TaxTMI 
TaxTMI 
TaxTMI 
2025 (2) TMI 1614
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....-filed its return of income on 01.10.2023 declaring total income at Rs. 3,50,79,049/- and after set off of brought forward losses, the balance taxable income is arrived at Rs. Nil. The return was processed u/s 143(1) of the Income Tax Act, 1961 (the "Act"). Subsequently, the case was selected for scrutiny under CASS and the assessment u/s 143(3) of the Act was completed by the Ld. Assessing Officer ("AO") on 29.01.2016 assessing total income of the assessee at Rs. 7,00,83,018/-. The Pr. CIT-2, Aurangabad observed that the following issues remained to be verified during the course of assessment made u/s 143(3) of the Act : "On verification of balance sheet and profit and loss account it is noticed that the assessee has made the provision on account of overdue interest of Rs. 34,94,01,000/-. However, there is no provision of income tax Act under which any provision is allowed as expenses. Therefore, provision for overdue interest is not allowable as expenditure and hence same should have been disallowed." 2.1 The Ld. Pr. CIT therefore invoked the provisions of section 263 of the Act holding that the impugned assessment is erroneous and prejudicial to the interest of the r....
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....ally applicable to the co- operative banks. The hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) held that the provisions of section 45Q of the Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, section 45Q of the Reserve Bank of India Act shall have the overriding effect over the income recognition principle followed by co-operative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India Directions, 1998, as held by the hon'ble Supreme Court. 9. The honourable apex court in the case of UCO Bank's case (supra) had an occasion to consider the nature of the Central Board of Direct Taxes Circular and the hon'ble apex court has thus held that the Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee ....
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....ular is binding under section 119. The Circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a 'sticky' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account goes to show that th....
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....Act." 10. The learned counsel for the respondent has placed reliance in a case of Mercantile Bank Ltd. v. CIT [2006] 283 ITR 84/153 Taxman 97 (SC), where similar question was raised before the apex court. The question was whether the assessee is liable to be taxed under the Income-tax Act, 1961, in respect of the interest on doubtful advances credited to the interest suspense account. In this case, UCO Bank's case (supra) was also referred and the hon'ble apex court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent co-operative banks, as understood by section 43C of the Income-tax Act on the scheduled bank. 11. Learned counsel for the appellants-Revenue placed reliance on the judgment in the case of Southern Technologies Ltd. (supra). However, this judgment pertains to non-banking financial companies. UCO Bank's case (supra) and Mercantile Bank Ltd. (supra) case squarely applies to the facts of the present case and issues involved. We, therefore, do not find it necessary to interfere in the judgment of the Appellate Tribunal. We hold that no substantial question of law arises in these appeals." I....
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....r 2008- 09. The Assessing Officer after rejecting the various contentions of the assessee has held that the RBI guidelines are not intended to regulate the income tax law and the assessee was liable to be assessed on accrual basis u/s.5 of I.T. Act for the reasons (i) benefits extended to schedule bank, public financial institutions, public companies for the purpose of section 43D were not extended to a co-operative bank and (ii) the assessee was following mercantile system of accounting and not cash system. Ultimately the Assessing Officer taxed on accrued interest of Rs. 25,20,022/- advance claimed to be NPA account. The matter was carried before the first appellate authority wherein, following the Osmanabad Janta Sahakari Bank Ltd. in ITA No.795/PN/2011, the CIT(A) has decided the issue in favour of the assessee and the same has been opposed before us on behalf of revenue. 2.1 After going through the rival submissions and material on record, we find that in Osmanabad Janta Sahakari Bank Ltd. (supra) the Tribunal has decided the issue in favour of assessee by observing as under: "7. In the case before us, admittedly, assessee has directly taken the interest to t....
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....ised by the Revenue. The grounds of appeal raised by the Revenue are thus, dismissed." 7.1 Also, in the case of Solapur District Central Co-op. Bank Ltd. Vs. ACIT for the AY 2008-09 (supra), the Pune Tribunal decided the impugned issue in favour of the assessee by observing as under : "4. The first dispute is in terms of Grounds of Appeal No.1 to 3 which relate to an addition of Rs. 47,01,85,366/- on account of interest on Non Performing Assets (in short "NPAs"). As noted earlier, assessee is a co-operative bank carrying on banking business in terms of a license issued by Reserve Bank of India (RBI). Therefore, assessee is governed by the Circulars and Guidelines issued by the RBI, in particular relating to Prudential Norms, Income Recognition, Asset Classification, Provisioning and other related matters. In terms of such Prudential Norms of RBI, assessee asserts that it did not recognize interest income on account of NPAs i.e. the loans/advances to customers which have been classified as NPAs following the Prudential Norms of RBI. The pertinent dispute in the Grounds of Appeal No.1 to 3 relates to non-recognition of income of Rs. 47,01,85,366/- in respect of advances/l....
