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TMI Blog2018 (7) TMI 1876X X X X Extracts X X X X X X X X Extracts X X X X ..... ly recount the facts of the case. The assessee is a cooperative-society in the business of banking, i.e., a cooperative bank. For the relevant year, an examination of the assessee's final accounts during the assessment proceedings by the Assessing Officer (AO), revealed a disclosure of interest accrued on Non-Performing Assets (NPA accounts) at Rs. 433.06 lacs. The same being not booked as income, the assessee in explanation stated that the categorization of a loan/advance account as a NPA is in view of the uncertainty as to its realization. When the realization of the principal is at stake, there is no question of accrual of interest income on the corresponding loan/advance (asset). In view of the AO, the assessee was, in view of the borrowers' contractual obligation, bound to account for the same, and in terms thereof. He, accordingly, brought the same to tax. In appeal, the ld. CIT(A) noted that the assessee has passed contra entries in respect of interest on NPA accounts. It was further not correct to say that the said interest had been kept outside books, or that no entries in respect thereof had been passed in the books of account. The assessee had in effect followed cash sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Substance over form requires that the accounting treatment is governed by the substance of the transaction and not its legal form. Put together, the two articulate and reinforce the real income theory, approved by the Apex Court in, among others, Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC); Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC); CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC)). The ld. CIT(A) has in our view misread the decision by the Apex Court in UCO Bank (supra). True, the assessee in that case successfully relied on a Circular (dated October 9, 1984) by the Board, providing for non-provision of interest on sticky loans, i.e., where there had been no recovery for the last three years. The Hon'ble Court, however, found the said Circular to be consistent with section 145 of the Act. The earlier decision in State Bank of Travancore (supra) was also explained. We have in the instant case itself shown section 145 to contain ingredients of real income theory. As explained in CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Del), the Apex Court in Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577 (SC) approved the real inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome recognition norms stated to be followed by the assessee as either not relevant or not having a direct bearing on the said uncertainty. Rather, we find it queer that, on one hand, the Revenue itself notifies accounting standards which provide primacy to 'prudence', while, on the other, objects when the assessee, in pursuance to those norms, refrains from booking income! We, accordingly, have no hesitation in, accepting the assessee's claim, directing the deletion of the amount of interest income. There is, we may though add, no question of the Revenue being not entitled to proceed in the matter in the absence of non-rejection of accounts. The limited issue that arises here is whether there has indeed been an accrual of income or not, which the assessee contends on the basis of objective data with regard to the performance of the relevant accounts in the past as well as the binding nature of the income recognition norms on it. The same have been found by us as in agreement with section 145, which cannot but be read as consistent with the real income theory, which the Hon'ble Courts have found to be engrained in the said norms. We decide accordingly, and the assessee succeeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of earning profits', obtaining in the analogous provision (s. 10(2) (xv)) of the 1922 Act. The same would include not only day to day running of the business but also rationalization of its administration and modernization of machinery; it may include measures for the preservation of the business or for the protection of the assets and property thereof from expropriation coercive process or assertion of hostile title; it may comprehend many other acts incidental to the carrying on of a business. In short, the words connote 'commercial expediency', considered from a businessman point of view and, therefore, would not include the condition of being incurred 'necessarily'. In the present case, however, we are unable to find any commercial expediency. The assessee's only explanation, as we see it, and even as put forth by the ld. counsels before us, is that the Registrar of Societies being a regulatory body, the assessee could not refuse to accede to its prescriptions for all the cooperative banks meeting the maintenance cost of the vehicles being used by its officers. On being ask by the Bench as to how could it be said that the assessee could not refuse in the absence of any legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The first ground of the Revenue's appeal is in respect of deletion of a sum of Rs. 34,00,732/- added by the AO as income from other sources on account of non payment of dividend distribution tax by the assessee-company, which in fact claims to be not liable for the said tax. We find no basis for the said addition. Even assuming, for the sake of argument, that the dividend distribution tax was indeed payable by the assessee-company, the Revenue can only proceed under law to exact the same. It does not in any manner lead to the inference of any income having accrued to the assessee as a result. Rather, the said tax, where paid, would stand to be debited to its operating statement (P&L A/c) for the year. We decide accordingly. 