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TMI Blog2017 (11) TMI 1645X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the assessee has rightly debited the expenses to the customer’s account. Hence the same should be included in the outstanding balance of the debts and while creating the provision the debt should be included by the expenses incurred by the bank. The Cooperative bank is eligible for deduction u/s 36(1)(viia) of the APCS Act @ 7.5% of the profits and 10% of its rural advances. The deduction claimed by the assessee as a provision for doubtful debts or NPA is within the limit provided by the Income Tax Act u/s 36(1)(viia) inclusive of the expenses. Therefore, the above sums are allowable u/s 36(1)(viia) of the Act, accordingly, we uphold the order of the Ld. CIT(A) and dismiss the appeal of the revenue on this ground. Reserve created for sundry debtors - Held that:- The assessee is a Cooperative Bank following the mercantile system of accounting. The subsidy released to PACS was not a loan, it was the assistance of funds in lieu of expected subsidy. Therefore, the order of the Ld. CIT(A) on this issue cannot be sustained, hence set aside and the order of the A.O. is restored and the addition is upheld. DCCB’s share of 35% of waiver of penal interest and interest on overdue d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year 2010-11 - Held that:- The assessee submitted that the payment was made to A.P. State Cooperative union to give training to their staff but not the contribution to the Union. Therefore, as rightly held by the CIT(A), the payment or contribution to co-operative educational fund is diversion of profits at source by over riding title under the Act. Hence, we do not find any reason to interfere with the order of the Ld. CIT(A) and the same is upheld. X X X X Extracts X X X X X X X X Extracts X X X X ..... as mandated by section 46(e) of the APCS Act, the sub-section (e) of section 46 was omitted w.e.f. 25.4.2001 and it is no more in existence. Therefore, the D.R submitted that the reliance placed by the assessee as well as the Ld. CIT(A) while deleting the appeal on section 46(e) of the APCS Act is misplaced. The Ld.D.R further submitted that as per proviso to section 46 of the APCS act 1964, the assessee required to invest its funds @ 0.25% in securities as specified in section 46 in Postal savings Banks, Nationalised Banks , or in shares of any other societies etc.. (as bad debts Reserve) of the amounts granted by it as short term loans and medium term loans to its members, out of the funds borrowed by it from Co-operative Financial Institutions for granting such loans. Further, it was also submitted by the Ld. D.R. that it is not necessary to make any such investments, once the bad debts reserve becomes equal to the total amounts of the bad debts of the society. The Ld. D.R. argued that firstly, section 46 deals with the investment of its funds i.e. the investments of available funds by the society. It is not dealing with appropriation or diversion of the income of society. Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is binding on the assessee. The bad debts reserve created is not freely available to the assessee and it is a charge on profits but not appropriation of profits and the investments are to be made irrespective of profits or losses. The Ld. D.R. further argued that the assessee has no domain over the amount or the bad debts reserve and it is not being treated as society's "Net worth". The Ld. A.R. further argued that "net worth" as defined in section 12A(13) explanation (b) of APCS Act reads as follows: "NET WORTH" means the sum total of the paid up capital and free reserves after deducting the provisions of expenses as may be prescribed. "FREE RESERVES" means all reserves created out of profits and share premium account but does not include reserve created out of revaluation of assets, write back of depreciation provisions and amalgamation". BAD DEBTS RESERVE IS NOT FREE RESERVE, FREE RESERVE IS WHAT WAS SET APART OUT OF PROFITS/GENERAL RESERVE To illustrate, S.2(43), Companies Act, 2013 defined Free Reserves as those reserves, which, as per the latest available Balance sheet are available for distribution as Dividend. 7. The Ld. A.R. relied on the decision of Keshkal Co-ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Provided that every primary agricultural credit society and every Co-operative Central Bank shall invest or deposit in each co-operative year towards the bad debts reserve of the said society or bank, a sum equal to one-fourth per centum of the amount granted by it as short term loans or medium term loans to its members during the co-operative year from out of the amounts borrowed by it from other cooperative financial institutions for granting such loans ; so however that no such investment or deposit shall be necessary when the total amount so invested or deposited towards bad debts reserve becomes equal to the total amount of bad debts of the society as estimated by the auditor appointed under Section 50.] Explanation: - For the purposes of this section, sub-section (3) of Sections 47 and 71, the expression 'primary agricultural credit society' means the society referred to in clause (i) of Explanation to Section 36. 