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TMI Blog2019 (6) TMI 1425X X X X Extracts X X X X X X X X Extracts X X X X ..... urred in preserving the business connections and goodwill of business. Disallowance on account of Amortization of Premium - HELD THAT:- As decided in own case [ 2018 (5) TMI 1867 - ITAT AHMEDABAD] the allowability of amortized expenses on premium on Government Securities has been provided u/s. 36(1)(ii) of the provisions have been clarified and explained by CBDT, New Delhi vide Instruction No. 17 of 2008 dated 26.11.2008. As per this clarification, investments of banks classified under HTM (Held to Maturity) 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 amortized over the period remaining to maturity. On the basis of this Instruction, different Tribunals, as mentioned above by assessee, have allowed the amortized expenditure. The AO has ignored the provisions of Instruction which is binding on him while discussing the issue and disallowing the expenditure. Since, the Instructions and Circulars are binding in nature on AOs and different Tribunals have given decisions against the revenue, respectfully following the same, ground of appeal of assessee is allowed and addition made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s be set aside and that of the Assessing Officer be restored to the above extent. The appellant craves, to leave, to amend or alter any ground or add a new ground which may be necessary." 2. The assessee, a Co-operative Bank filed its return of income on 12.09.2014 declaring total income of ₹ 80,14,86,735/-. Under scrutiny through CASS notice u/s 143(3) of the Act dated 28.08.2015 was issued followed by a further notice dated 17.06.2016 u/s 142(1) r.w.s. 129 of the Act due to change of incumbent. The assessment proceeding was finalized with the following additions: Returned Income ₹ 80,14,86,735/- Additions: 1) Disallowance of Business Promotion Members Gift, scholarship expenses and payment to legal heirs of the members ₹ 31,98,772/- 2) Amortization Expenses of Premium amounting ₹ 3,15,81,243/- 3) Addition of an account of Interest accrued on non performing assets (as discussed in para 5) ₹ 41,18,29,397/- Total ₹ 1,24,80,96,147/- Assessed Income u/s 143(3) ₹ 1,24,80,96,150/- The said addition in turn was deleted by the Learned CIT(A) in appeal. Hence, the revenue is before us. During the course of assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heirs of the members amounting to ₹ 31,98,7762/-. The similar issue came up before the Hon'ble ITAT, Ahmedabad "C" Bench in the appellant's own case for A.Y. 2008-09. After discussing the issue in detail, the Hon'ble ITAT has held as under:- "5.4 We have heard both sides, perused the material available on record and gone through the orders of the authorities below. The main source of income of the assessee is that of receipt of I interest realized on the advance made by the bank and out of the total advance outstanding at the end of the year at ₹ 735.65 crores, advances to the members works out to be ₹ 722.36 crores which comprises more than 98% of total advances. The principal source of recurring income of the assessee is from the members and therefore the expenditure for "keeping members' support and attraction towards the bank is wholly and exclusively necessary for the purpose of business. The Hon'ble High Court of Gujarat (Full Bench) in the case of Karjan Cooperative Cotton Sales Ginning Pressing Society (Supra) has held that it was absolutely necessary for the assessee to maintain goodwill amongst its members and to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. This ground of appeal is allowed." We have also find that the said order has been affirmed by the Jurisdictional High Court in revenue's Appeal No. 596 of 2017; the tax appeal preferred by the Revenue was found to be devoid of merit by the Hon'ble Jurisdictional High Court, relevant portion whereof is as follows: "3. It can thus be seen that the Tribunal accepted the assessee's version that the expenditure was incurred for the purpose of business to maintain goodwill and continuity of business being provided by important members. It was pointed out that these members had provided for nearly 98% of the bank's business and the expenditure was marginal as compared to the interest realised on advances made to such members by the bank and the amount of deposits made by the members with the bank. The Tribunal held that merely because there was no legal obligation to incur such expenditure would not mean that the same was not allowable business expenditure if it could be pointed out that the expenditure incurred in preserving the business connections and goodwill of business expenditure incurred in preserving the business connections and goodwill of business. 4. No qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed in A.Y. 2012-13. In fact, the order passed by the Learned CIT(A) for A.Y. 2012-13 was further affirmed by the Co-ordinate Bench; copy whereof has been also submitted by the Learned AR before us. The Learned DR, however, failed to controvert the arguments advanced by the Learned Senior Counsel appearing for the assessee. 8. Heard the respective parties, perused the relevant materials available on record. It appears from the records that while deleting the addition made by the Learned AO, the Learned CIT(A) observed inter alia as follows following the order passed by his predecessor. Relevant portion whereof is as follows: "…6. After taking into consideration the submission of the assessee, Id. CIT(A) deleted the addition by observing as under:- "2.3 I have considered the facts of the case and legal position on the issue. The allowability of amortized expenses on premium on Government Securities has been provided u/s. 36(1)(ii) of the provisions have been clarified and explained by CBDT, New Delhi vide Instruction No. 17 of 2008 dated 26.11.2008. As per this clarification, investments of banks classified under HTM (Held to Maturity) category need not be mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. The ld. CIT(A) has deleted the addition by following the decision of his predecessors. We have noticed that as per RBI guidelines dated 16th Oct, 2000, the investment portfolio of the bank is required to be classified under three categories viz." Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (ATS). Investment classified under HTM category needs to 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 amortized over the remaining period. Allowable of amortized expenses on premium on government securities has been provided u/s. 36(1)(ii) of the act and explained by CBDT vide instruction No. 17 of 2008 dated 26-11-2008. The Hon'ble High Court of Gujarat vide (2014) 43 taxmann.com 161 (Gujarat) in the case of CIT, Rajkot-II vs. Rajkot Dist. Co-op. Bank Ltd. held that instructions clearly provide for amortization of premium paid on 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. In view of the above stated facts and legal finding, we do not find any infirmity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest accrued on NPA, it should be ₹ 41,18,29,397 only and not as propose in the notice. Regarding Non-applicability of Provisions of Section 43D & non considering interest accrued on NPA account as income, your assessee respectfully submits as under. 