TaxTMI 
TaxTMI 
2015 (10) TMI 598
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.... or mercantile system of accounting to compute the real income. No adjustment could be made to the income assessed on accrual basis. 3. The learned CIT(A) has erred in deleting the addition on account of interest on non performing assets as the assessee has already identified and accounted the interest on NPAs and as such it can be clearly held that this interest on NPAs has also accrued to the assessee as on 31-03-2010 and is taxable. The learned CIT(A) has relied upon the decision of Hon'ble Jurisdictional High court in the case of CIT Vs Canfin Homes Ltd (2011) 5 Tax Corp (DT) 49593, reported in 347 ITR 382 on this issue despite the fact that the Department has challenged this decision before the Hon'ble Supreme Court and the SLP is pending in this case." 3. The assessee is a cooperative society engaged in the business of banking and providing credit facilities to its members. In the course of assessment proceedings, the Assessing Officer noticed that the system of accounting followed by the assessee was 'mercantile system of accounting'. The AO further noticed that the assessee had accounted interest income on accrual as well as cash basis as follows:- a. Interest r....
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....he pronouncement of Hon'ble High Court of Karnataka in the case of Canfin Homes (supra), there can be no question of accrual of income on NPA and therefore even under the mercantile system of accounting, it cannot be said that income has accrued or arisen to the assessee. The fact that the Revenue has preferred SLP against the decision of the Hon'ble High Court cannot be a ground to take any different view on the issue. We therefore uphold the order of CIT(Appeals) and dismiss ground Nos.2 & 3. 9. Ground No.4 reads as follows:- "The Ld. CIT(Appeals) ought to have upheld the decision of the Assessing Officer in disallowing the expenses relating to earlier years. As the assessee is following mercantile system of accounting according to which the actual claim on payment basis made by the assessee which does not pertain to the previous year relevant to the A.Y.2010-11 but it pertains to the A.Y.2009-10 cannot be claimed on payment basis during the A.Y.2010-11. The said expenses should have been claimed in the A.Y.2009-10." 10. As we have already seen, the assessee is a cooperative society engaged in the business of providing credit facilities to its members. On going through t....
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....ting to Rs. 4,16,70,762/- does not pertain to the previous year relevant to the Asst. Year 2010-11. These expenditures pertains to prior period i.e., for the Asst. Year 2009-10. 13. In view of the above and also considering the fact thàt the assessee is following mercantile system of accounting, according to the AO, the expenses cannot be claimed on payment basis in the AY 2010-11 and the same should have been claimed in the Asst. Year 2009-l0. Accordingly, a sum of Rs. 4,16,70,762/- was disallowed and added to the total income of assessee. 14. The CIT(Appeals) observed that the assessee has made a claim of Rs. 6,16,00,000/- under the head provision of NABARD sub-vention to PACs. This is basically a subsidy given by NABARD on the advances made to primary agricultural co-operative societies (PACs). NABARD has framed certain schemes where, it charges loan at concessional rate on agricultural loans granted to targeted sections of agriculturists. As per the scheme, initially the banks are required to charge the normal rate of interest. After the year end, the primary agricultural co-operative societies (PAC) would submit a claim for interest sub-vention. Based on this clai....
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....fficer. The ld. counsel for the assessee relied on the order of CIT(Appeals). 20. We have given a very careful consideration to the rival submissions. It is clear from the facts as it emanates from the record that announcement of schemes by NABARD happened during the previous year. Therefore accrual of liability as far as assessee is concerned is only when subvention percentage is announced by NABARD. Till such time, the assessee's liability cannot be said to have accrued. Since liability relates to the previous year in which subvention is announced by NABARD, we are of the view that accrual of liability occurs only when the subvention percentage is announced by NABARD and it is only thereafter that the Assessee can know what is the liability on account of sub-vention that it has to bear. In that view of the matter we find no infirmity in the order of the CIT(A). We therefore confirm the order of the CIT(Appeals) and dismiss ground No.4. 21. Ground Nos. 5 to 8 raised by the Revenue reads as follows:- "5. The learned CIT(A) ought to have upheld the decision of the Assessing Officer towards additions made on account of nonbusiness expenditure as this expenditure is incurred ....
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....ow banking, learn to handle finance and increase their income level. They also develop the habit of thrift and rural poor learn to save money. The scheme has a great vision of upliftment of the rural poor through these activities. With this object in view, NABARD, our controlling authority has thrust this responsibility on us. The expenses made by us are in respect of the remuneration paid each month to 250 Animators and 8 coordinators. Such Animators and coordinators do the work of liaisoning, training, monitoring and guiding such SHGs. They are also promoting various loan products of our bank and are also work as the persons canvassing for the deposits of the bank. At present there are 250 Animators and 8 coordinators working under this scheme. Since inception in 2004, the bank has advanced various loans amounting to over Rs. 500 crores. The present advance outstanding balance of various advances to different SHGs is over Rs. 100 crores with very high recovery rate. The SHGs are prompt payers of the loan installments. The present deposits of such SHGs with us is over Rs. 85 crores. The expenditure incurred is as per the MOU made between the Bank and the said Trust. A copy o....
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....e. 26. The assessee relied on the decision of Sri Venkata Sathyanarayana Rice Mills Vs CIT (223) ITR 101 wherein it was observed that 'What is to be seen is not whether it was compulsory for the assessee to make the payment or not but whether it was expended out of consideration of commercial expediency. As long as the payment is made for the purpose of business and the payment made is not by way of penalty for infraction of any law, the same would be allowable as deduction' (head notes). It was submitted that the Hon'ble Supreme Court in the above case held that the donation made by the assessee to the District Welfare Fund with which the District Collector was associated is allowable as business expenditure. It was held that requiring payment to be made for just cause which has entitled a business man to obtain a license or permit could not be recorded as being against the public policy and the expenditure has been motivated purely by commercial consideration. Applying the ratio of the above decision to the facts of the present case, it was submitted that the expenditure has been motivated purely by commercial consideration. The assessee has established as to how it is in its ....
