TaxTMI 
TaxTMI 
2015 (3) TMI 936
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....statement of total income to the profit as per P&L account. The AO noticed the following:- Balance of overdue interest receivable as on 31-03-2007 8,16,28,582 Less: Balance of overdue interest receivable as on 31-03- 2006 6,61,50,558 Difference amounting to interest for the year accrued but not credited to P&L a/c 1,54,78,024 Less: Income offered out of the above by the assesse 60,71,459 Balance 94,06,565 3. According to the AO, the difference between the overdue interest as on 31.3.2007 and 31.3.2006 was a sum of Rs. 1,54,78,024 and this entire amount ought to have been offered to tax as income by the assessee as the assessee was following mercantile system of accounting. The AO therefore added the difference between the sum of Rs. 1,54,78,024 and Rs. 60,71,459 (which was added in the computation of total income by the assessee) viz., a sum of Rs. 94,06,565. The AO also referred to the decision of the Hon'ble Supreme Court in UCO Bank v. CIT, 237 ITR 889 (SC) and accepted the fact that as per the aforesaid decision, interest on sticky loans need not be offered to tax. 4. The AO also, referred to the provisions of section 43D which was in....
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....rned CIT(A) failed to consider the jurisdictional High Court's order in the case of Karnataka State Finance Corporation Vs CIT (1988) 174 ITR 212, where it was held that the interest on sticky loans of doubtful recovery was includible in assessee's income following the mercantile system of accounting. 5. The learned CIT(A) has erred in deleting the disallowance of Rs. 94,06,565/- on account of accrued interest which is not credited to the P and L account treating it as double taxation. The CIT(A) has not examined the correctness of this accrued interest arrived at by the assessee." 8. We have considered the rival submissions. In our view, the issue requires a fresh consideration by the AO and therefore the order of the CIT(Appeals) is set aside. The reasons for doing so are that the order of the CIT(A) is not clear as to how the interest receivable which are overdue have been accounted for by the assessee in its books of account. Admittedly, the assets side of balance sheet as on 31.3.2006 showed a sum of Rs. 6,61,50,558 as overdue interest. The overdue interest as on 31.3.2007 was Rs. 8,16,25,582. The difference between the two was a sum of Rs. 1,54,78,024. This interest ought t....
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....gregate average advances made by the RURAL BRANCHES of the appellant bank. 3. The learned Commissioner of Income Tax (Appeals) ought to have appreciated that, the appellant bank is entitled to claim the deduction U/s 36(1) (viia) of Income Tax Act for creation of "BAD AND DOUBTFUL RESERVE" to the extent of 10% of the aggregate average advances made by the RURAL BRANCHES. 4. The learned Commissioner of Income Tax (Appeals) was not justified in contending that, the appellant bank does not come under the definition of "SCHEDULED BANK" or "NONSCHEDULED BANK" as per explanation (ia) of section 36(1) (viia) of Income Tax Act" 12. As we have already seen, the assessee is a cooperative bank. In the P&L account, the assessee had debited a sum of Rs. 1.50 crores under the head 'contribution to bad and doubtful'. The real nomenclature ought to have been "provision for bad and doubtful debts". The assessee made a claim for such a deduction u/s. 36(1)(viia) of the Act. The relevant provisions of section 36(1)(viia) as substituted by the IT (Amendment) Act, 1986 by the Finance Act, 1985 and as amended from time to time reads as follows:- SECTION 36- OTHER DEDUCTIONS Other deductions.- (1) T....
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....The AO was also of the view that provisions of section 36(1)(viia) are not applicable to the assessee, which are rather applicable only to banking sector. According to the AO, assessee cannot be said to be in the banking sector. The AO therefore rejected the claim of assessee for deduction of a sum of Rs. 1.5 crores. Alternatively, the AO also held that in case it is held that assessee is entitled to claim deduction u/s. 36(1)(viia), then the quantum of deduction cannot, in any event, be more than Rs. 1,30,61,552 as per computation given in the order of assessment. It is to be mentioned that no such computation is given in the order of assessment. 16. Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(Appeals). The CIT(A) upheld the order of the AO, following the decision of the Lucknow Bench of the Tribunal in the case of Manasarovar Urban Cooperative Bank Ltd. v. DCIT, 126 ITD 172, wherein it was held that provisions of section 36(1)(viia) of the Act are not applicable to cooperative banks and are applicable only to scheduled and non-scheduled banks. 17. Aggrieved by the order of the CIT(A), the assessee has raised grounds 2 to 4 before the Tribunal.....
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.... 1,65,96,821/- being "Interest on loans received during the year, but pertains to earlier years". 22. In the statement of total income filed along with the return of income, the assessee deducted from the profit as per P&L account a sum of Rs. 1,65,96,812 representing "interest received during the previous year but pertaining to earlier year". It is not in dispute that the aforesaid sum represents interest income of the assessee which accrued to the assessee during the period prior to the previous year relevant to A.Y. 2007-08, but was not recognized in the books of account on accrual basis. The assessee follows mercantile system of accounting. Therefore the interest income that accrued to the assessee ought to have been included as income of the period prior to the previous year relevant to A.Y. 2007-08. The assessee did not do so, but accounted the interest income on receipt basis. According to the assessee, interest income has to be accounted only on receipt basis, as per the Karnataka Co-operative Societies Rules, 1960. Therefore, the assessee accounted for interest income on receipt basis. This was the method consistently followed by the assessee. The assessee pointed out tha....
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....s. Interest on loan and Advances 7,74,03,010 8,26,70,388 9,10,13,106 Interest on investment 1,92,46,213 1,98,18,048 1,55,35,868 Aforesaid interest has been received/receivable from loans advances and from investment in Government securities year wise details as under - Loans and Advances 58,34,96,310 64,60,92,353 73,89,62,726 Investment 13,75,32,500 14,10,32,500 25,35,37,500 From the above it indicates that loans and advances and investment (including Govt. securities are increasing trend, correspondingly interest on loans and advances also increased from Rs. 8.26 lakhs to Rs. 9.10 lakhs. If interest of Rs. 1,65,96,812/- to be reduced from Rs. 9,10,13,106/-, net interest would be Rs. 7,44,16,294/- which is less than interest declared in the assessment year 2005-06 i.e., Rs. 7,74,03,010/-. In view of this fact there is no merit in the appellant's contention that income pertains to the financial year relevant to the assessment year 2006-07. 14. The appellant following mercantile system of accounting, shows following facts and figures - Y.E. on 31.03.2005 Y.E. on 31.03.2006 Y,E. on 31.03.2007 Interest receivable on overdue 4,84,08,853 6,61,50,558 8,16....
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....e interest income in question is interest on sticky loans. The AO has proceeded on the basis that since interest has to be accounted on receipt basis under the Karnataka Cooperative Societies Rules, 1960, the loans in question were sticky loans. In our view, such conclusions cannot be sustained. The claim made by the assessee in this regard about the nature of interest income and its time of accrual has to be accepted. The conclusions of the CIT(A) in para 13 of his order, in our view, is again based on surmises and cannot be sustained. Neither the AO nor the CIT(A) called upon the Assessee to explain as to whether the interest income in question is interest on sticky loans which was accounted for as income only on receipt basis. As we have already observed, accounting entries in the books of the assessee regarding interest income assumed significance only after A.Y. 2006-07 when interest income became taxable in view of insertion of section 80P(4) to the Act w.e.f. 1.4.2007. Therefore, there is no merit in the observations of the CIT(A) regarding lack of entries in the books of account of the assessee for A.Y. 2005-06 and 2006-07. We are therefore of the view that it would it woul....