TaxTMI 
TaxTMI 
2016 (3) TMI 720
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....ant appeal in challenging lower appellate findings inter alia deleting addition of accrued interest on NPA accounts of Rs. 1,36,09,737/- and disallowance of Rs. 23,13,907/- made u/s.14A r.w.r 8D of the Income Tax Rules; as made in the course of re-assessment framed on 11.03.2013. We come to former ground. The assessee is a Co-operative Bank. It had not offered the impugned interest amount accrued on NPAs as its income for taxation. It follows mercantile system of accounting except for the impugned sum. The Assessing Officer sought to reject this hybrid system of accounting. The assessee inter alia pleaded that the above stated sum had been shown on the asset side of the balance sheet without crediting it in P&L account, the Bank had not credited any amount to this reserve account by correspondingly debiting any income account, the impugned figure had been taken from item no.10 under the head "over due interest reserve" account appearing in corpus and liability side of the balance sheet as on 31.03.2007 and in fact opening balance of the above stated reserve account was Rs. 4,49,24,071/- as reduced to Rs. 1,36,09,737/- in question without having any impact on current year's inte....
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....nition. The appellant being a co-operative bank is not expressly covered by the S.43D. However, CBDT circular dt. 9/10/1984 refers to banking companies. This phrase has been specifically defined in explanation (c) to s.36(1)(viii). It is seen from this definition that co-operative banks are not included in this definition. In other words, neither this circular nor s.43D seem to be applicable lo co-operative banks. However, the basic principles regarding interest on non-performing assets have been brought about by the circular as well as s.43D. It would therefore be necessary to look at the legislative intent behind enactment of S.43D. In the notes to account to Finance Act No,2 of 1991, it has been mentioned as under:- "FINANCE (NO.2) ACT, 1991 :- Chargeability of income from bad or doubtful debts in the case of financial institutions and banks. 22. The Reserve Bank of India has classified advances given by banks into eight categories called Health codes1 to 8. Stickv advances which are doubtful of realisation fall under Health codes 4 tot8. The banks and financial institutions normally credit interest from such stickv advances to the "Interest Suspense A....
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....give the following reasons in support : - (1) First of all we would discuss the matter in the light of the provisions of Income-tax Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee. It is stated at the cost of repetition that admitted position is that the assessee had not received any interest on the said ICD placed with Shaw Wallace since the assessment year 1996-97 as it had become NPAs in accordance with the prudential norms which was entered in the books of account as well. The assessee has further successfully demonstrated that even in the succeeding assessment years, no interest was received and the position remained the same until the assessment year 2006-07. Reason was adverse financial circumstances and the financial crunch faced by Shaw Wallace. So much so. it was facing winding up petitions which were filed by many creditors. These circumstances, led to an uncertainty insofar as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even the principal amount itself had become doubtful to recover. In this scenario it was....
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....rst three years the income may be taken on accrual basis and from 4th year onwards, the income in respect of doubtful debts was to be recognized on receipt basis. Since the income was to be assessed for first three years on accrual basis, provisions of section 43D were inserted in the Act. Circular No.621, dated 19-12-1991 gives the legislative intention, stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc.. so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or credited to the profit and loss account. This benefit was extended with effect from 1-4-2000 in the case of public companies engaged in long-term financing of housing projects approved by National Housing Banks. The Legislature in their wisdom did not extend the same benefit to NBFCs which has been given to scheduled banks, public financial institutions etc. The provisions of section 43D as stood at relevant time contained an expression the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the Guidelines issue....
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....f the applicability of Explanation to section 36(1)(vii) of the I.T. Act. For the sake of ready reference, relevant paragraph from the held portion is reproduced below:- "The income-tax is a tax on "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the Act. Therefore, if by the Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of bad debt which is written off, then one has to take into account the Explanation in computing the total income under the Income-tax Act failing which one cannot ascertain the real profits. The provision for non-performing assets debited in the profit and loss account under the Reserve Bank Directions of 1998 is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the Income-tax Act." Therefore the distinction can easily be drawn that in the appeal before us the question is accrual of interest income on stick by loan but in this cited decision the question before he Apex court was about the admissibility of provision made in respect of doubtful debts. (vi) Concept of real in....
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....is, in fact, arising in respect of a doubtful or sticky loan. This was done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan, but if after three years the payment of interest is not received, from the 4th year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. Following the UCO Bank (supra), the said appeal of the Revenue was dismissed. 8.6 It is also seen that this issue has been decided by the Hon'ble ITAT, Rajkot Bench in the case of Jamnagar District Co-op. Bank vs. Addl. CIT, Jamnagar in ITA No.481/Rjt/2011 for A.Y. 08-09. While deciding the same issue, the Hon'ble 1TAT has held as under:- "22.With regard to ground No.3, we have heard both sides. The AO disallowed the overdue interest reserve amounting to Rs. 1,15,00,000/- on the ground that assessee made the provision of this amount. Before us, the assessee submitted that the AO has not considered that it is credited into profit and loss account and debited back as per RB1 guidelines accounting policy of the bank adopted consistently. Thus, there is no real i....