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....e Paper Book, on the credit side under the heading "Interest Received", interest from Society Loan and from Individual Loans have been reflected at Rs. 167,02,91,981/- and Rs. 13,66,79,692/- respectively. It has been explained that the aforesaid interest income credited in the Profit & Loss Account include Rs. 46,30,12,177/- and Rs. 71,73,189/- on account of Society Loans and Individual Loans respectively which are relatable to loans/advances to customers classified as NPAs as per RBI norms. Similarly, on the debit side of the Profit & Loss Account under the heading "Interest Paid", sums of Rs. 46,30,12,177/- and Rs. 71,73,189/- are put under sub-headings "Overdue interest from Society Loans" and "Overdue interest from Individual Loans" respectively. Similarly, on the Liabilities side of the Balance-Sheet an entry of Rs. 82,81,68,339/- styled as "Overdue Interest Reserve" appears. It has been explained that the term Reserve has been mistakenly used and in-fact the said amount reflects a contra entry for Interest Receivable on NPAs, which is appearing on the "Assets side" on the Balance-Sheet under the heading "Interest Receivable", with sub-headings "On Society Loans" and "On Indiv....
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.... is not appearing under the heading Provisions but is debited under the heading Interest Paid as overdue interest on loans of Societies and Individuals as a contra entry. 4. The bank most respectfully submits that a careful and dispassionate study of the final accounts of the bank would reveal that it has never created any provision or reserve in respect of Overdue Interest on N.P.A. as alleged by the tax authorities. The entries as appearing in the Profit and Loss Account and the Balance Sheet for the F.Y. 2007-08 appear to have created some confusion in the minds of the learned Assessing Officer. It is false and incorrect to say that the bank has created a Reserve/ Provision in respect of the overdue interest on N.P.A. which has been treated as Interest accrued in the books of account of the bank for the relevant year. 5. The bank most respectfully submits that instead of netting of the interest on loans, the bank has shown the gross interest on credit side of the Profit and Loss Account and simultaneously shown on debit side of the Profit and Loss Account the amount of interest on N.P.A. which is in accordance with the Accounting Standard [AS] 9 issued by the I....
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....We have carefully considered the rival submissions. As noted earlier, the crux of the controversy is with regard to assessee's claim that income with respect to the Interest on NPAs classified as per RBI norms is not assessable on accrual basis but is liable to be taxed as and when received. As per the Revenue, in the present case, assessee has credited gross interest in its Profit & Loss Account which is inclusive of the interest relatable to the NPAs, and crediting of such interest in the Profit & Loss Account shows that assessee has perceived such income to have been accrued, because assessee is following the mercantile system of accounting. 12. Undisputedly, the assessee bank is following the mercantile system of accounting. However, with regard to the recognition of income on NPAs, it has applied the RBI guidelines which say that such income is not to be recognized on accrual basis but is to be recognized as income only when it is actually received. The RBI guidelines also prescribe the manner in which the interest in relation to NPAs is to be shown in the Annual financial statements. In terms of the Master Circular on Income Recognition, Asset Classification, Provisi....
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....arlier paras, assessee has credited its Profit & Loss Account with gross interest which, inter-alia, includes the impugned interest on NPAs. On the debit side, assessee has shown the impugned interest on NPAs under the heading "Interest paid" and sub-headings "Overdue Interest from Society Loans" and "Overdue Interest from Individual Loans". The assessee is a society registered under the Maharashtra Co-operative Societies Act, 1960 and it is also governed by the Maharashtra Co-operative Societies Rules, 1961. Section 65 of the Maharashtra Societies Act, 1960 deals with Ascertainment and appropriation of profits by a society. Sub-section (1) of section 65 of the Maharashtra Co-operate Societies Act, 1960 lays down that a society shall construct its relevant annual financial statements to arrive at its consequent net profit or loss in the manner prescribed. Such manner in relation to the calculation of net profits has been prescribed in Rule 49-A of the Maharashtra Co-operative Societies Rules, 1961. Rule 49-A prescribes that a society shall calculate "the net profits by deducting" from the gross profits for the year the Items (i) to (xvi) prescribed therein. For our purpose, it woul....
