2016 (3) TMI 871 - AT - Income Tax

Tribunal Grants Relief on Investment Issues, Upholds Disallowances on Debts and Tax Deduction

Shri Mahalaxmi Co-op Bank Ltd. Versus The Asst. Commissioner of Income Tax, Circle – 1, Kolhapur

The Tribunal partly allowed the appeal, granting relief on issues related to amortization of premium on HTM investments, interest on NPAs, loss on AFS ... Deduction claimed on account of provision made in the books of account for bad and doubtful debts u/s 36 - Held that:- The assessee was engaged in the business of banking and in terms of section 36(1)(viia) of the Act, was entitled to claim the deduction in respect of provision made for bad and doubtful debts, on account of aggregate average advances made by the rural branches of the assessee bank. Section 36(1)(viia) of the Act provides that such deduction shall not exceed 7.5% of the total income i.e. income computed before making any deduction under this clause and Chapter VI-A of the Act and the assessee for the year under consideration claimed deduction of ₹ 1.95 crores under section 36(1)(viia) of the Act in its return of income on account of bad and doubtful debts relating to advances made by the rural branches. However, as against the said claim made in the return of income, the assessee had made provision for bad and doubtful debts of ₹ 56 lakhs. On account of this, the assessee’s claim was restricted to ₹ 56 lakhs and the balance was disallowed. The issue arising before us is identical to the issue before the Tribunal in assessment year 2009-10 and following the same parity of reasoning, we dismiss the ground of appeal No.1 raised by the assessee. Deduction claimed on account of amortization of premium in respect of HTM investments - Held that:- The assessee is entitled to the claim of deduction on account of amortization of premium paid on Government securities held in HTM category - Decided in favour of assessee. Treatment of interest income arising on Non-Performing Assets (NPAs) - Held that:- Interest accrued on NPAs is not taxable in the hands of assessee, in view of the guidelines issued by the RBI. Thus we hold that no addition is warranted on account of interest accrued on NPAs. See Vasantadada Nagari Sahakari Bank Ltd. case [2015 (1) TMI 1218 - BOMBAY HIGH COURT] - Decided in favour of assessee. Disallowance of loss on account of sale of Available for Sale (AFS) securities - Held that:- Loss arising on account of sale of AFS securities as per directions of the RBI is allowable in the hands of assessee.r. The perusal of assessment order reflects that while computing the assessed income in the hands of assessee, the Assessing Officer had disallowed the provision debited to Profit & Loss Account of ₹ 49,99,457/- which comprises of provision of ₹ 41,70,140/-. In view of our order, we direct the Assessing Officer to allow the claim of deduction on account of loss of ₹ 41,70,140/- arising on sale of AFS investments.- Decided in favour of assessee. Addition made on account of disallowance of contribution to Education Fund - Held that:- In view of the proposition laid down by the Hon’ble Bombay High Court in Krishna Sahakari Sakhar Karkhana Ltd. Vs. CIT (1997 (7) TMI 97 - BOMBAY High Court), wherein similar expenditure claimed by the assessee was held as allowable. Where the assessee is following the mercantile system of accounting, the expenditure relatable to the year under consideration though not paid is to be allowed in the hands of assessee. Further, the provisions of section 43B of the Act are not attracted in respect of such payments to the State authorities. Accordingly, we direct the Assessing Officer to allow the contribution - Decided in favour of assessee. Deduction under section 36(1)(viii) - Held that:- The assessee had failed to create a special reserve in its books of account out of eligible profits of the year and in view thereof, the assessee was not entitled to the claim of benefit of deduction under section 36(1)(viii) of the Act in view of the ratio laid down by the Pune Bench of Tribunal in Shree Sharada Sahakari Bank Ltd. Vs. ITO (2015 (6) TMI 34 - ITAT PUNE) - Decided against assessee Issues Involved:1. Deduction on account of provision for bad and doubtful debts.2. Deduction on amortization of premium on HTM investments.3. Treatment of interest income from Non-Performing Assets (NPAs).4. Disallowance of loss on sale of Available for Sale (AFS) investments.5. Disallowance of contribution to Education Fund.6. Deduction under section 36(1)(viii) of the Income Tax Act.Issue-wise Detailed Analysis:1. Deduction on account of provision for bad and doubtful debts:The assessee claimed a deduction of Rs. 1,95,01,379 under section 36(1)(viia) of the Income-tax Act, 1961, for bad and doubtful debts. However, the CIT(A) restricted the deduction to Rs. 56,00,000, which was the actual provision made in the books. The Tribunal referenced its previous decisions in the assessee's own case for assessment years 2008-09 and 2009-10, where it was held that the deduction under section 36(1)(viia) is limited to the provision actually made in the books. The Tribunal upheld the CIT(A)'s decision, dismissing the assessee's appeal on this ground.2. Deduction on amortization of premium on HTM investments:The assessee claimed a deduction of Rs. 28,40,605 for amortization of premium on Government securities held under the Held to Maturity (HTM) category. The Tribunal noted that this issue was previously decided in favor of the assessee for assessment year 2009-10, where it was held that such amortization is allowable as per RBI guidelines and CBDT instructions. The Tribunal allowed the assessee's claim for the current assessment year as well.3. Treatment of interest income from Non-Performing Assets (NPAs):The assessee did not recognize interest income on NPAs in its Profit & Loss Account, following RBI guidelines. The Assessing Officer added this interest to the taxable income, but the Tribunal referenced its decision in the assessee's own case for assessment year 2009-10 and other similar cases, where it was held that interest on NPAs is not taxable until actually received. The Tribunal reversed the CIT(A)'s order and allowed the assessee's appeal on this ground.4. Disallowance of loss on sale of Available for Sale (AFS) investments:The assessee incurred a loss of Rs. 41,70,140 on the sale of AFS securities, which was disallowed by the Assessing Officer. The Tribunal noted that the CIT(A) incorrectly stated that no such disallowance was made by the Assessing Officer. The Tribunal referenced its decision in Kallapanna Awade Ichalkaranji Janata Sah. Bank Ltd., where it was held that losses on AFS securities are allowable as business losses. The Tribunal directed the Assessing Officer to allow the assessee's claim.5. Disallowance of contribution to Education Fund:The assessee's contribution of Rs. 30,000 to the Education Fund was disallowed by the Assessing Officer on the grounds of non-payment within the relevant financial year, invoking section 43B of the Act. The Tribunal referenced the Bombay High Court's decision in Krishna Sahakari Sakhar Karkhana Ltd., which allowed such contributions as business expenditure. The Tribunal directed the Assessing Officer to allow the contribution, reversing the CIT(A)'s order.6. Deduction under section 36(1)(viii) of the Income Tax Act:The assessee claimed a deduction of Rs. 96,063 under section 36(1)(viii), which was disallowed due to the failure to create a special reserve in the books of account. The Tribunal referenced its decision in Shree Sharada Sahakari Bank Ltd., where it was held that the creation of a special reserve is a prerequisite for claiming the deduction. The Tribunal upheld the disallowance, dismissing the assessee's appeal on this ground.Conclusion:The Tribunal partly allowed the appeal, granting relief on issues related to amortization of premium on HTM investments, interest on NPAs, loss on AFS securities, and contribution to the Education Fund, while upholding the disallowances on provision for bad and doubtful debts and the deduction under section 36(1)(viii).