TaxTMI 
TaxTMI 
2019 (3) TMI 2105
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....r appeal is arbitrary and contrary to Law & facts of the case, hence deserves to be cancelled. 3. The appellant craves leave to amend/ alter or add any of the grounds of appeal before or at the time of hearing of the appeal." On the other hand the revenue has assailed the order of the CIT(A) on the following grounds :- " 1 That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in law as well as on facts in deleting the addition of Rs. 1,93,31,040/- made by the A.O. on account of disallowance of interest on Non Performing Assets. 1 (a). That while deleting the above addition of Rs. 1,93,31,040/- Ld. CIT(A) has erred on facts as well as in law by ignoring the fact that the assessee is neither following Mercantile System of Accounting nor Cash System of Accounting and is in fact following a mixed/ hybrid system of accounting, which is not a recognized system of accounting. 2. that, it is prayed that the order of the Ld. CIT(A) be set-aside and that of the Assessing officer restored. 3. That the appellant request for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off ....
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....ion of bifurcating the same as one relating to rural advances and other advances (i.e. non-rural advances). In support of its aforesaid contention the assessee relied on the order of ITAT, Bangalore in the case of DCIT, Circle-11(4) vs. ING Vysya Bank Ltd. (2014) 149 ITD 611 (Bang). It was submitted by the assessee that as the average total outstanding advances amounted to Rs. 37,832 lakhs, therefore, the assessee bank could create the provision for bad and doubtful debts to the maximum of Rs. 3,783.20 lakhs (i.e. 10% of average aggregate advances of Rs. 37,832 lakhs). However, the A.O declined to accept the aforesaid claim of the assessee. The A.O holding a conviction that the assessee bank could make a provision for bad and doubtful debts equal to 7.5% of its total income (before making any deduction under the said clause and Chapter VI-A), and 10% of aggregate advances made by the rural branches of such bank, thus disallowed the excess provision for bad and doubtful debts of Rs. 2,31,94,768/- made by the assessee. 4. The A.O in the course of the assessment proceedings called upon the assessee to furnish complete details of the interest accrued on non performing assets (for sh....
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....assessee that the interest on NPA's as per the RBI guidelines were not to be accounted for on accrual basis was concerned, it was observed by the CIT(A) that the issue was squarely covered by the order of the ITAT, Chandigarh in the case of DCIT Vs. The Ludhiana Central Cooperative Bank Ltd. (ITA No. 526/Chd/2013). On the basis of her aforesaid observations the CIT(A) concluded that as per the provisions of Sec. 43D the interest on NPA assets could not be held to the income of the assessee on accrual basis. In the backdrop of the aforesaid observations the CIT(A) deleted the addition of Rs. 1,93,31,040/- that was made by the A.O towards interest that had accrued on NPA accounts. 6. The assessee being aggrieved with the order of the CIT(A) to the extent the disallowance of the assesses claim of deduction in respect of provision for bad and doubtful debts of Rs. 2,31,94,768/- under Sec. 36(1)(viia) was upheld by her, has carried the matter in appeal before us. The Learned Authorized Representative (for short 'A.R') for the assessee at the very outset of the hearing of the appeal submitted that the assesses claim for deduction on account of provision for bad and doubtfu....
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.... lower authorities and the material available on record. We shall first advert to the aspect as to whether the CIT(A) was right in law and the facts of the case in confirming the addition/disallowance of Rs. 2,31,94,768/- made by the A.O on account of excess provision for bad and doubtful debts made by the assessee. On a perusal of the order passed by the A.O, it stands revealed that as per him the provision for bad and doubtful debts was allowable for an amount not exceeding 7.5% of the total income (computed before making any deduction under the said clause and Chapter VI-A), and an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank. On the other hand, it was the claim of the assessee that the same was to be allowed subject to the permissible upper limits of the provision for bad and doubtful debts and there was no question of bifurcating the same as one relating to rural advances and other advances (i.e. non-rural advances). As observed by us hereinabove, the assessee had in support of its aforesaid contention relied on the order of ITAT, Bangalore in the case of DCIT, Circle-11(4) vs. ING Vysya Bank Ltd. (2014) 149 ITD 611 (Bang). ....
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....ugh the material on record. We find that the assessee had created a provision of Rs. 50,00,000/- which included a sum of Rs. 13,25,000/-as provisions for bad and doubtful debts and the balance amount of Rs. 36,75,000/- was provision against standard assets and the entire amount was claimed as deduction under section 36(1)(viia) of the Act. The Assessing Officer was of the opinion that the provisions made by the assessee against standard assets was contingent liability and which was not allowable as business expenditure. The ld. CIT(A), however, allowed relief to the assessee by holding that the claim of the assessee fall into the main provisions of section 36(1)(viia). To resolve the dispute it is important to visit the provisions of section 36(1)(viia) of the Act and which for the sake of convenience are reproduced below: "36(1)(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 primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half percent of the total income (computed before making any deduction und....
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....provisions is allowable in respect of provision for bad and doubtful debts, the computation of such deduction is made with reference to total income of the specified banks based upon quantum of average advances. The deduction of the provisions is neither limited to the quantum of bad debts in the books nor is computed with reference to the quantum of provisions of anticipated default on the loans and advances made in respect of total assets including standard assets and the claim of the assessee does not fall into the proviso to section 36(1)(viia) as the proviso deals with further deduction for provisions on bad and doubtful debts. The claim of the assessee is covered in the main provisions of section 36(1)(viia) of the Act. The learned CIT(A) has passed a very exhaustive and speaking order any we do not find any infirmity in the same." Apart therefrom, we find that the aforesaid view taken by the Tribunal was thereafter followed by it while disposing off the appeals in the case of Dy. CIT, Circle-IV, Jalandhar Vs. M/s The Kapurthala Central Cooperative Bank Ltd. (ITA No. 543(Asr)/2017; dated 16.08.2018) and DCIT Vs. Punjab Gramin Bank, Kapurthala (ITA No. 134(Asr)/2015; dated ....
