TaxTMI 
TaxTMI 
2015 (1) TMI 514
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....g the deduction under section 36(1)(viia) to Rs. 15,37,76,000/- against Rs. 65,35,21,900/-. 4. Without prejudice to Ground no.1 and ground no.3, CIT(A) has erred in not considering the alleged provision of Rs. 7,68,22,858/- for the purpose of section 36(1)(viia) of the Act, 1961 (Para-5 of the order). 5. Commissioner (Appeals) has erred in setting aside to Assessing Officer the issue of excluding interest of NPA A/c recovered / received during the year. Same be allowed if not allowed in A.Y. 2008-09. 6. Commissioner (Appeals) has erred in charging of interest under section 234B of the Act. Same may please be cancelled." 3. The appellant before us is a co-operative society incorporated under the provisions of Maharashtra Co-Operative Societies Act, 1960, and is carrying on banking business under license from the Reserve Bank of India as a Co-operative Bank. For the assessment year 2009-10, it filed a return of income on 29th September 2009, declaring total income of Rs. 10,91,49,950, which was subsequently revised on 31st March 2011, whereby, the total income was returned at "nil" and the current year's loss was determined at Rs. 34,11,33,623. The return of income filed by the a....
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....een classified as NPAs. 5. The controversy with respect to non-recognition of income on accrual basis relatable to the NPAs is no longer res integra but the same has already been adjudicated in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order dated 31.10.2013 and also other subsequent decisions of the Pune Bench of the Tribunal. Apart therefrom, the Hon'ble Bombay High Court in the case of CIT vs. M/s KEC Holdings Limited vide Income Tax Appeal No.221 of 2012 dated 11.06.2014 has also approved the proposition that the interest income on NPAs is not recognizable on accrual basis. The aforesaid matrix is not challenged by the Revenue also. So however, in the present case, the case setup by the Revenue 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 de....
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....ancial statements, the case of the Revenue is that the interest on NPAs have been credited in the Profit & Loss Account and thus its accrual has been accepted by the assessee; and that the contra entry by way of debit in the Profit & Loss Account is to be understood as a mere Provision and, since a Provision is not an allowable deduction, the amount of Rs. 47,01,85,366/- has been added to the total income. 9. The claim of the assessee is that it is incorrect to say that it has created a Reserve/Provision in respect of the Overdue Interest on NPAs. It is explained that instead of netting of the interest on loans, the bank has shown the gross interest on credit side of the Profit & Loss Account and on the debit side of the Profit & Loss Account the amount of interest on NPAs has been separately 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 ....
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....e time of preparation of consolidated Profit and Loss Account and Balance Sheet as on 31/03/2008 [the copies of which are filed before the various tax authorities] solely with a view to make a disclosure of Gross Interest that would have been received by the bank, the interest on N.P.A. is disclosed on credit side of the Profit and Loss Account and a contra entry is made on debit side under the head Interest Paid. This accounting treatment does not by any logic convert the interest on N.P.A. in to interest accrued within the meaning of the provisions of the I.T. Act 1961 or cannot be called as recognition of income by the bank. 7. The interest on N.P.A. advances can never be recognized as income accrued to the bank merely by placing reliance in isolation on the presentation of Profit and 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 proc....
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....erest in relation to NPAs should be computed and shown separately, though not accounted as income of the bank for the relevant period. Further, in para 4.5.3, with a view to ensuring uniformity in accounting the accrued interest in respect of both the performing and non-performing assets, the RBI guidelines inter-alia, prescribe that interest accrued in respect of NPAs should not be debited to borrowal accounts but shown separately under 'Interest Receivable Account' on the 'Property and Assets' side of the Balance-Sheet and corresponding amount shown under the 'Overdue Interest Reserve Account' on the 'Capital and Liabilities' side of the Balance-Sheet. In-fact, as a preface in para 4.5.3 the RBI has laid down that the aforesaid guideline be adopted notwithstanding the existing provisions 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 Ac....
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.... loans against fixed deposit, gold, etc." 15. The aforesaid would show that while constructing its Profit & Loss Account to arrive at its net Profit or Loss, a Co-operative Society is required to show interest accrued/accruing on amounts of Overdue Loans separately. This is precisely what has been done by the assessee in the present case. The aforesaid requirement of the manner of construction of Profit & Loss Account, prescribed under the Rules of the Maharashtra Co-operative Societies Act, 1960, has prompted the assessee to draw up its Profit & Loss Account in the manner we have noted above qua the interest on NPAs. Therefore, it cannot be accepted that the manner or presentation of account which ostensibly is in compliance with the statutory provisions governing the assessee, can 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 financi....
