Dy. CIT, CIRCLE - 2(1),, Vijayawada v. M/s Krishna District Co.-Op.Central Bank Ltd.,, Machilipatnam

ITA 121/VIZ/2013 | 2008-2009
Pronouncement Date: 08-11-2017 | Result: Partly Allowed

Appeal Details

RSA Number 12125314 RSA 2013
Assessee PAN AABTT0343E
Bench Visakhapatnam
Appeal Number ITA 121/VIZ/2013
Duration Of Justice 4 year(s) 8 month(s) 12 day(s)
Appellant Dy. CIT, CIRCLE - 2(1),, Vijayawada
Respondent M/s Krishna District Co.-Op.Central Bank Ltd.,, Machilipatnam
Appeal Type Income Tax Appeal
Pronouncement Date 08-11-2017
Appeal Filed By Department
Tags No record found
Order Result Partly Allowed
Bench Allotted DB
Tribunal Order Date 08-11-2017
Date Of Final Hearing 15-03-2016
Next Hearing Date 15-03-2016
First Hearing Date 15-03-2016
Assessment Year 2008-2009
Appeal Filed On 25-02-2013
Judgment Text
ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 1 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM . . . ' % BEFORE SHRI V. DURGA RAO JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH ACCOUNTANT MEMBER ./I.T.A.NOS.120&121/VIZAG/2013 ( / ASSESSMENT YEARS: 2007-08 & 2008-09) DCIT CIRCLE - 2(1) VIJAYAWADA M/S. THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK LTD. MACHILIPATNAM [PAN NO. AABTT0343E ] ( ' / APPELLANT) ( ()' / RESPONDENT) ./I.T.A.NO.200/VIZAG/2016 ( / ASSESSMENT YEARS: 2010-11) J CIT (OSD) VIJAYAWADA M/S. THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK LTD. MACHILIPATNAM ( ' / APPELLANT) ( ()' / RESPONDENT) C.O. NOS.68 & 69/VIZAG/2013 (ARISING OUT OF I.T.A.NOS.120&121/VIZAG/2013) ( / ASSESSMENT YEARS: 2007-08 & 2008-09) M/S. THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK LTD. MACHILIPATNAM DCIT CIRCLE - 2(1) VIJAYAWADA ( ' / APPELLANT) ( ()' / RESPONDENT) ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 2 C.O. NO.2/VIZAG/2017 (ARISING OUT OF I.T.A.NO.200/VIZAG/2016) ( / ASSESSMENT YEARS: 2010-11) M/S. THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK LTD. MACHILIPATNAM DCIT CIRCLE - 2(1) VIJAYAWADA ( ' / APPELLANT) ( ()' / RESPONDENT) / APPELLANT BY : SHRI T.S.N. MURTHY DR / RESPONDENT BY : SHRI K. SIVA RAM KUMAR AR / DATE OF HEARING : 17.10.2017 / DATE OF PRONOUNCEMENT : 08.11.2017 / O R D E R PER D.S. SUNDER SINGH ACCOUNTANT MEMBER: THESE APPEALS FILED BY THE REVENUE ARE DIRECTED AG AINST ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) {CIT(A)} VIJAYAWADA VIDE APPEAL NO.207/MTM/CIT(A)/VJA/2009-10 DATED 19.12.20 12 ITA NO.406/VJA/CIT(A)/VJA/2010-11 DATED 19.12.2012 AND ITA NO.78/CIT(A)/VJA/2013-14 DATED 12.1.2016 FOR THE AS SESSMENT YEARS 2007-08 2008-09 & 2010-11. THE CROSS OBJECTIONS F ILED BY THE ASSESSEE ARE IN SUPPORT OF THE ORDER PASSED BY LD. CIT(A). 2. THE FIRST ISSUE IN THIS CASE IS RELATED TO THE S TATUTORY RESERVE CREATED U/S 46(E) OF THE ANDHRA PRADESH CO-OPERATIV E SOCIETIES ACT ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 3 1964 (HEREINAFTER CALLED AS THE APCS ACT). THE ASS ESSEE HAS CREATED RESERVE OF ` 88 58 130/- FOR THE ASSESSMENT YEAR 2007-08 ` 60 71 208/- FOR THE ASSESSMENT YEAR 2008-09 AND ` 30 40 970/- FOR THE ASSESSMENT YEAR 2010-11. THE ASSESSEE CLAIMED THE SAME AS DED UCTION BEFORE THE A.O. U/S 36(1)(VIIA) OF THE INCOME TAX ACT 1961 (H EREINAFTER