1. Your Assessee is a schedule Bank and Provisions of Section 43D of the IT. Act. reads as under. "Sec. 43D - Notwithstanding anything to the contrary contained in any other provisions of the Act, - (a) In the case of a public financial institution or a scheduled bank or a State Financial Corporation or a State Industrial Investment Corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts ; (b) In the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts. (c) Shall be chargeable to tax in the previous year in which it is credited by the-public financial institution or the scheduled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e such addition as alleged and save your assessee from facing uncalled for pressure of paper demand. Kindly refer to "Income\Recognition Policy contains in Master Circular issued by the RBI dated July 1, 2015 relating to Income Recognition, Asset classification provisioning and other related matters- UCB on Page 16A copy of the said circular is appended - Annexure III (Annexure B) Therein it has been categorically stated that "Income from NonPerforming Assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore banks should not take income account interest on non performing assets on accrual basis. Para 4.5 Interest Application 4.5.1 In case of NPAs where interest has not been received for 90 days or more, as a prudential norm, there is no use in debiting the said account by interest accrued in subsequent quarters and taking this accrued interest amount as income of the bank as the said interest is not being received. It is simultaneously desirable to show such accrued interest separately or park in a separate account so that interest receivable on such NPA Account is computed and shown as such, though n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herewith." However, such submission of the assessee was not accepted by the Learned AO and he was of the view that the Circular issued by the RBI which has been relied upon by the assessee was of no impact on the computation of taxable income under the Income Tax Act. The directions given under such circular cannot overrule the permissible deduction or other exclusion under the Income Tax Act. He further added the following: "5.7 Further, according to section 145, with effect from 1.4.1997, income of the assessee shall be computed either on cash or on mercantile system of accounting regularly employed by the assessee. It cannot be on mixed system of accounting. Sub section (1) of section 145 contains the word "shall" which suggest that the provisions 01 section 145 are mandatory in nature. Further, section 5 defines the scope of total income. The combined reading of the provisions of section 5 and 145 shown that the total income of an assessee shall include the income on the7 basis of system of accounting regularly employed by him. Therefore, once income has accrued as per the method of accounting followed by the assessee, it shall be included total income. Admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee that the taxable whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3)Where a debt has become bad, deduction in compliance with the provision of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assesses is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry - but taking the interest merely to a suspense account cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bank and shown in the balance sheet even, if the realization of the interest amount is delayed. Therefore, it cannot be said that what is assessed is notional income or hypothetical income or unreal income. 5.10 To sum up, RBI guideline have been issued under delegated legislation for the purpose of effective supervision and control of monetary and system and to supervise and exercise control on banks and NBFCS. The RBI guideline would not override the '.mandatory provisions of section 145 and accrual of income under section 5 (he- Income-tax Act. Since the assessee was following mercantile system of accounting, the interest income from assets including NPAs has to be assessed to tax on accrual basis. Accordingly, the interest income of ₹ 41,18,29,397/- on loans and advance claimed to be NPA accounts is hereby added back to the total income of the assessee. Penalty proceedings under section 271(1)(c) of the I.T. Act are being initiated for concealing the particulars of income and furnishing inaccurate particulars of income. [Addition of ₹ 41,18,29,397/-]" In appeal, the Learned CIT(A) deleted the same following the order passed by his predecessor in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia ('RBI' for short), as per which, it is mandatory for the bank to follow directives issued by the RBI. During the year under consideration, the bank had made a provision for overdue interest of ₹ 93.03 lakhs against interest accrued but not receivable on non performing assets which were irrecoverable, sticky loans, or doubtful loans. The assessee pointed out that as per the Reserve Bank of India circular dated 22-06-1996, the bank had to follow prudential norms of State Central Cooperative Banks and District Central Cooperative Banks. As per these guidelines, such banks are required to make 100% provision for the entire overdue interests as on 31st March of the year. The bank further pointed out that when the loan itself had become NPA, there was no possibility of recovering the interest and thus no prudent businessman would consider interest accruing out of such NPA as income leading to additional tax burden. 3. The Assessing Officer was however unmoved. He was of the opinion that the assessee's case would be governed under section 36(1)(viia) of the Act. Within the parameters of such provisions, the deduction cannot be granted. The RBI directives cannot go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Pr. CIT v. Shri Mahila Sewa Sahakari Bank Ltd. [2016] 72 taxmann.com 117/242 Taxman 60/[2017] 395 ITR 324 (Gujarat) in which the said issue came up for consideration. 8. In our opinion, entire issue is covered by the judgment of this Court in case of Shri Mahila Sewa Sahakari Bank Ltd. (supra). In the said case, the Court has considered following substantial question of law: "Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law and on facts in holding that interest on non performing assets is not taxable on accrual basis looking to the guidelines of the Reserve Bank of India ?" 9. The Court answered the question in favour of the assessee and concurred with the view of the Delhi High Court in case of lasisth Chay Vyapar Ltd. (supra). In the said decision, contrary to what was argued before us by the counsel for the Revenue, the Court had not only noticed but also referred to at some length the judgment of the Supreme Court in case of Southern Technologies Limited (supra). 10. In the result, the question is answered in favour of the assessee and against the Revenue and all Tax Appeals are dismissed." ..... X X X X Extracts X X X X X X X X Extracts X X X X
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