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....PAs as assessable on receipt basis, such a position cannot be ignored in the case of present assessee merely because of a presentation in the annual financial statements. Even otherwise, we notice that the RBI guidelines permit that interest income on NPAs be parked in a suspense account and it is not necessary that it has to be brought to the Profit & Loss Account by the assessee. However, in the present case, as seen earlier, assessee has credited the gross amount of interest on credit side of the Profit & Loss Account and simultaneously shown on the debit side of the Profit & Loss Account, the amount of interest on NPAs. In other words, instead of netting of the interest the two amounts have been shown separately one on the credit side and other on the debit side. The net effect of the said presentation is the same. Therefore, in our view, the lower authorities have misguided themselves in rejecting the claim of the assessee for non-recognition of interest income on NPAs. 16. In view of the aforesaid, we set-aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 47,01,85,366/-. Thus, on Grounds of Appeal No.1 and 2 assessee succeeds....
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....erest pertaining to doubtful loans as not real income in the year in which it accrues but in the year in which it is realized. This method of accounting adopted by the assessee is in accordance with accounting practice. Accordingly, the ITAT, Pune Bench has allowed this identical overdue interest provision issue for the AYs 2008-09, 2009-10 and 2011-12 in the case of the assessee itself. The Ld. AO, however, did not accept the above contention of the assessee and completed the assessment on 30.12.2016 by making an addition of Rs. 34,13,94,000/- on account of overdue interest disallowing the claim of the assessee u/s 43D of the Act. 10.1 The Ld. AO also disallowed the provisions made towards robbery amounting to Rs. 5,10,000/- and provision made towards fraud amounting to Rs. 1,59,83,000/- u/s 37 of the Act observing that these are not legitimate business expenses. Before the Ld. AO, the Ld. AR for the assessee made the following submission in respect of the impugned issue, which were not accepted by the Ld. AO : "Robbery: There was robbery to the tune of Rs. 5,10,000/- for which FIR is lodged. Copy of the FIR is enclosed herewith for your reference. Hence, provision for....
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....30 ITR 440/196 Taxman 169/[2010] 8 taxmann.com 145 (Delhi). In this case, the Revenue relied upon the decision of the hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra). The learned Income-tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of Southern Technologies Ltd. (supra). The assessee herein being a co- operative bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the co-operative banks. The hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) held that the provisions of section 45Q of the Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, section 45Q of the Reserve Bank of India Act shall have the overriding effect over the income recognition principle followed by co-operative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India Directions, 1998, as held by the hon'ble Supreme Court. 9. The honourable apex court in the case of UCO Bank's cas....
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....t Taxes's Circular on October 9,1984, since the assessment pertains to the assessment year 1981-82 to which the Circular of October 9, 1984, is applicable If, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officer's should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income- tax Act. Such a circular is binding under section 119. The Circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars whic....
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.... on the department The relevant circulars of Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act." 10. The learned counsel for the respondent has placed reliance in a case of Mercantile Bank Ltd. v. CIT [2006] 283 ITR 84/153 Taxman 97 (SC), where similar question was raised before the apex court. The question was whether the assessee is liable to be taxed under the Income-tax Act, 1961, in respect of the interest on doubtful advances credited to the interest suspense account. In this case, UCO Bank's case (supra) was also referred and the hon'ble apex court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent co-operative banks, as understood by section 43C of the....
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....deleted the addition made by the Ld. AO for the reason that the said provisions are not contingent but based on ascertained liabilities without carrying out any verification. The Ld. CIT(A) has therefore erred in considering the amount of Rs. 1,64,93,000/- as ascertained liabilities ignoring the fact that the same were previous year losses and thus not allowable in the year under consideration. 13.2 The Ld. AR supported the order of the Ld. CIT(A) and reiterated the submissions made before him and submitted the fraud has been made by the employees of the assessee's bank due to which the bank has suffered loss which has impacted the profit of the bank and therefore the same is an allowable expenses u/s 37 of the Act. He submitted that the assessee had filed FIR against all the employees involved in the fraud and the copies of the same were produced before the Ld. AO. On specifically being asked by the Bench as to when the alleged fraud took place, the Ld. AR submitted that the fraud has taken place from 1986 to 2013. 14. We have heard the Ld. Representatives of the parties and perused the material on record. So far as the first issue relating to claim of deduction u/s 43D of t....
