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TMI Blog2022 (5) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... arged to the operating statement (P L A/c). Both the methods are equivalent and equally valid, yielding the same result. The disallowance in respect of provision qua standard assets has, in our view, been therefore rightly deleted by the ld. CIT(A). We decide accordingly. Provision against overdue interest, i.e., the unrealized interest on NPA A/cs, provided for at the whole of the said interest, relief stands allowed by the ld. CIT(A) with reference to sec. 43D - Even granting applicability of sec. 43D, i.e., for the sake of argument, the same would be of little assistance to the assessee in the facts and circumstances of its case. This is as all that it says is for the interest being recognized as income for the year of credit or the year of receipt, whichever is earlier. The assessee having credited the interest income in its accounts for the relevant year/s, the same, even though not received, is to be, in terms of s. 43D itself, regarded as the income for the relevant year/s, i.e., the year/s in which it stands recognized as income by crediting the same to its P L A/c. This would also meet the assessee s reliance on some decisions by Hon ble Courts, referred to by CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot increased by this sum. The interest, though worked out, is kept in shadow accounts or in memoranda accounts. AO shall, upon due verification, decide in accordance with law, i.e., in conformity with what stands stated by us, per a speaking order, issuing clear and definite findings. We decide accordingly. Validity of reopening of assessment u/s 147 - Claim of provision for bad and doubtful debts, comprising provision for bad and doubtful debts (i.e., toward principal debt due) and for overdue interest - HELD THAT:- The assessee claims the same to be a part of the debt due, justifying provisioning in its respect as toward bad and doubtful debts and, in any case, equivalent to non-recognition of income on the interest - The argument is self-contradictory inasmuch as only an amount accrued could form part of the debt/debt due, while the non-recognition of interest is only for the reason that the same has, in the given facts and circumstances, not accrued. Further, the claim of equivalence is a matter of verification, i.e., as to whether the accounting treatment by the assessee is indeed and, in effect, equivalent to not recognising the unrealized income on NPA borrower accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is a set of three Appeals by the Revenue and two Cross Objections (COs) by the assessee in respect of its assessments for three years, being assessment years (AYs.) 2009-10, 2013-14 2014-15. The issues arising being common, these were heard together, and are being accordingly disposed of per a common order. 2. The only issue arising in these appeals and COs, save an additional issue for AY 2009-10, is the maintainability of the provision for bad and doubtful debts, as well as for overdue interest, as claimed by the assessee, a cooperative bank, per its returns of income for the relevant years. The details of the claims are as under: (Amount in Rs. lacs) A.Y. P1 P2 Total (P1 + P2) P3 P1A 2009-10 643.74 262.57 906.31 764.25 - 2013-14 514.00 381.23 895.23 1698.91 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or the State financial corporation or the State industrial investment corporation or [a deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company or] the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. Explanation.-For the purposes of this section,- (a) (c) .. (d) scheduled bank shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that extent, which is then made in full at the following year-end. Any bad debt arising during this, following, year is charged to the operating statement (P L A/c). Both the methods are equivalent and equally valid, yielding the same result. The disallowance in respect of provision qua standard assets has, in our view, been therefore rightly deleted by the ld. CIT(A). We decide accordingly. 4.2 Coming to the provision against overdue interest, i.e., the unrealized interest on NPA A/cs, provided for at the whole of the said interest, relief stands allowed by the ld. CIT(A) with reference to sec. 43D (supra). The words a cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank or , which apply to the assessee, stand inserted in the provision (s.43D) after the words scheduled bank or by Finance Act, 2018, w.r.e.f. 01/04/2017. There is surprisingly no discussion in the impugned order in respect of the retrospective operation of the amendment by Finance Act, 2018, only which would make the said provision applicable to the assessee for the relevant years. This is precisely the Revenue s grievance, claimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that worked with reference to the mandate of the Regulator. The issue, it may be appreciated, is not if the assessee is a banking company or not, but if a cooperative bank , separately defined under the Act, is included within ambit of the provision for the relevant years. Section 80-P, for instance, was applicable to the cooperative banks as the assessee, only for that reason, and not because they were banking companies, which they continue to be. Continuing further, even granting applicability of sec. 43D, i.e., for the sake of argument, the same would be of little assistance to the assessee in the facts and circumstances of its case. This is