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....al in its aforesaid order had after exhaustive deliberations upheld the order of the CIT(A) who had observed that the interest on NPA's was taxable in the year of receipt. The Tribunal in its aforesaid order had observed as under :- "6. We have heard the rival parties and have gone though the material placed on record. We find that the Assessing Officer has disallowed the provisions which the assessee has made on standard assets and has also made addition on account of interest on Non Performing Assets which the assessee had not taken into account. We find that these issues are squarely covered in favour of the assessee by the orders of the Tribunal in the case of M/s Punjab Gramin Bank and also in the case of Moga Central Cooperative Bank. The findings of the Hon'ble Tribunal in the case of Moga Central Cooperative Bank are reproduced below: "6. We have heard the rival parties and have gone though the material placed on record. We find that the issue involved in these appeals, is regarding non declaration of interest income on non performing assets by the assessee. The Hon'ble Amritsar Bench in the case of Jalandhar Central Co-operative Bank Ltd. vide....
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....f loans which are advanced by it to various customers, recovery of some loans is very doubtful. It is doubtful whether even the interest on the loans advanced will be recovered from the customer. In such cases, the interest calculated on the loan amount is credited in a suspense account. This amount is not brought to the profit and loss account of the assessee-bank because these are amounts which are not likely to be realized by the bank. Hence they do not form a part of the real income of the bank. If and when any such amount or a part of it is recovered, it is included in that assessment year in the total income of the assessee for the purpose of payment of incometax. The method of accounting which is followed by the assessee- bank is mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realized. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice. In Spicer and Pegler's Practical Auditing the relevant passage occurring at page 186-1....
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....etermination of income." (emphasis supplied by us) 15. Further the Apex Court also referred to the CBDT Circular dated 9th October 1984 stating that interest on loans on which there has been no recovery for 3 years will be subjected to tax on receipt basis, and held as follows: "The question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realization, is a question which may arise before several income tax officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, 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 officers 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 power....
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....r as income recognition is concerned, clause 4.1.1 of the circular provides that the policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis. Thus, in view of the mandate of the RBI Guidelines the assessee cannot recognise income from non-performing assets on accrual basis but can book such income only when it is actually received. Thus, this is a case where at the threshold, the assessee, in view of the RBI Guidelines, cannot recognize income from NPA on accrual basis. This is, therefore, a case pertaining to recognition of income and not computation of the income of the assessee. 21. The Supreme Court in Southern Technologies Limited (supra) has held that the 1998 Directions are only disclosure norms and have nothing to do with computation of total income under the IT Act or with the accounting treatment. The 1998 Directions only lay down the manner of presentation of NPA provision in the balance sheet of an N....
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....the "permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and the Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the accounting policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions, 1998 in view o f Section 45-Q o f the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute." Thus, insofar as income recognition is concerned, the court has held that even the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and that as far as income recognition is concerned, section 145 of the Income Tax Act, has not role to play. 23. In the light of the above discussion what emerges is that while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition....
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....nition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court." 21. Further relying upon the decision of the Apex Court in the case of UCO Bank, Calcutta and Mercantile Bank Ltd. (supra) it allowed the assessee's appeal. 22. It is evident from the above that the issue regarding taxability of interest on NPA's is settled in favour of the assessee as being taxable in the year of receipt. 23. The grievance of the Revenue that the Hon'ble Supreme Court's decision in the case of State Bank of Travancore (supra) applies to the present case, we find is misplaced, since as pointed out above by the Ld. counsel of the assessee, it has been overruled by the Apex Court itself in the case of UCO Bank Limited (supra) wherein it was pointed out by the Apex Court that while rendering the judgment in the case of State Bank of Travancore (supra), the circular dated 9.10.1984 had not been brought to the notice of the Court,....
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....of the Constitution Bench of this Court in Navnitlal C. Javeri v. K.K. Sen (Supra), or the subsequent decision in K.P. Varghese v. 19 Income Tax Officer (supra) also do not appear to have been pointed out to the Court. Since the later circular of 9.10.1984 was not pointed out to the Court, the Court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law." 24. Therefore, the contention of the Revenue that the decision in the case of State Bank of Travancore (supra) applies to the assessee's case is dismissed. 25. The argument of the learned D.R. that the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) would not apply to the assessee's case since the assessee is a cooperative society while in the case of Vasisth Chay Vyapar Ltd. (supra), the assessee was a NBFC, is also dismissed since the....
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....arties and have gone through the material on record. We find that the assessee had created a provision of Rs. 50,00,000/- which included a sum of Rs. 13,25,000/- as provisions for bad and doubtful debts and the balance amount of Rs. 36,75,000/- was provision against standard assets and the entire amount was claimed as deduction under section 36(1)(viia) of the Act. The Assessing Officer was of the opinion that the provisions made by the assessee against standard assets was a contingent liability and which was not allowable as business expenditure. The Ld. CIT(A), however, allowed relief to the assessee by holding that the claim of the assessee fall into the main provisions of section 36(1)(viia). To resolve the dispute it is important to visit the provisions of section 36(1)(viia) of the Act and which for the sake of convenience are reproduced below. "36(1)(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 outside India] or a primary co- operative agricultural and rural development bank, an amount not exceedi....