2015 (5) TMI 1168 - AT - Income Tax

Tribunal decision: disallowance upheld but assessee wins on interest & amortization issues

The Tribunal partly allowed the appeal, upholding the disallowance under section 36(1)(viia) for a cooperative society engaged in banking. However, the ... Disallowance of deduction u/s 36(1)(viia) - assessee is a co-operative society registered under Maharashtra Cooperative Societies Act and is engaged in the business of banking - provision for bad and doubtful debts made by any scheduled bank/co-operative bank - Held that:- The provisions of clause (vii) deal with ‘bad debts’, whereas, provisions of clause (viia) deals with ‘provision for bad and doubtful debts’. The distinction which the assessee has tried to create by dividing the provisions of clause (viia) into two parts is merely self-drawn. Both the parts of clause (viia) are joined with conjunction “and”. Therefore, both the limbs of clause (viia) have to be read together and not as alternate. The Hon’ble Supreme Court of India in the case of Catholic Syrian Bank Ltd. vs. CIT ( [2012 (2) TMI 262 - SUPREME COURT OF INDIA] has categorically held that the provisions of section 36(1)(vii) deals with general deduction available to a bank and even non-banking business. The provisions of section 36(1)(vii) operate in their own field and are not restricted by the limitation of section 36(1)(viia) of the Act. Accrual of income - Interest on NPA - assessee bank has been consistently following the practice of crediting interest accrued on NPA accounts to Overdue Interest Reserve as per the guidelines issued by Reserve Bank of India - interest actually recovered on such accounts is credited to Profit & Loss Account and due tax is paid thereon - Held that:- The issue raised in the present appeal is identical to one already decided by the Co-ordinate Bench in the case of ACIT vs. Ratanchand Shah Sahakari Bank Ltd. (2014 (12) TMI 345 - ITAT PUNE) what to talk of interest, even the principle amount itself had become doubtful to recover - In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”- thus, there was no infirmity with the decision of the CIT(A) in holding that the interest income relatable on NPA advances did not accrue to the assessee – Decided against revenue. Disallowance of amortization of premium paid on Govt. - Securities held under HTM category - Held that:- We observe that this issue has already been decided in assessee’s own case in assessment year 2009-10. There has been no change in facts and circumstances of the case in impugned assessment year. DR has not been able to refute the findings of the Tribunal in immediately preceding assessment year. Thus, the addition towards disallowance of amortization of premium on Govt. Securities held under HTM category is deleted. Issues Involved:1. Disallowance of deduction under section 36(1)(viia).2. Verification of interest on NPA accounts.3. Disallowance of amortization of premium on HTM securities.Detailed Analysis:1. Disallowance of Deduction under Section 36(1)(viia):The assessee, a co-operative society engaged in banking, contested the disallowance of Rs. 68,50,765/- claimed under section 36(1)(viia) of the Income Tax Act. The assessee argued that the deduction was permissible as per the first limb of section 36(1)(viia), which allows a deduction for bad and doubtful debts up to 7.5% of the total income. The assessee emphasized that all its branches are in urban areas, and there was no change in accounting principles or business activities from previous years when the deduction was allowed. The Revenue's disallowance was based on the Supreme Court's decision in Catholic Syrian Bank Ltd. vs. CIT, which the assessee contended was distinguishable. The Tribunal, however, upheld the disallowance, stating that both limbs of section 36(1)(viia) must be read together and not as alternatives. The Tribunal concluded that the deduction under section 36(1)(viia) applies only to rural advances, as clarified by the Supreme Court, and since the assessee had no rural branches, the disallowance was justified.2. Verification of Interest on NPA Accounts:The assessee challenged the direction to verify interest on NPA accounts amounting to Rs. 63,98,459/-. The assessee argued that it followed the RBI guidelines by crediting interest on NPAs to an Overdue Interest Reserve and recognizing it in the Profit & Loss Account only upon actual recovery. The Tribunal referred to its previous decisions, including the case of ACIT vs. Ratanchand Shah Sahakari Bank Ltd., where it was held that interest on NPAs should not be taxed on an accrual basis but on receipt basis, following the RBI guidelines and the principle of 'real income.' The Tribunal accepted the assessee's contention and ruled in favor of the assessee, consistent with its earlier judgments.3. Disallowance of Amortization of Premium on HTM Securities:The assessee disputed the disallowance of Rs. 1,77,500/- towards amortization of premium on Government Securities held under the Held to Maturity (HTM) category. The Tribunal noted that this issue had already been decided in favor of the assessee in the previous assessment year (2009-10) and that there were no changes in the facts and circumstances for the current assessment year. The Tribunal, therefore, deleted the disallowance, following its earlier decision.Conclusion:The appeal was partly allowed. The Tribunal upheld the disallowance under section 36(1)(viia) but ruled in favor of the assessee on the issues of interest on NPAs and amortization of premium on HTM securities. The judgment emphasized the need to follow judicial precedents and the specific provisions of the Income Tax Act, as well as the guidelines issued by regulatory authorities like the RBI.