7. Vide the second ground, the Revenue contests the deletion of the disallowance of the provision on standard assets, made by the assessee-bank at the rate of 0.25%, on the ground it being only a contingent liability. The assessee alludes to the RBI/NABARD guidelines, which are to be mandatorily followed. The same, in view of the AO, would not convert the provision as toward an existing liability, only in which case would the provision be deductible u/s. 37(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as u/s. 80P. We decide accordingly. 9. The third and final ground raised by the Revenue is with regard to an addition of Rs. 1,27,980. The assessee had both under-charged as well as over-charged interest to its customers (i.e., on loans) as well as its depositors, as under, even as noted in the audit report: (Amount in Rs.) S. No. Particulars Less Excess 1. Interest on deposits 1,68,828 26,661 2. Interest received on loans 1,94,795 1,01,319 The AO added the entire excess interest, i.e., at Rs. 1,27,980. He, as apparent, has taken only a part of the auditor's observation per their report. Taken in totality, it would imply that the income would stand reduced by Rs. 48,691. The ld. CIT(A) accordingly held that there was no ground for making the impugned addition, and directed its deletion. The facts are not in dispute, and we find no infirmity in the adjudication by the ld. CIT(A). We decide accordingly, and the assessee succeeds. 10. The assessee's appeal is partly allowed and the Revenue's appeal is partly allowed for statistical purposes. AY 2008-09 Assessee's Appeal (ITA No. 348/Asr/2011) 11. Ground 1 of the assessee's appeal raises the (same) issue of denial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect giving proceedings. The AO shall, where a case duly substantiated, is made out by the assessee, consider the assessee's contention and adjudicate per a speaking order. Without doubt, the onus to prove its claim, both on facts and in law, would be on the assessee. We decide accordingly. 14. Ground 4 is in respect of claim of Rs. 1.43 lacs (refer para 13 above). The same was denied on the basis that the said provision could not be regarded as a provision for bad and doubtful debts. The assessee's claim is that the interest, booked as income for fy. 2006-07 (AY 2007-08), being not realized even during fy. 2007-08 (AY 2008-09), was reversed. That is, constitutes reversal of interest, so that it would not, as stated by the ld. CIT(A), stand to be debited to the provision account. 15. We have heard the parties, and perused the material on record. The assessee bank, following accrual system of accounting, had booked income for AY 2007-08 even as the interest was pending realization. The same having not been realized even during AY 2008-09, the current year, the same was reversed. The assessee has itself claimed this reversal as a provision for bad and doubtful debts. If the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, a provision for bad and doubtful debts, the deduction for the same is to be made with reference to the upper limit for each of the two limbs, defined separately as, 'not exceeding' i.e., the specified percentage of total income in one case, and of the aggregate rural branch advances for the other. Each of the two components would therefore have to be reckoned separately, and no disallowance could be made where each of the two components does not exceed the limits specified therefor. It does not mean that the provision already made in accounts is to be disturbed to accommodate other provision, i.e., adjust the provision account, where in excess (as by Rs. 1.69 lacs qua the income based provision in the instant case), with that where it is short. We say so as the section does not specify the amount of deduction per se, but permits the deduction in respect thereof up to a particular sum. As such, as along as the limit, specified separately, which is the reason for our stating of the assessee being required to maintain two provision accounts, is not breached, no disallowance could be made. Per contra, to the extent it is, disallowance for the excess claim would follow. It may be ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing at first blush, does not hold. At this stage, we may refer to the Revenue's Ground No. 2 (for AY 2008-09, in ITA No. 399/Asr/2011). The AO regarding the entire provision of Rs. 852 lacs by the assessee as against standard loans, effected an addition for the same, i.e., Rs. 852 lacs. The ld. CIT(A), while confirming disallowance of Rs. 2 lacs (agitated by the assessee per its appeal), regarding the balance Rs. 850 lacs as in excess by Rs. 1.69 lacs, allowed thus, in effect, a relief of Rs. 848.31 lacs, which the Revenue contests per its Ground 2. Even if against standard assets, why could not