited to the interest suspense account was not taxable following the decision pronounced in the case of UCO Bank (supra). v) Judgement in favour of Revenue : From the side of the Revenue an order of the Tribunal has been vehemently relied upon and this is the basic reason of the elaborate discussion made hereinabove so as to unfold the controversy. In the said decision of the Tribunal, viz. Jt.CIT v. India Equipment Leasing Ltd. [2008] 111 ITD 37 (Chennai), the Respected Coordinate Bench has expressed that quote "Prior to insertion of section 43D with effect from 1-4-1991, recognition of income was on the basis of circular of 9- 10-1984. It said that for first three years the income may be taken on accrual basis and from 4th year onwards, the income in respect of doubtful debts was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 decision of the Hon'ble Apex Court which is yet to be mentioned while discussing the arguments raised from the side of the Revenue. A decision in the case of Southern Technologies Ltd. vs. Jt. CIT 320 ITR 577 (SC) has been cited but the fundamental difference is that the issue before the Hon'ble Court was in respect of provision for NPA and debited to P&L Account by a NBFC. The said provision was undisputedly made by the said NBFC as per the prudential norms made by the Reserve Bank. Therefore we want to make it clear that the question for consideration before the Hon'ble Court was that if a provision for doubtful debt is made then what will be the legal position of the applicability of Explanation to section 36(1)(vii) of the I.T. Act. For the sake of ready reference, relevant paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT vs. India Equipment Leasing Ltd. [2007] 293 ITR 350. (Mad.). To conclude the issue, we deem it important to discuss the decision of India Equipment Leasing Ltd. (293 ITR 350) for the sake of completeness of our judgement. In that appeal, the assessee was doing the business of hire purchase transaction and leasing of Plant & Machinery. The interest on "sticky loans" not being brought into the Profit & Loss account but being taken to the suspense account was held by the Court as an accepted mode of treatment of notional income in accounting practice. The Court has said that the Circular-9 of October- 1984 serve a practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to suspense account is, in fact, arising in respect of a doubtful or sticky loan. This was done by providing that non-receipt of interest for the first th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PAs. This addition is directed lo be deleted. This ground of appeal is allowed." 5. We have heard rival contentions. Relevant facts narrated in the preceding paragraphs are not repeated to avoid repetition. There is no dispute that the assessee/Co-operative Bank has not recognized the impugned accrued interest of ₹ 1.36crores overdue on non performing assets as its income by following real income principal. Ld. co-ordinate bench of the tribunal (supra) already holds in case of a similar Co-operative Bank that no income accrues in an instance of crediting of overdue interest from NPAs to P&L account and debited as per RBI guidelines, since there is no ultimate credit in P&L account. The Revenue is unable to point out any distinction on facts or law after being granted adequate opportunity. We confirm CIT(A)'s appeal's findings accordingly deleting the impugned addition of ₹ 1,36,09,737/- on account of accrued interest on NPA accounts. This first ground stands rejected. 6. The Revenue's second substantive ground challenges the CIT(A)'s order deleting Section 14A r.w.r. 8D disallowance of ₹ 23,13,907/- made by the Assessing Officer. We find tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... store addition of accrued interest on NPA accounts of ₹ 1,20,22,806/-. Both parties clarify at the outset that our corresponding finding hereinabove in preceding assessment year decide this issue in assessee's favour. We follow the very course of action and reject this first ground. 9. The Revenue's next substantive ground challenges the lower appellate order deleting disallowance of bad debts written off of ₹ 25,93,280/- u/s.36(1)(viia) out of total claim of ₹ 38,55,000/-. This issue appears to be more of interpretation of the above stated statutory provision. The lower appellate findings decide the issue as follows: "Ground No.5 : The ld. AO grievously erred on facts as a/so in law in disallowing claim of bad debt of ₹ 25,93,280/- out of total bad debt of ₹ 38,55,000/- claimed by the appellant on the alleged ground of excess claim of bad debt as per the provision of section 36(1)(viia) of the Act. It was noticed by the A.O. that the bad debt balance as on 31/3/2008 was ₹ 2,54,34,400/-. Thus, as per provisions of s.36(1)(viia) 5% of the bad debts amounting to ₹ 12,61,720/- could be written off. However, the bank had claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this one is a deduction provision. The Revenue fails to take us to a different construction thereof in the course of arguments that the net figure has to be adopted instead of the one appearing on last day of year. We find no reason to interfere with CIT(A) findings accordingly. This ground is rejected. Revenue's