CALLED AS 'THE ACT') AND ARGUED THAT THE RESERVE IS SIMILAR T O THE NON-PERFORMING ASSET (NPA). THE ASSESSEE ALSO ARGUED BEFORE THE A .O. THAT THE CREATION OF RESERVE IS MANDATORY IN ACCORDANCE WITH THE PROV ISIONS OF SECTION 46 SUB-SECTION (E) OF APCS ACT 1964. THE A.O. CONSIDE RED THE SUBMISSIONS MADE BY THE ASSESSEE AND ALSO CONSIDERED SECTION 46 OF APCS ACT AND OBSERVED THAT SINCE THE SECTION 46 DEALS WITH THE I NVESTMENT OF FUNDS THE LD. A.O. HELD THAT IT IS THE RESERVE CREATED F OR APPROPRIATION BUT NOT THE EXPENDITURE. THE LD. A.O. RELIED ON THE DECIS ION OF HONBLE ITAT A BENCH HYDERABAD IN THE CASE OF ANDHRA BANK VS. DCI T CIRCLE-1(1) IN ITA NOS.615 TO 619/H/2007 AND ITA NO.711/H/2008 WH EREIN HONBLE COORDINATE BENCH HAS REJECTED THE CLAIM OF THE ASSE SSEE WITH REGARD TO THE GENERAL PROVISION OF 25% ON STANDARD ASSETS. T HE COORDINATE BENCH FURTHER OBSERVED THAT THE ACT HAS GIVEN OPTION TO T HE ASSESSEE TO MAKE PROVISION FOR BAD AND DOUBTFUL DEBTS OR LOSS OF ASS ETS AND WHILE AGREEING WITH THE ASSESSEE THAT THE BANK HAS TO FOLLOW THE R ESERVE BANK OF INDIA ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 4 GUIDELINES BUT THE INCOME HAS TO BE COMPUTED AS PER THE PROVISIONS OF THE ACT. 3. AGGRIEVED BY THE ORDER OF THE A.O. THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD. CIT(A) ALLOWED THE A PPEAL OF THE ASSESSEE AND OBSERVED THAT THE RESERVE WAS CREATED AS PER SECTION 46(E) OF THE APCS ACT AND THE SAID AMOUNT BEING NOT AVAILABLE FOR THE ASSESSEE FOR THE USE AT ITS OPTION IT IS EXCLUDIBL E FROM THE TOTAL INCOME LIABLE TO TAX UNDER THE INCOME TAX ACT. ACCORDINGL Y THE LD. CIT(A) HELD THAT THE SAME IS DEDUCTION BY OVERRIDING TITLE AND ACCORDINGLY ALLOWED THE APPEAL OF THE ASSESSEE. AS STATED EARLIER THI S ISSUE IS INVOLVED FOR THE ASSESSMENT YEARS 2007-08 2008-09 & 2010-11. 4. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE RE VENUE FILED APPEAL BEFORE THIS TRIBUNAL. APPEARING FOR THE REVENUE T HE LD. D.R. ARGUED THAT THOUGH THE ASSESSEE CLAIMED THAT THE STATUTORY RESERVE WAS CREATED AS MANDATED BY SECTION 46(E) OF THE APCS ACT THE S UB-SECTION (E) OF SECTION 46 WAS OMITTED W.E.F. 25.4.2001 AND IT IS N O MORE IN EXISTENCE. THEREFORE THE D.R SUBMITTED THAT THE RELIANCE PLA CED BY THE ASSESSEE AS WELL AS THE LD. CIT(A) WHILE DELETING THE APPEAL ON SECTION 46(E) OF THE APCS ACT IS MISPLACED. THE LD.D.R FURTHER SUBMI TTED THAT AS PER PROVISO TO SECTION 46 OF THE APCS ACT 1964 THE ASS ESSEE REQUIRED TO INVEST ITS FUNDS @ 0.25% IN SECURITIES AS SPECIFI ED IN SECTION 46 IN ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 5 POSTAL SAVINGS BANKS NATIONALISED BANKS OR IN SH ARES OF ANY OTHER SOCIETIES ETC.. (AS BAD DEBTS RESERVE) OF THE AMOUN TS GRANTED BY IT AS SHORT TERM LOANS AND MEDIUM TERM LOANS TO ITS MEMBE RS OUT OF THE FUNDS BORROWED BY IT FROM CO-OPERATIVE FINANCIAL IN STITUTIONS FOR GRANTING SUCH LOANS. FURTHER IT WAS ALSO SUBMITTE D BY THE LD. D.R. THAT IT IS NOT NECESSARY TO MAKE ANY SUCH INVESTMENTS O NCE THE BAD DEBTS RESERVE BECOMES EQUAL TO THE TOTAL AMOUNTS OF THE B AD DEBTS OF THE SOCIETY. THE LD. D.R. ARGUED THAT FIRSTLY SECTION 46 DEALS WITH THE INVESTMENT OF ITS FUNDS I.E. THE INVESTMENTS OF AVA ILABLE FUNDS BY