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TMI Blog2022 (12) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... ing assests by ignoring the decision of the Hon'ble supreme Court in the case of State Bank of Travancore (158 ITR 102" (2) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT erred in applying Section 43D to a cooperative society even though the same is specifically excluded under Explanation (ii) to clause (vii a) of Section 36 (1) (3) Whether on the fact and in the circumstances of the case, the Hon'ble ITAT has erred in following the decision in the case of CIT vs. Punjab State Co-op Bank Ltd. Of A.Y. 2007-08, 2008-09 reported in 143 ITD 571 (Chd) as the Punjab State Co-op Bank Ltd. is a scheduled Bank whereas the Kangra Central Co-op Bank Limited is not a scheduled Bank." 4. Similar substantial questions of law were framed in ITA No.83 of 2018, with difference in the amount concerned. 5. The question involved in the present appeals is as to whether the assessee was liable to pay tax on interest accrued on loans categorized as non-performing assets (NPA)/sticky loans on receipt basis as claimed by the assessee or on accrual basis as calculated by the revenue. 6. The assessee is a non-scheduled bank. The assessing officer noted that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... department. Learned counsel has further submitted that the assessee had not maintained any suspense account and had to only follow mercantile system of banking. 10. In support of his arguments, learned counsel for the appellant has placed reliance on the judgment of Hon'ble Supreme Court in State Bank of Travancore Versus Commissioner of Income Tax, Kerala, (1986) 2 Supreme Court Cases, 11, wherein it has been held as under:- "64. In CIT v. Motor Credit Co. Pvt. Ltd., the assessee, a private company, was carrying on business as financier for purchase of motor vehicles on hire purchase. It advanced under hire purchase agreements monies to two firms which were plying buses. The routes of these two firms having been taken over by a State Transport Corporation following nationalisation, the firms defaulted in making payment of the hire purchase instalments, and consequently the buses were seized. As the assesseecompany was advised that there was no prospect of recovering even the principal amount, the assesseecompany did not credit the interest on the outstandings from the two companies even though it was adopting the mercantile system of accounting. The Income-tax Officer, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the producer and after the advance was completely adjusted, the distributor had to remit to the producer the realisations after deducting the commission. The distribution commission was to be calculated at 35% of the net realisation on the picture. The producer undertook to complete and deliver the prints for the release of the picture failing which the producer under took to pay damages together with interest for the amount received at 12% per annum from the date of default to the date of delivery of the prints and also provided certain sum for certain contingency. It is not necessary to set out in detail the further facts. It was held that the assessee was in a position to realise only Rs. 3,47,000 approximately during the three years in question as against a total sum or Rs. 4,37,828 incurred as the cost of production. The Tribunal was justified in the High Court's view that having regard to the terms of the agreement entered into between the parties and in the light of the entries contained in the accounts, the commission could not be said to have accrued in favour of the assessee, as commission could be earned only after the entire advance had been realised. The d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s versus Commissioner of Income Tax, T.N. (2005) 1 Supreme Court Cases, 289, wherein it has been held as under:- "18. The 1994 and 1995 notifications both relate to the interpretation of Item (x) in the Twelfth Schedule read with Section 80-HHC as amended in 1991. They are confined to an exposition of the phrase of "cut and polished" used in Item (x) and do not seek to interpret the word 'minerals' in general. The 1994 circular clarified that the phrase 'cut and polished' minerals meant exactly that and could not be extended to any other process. The 1995 circular modified the rigour of the 1994 circular to the extent that it recognized some other processes as falling within the phrase 'cut and polished'. Both circulars clearly state that benefit of Section 80 HHC was available to cut and polished granite only with effect from 1.4.91 by virtue of insertion of Item (x) in the Twelfth Schedule to the Act. 19. Doubtless, the Customs Tariff Act and the Central Excise Tariff Act both draw a distinction between minerals and processed minerals. For example in Chapter 27 of the Customs Tariff, a distinction has been drawn between mineral fuels, mineral oils and mineral products. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral construction should be avoided if it defeats the manifest object and purpose of the Act. Therefore, in the well known words of Judge learned Hand, one cannot make a fortress out of the dictionary; and should remember that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. In the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570, this Court said that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to made the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. This view has been accepted by a number of High Courts. In the case of CIT v. Chandulal Venichand [1994] 209 ITR 7, the Gujarat High Court has held that he first proviso to section 43B is retrospective and sales-tax for the last quarter paid before the filing of the return for the assessment year is deductable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought to the profit and loss account of the assesseebank because these are amounts which are not likely to be realised by the bank. Hence they do not form a part of the real income of the bank. If and when any such amount or a part of it is recovered, it is included in that assessment year in the total income of the assessee for the purpose of payment of income-tax. The method of accounting which is followed by the assessee-bank is mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realised. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice. In Spicer and Pegler's Practical Auditing the relevant passage occurring at page 186-187 has been reproduced in the minority judgment of this Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala [(1986) 158 ITR 102 at p.120]. It is as follows: "Where interest has not been paid, it is sometimes left out of account altogether. This prevents the possibility of irrecoverab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered. xxx xxx xxx In the premises the majority decision in the State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) cannot be looked upon as laying down that a circular which is properly issued under Section 119 of the Incometax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnitlal C. Javeri v. K.K. Sen (1965) 56 ITR 198 (SC). In fact, State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) has already been distinguished in the case of Keshavji Ravji and Co. v. CIT (1990) 182 ITR 1 (SC) by a Bench of three judges in a similar fashion. It is held only as laying down that a circular c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of Central Board of Direct Tax cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of Section 119 to ensure a uniform and proper administration and application of the Income-tax Act." 16. Learned counsel for the respondent has also placed reliance on the judgment of Hon'ble Supreme Court in Mercantile Bank Ltd. versus Commissioner of Income-Tax, (2006) 283 ITR 84 (SC), wherein it has been held as under:- "7. Although the 1952 circular was withdrawn in June 1978 in view of the decision of the Kerala High Court to the contrary in State Bank of Travancore vs. CIT (1977) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of filing of the Return under the Income Tax Act [due date], the assessee(s) then would be entitled to deduction. However, this relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits under Social Welfare legislations by delaying payment of contributions to the welfare funds. However, as stated above, the second proviso resulted in implementation problems, which have been mentioned hereinabove, and which resulted in the enactment of Finance Act, 2003, deleting the second proviso and bringing about uniformity in the first proviso by equating tax, duty, cess and fee with contributions to welfare funds. Once this uniformity is brought about in the first proviso, then, in our view, the Finance Act, 2003, which is made applicable by the Parliament only with effect from April 1, 2004, would become curative in nature, hence, it would apply retrospectively with effect from April 1, 1988. Secondly, it may be noted that, in the case of Allied Motors (P) Limited vs. Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Finance Act, 2003, is retrospective in operation. Moreover, the judgment in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that Finance Act, 2003, will operate retrospectively with effect from April 1, 1988 [when the first proviso stood inserted]. Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that Finance Act, 2003, to the above extent, operated prospectively. Take an example - in the present case, the respondents have deposited the contributions with the R.P.F.C. after March 31 [end of accounting year] but before filing of the Returns under the Income Tax Act and the date of payment falls after the due date under the Employees' Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction under Section 43-B of the Act for all times. They would lose the benefit of deduction even in the year of account in which they pay the contributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year or actually received, whichever is earlier. This provision is an exception to the accrual system of accounting which is regularly followed by such assessees for computation of total income. The benefit of this provision is presently available to scheduled banks, public financial institutions, State financial corporations, State industrial investment corporations and certain public companies like Housing Finance companies. With a view to provide a level playing field to co-operative banks vis-à-vis scheduled banks and to rationalise the scope of the section 43D, it is proposed to amend section 43D of the Act so as to include cooperative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Consequentially, as per matching principle in taxation, if the interest income on bad or doubtful debts is chargeable to tax on receipt basis, the interest payable on such bad or doubtful debts need to be allowed on actual payment. In view of this, it is proposed to amend section 43B of the Act to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led banks and to rationalize the scope of Section 43D, it was proposed to introduce the amendment to Section 43D of the Act so as to include co-operative banks other then a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The omission was sought to be corrected by bringing at par the scheduled banks and non-scheduled banks. Thus, it is evident that the amendment was brought in force with a view to cure the omission in Section 43D. Although, the amendment was sought to be made effective w.e.f. 1st April, 2018, but it was liable to be treated as retrospective in nature. In order to arrive at this view, reliance is made on the decision of Hon'ble Supreme Court in Allied Motors' case supra. Moreover, it serves no purpose that the assessee, which is a nonscheduled bank, should include the NPAs/sticky loans in the relevant assessment year and then claim it as a bad debt in the next assessment year. There is no quarrel with the preposition of law settled by the judgments relied upon by the learned counsel for the appellant, but in view of the decision given by the Hon'ble Supreme Court in Allied Motors' case supra, we are of the opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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