appeal ITA No.541/Rjt/2014 is dismissed. A.Y. 2009-10 Revenue's appeal ITA No.558/Rjt/2014 11. The Revenue's first substantive ground assails correctness of the CIT(A)'s order in deleting addition of ₹ 5,92,429/- on account of amortization of premium paid on investments. These findings under challenge summarize Assessing Officer's observation as well as assessee's arguments as under: "5.2.1 The AO vide para 5.3 of the assessment order held that the securities held under HTM (held to maturity) are not meant to earn profit and hence disallowed. This finding of the AO is based on the decision of the Hon. Supreme Court reported in 320 ITR 577 (SC) wherein it was stated that the RBI directives have nothing to do with the taxability of the entities governed and taxable income of the assessee is required to be determined in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he latest guidelines of the RBI may be referred to for allowing any such claims." 5.2.2 According to the ld. AR, in view of the above, the issue became very clear that the premium on HTM is to be amortized over the period of maturity and that, the AO may not be bound to follow the guidelines of the RBI or the principle of res judicata but has to definitely follow the instructions issued by the CBDT. The ld. AR also relied upon the decision of the Hon. Gujarat High Court in the case of CIT vs. Rajkot District Co-operative Bank Ltd in tax appeal No.56 of 2013 wherein Hon'ble High Court has held that; "The circular No. 17 of 2008 dated 26.11.2008 clearly provide for amortization of premium paid on acquisition, of securities when the same are acquired at the rate higher than the face value. Such amortization would have to be for the remaining period of maturity. This precisely the Tribunal had directed in the impugned order. Though contended, no contrary instructions of CBDT are brought to our notice. The instruction in question having been issued u/s. 119(2) of the Income tax Act, 1961, would bind the revenue, No question of law, therefore arises. Resultantly, the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of 2008 dated 26.11.2008 clarifying that 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 the premium should be amortized over the period remaining to maturity. The Revenue fails in pointing out any distinction on facts or law thereto. We affirm CIT(A)'s actions. This substantive ground is rejected. 13. The Revenue's second substantive ground seeks to revive interest of ₹ 5,32,375/- on account of accrued interest on NPA accounts is found to be covered by our corresponding findings in A.Y. 2007-08 decided hereinabove. The same accordingly fails. 14. The Revenue's third substantive ground challenges the lower appellate order deleting disallowance of depreciation on investment of ₹ 1,07,50,000/-. The CIT(A) decides the issue in assessee's favour as under: "7.2 I have perused the assessment order and the written submission filed by the ld. A.R. of the appellant. 7.2.1. During the assessment year under consideration, the appellant has claimed depreciation of ₹ 1,07,50,000/- being the difference between the cost of acquisition and mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and is shifting its method of accounting to suit itself. 2) The assessee has not invested in government securities, as the investment made in Mutual Fund Units and that too which am non-SLR based. The depreciation on securities was available only on Govt. Securities and lot on Mutual Fund Units. 3) Mutual Funds Units that the assessee has invested in have been regularly declaring dividends and in fact during the said assessment year itself, the assesses has earned ₹ 1,80,18,202/- as dividend. It is well known fact that after declaration of dividend the NAV falls drastically. The assesses was clearly not providing for Appreciation on those securities as just before the declaration of dividend, the NAV of these securities would have been higher and there would have been appreciation. Since the assessee has valued the investment at the year-end, hence, setting of appreciation has been completely ignored. 7.2.2 On the other hand, it is the contention of the ld. AR that, as per RBI guidelines, non-SLR securities are available for sale and are required to be valued at Market Value. The CBDT vide circular no. 599 dated 24.04.1991 clarified that securities held by banks must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d/redeemed at that point of time. Therefore, the said realizable value is always a net result of all the appreciation/depreciation in investment happened during the year. For example, an investment made for ₹ 100/- is having the market value of ₹ 150/- at the middle of the year and ₹ 90/- at the end of the year. According to the AO, the appellant has first to provide for appreciation in investment at the middle of the year at ₹ 50 (150-100) and thereafter, depreciation in value of ₹ 60(150-90) has to be set-off against previous appreciation, i.e., ₹ 50. And net depreciation to the extent of ₹ 10 can only be allowed. However, in the instant case, the appellant has directly claimed ₹ 10 as depreciation, which is net result of appreciation / depreciation happened during the year. Therefore, the AO has totally misunderstood the principle of accountancy and hence, the allegation is not sustainable. The AR of the appellant also submitted that "provision of section 94(7) of the Act (Dividend Stripping) is not applicable to the Appellant and requested to allow the claim of depreciation as per audited financial statement. 