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....he CIT(A)'s order deleting Section 14A r.w.r. 8D disallowance of Rs. 23,13,907/- made by the Assessing Officer. We find that the assessee had received dividend income of Rs. 90,94,421/- comprising of Rs. 87,18,670/- as exempt u/s.10(34) of the Act. The Assessing Officer invoked Section 14A r.w.r. 8D for computing the impugned disallowance of Rs. 23,13,907/-. The assessee submitted in the course of lower appellate proceedings that it had received interest income of Rs. 8.59 crores turning out to be much more than interest expenditure of Rs. 6.98crores. It highlighted the fact that its capital and reserves of Rs. 13.54crores exceeded the impugned tax free investments in UTI MNC funds of Rs. 3.24crores. The CIT(A) quotes Hon'ble jurisdictional high court's decision in CIT vs. Gujarat State Fertilizer & Chemical Ltd. 217 Taxman 343 and holds that the assessee had sufficient funds at its disposal and the Assessing Officer did not make out a case of utilization of borrowed funds for the purpose of the impugned tax free investments. Thereafter, he refers to CIT vs. Hero Cycle Ltd. 323 ITR 518 (P&H) that the impugned disallowance is not to be made since no expenditure has been ....
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....e bad debts amounting to Rs. 12,61,720/- could be written off. However, the bank had claimed write off of Rs. 38,55,000/- which exceeded the allowable limit by Rs. 25,93,280/-. The excess write off claimed by the appellant to this extent was disallowed by the A.O. During the course of assessment as well as appellate proceedings, the appellant has contended as under:- 1. During the year, the total bad and doubtful debts were Rs. 771 lakhs and 5% of the same amounting to Rs. 38,55,000/- was claimed as a deduction u/s.36(1)(viia). 2. The A.O. has taken the difference of closing balance of bad and doubtful debts of Rs. 715.91 lakhs and closing balance of bad debts reserves of Rs. 463.56 lakhs and arrived at a figure of Rs. 252.35 lakhs for calculating the maximum allowable write off to the extent of Rs. 12,61,720/-. It was therefore requested that the disallowance may be deleted. I have carefully considered the appellant's contention and the assessment order. What the A.O. has done is reduced the amount of reserve for bad debts from the total had debts as on the last day of the previous year. On careful perusal of s. 36(1)(viia), it is s....
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....and taxable income of the assessee is required to be determined in accordance with the provisions of Income tax Act, 1961. He accordingly held that the items in question are 'held to maturity' [HTM] are investment and premium paid is basically 'cost of investment'. The ld. AR of the appellant pleaded that, on one hand the AO states that the RBI's directions are not binding to the AO to determine the taxability under the Act whereas vide para 5.3 of the assessment order the AO had held that the guidelines of the RBI very clearly show that the securities held under HTM are not meant to earn profit but are required to be kept as they are till maturity. The absence of purpose of earning profit at the time of purchase of such securities is a strong indicator of the fact that the investment in securities under HTM is a capital investment. Moreover, if assessee resorts to frequent sale and transfers from HTM securities then the difference in market value and book value of such securities are also required to be indicated. It may in fact wipe out the difference between book value and maturity value if the market conditions are favourable. In view of the above it is clea....
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....ould bind the revenue, No question of law, therefore arises. Resultantly, the tax Appeal is dismissed." 5.2.3 The ld. AR also relied upon various other judicial pronouncements, which are reproduced supra and hence, not repeated here. These judicial pronouncements have been carefully perused. I have also perused the written submission of the ld. AR. The latest guideline from the RBI given to the banks in the-master circular RBI/2012-13/51 UBD.BPD (PCB).MC No 12/16.20.000 / 2012-13 dated 2.7.2012 in point No 16 for valuation of investment and valuation standards, has held that, 'Investments classified under HTM category need not be marked to market and will be carried at acquisition cost unless it is more than the face value. In such a case, the premium should be amortized over the period remaining to maturity. Now, in the instruction No 17 from the CBDT (reproduced supra), the AOs are specifically guided to follow RBI's guidelines for allowing (a) amortization of premium paid on investments under HTM category and (b) provision for depreciation in investment under AFS / HFT category. Thus, from the above two circulars, it is very clear that, for HIM category if the s....
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....0,000/- being the difference between the cost of acquisition and market value (NAV) of the mutual funds units held under the category of non-SLR securities, Held for Trading [HFT] and Available for Sale [AFS]. The appellant values its investment in Mutual Fund Unite at the market value, i.e., Net Asset Value [NAV] at the end of each year and depreciation in the value, if any, were debited to the Free Reserve with corresponding credits to the another reserve namely "Depreciation fluctuation Fund", however, in the audited financial statement, investments, in Mutual Funds Units were stated at cost on the Asset side and depreciation in the value of investments was shown under the Depreciation Fluctuation Fund on the liability side. Therefore, by netting-off the investment value with the depreciation fluctuation fund| at the end of the year, market value of the investment, i.e, NAV can be worked out. This is seen from the audited balance sheet that, investment in mutual funds are stated at cost, i.e, Rs. 399.89 Lacs against which depreciation in the value of investment at Rs. 127.00 Lacs are credited to Depreciation Fluctuation Fund. Therefore, by netting-off the value of investment wit....