the provision be regarded as a provision for bad and doubtful debts. A provision, though normally in-admissible in computing income u/s. 28, is allowed as special measure (in computing taxable income) for banks, including cooperative banks, in view of the nature of the business. While one component of the provision is based on income, so that it would necessarily have to be a regular component, i.e., for each year, based on its income, the other part is based on the aggregate (average) advances by rural branches, limit for which stands separately already specified. The provision made durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that effect on the appeal memo itself. As no prejudice in our view is thereby caused to the Revenue, the same is allowed. The said grounds are accordingly dismissed as not pressed. 20. The assessee vide its ground 2 contests the upholding of the disallowance of Rs. 200 lacs effected u/s. 37(1) r/w.s. of the Act, which reads as under: General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The assessee does not deny that the leave encashment has not been paid, provision for which has been disallowed invoking section 43B(f). The said provision of law, however, has been declared unconstitutional by the Hon'ble Court in Exide Industries Ltd. v. Union of India [2007] 292 ITR 470 (Cal), being inconsistent with the decision by the Apex Court in Bharat Earthmovers Ltd. v. CIT [2000] 245 ITR 428 (SC). The same, however, did not find favour with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision account, he could not furnish a satisfactory answer, stating that the matter, for factual verification, be restored to the file of the AO, a proposition to which the ld. CIT-DR did not object. 21. We have heard the parties, and perused the material on record. Though it may appear that the assessee has raised a new plea, its ground only raising the issue of the unconstitutionality of section 43B(f), the relevant facts being also not on record, it is not so. The assessee vide its letter dated 31.01.2013 to the AO has brought forth this aspect, stating of having deposited like amount (i.e., Rs. 200 lacs) in a scheme framed by LIC of India. The issue arising, notwithstanding the assessee's ground before us, is the sustainability of the impugned disallowance. The Apex Court, while staying the decision in Exide Industries Ltd. (supra), clarified that the assessments are to be proceeded with and framed on the basis that section 43B(f) is on the statute book, even as noted by the tribunal in Nanital, Almore Kshetriya Gramin (supra). The assessee having purchased a policy in respect of its leave encashment liability (of its employees), which, as explained in Bharat Earthmovers Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, is restored back to the file of the AO who, upon satisfaction, shall allow the assessee's claim qua the said expenditure to the extent of payment made to LIC of India during the year, i.e., in terms of section 43B. We say so as the provision made is not for the liability accruing during the year, but that since accrued, so that the deduction shall be restricted to the amount paid/discharged during the year. We decide accordingly. 22. Ground 3 of the assessee's appeal is in respect of disallowance of a payment of Annual Maintenance Charges (AMC). The bank was observed during assessment proceedings to have paid Rs. 19.11 lacs by way of AMC for CCTV cameras on 27.03.2010. The contract being for one year, i.e., 27.03.2010 to 26.03.2011, the assessee had claimed expenditure for full year, while only a period of four days of the contract period (of one year) had expired during the relevant year. The amount, worked proportionately at Rs. 18,84,820, was thus prepaid and, accordingly, disallowed, which was confirmed on the same basis. 23. We have heard the parties, and perused the material on record. The assessee's case, which though did not find favour with the Revenue, is that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have accrued during the relevant year. That is, the liability to interest, irrespective of the contractual obligation in its respect, arises on lapse/efflux of time. The assessee's having availed the 'benefit' of the loan for a definite period of time during the year, interest liability to the corresponding extent would, independent of the contractual obligation as to payment, be deductible on matching principle basis. We therefore find no infirmity in the orders by the Revenue Authorities on this issue. Why, however, we fail to understand, should not the Revenue allow the balance amount (Rs.18.85 lacs) as deduction for the following year, i.e., AY 2011-12, also in appeal before us. Though no ground in its respect has been taken by the assessee, who does not appear to have raised this issue by way of rectification application u/s. 154, that would not detain us to state that the assessment for AY 2011-12, subject to verification by the AO, the Revenue should have allowed the assessee's claim for the balance amount in the following year (AY 2011-12). That would in fact accord with the Boards' Circular dated April 11,1955. The proceedings under the Act are not adversarial proceedings, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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