7.2.5 I have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation/loss in the value of investment is allowable under RBI directions and above stated case law. We find that hon'ble Karnataka high court in case of CIT vs. Vijaya Bank (2013) 40 Taxmann.com 92 upholds tribunal's action thereby observing that it was correct in allowing depreciation claimed on held to maturity investment by treating it as stock in trade despite the same not being traded on a regular basis in accordance with RBI and CBDT Circulars. Similarly, hon'ble Bombay high court in CIT vs. Bank of Baroda 129 Taxman 716 observes that the said bank valued its investments in the form of shares and securities at cost or market price, whichever is lower. And that it was entitled to deduction on account of depreciation in value of investments involving debiting of loss to P&L account as reflected in the nature of provision for liability in balance sheet and in case of shares and securities valued at cost on assets side. The Revenue does not refer to any case law to the contrary. We draw support therefrom for upholding the CIT(A)'s findings accordingly. This third ground stands decided in assessee's favour. Revenues' appeal ITA No.558/Rjt/2014 is dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of such expenditure in relation to income which does not form part of the total income under the Act. In support of this contention, the Id. AR relied judicial pronouncements. 4.2.2 The second limb of the appellant's argument is that, the entire investment in UTI mutual funds were made from the Share capital and Free Reserves, which are interest free funds of the appellant. (In support of which the appellant produced a copy of its balance sheet, which is placed on record). Therefore, since the investments were from own funds and not from burrowed funds on which interest was paid, as per the norms laid down by the Hon'ble High Court Of Gujarat in the case of CIT vs. Gujarat State Fertilizers & Chemicals Ltd. (2013) 217 TAXMAN 343 (Gujarat) wherein it was held that "No ad-hoc disallowance of dividend income u/s 14A was warranted where the assessee had sufficient funds available with it, which was more than amount it invested for earning dividend income", the appellant submitted that, the disallowance made by the AO is on wrong footing and sought its deletion. 4.2.3 I have perused the above submissions and also gone through the records of the appellant. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered a very, significant judgement relating to the disallowance u/s. 14A of the IT Act, The Hon. ITAT held that, as the assessee's own funds were far in excess of the investment made by it, which yielded exempt income, it has to be presumed that the investments had come from interest free funds available with the assesses and therefore, the disallowance u/s. 14A made by the AO in respect of interest on borrowings could not be sustained. While dismissing the appeal of the department, the Hon.Tribunal had relied upon the judgement of the Hon. Bombay High Court in the case of CIT Vs Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom), wherein it was held that if there were funds available both interest free and overdraft and / or loans taken, then a presumption would arise that the investments would be out of the interest free funds generated or available with the company. If the interest free funds were sufficient to meet, the investments and therefore, no part of the interest on the borrowings could be disallowed on the basis that the investments were out of interest bearing fluids. It is thus quite clear from the above decisions of the Hon. Bombay High Court and ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly confirmed the CIT(A)'s order keeping in mind the CIT(A) discussion on facts and law. 19. This leaves us with the issue of administrative expenditure disallowance. The CIT(A) restricts the same to 1% of the exempt income (supra). We find that Rule 8D(2)(iii) envisages the same to be .5% of the average value of the investment in question. The CIT(A)'s findings under challenge do not take into account this specific clause. We accept assessee's arguments accordingly and direct the Assessing Officer to proceed afresh for necessary computation of the impugned disallowance. The Revenue's second substantive ground fails. So is the outcome of its appeal ITA No.559/Rjt/2014. The assessee's Cross Objection No.5/Rjt/2015 is accepted for statistical purposes. A.Y.2011-12 Revenue's appeal ITA No.542/Rjt/2014 20. A perusal of case file reveals that the Revenue's twin substantive grounds seek to revive addition of accrued interest on NPA account of ₹ 44,65,000/- and Section 14A disallowance of ₹ 13,45,281/-; respectively. Both parties stated the outset that the same are covered by our findings on both the issues in preceding assessment years for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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