TaxTMI 
TaxTMI 
TaxTMI 
2014 (12) TMI 1061
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....d No. 2 above and if assessee fails to succeed on Ground No. 2, the amount already included in credit to Profit & Loss A/c being interest actually received on NPA A/cs. Same may please be excluded. 4. CIT (A) has erred in confirming addition of interest on Agricultural Stabilization Fund Rs. 52,24,988/- and Rs. 13,97,158/- interest on Corpus Fund. This being over riding charge over profit of Bank, addition may please be cancelled. 5. Assessing Officer has erred in disallowing excess provision for Bonus Rs. 60,500/- Same may please be cancelled. As per notified AS 2 u/s 145 same cannot be disallowed. 6. Assessing Officer has erred in charging interest u/s 234 B,C and withdrawing interest u/s 234D. Same may please be cancelled. 7. Assessee denies liability to interest u/s 234 A,B and C. 8. Appellant prays for just and equitable relief. 9. Appellant prays to add, alter, modify, clarify, amend and/or withdraw the ground/s as the occasion may demand." 3. The appellant before us, is a Co-operative Society incorporated under the provisions of the Maharashtra Co-operative Societies Act, 1960 and is carrying on banking business as a Co-operative Bank. For the assessment year 20....
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.... is that assessee had indeed credited such income in its Profit & Loss Account and there is an equivalent amount of Provision made by the assessee by way of debit in the Profit & Loss Account. In essence, the stand of the Revenue is that the impugned income, though relatable to NPAs, is deemed to have accrued since assessee has credited it in its Profit & Loss Account, and the corresponding debit in the Profit & Loss Account is only a Provision for overdue interest and it is not an allowable deduction. 6. In the above background, we have considered the rival stands. The assessee has also furnished an affidavit on oath dated 05.10.2013 enumerating the various factual aspects and in response the Revenue has also furnished its say in terms of written comments dated 18.11.2013 by the Assistant Commissioner of Income Tax, Circle-2, Solapur, the Assessing Officer in this case. Before dwelling on the rival arguments on the objections raised by the Revenue we consider it appropriate to briefly cull out the necessary facts having regard to the orders of the authorities below as well as the material on record. 7. The assessee is registered as a co-operative society and is carrying on the b....
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.... shown. It is further pointed out that amount on the debit side of the Profit & Loss Account is not appearing as a Provision. Further, even in the Balance-Sheet, it is pointed out that amount of Rs. 82,81,68,339/- on the 'Liabilities' side of the Balance-Sheet does not appear under the head 'Reserve and Other Funds' but is separately disclosed as 'Overdue Interest Reserve'. It is also pointed out that the treatment in the financial statement of the assessee would show that it has never created in a Provision or a Reserve in respect of Overdue Interest on NPAs as sought to be made out by the income-tax authorities. In this context, the following averments in the affidavit are relevant :- "3. It is respectfully submitted that in the Balance Sheet as on 31/03/2008 [in English copy] on the Liability side there appears an entry for Rs. 82,81,68,339.10 styled as Overdue Interest Reserve. The bank submits that the term Reserve is mistakenly used and is erroneous and in fact it is a Contra Entry for Interest Receivable on N.P.A. which is appearing on Asset side of the Balance Sheet under the heading Interest Receivable and sub heading On Society Loans and On Individual Loan. The bank sub....
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.... Loss Account and dehors of entries in the Balance Sheet which show that the same is simultaneously debited to Interest Receivable on N.P.A. Account [on Asset side] and a contra credit entry is made in Overdue Interest Account [on Liability side] 8. The bank most respectfully submits that the aforesaid factual position was explained by it to the learned Assessing Officer during the assessment proceedings as well as to the learned C.I.T.[A] during the appellate proceedings. However both the authorities have failed to appreciate the facts in the proper perspective. 9. The bank most respectfully submits that entries made while presentation of final accounts to the shareholders for better understanding of the various issues shall not convert the true character and nature of income." 10. Apart therefrom, it has also been pointed out that the gross interest reflected on the credit side of the Profit & Loss Account and the Overdue Interest on NPAs shown on the debit side of the Profit & Loss Account is as per the requirements of section 65 of the Maharashtra Co-operative Societies Act, 1960 which prescribes the manner in which the net profit or loss is required to be computed in the ....
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....ons in the respective State Co-operative Societies Act. Notably, the Balance-Sheet format prescribed under the Third Schedule to the Banking Regulation Act, 1949 (as applicable to Co-operative Societies) specifically requires the banks to show 'Overdue Interest Reserve' as a distinct item on the 'Capital and Liabilities' side of the Balance-Sheet. Thus, it is evident that 'Overdue Interest Reserve Account' cannot be regarded as a 'reserve' or a part of the owned funds of the bank, as it is not created out of the real income received by the bank. 13. As a compliance to the aforesaid RBI guidelines, we find that the assessee has not debited the interest on NPAs to the accounts of the respective borrowals but it has been shown separately under 'Interest Receivable Account' on the 'Property and Assets' side of the Balance-Sheet. and corresponding amount has been shown under 'Overdue Interest Reserve Account' on the 'Capital and Liabilities' side of the Balance-Sheet. Thus, the depiction in the Balance-Sheet is in adherence to the prescription contained in the Banking Regulation Act, 1949 (as applicable to Co-operative Societies), a statute under which assessee is bound to carry out it....
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....n be a factor to evaluate assessability or otherwise of an income. In our considered opinion, it would inappropriate to be merely guided by a presentation in the annual financial statements to infer assessee's perception that an income had accrued, without considering the entries made in the financial statements in toto. In the present case, it is quite clear that assessee has drawn up its annual financial statement in compliance with the requirements of the statutes under which it functions and/or is incorporated. Therefore, the issue with regard to non-recognition of income on NPAs is required to be adjudicated having regard to the relevant legal position and not on the basis of the presentation in the annual financial statements. At this stage, we may also refer to the judgement of the Hon'ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co., (1962) 46 ITR 144 (SC) for the proposition that a mere book keeping entry cannot be assessed as income unless it can be shown that income has actually resulted. In the present case, the crediting of gross interest in the Profit & Loss Account, which includes interest on NPAs cannot be taken as a proof that such income has accru....
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....ization of which was governed by the Rules laid down by the State Government. It is stated that the assessee has been paying interest @ 3% on the Fund balance as per stipulation in the Rules and accordingly, an amount of Rs. 52,24,988/- was credited to the balance of the fund at on the end of the year. The aforesaid amount was claimed as a deduction while computing the taxable income. The Assessing Officer held that the aforesaid amount could not be deducted because it was not an actual outgo. Accordingly, the interest debited in the Profit & Loss account in this regard amounting to Rs. 52,24,988/- was disallowed and added back to the income of the assessee. The CIT(A) has also affirmed the stand of the Assessing Officer on this aspect and the operative part of the order of the CIT(A) in this regard reads as under :- "6.3 The submissions of the appellant are carefully considered with reference to the income & expenditure account and the relevant rules for establishment and use of agricultural credit (Stabilization) Fund as provided in the Govt. Resolution No.CCR4 1869/22948-C-1 dated 27th February 1971. As stated in para 3 of the Rules, the resources for establishment and mainten....