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....g total income at Rs. 12,29,16,320/-. The return was processed u/s 143(1) of the Act. Subsequently, the case was selected for Compulsory Scrutiny on the basis of parameter at a Para 1(i) of the Manual Compulsory Guidelines of CBDT issued vide instruction No. 04/2016 dated 13.07.2016. Accordingly, statutory notice(s) u/s 143(2)/142(1) were issued and duly served upon the assessee. In response thereto, the assessee's authorized representative attended the proceedings before the Ld. AO and made written submissions before him from time to time. The Ld. AO after due verification of the information/material available on record and books of account of the assessee made an addition of Rs. 12,86,33,000/- on account of overdue interest for the same reasons stated in ITA No. 800/PUN/2024 mentioned above. He rejected the submission of the assessee that this identical overdue interest provision issue has been decided by the Pune Bench of the Tribunal in favour in assessee's own case for AYs 2008-09, 2009-10 and 2011-12 and the decision of the Aurangabad Bench of the Hon'ble Bombay High Court in the case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd. (supra) in favour of the assessee of the assess....
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....e Ld. AO on account of overdue interest in view of the Aurangabad Bench of the Hon'ble Bombay High Court in the case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd. (supra). So far as the second issue relating to disallowance of fraud provision u/s 37 of the Act, the Ld. CIT(A) directed the Ld. AO to allow the deduction / expense observing that the said provisions are not contingent but based on ascertained liabilities. 17.1 On the issue relating to third addition made by the Ld. AO amounting to Rs. 9,18,37,907/- on account of penal interest charged by the RBI for non- maintenance of CRR/SLR, the assessee submitted before the Ld. CIT(A) that this issue is covered in favour of the assessee for AY 2012-13 in assessee's own case. The Ld. CIT(A) observed that the Ld. AO has made this addition relying on the decision of the Hon'ble Kerala High Court in the case of DCIT Vs. Dhanlaxmi Bank Ltd. (supra), however, the impugned issue is covered by the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Bank of Baroda in ITA No. 4169 of 2009 in favour of the assessee and therefore allowed the claim of the assessee by observing as under: "In ground No. 3, the Appellant ha....
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.... assessee and not the first instance of default as claimed by the Ld. AR and therefore it partakes the nature of penalty. 20. The Ld. AR, on the other hand, supported the order of the Ld. CIT(A). He advanced similar arguments mentioned in preceding paragraphs with respect to first two additions deleted by the Ld. CITA) pertaining to overdue interest and fraud provision. 20.1 As regards third addition relating to RBI penal interest, the ld. AR reiterated the above submissions which were made before the Ld. CIT(A). Referring to page 75 of the paper book, the Ld. AR submitted that the Reserve Bank of India levied the penalty u/s 24(8) of the Banking Regulation Act for default in maintenance of the SLR and CRR. This default was due to liquidity problems in bank between the period June 2011 to June 2013. During this period, Directors Board was dissolved by the Government and Administrator was appointed. Levy of interest due to default in maintaining SLR/CRR in banking parlance, it is additional interest termed as „penal interest‟. The said interest is compensatory in nature and not the penalty levied due to infraction of law. 20.2 The Ld. AR further submitted that t....
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....rve Ratio (CRR) and Statutory Liquidity Reserve (SLR). The AO disallowed a sum of Rs. 3,74,704/- paid to RBI for shortfall in maintenance of CRR as well as an amount of Rs. 9,30,377/- paid to RBI for not complying with the SLR requirements. These disallowances were made by AO on the ground that the payments are infraction of law and therefore, cannot be allowed u/s. 36(1). The Id. CIT(A) has confirmed the disallowance made by Assessing Officer. 7.1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has submitted that this issue has been considered and decided by the Tribunal in Assessee's own case for the assessment year 1992-93 in ITA No.141/Bom/96 in favour of assessee. He has further submitted that an identical issue has been decided by the Hon'ble Jurisdictional High Court in case of Bank of Baroda vide order dated 15.02.2011 in Income Tax appeal No.4169 of 2009. On the other hand the ld. DR has relied upon the orders of authorities below. 7.2 Having considered the rival submissions and careful perusal of record we note that this issue is covered by the decision of Hon'ble Jurisdi....
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.... 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of DCIT V/s. Dhanalakshmi Bank Ltd. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 I.T.R. (ST) 3. In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs." 21.3 We have also perused the order in the case of The Central Bank of India Vs. DCIT (supra) wherein the Hon'ble Bombay High Court relying on the decision in the case of CIT Vs. Bank of Baroda (supra) decided the assessee's appeal in its favour. The relevant findings and observations of the Hon'ble High Court is as under : "4. The Appellant is a Scheduled Nationalised Bank. In the return of income for the assessment year 1990-91, the Appellant claimed the deduction of Rs. 31164211 and Rs. 6025430. The ....