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.... Trust. The expenses in question are in respect of the remuneration paid each month to 250 Animators and 8 coordinators. Such Animators and coordinators do the work of liaisoning, training, monitoring and guiding such SHGs. They are also promoting various loan products of the Assessee's bank and are also work as the persons canvassing for the deposits of the bank. Further it is clear from the factual finding rendered by the CIT(Appeals) that the assessee could generate disbursements to the tune of Rs. 500 crores and deposit mobilization to the extent of Rs. 85 crores from the Self Help Groups. It is also clear that the expenditure in question was incurred by the assessee keeping in mind the commercial exigency. The decision of the Hon'ble Rajasthan High Court in Rajasthan Spinning and Weaving Mills Ltd. cited supra clearly support the conclusions arrived at by the CIT(Appeals). In the aforesaid decision, the Hon'ble Rajasthan High Court held that it is not necessary to show that the expenses were not profitable or no benefit was actually derived. The receipt of actual benefit is also not necessary. The key aspect to be seen is relationship between the expenses incurred and carrying....
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....3. The assessee in its reply dated 14.08.2012 has stated as under:- "This method of amortization of premium on investment is in line with the guidance notes on audit of the Banks given by the Institute of Chartered Accountants of India. The Bank has followed the normal method of accounting and writing off of the premium which is being followed by the banking sector as a whole. A copy of relevant page from the Guidance Note on Audit of the Banks is also enclosed." 34. The AO noted that the assessee mainly relied on Reserve Bank of India's guidelines. All the Government securities purchased are required to be categorized under (a) Held to Maturity (b) Held for Trading (c) Available for Sale; as per circular/instruction from RBI. Such purchases of securities involve payment of premiums over the face value at the time of acquiring the, security. The premium so paid is added to the value of security cost. When such securities are held under the category Held to Maturity, the premiums so paid s equally spread over maturity date and amortised annually as per RBI guidelines. Such premiums amortised and pertaining to the current year is debited to the Profit and Loss Account as expend....
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....(A), the revenue has preferred the aforesaid ground before the Tribunal. 39. We have heard the rival submissions. The issue raised by the assessee in ground No.8 & 9 is no longer res integra and has been decided by this Tribunal in the case of M/s. Sir M. Visweswaraya Cooperative Bank Ltd. Vs. JCIT, ITA No.1122/Bang/2010 for AY 07-08 order dated 11.5.2012. The following were the relevant observations of the Tribunal: "03. Let us first take up the issue relating to amortization of premium on investment in government securities. Relevant grounds read as under : " i) The learned Commissioner (Appeals) ought to have appreciated that the appellant has to invest surplus fund in Government Securities as per RBI guidelines and the premium paid while investing in Government Securities that are bought in open market would have to be amortized till the maturity date of the security and thus the premium was written off was liable to be allowed as depreciation of value of securities ; ii) The learned Commissioner (A) ought to have appreciated that the classification of securities for RBI purposes would not take away the benefit which the appellant was entitled to and he ....
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....s. 29,02 lakhs of amortization of premium. 07. Per contra, the learned DR was unable to controvert to the submissions of the learned counsel for the assessee. 08. We have carefully considered the rival submissions and perused the relevant facts and materials on record. We have also considered the findings of the various benches of the Tribunal, as under : (i) Catholic Syrian Bank Ltd v. ACIT - (2010) 38 SOT 553 (Coch) : An identical issue to that of the subject matter under consideration had arisen before the Cochin Bench. After analyzing the issue in depth, the bench has observed that with regard to amortization of premium on purchase of Government securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortization of premium on government securities. United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 ; (1999) 240 ITR 355 (SC) and South Indian Bank Ltd., ....
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....ut appreciating the fact that the Department has not accepted the decision and since the SLP filed has been dismissed without going into the merits of the case, the question of law continues to remain unsettled." 45. On perusal of the assessee's P&L A/c, the AO noticed that an amount of Rs. 35,77,41,170/- has been credited to the P&L A/c. When specifically asked as to why this amount had not been offered on accrual basis, the assessee stated as under:- "(b) Interest on Investments: In addition to the above, we were asked to file details of interest accrued on investment. As is the case of interest on advances, the assessee has been offering the interest income from investments of cash basis. The same has also been accepted by the Learned JC1T during the course of Assessing Proceedings for the Assessment Year 2010-l1. We are of the opinion that the department may accept the accounting treatment adopted by the Assessee Bank since the same has been followed consistently. However, as required by you we are herewith annexing to this letter working in relation to interest accrued on investments. The amount of interest accrued on investments for the year ended 31- March-2011 i....
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.... case law cited above, has clearly held that if the interest does not become due and not liable to pay such part of interest, it cannot be said that the interest has become accrued. Hence, it was held that the broken period interest on the government securities in the above case were not taxable. Hence the addition was directed to be deleted. 48. Aggrieved by the order of CIT(Appeals), the Revenue has raised ground Nos.4.1 & 4.2 before the Tribunal. 49. We have heard the rival submissions. We have given a careful consideration to the rival submissions. At the time of hearing before us, it was agreed by the parties that the issue raised by the revenue in this appeal has already been decided by the Hon'ble Madras High Court in the case of CIT v. Tamil Nadu Mercantile Bank Ltd., 291 ITR 137 (Mad). The question of law before the Hon'ble Madras High Court was as follows:- "Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that interest on securities is taxable only on specified dates when it became due for payment and not on accrued basis?" The Hon'ble Madras High Court held as follows:- " In view of the deletion of section 18 o....