as all that it says is for the interest being recognized as income for the year of credit or the year of receipt, whichever is earlier. The assessee having credited the interest income in its accounts for the relevant year/s, the same, even though not received, is to be, in terms of s. 43D itself, regarded as the income for the relevant year/s, i.e., the year/s in which it stands recognized as income by crediting the same to its P L A/c. This would also meet the assessee s reliance on some decisions by Hon ble Courts, referred to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est (as per the loan agreement), being not realized, is, as per the accounting mandate, not accounted as income, as in the case above, there would be no occasion for either making a provision for overdue interest (on NPA A/cs), which is charged to the operating statement (P L A/c), or debit the said interest to the Borrower s A/c, to then claim it as a part of the debt due from him. Rather, where so, income having been already accounted for (as per the loan agreement), there would be no occasion to account it as such on receipt, whereat the amount would stand to be credited to the debtor (borrower) s A/c, i.e., as recovery of debt. The income implication in the instant case, due to the provisioning for overdue interest, arises, as it appears to us, only due to the assessee not following the mandatory accounting prescription, which it claims to follow (refer written submissions before the ld. CIT(A) for AY 2014-15 which was adopted as the lead year for the purpose of arguments at the time of hearing). The argument, even otherwise only partly valid for AY 2009-10 (refer Table at para 2), i.e., for Rs. 120.51 (262.57 - (906.31 764.25)) lacs, as the balance claim for Rs. 142.06 (i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is well-settled, and for which one may refer to the decisions by the Apex Court, as in UCO Bank v. CIT [1999] 237 ITR 889 (SC); United Commercial Bank v. CIT [1999] 240 ITR 355; Godra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC), to cite some, also relied upon by the assessee, wherein it stands clarified that accrual of income is to be judged in the light of the reality of the situation. There is thus no question of accrual of such interest income. At the same time there is, however, as afore-noted (para 4.3), little clarity on the accounting treatment being given by the assessee. While that stated to be followed has no income implication, even as sought to be clarified and brought forth per the accounting entries that would stand to be passed, the accounting followed by the assessee, contrary to what it states, has income implication, which stands neutralized by making a provision for overdue interest, and which has been disallowed in assessment. It may, however, well be that the accounting entries passed by the assessee are to the same effect, toward which we may draw up some sample accounting entries, as indicated above, as under: (Amount in Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also its ultimate effect. The AO shall also verify the excess provision for overdue interest, if any, due to the debit of the unrealized interest to the (NPA) borrower s accounts, i.e., by way of provision for bad and doubtful debts, which gets thus gets reflected in accounts as so, though is only a provision against the said interest included in the borrower s due, and restrict the claim for such interest to 100% thereof (as at the year-end). It is imperative for the purpose that the provision for overdue interest for each year is quantified, adjusting it for the amount thereof which is reflected as provision for bad and doubtful debts. Going by the example adopted, assuming the relevant asset is a doubtful asset qualifying for provision @ 50%, the total provision for overdue interest would as at the year-end would be Rs. 6000, i.e., Rs. 4000 reflected as such, and Rs. 2000 under the A/c head Provision for bad doubtful assets , which would therefore also require being reduced to that extent. There may be a carry-over of such provision for unrealized interest, as where the same, pertaining to earlier years, remains unrealized as at the relevant year-end. The adjustment, neve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to be applicable to each of the three reasons recorded (at PB pg. 85) for reopening the assessment. The first reason recorded is in respect of a sum of Rs. 643.74 lacs claimed as provision for bad and doubtful debts, comprising provision for bad and doubtful debts (i.e., toward principal debt due) and for overdue interest, at Rs.381.17 lacs and Rs. 262.57 lacs respectively. The AO states in the reason recorded that the same is not allowable u/s. 37(1). The same cannot be regarded as a valid reason inasmuch as a provision for bad and doubtful debts in case of a cooperative bank is deductible u/s. 36(1)(viia), so that any reason without reference to the said section cannot be a proper ground to entertain a reason to believe an excess claim qua the said provision and, thus, an escapement of income chargeable to tax on that basis. Further, the AO having not referred to the said section in his reason/s recorded, it is not permissible for us to travel thereto. The reason is, thus, not a valid ground to reopen the assessment. So, however, the sum admittedly includes Rs. 262.57 lacs, being the provision for overdue interest. The same is not admissible either u/s. 36(1)(viia) or u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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