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....rified that securities held by banks must be regarded as their stock-in-trade and the claim of loss, if debited in books of account, should be given the same treatment as is normally given to the stock-in-trade and Banks are statutorily required to prepare their statement of affairs as per format and principles of Banking Regulation Act, as per which, they are required to show value of shares/securities at cost or market value under the head "Investment". In the instant case, balance sheet and profit & loss a/c is prepared by following the statutory guidelines and real income is brought to tax. According to the Id. AR, the appellant had in the past also created-the depreciation fluctuation fund to safeguard the loss in future. The opening balance of the said depreciation fluctuation fund was Rs. 115.10 lacs as on 1.4.2008. Thus, this is not the first time that the claim is made. 7.2.3 So far as the finding of the AO that depreciation on securities was available on Govt. Securities and not on Mutual Fund Units, the ld. AR submitted that, the AO has failed to appreciate the accounting principle that the valuation of every stock/asset has to be done on the last day of the acc....
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.... carefully assessed the above situation. The Hon. Supreme Court in the case of United Commercial bank Vs CIT (1999) 240 ITR 355 has held that, preparation of the balance sheet by a bank governed by the provisions of the Banking Regulations Act, 1949, in accordance with statutory provisions will not disentitle the appellant from submitting the income tax return on its real taxable income in accordance with the method of accounting it adopts consistently and regularly. For the purpose of income tax, what is to be taxed is real income, which is to be deducted on the basis of the accounting system regularly maintained by the assessee. The method by which the assessee bank is valuing securities by treating them as stock in trade is in accordance with the accounting principles and the revenue itself was treating the profit on maturity of such securities as business income. Again, as per RBI guidelines, non-SLR securities are available for sale and are required to be valued at Market Value. The CBDT vide circular no.599 dated 24.04.1991 clarified that securities held by banks must be regarded as their stock-in-trade and the claim of loss, if debited in books of account, should be given th....
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..... A.Y. 2010-11 Revenue's appeal ITA No.559/Rjt/2014 & Assessee's C.O. No.5/Rjt/15. 16. The Revenue's first substantive ground seeking to revive addition of accrued interest on NPA account of Rs. 23,49,786/- is found to be covered by our corresponding finding in A.Y. 2007-08 on an identical issue decided therein in preceding paragraphs. This ground also follows suit. 17. The Revenue's second substantive ground assails correctness of the lower appellate order restricting Section 14A r.w.r. 8D disallowance of Rs. 1,51,56,596/- to that @ 1% of the exempt income coming to Rs. 1,70,054/-. The assessee's Cross Objection on the other hand seeks to delete the entire disallowance. We come to the relevant facts as discussed in the CIT(A)'s order as under: "4.2 I have perused the assessment order and the written submission filed by the ld. AR. 4.2.1 On perusal of the assessment order and the records, it is seen that, the appellant bank had earned dividend income of Rs. 17,00,541/- from investment in UTI Mid Cap Funds etc and claimed the said income as exempt u/s 10 of the Act. The AO disallowed Rs. 1,51,56,596/-, u/s. 14A by applying the formu....
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....hat the bank had received interest of Rs. 11.61 crores from advances etc. as against which the bank has paid interest of Rs. 7.05 crores resulting into positive interest income to the tune of Rs. 4.56 crores which is from the application of bank's own fund. In the working of disallowance u/s. 14A, as per Rule 8D, the AO had taken into account the entire interest expenditure, which implies, that the appellant had borrowed all its funds to make investment in mutual funds, resulting into earning of exempt income. However from the face of the records, this is virtually not correct. The appellant had sufficient interest free funds and reserves which were deployed to make the investments, and hence, the .element of deploying borrowed funds to make investments does not exist. There is a direct decision of the Hon. Gujarat High Court (which is reproduced supra), which upholds this view. Further, in the case of CIT Vs Winsome Textiles Industries Ltd (204 ITR 319), the Hon. Court had decided that, when the shares were acquired by way of own funds and no interest was incurred as there was no borrowed funds to make investments, there does not arise any disallowance u/s. 14A. Also, in the c....
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....withstanding the provisions of Rule 8D where the assessoe's own funds are in excess of the investments made by it which yielded exempt income. Therefore, since the appellant was having sufficient interest free funds, it is reasonably acceptable that such interest free funds went into investments, which generated exempt income. Therefore, no disallowance can be made u/s. 14A as no interest, bearing fund has been deployed to earn exempt dividend income and no expenditure has been incurred to earn exempt dividend income and the AO had not demonstrated any nexus between the earning of exempt income and expenditure incurred for such income. 4.2.6 Having given the above finding, it cannot be said that the appellant had not incurred any administrative expenditure in earning exempt income since the office and administrative machinery would have a small involvement in managing the investments of the appellant. Therefore, respectfully following the ratio laid down by the Hon. Calcutta High Court in the case of EIH Associated Hotels Ltd (126 TTJ 246), it is held that, 1% of the exempt dividend income, would go towards incurring administrative expenses and hence, the disallowance ....