10. Plain reading of section 46 of the APCS Act clearly shows that the section deals with the sources of funds and it's application of funds. The section mandates the society to create bad debts reserve out of its sources of funds equalient to bad debts. It does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as well as the provision for bad and doubtful debts are allowed as a deduction. Therefore, no separate deduction is required to be allowed towards the bad debts reserve. In case if the bad debts as well as the bad debts reserve is allowed as deduction, the same would be amount to double deduction, once as bad debts and secondly as bad debts reserve. Therefore, the deduction claimed by the assessee on account of bad debts reserve is not allowable. The assessee relied on the decision of Keshkal Co-operative Marketing Society Limited (supra). The issue with regard to the bad debts and bad debts reserve was not dealt with by the Hon'ble High Court of M.P. in its order. The issue with regard to the double deduction of the bad debts and the bad debts reserve was also not considered by the Hon'ble High court, therefore the facts of the Hon'ble M.P. High Court's decision in the cited case law is distinguishable hence not applicable. Further, the section does not place any restriction as argued by the Ld. A.R. that the amount is not available to the assessee for its business purpose. The assessee has extended its meaning by interpreting net worth and the Companies Act. Therefore, we are u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained that all these were provisions for bad and doubtful debts created in compliance to the Prudential Norms of the Reserve Bank of India, to be strictly observed by all the Banks in the country, as per the RBI Act and the Banking Regulation Act. The Income Tax Act,1961 has also carved out a deduction towards Provision for bad and doubtful debts and also spelt out the monetary limits within which Banks are entitled to the said deduction. It was also argued that the over-all provision for bad and doubtful debts created by the bank was well within the limits set out in Sec.36 (1)(viia), as amended from time to time. The appellant's AR has drawn attention to the amendment made by the Finance Act, 2007 whereby the aggregate provision available under this Section to all the Banks including the non-scheduled Co-operative banks like the appellant - bank is 7.5% of the Net Profit before making the deduction under this statutory provision plus 10% of the aggregate average rural advances. The restriction of the same to 7.5% of the Net Profit before making this deduction, as canvassed by the AO was stated as not the correct legal position. It was also argued that alternatively, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.O. was that this was an expenditure which should have been debited to the profit & loss account. The deduction of sundry debtors individuals amounting to ₹ 45,88,706/- was also admittedly the legal and other expenses incurred by the assessee during the course of recovery of the loan. The last one is sundry debtors institutions, which was disallowed by the A.O. holding that the amount of ₹ 36.15 lakhs was related to the expenditure incurred by the assessee for recovery of loan. According to the A.O., since the above sums represent the expenses incurred by the assessee in the process of recovery of loans and advances the same should have been claimed as expenditure instead of bad and doubtful debts. According to the A.O., it is not covered u/s 36(2) or 36(1)(viia) of the income tax Act. However, it is established fact that the debt includes the principal amount as well as the other receivables/expenses incurred by the assessee due from the borrower. The assessee has to collect the entire amount of the principal amount as well as the expenses incurred for collection of the amounts advanced, therefore, the fact that the amounts are due from the customers of the bank was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a regulator of PACS in the District and all of them are affiliated to the DCCB. The subsidy due to PACS from the Government would be made over to bank as and when the same is received by them from the Government. Since the subsidy of the earlier year was not received by the end of the relevant previous year, a provision was made for the subsidy receivable and claimed as deduction. The assessee had received the subsidy in the subsequent financial year, which was offered to income. The A.O. disallowed the said sum holding that the amounts receivable from Government cannot be treated as a doubtful debt at any stretch of imagination and placed reliance on Hon'ble Madras High Court decision in the case of South India Surgical Company Limited Vs. ACIT 287 ITR 62. 18. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee holding that the assessee is justified in creation of a provision in the first place and reversal of the same subsequently and on receipt of the subsidy the assessee had offered the same to the income. 19. We have heard both the parties, perused the materials available on record and gone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and penal interest and IOD 1,74,22,643/- (1,12,36,487+ 61,86,165) 95,61,180/- 2,90,75,132/- (86,88,231+9,22,019+ 1,94,64,882) 21. These amounts related to the DCCB share of 35% waiver of penal interest and interest on overdue deposits. The assessee is lending agency to PACS and PACS lends the monies to farmers. Unless the monies lent by PACS are recovered, the same cannot be repaid to the bank. APCOB is the main lending agency of the DCCB. Therefore, there is direct interconnection of lending to farmers with the APCOB, DCCB and the PACS. As per the directions of the APCOB, the PACS was to collect the dues of loan and interest from small and marginal borrowers and the PACS charges the overdue interest and the penal interest for defaults in payments. On the directions of the APCOB the assessee has directed the PACS to waive the overdue interest and penal interest subject to payment of the principal along with the interest. In the process the PACS would loose the over due interest and the penal interest which will be shared between the APCOB, the assessee and the PACS. As per the direction of APCOB, the assessee has to bear 35% of the overdue interest and penal interest as its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business expenditure, in the case of City Union Bank's case." 22. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has waived the interest on short term and long term loans given to the farmers. This is evidenced by page no.28 of paper book submitted before us. As per the scheme of waiver 35% of the interest relating to waiver of penal interest and Interest on deposits (IOD) is borne by the assessee. There is no dispute that 35% of the share was borne by the bank relating to IOD and penal interest. This is on repayment of the loans collected along with interest. Waiver of over due interest and the penal interest is an incentive to the borrowers to make them to repay the loan granted by the bank. There is no dispute regarding the genuineness of the waiver. The Ld. A.R. submitted that it is on account of reimbursement given to PACS on complete repayment of loans. The similar issue was considered by the coordinate bench of ITAT,Hyd in Nizamabad Co-operative Society and held the same as allowable. For ready reference, we extract the relevant paragraphs of the coordinate bench of ITAT, Hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INTEREST/ 2005/06 DT.7.3.2006 WHICH POSTULATES THAT A PACS IS ENTITLED TO GET REIMBURSEMENT OF PENAL INTEREST AND IOD , ONLY ON ITS REALISATION OF THE OVERDUE LOANS FROM FARMERS IN FULL WITH PRINCIPAL AND INTEREST. AS THE SAID CONDITIONS WERE FULFILLED IN THE RELEVANT PREVIOUS YEAR, WE INCURRED THE EXPENDITURE ALSO IN THE SAME PREVIOUS YEAR, DEBITED THE SAME AND CLAIMED DEDUCTION, WHICH IS SUBMITTED AS APPROPRIATE. We submitted that as the expenditure for reimbursement of penal interest hOD was laid out /expended irretrievably during the relevant previous year, the same was claimed as expenditure in the previous year and the said claim is in accordance with the language of Sec. 37( 1). 6. There can't be an insistence for claim of expenditure at a different point of time, because we submit that we were instructed by APCOB to implement a waiver scheme, the expenditure was claimed in the relevant previous year only when we irretrievably spent the amount towards reimbursement of penal interest and IOD , in pursuance of the scheme and on fulfilment of the scheme conditions by eligible farmer-borrowers (for a moment, if the APCOB resolves differently, as per any modification in Govt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xact nature of overdue interest created for reserve. As per the RBI guidelines, the assessee need not recognize the interest on bad and doubtful debts. Such interest neither credited to the profit & loss account nor offered as income. The assessee requires to record such accrued interest in a Memorandum of account in their books. It is not known whether the interest related to the overdue interest is on NPA advances or not. In case the interest is related to the non performing assets (NPA) as claimed by the assessee, the same required to be allowed as a deduction since the same cannot be recognised as income and the treatment given by the assessee in the profit & loss account appears to be correct. Since the issue involve verification with regard to the true and correct nature of the overdue interest, both the parties have agreed to remit the matter back to the file of the A.O. to verify the true and correct nature of interest whether it is relating to bad and doubtful debts or NPA or on performing assets. Therefore, we direct the A.O. to verify the true nature of the overdue interest and decide the issue afresh on merits. This ground of appeal of the revenue is allowed for statist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined by the RBI's Prudential Norms. The ITAT held that to get a deduction under the IT Act, the provision shall be on bad and doubtful debts and though the RBI stipulated provision on standard assets, the Bank can't make a claim for deduction under section 36(1)(viia), which deals with a provision on bad and doubtful debts. The A.R. argued that the decision is inapplicable to this issue. In the circumstances, it is held that the rejection of the appellant's claim is patently unjust, since the provision created satisfies the requirements of law and also is well within the maximum amount of deduction prescribed under Sec.36(1)(viia) and accordingly, the A0 is directed to allow the same." 27. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee is entitled for deduction u/s 36(1)(viia) of the Act to the extent of 7 ½% of total income and 10% of rural advances as NPA. The assessee has categorized the interest of ₹ 2,84,11,535/- as NPA provision. The assessee argued that it is an interest part of the advances which was categorized as NPA. The ld.AO did not dispute the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee during the assessment on 23.12.2010 and the Ld. CIT(A) found that the said expenditure was akin to any Interest paid on depositors by the Bank. 29. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed the above expenditure under the impression that the said amount was not an expenditure but it was related to the investments. However, during the appeal hearing, before the CIT(A) and before us, the assessee argued that the item represents the interest paid by the bank to the depositors. Since the amount is interest paid on the deposits of the co-operative societies relating to fund called agricultural credit stabilization fund, the same is a business expenditure and the CIT(A) has allowed the same correctly. There is no dispute with regard to the genuineness of the expenditure and we agree with the Ld. CIT (A) that it was not an appropriation of the profits and it was the interest paid on the deposits of PACS. The appeal of the revenue on this ground is dismissed. 30. The next issue is related to the reserve for Co-operative Educational fund for the assessment year 2010-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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