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....of Appeal No.3 is dismissed as infructuous." 5. Following the aforesaid precedent in the assessee's own case for the assessment year 2008-09, we set aside the impugned order of the Commissioner (Appeals) and direct the Assessing Officer to delete the addition of Rs. 7,88,22,858/-. Thus, with respect to Ground of appeal no.1, the assessee succeeds. 6. Insofar as Ground of appeal no.2 is concerned, it relates to an amount of Rs. 54,38,535, representing the interest on agricultural credit stabilization fund. 7. In the above context, a perusal of Para-8 of the assessment order reveals that a sum of Rs. 54,38,535/- was found to have been debited by the assessee in its Profit & Loss account on account of "interest paid on agricultural credit stabilization funds". It is also noticed from the discussion made by the Assessing Officer in Para-8 that the assessee had suo-motu disallowed the said amount in the computation of income filed along with the revised return of income filed on 31st March 2011. In this background, it is also noticeable that before the learned Commissioner (Appeals) also, no specific ground was raised in this regard. Furthermore, the learned Authorised Representative....
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....aim of deduction is the controversy before us. In this context, the Pune Bench of the Tribunal in the case of Mahalaxmi Cooperative Bank Ltd. (supra) considered an identical controversy and came to conclude that the deduction sought to be claimed by the assessee under section 36(1)(viia) of the Act was liable to be restricted to the extent of the Provision for bad and doubtful debts actually made in the books of account. The relevant discussion in the order of the Tribunal dated 29th October 2013 (supra) is reproduced hereinafter:- "9. We have carefully considered the rival submissions. We have also anxiously perused the authorities cited at Bar in order to determine the controversy on hand. The relevant portion of Section 36(1)(viia) of the Act, as applicable for the assessment year under consideration i.e. A.Y. 2008-09 reads as under : - "[(viia) [in respect of any provision for bad and doubtful debts made by- (a) a scheduled bank [not being [* * *] a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank....
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.... in the Balance-Sheet of the subsequent assessment year. On this basis, it was sought to be made out that there was substantial compliance with the requirement of law of making Provision for bad and doubtful debts and therefore assessee justified the claim of deduction for the complete amount of Rs. 1,94,21,000/- and not restricted to Rs. 1,90,36,000/-. The CIT(A) as well as the Tribunal negated the plea of the assessee and accordingly, the matter was carried before the Hon'ble Punjab & Haryana High Court. The Hon'ble High Court referred to the provisions of Section 36(1)(viia) of the Act and observed that ".....the deduction allowable under the above provisions is in respect of the provision made" and further went on to hold that ".....making of a provision for bad and doubtful debts equal to the amount mentioned in this section is must for claiming such deduction." In view of the aforesaid judgement of the Hon'ble Punjab & Haryana High Court, in our view, the position sought to be canvassed by the assessee deserves to be repelled. We reproduce hereinafter the relevant portion of the order of the Hon'ble High Court, which reads as under :- "5. Sec.36(1)(viia) of the Act as applic....
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....had made a provision of Rs. 1,19,36,000 for bad and doubtful debts, its claim for deduction under s. 36(1)(viia) of the Act had to be restricted to that amount only. Since the language of the statute is clear and is not capable of any other interpretation, we are satisfied that no substantial question of law arises in this appeal for consideration by this Court. 11. In view of the aforesaid interpretation of Section 36(1)(viia) of the Act by the Hon'ble Punjab & Haryana High Court, the orders of the lower authorities deserve to be upheld inasmuch as the assessee has not made a Provision for bad and doubtful debts in the books of account equal to the amount of deduction sought to be claimed under Section 36(1)(viia) of the Act, and therefore, in our view, the lower authorities were justified in restricting the deduction to Rs. 50,00,000/- , being the amount of Provision actually made in the books of account. 12. The learned counsel for the assessee has cited certain decision in support of his proposition that the claim of deduction under Section 36(1)(viia) of the Act is not linked to making of a Provision in the account books. At the outset, we may observe that the decisions reli....