THE SOCIETY. IT IS NOT DEALING WITH APPROPRIATION OR D IVERSION OF THE INCOME OF SOCIETY. SECTION VERY CLEARLY SPECIFIES THAT S OCIETY TO INVEST ITS SURPLUS FUNDS FOR THE BUSINESS OF THE SOCIETY. TH OUGH THE ASSESSEE ARGUED THAT THE FUNDS INVESTED IN BAD DEBTS RESERVE CANNOT BE USED BY THE ASSESSEE SOCIETY IN SPECIFIED SECURITIES. THER E IS NO SUCH RESTRICTION PLACED IN THE SAID SECTION. SINCE SECTION 46 DEALS WITH THE INVESTMENT OF FUNDS IT HAS NO RELATION WITH THE APPROPRIATION OR DISTRIBUTION OR DIVERSION OF THE PROFITS. IT IS MERELY SOURCES OF FUNDS AND APPLICATION OF FUNDS THEREFORE IT HAS NO IMPACT ON THE INCOME OF THE ASSESSEE AND NO DEDUCTION REQUIRED TO BE ALLOWED AND IT IS NOT DIVE RSION BY OVERRIDING TITLE AS HELD BY THE LD.CIT(A). ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 6 5. THE SECOND PROPOSITION SUBMITTED BY THE LD.D.R I S AS PER SECTION 46 OF APCS ACT THOUGH THE ASSESSEE REQUIRED TO INV EST 0.25% OF ITS SHORT TERM AND MEDIUM TERM LOANS OUT OF THE FUNDS BORROWED FROM CO- OPERATIVE FINANCE INSTITUTIONS THE ASSESSEE HAS NO T SUBMITTED THE AMOUNTS BORROWED FROM CO-OPERATIVE FINANCE INSTITUT IONS AND THE LOANS GRANTED OUT OF THE FUNDS BORROWED BY THE ASSESSEES SOCIETY. THE ASSESSEE SOCIETY HAS RECEIVED THE DEPOSITS FROM PUB LIC AMOUNTING TO ` 404.56 CRORES AND THE BORROWINGS OF ` 356.89 CRORES. THE ASSESSEE HAS NOT GIVEN THE DETAILS OF THE SHORT TERM AND MEDIUM TERM LOANS GRANTED OUT OF THE BORROWINGS MADE FROM THE CO-OPERATIVE FI NANCIAL INSTITUTIONSSOCIETY. INSTEAD THE ASSESSEE HAS CRE ATED RESERVE ON TOTAL AMOUNT OF BORROWINGS AND CLAIMED THE DEDUCTION WHIC H IS INCORRECT COMPUTATION. THIRDLY AS PER PROVISO TO SECTION 46 OF THE APCS ACT THE BAD DEBTS RESERVE REQUIRED TO BE CREATED TO THE EXT ENT BAD DEBTS OF THE SOCIETY AND THEREAFTER NO RESERVE REQUIRED TO BE CR EATED. THE ASSESSEE HAS NOT FURNISHED THE DETAILS OF BAD DEBTS AS PER S ECTION 36(1)(VII) & 36(1)(VIIA) OF THE ACT BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS ARE ALLOWED AS DEDUCTION THEREFORE NO SEPAR ATE DEDUCTION REQUIRED TO BE ALLOWED UNDER BAD DEBTS RESERVE. IF THE SAME IS ALLOWED AS DEDUCTION IT AMOUNTS TO DOUBLE DEDUCTION OF THE SAME AMOUNT. THEREFORE THE LD. D.R. ARGUED THAT THE A.O. HAS RI GHTLY MADE THE ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 7 ADDITION AND THE CIT(A) HAS COMMITTED AN ERROR IN D ELETING THE ADDITION ACCORDINGLY REQUESTED TO RESTORE THE ORDER OF THE A.O. 6. ON THE OTHER HAND THE LD. A.R. ARGUED THAT BAD DEBTS RESERVE IS CREATED AS MANDATED U/S 46 OF THE APCS ACT. IT IS A STATUTORY RESERVE AND PROVISION OF SECTION 46 IS BINDING ON THE ASSES SEE. THE BAD DEBTS RESERVE CREATED IS NOT FREELY AVAILABLE TO THE ASSE SSEE AND IT IS A CHARGE ON PROFITS BUT NOT APPROPRIATION OF PROFITS AND THE INVESTMENTS ARE TO BE MADE IRRESPECTIVE OF PROFITS OR LOSSES. THE LD. D. R. FURTHER ARGUED THAT THE ASSESSEE HAS NO DOMAIN OVER THE AMOUNT OR THE B AD DEBTS RESERVE AND IT IS NOT BEING TREATED AS SOCIETYS NET WORTH . THE LD. A.R. FURTHER ARGUED THAT NET WORTH AS DEFINED IN SECTION 12A(1 3) EXPLANATION (B) OF APCS ACT READS AS FOLLOWS: NET WORTH MEANS THE SUM TOTAL OF THE PAID UP CAPI TAL AND FREE RESERVES AFTER DEDUCTING THE PROVISIONS OF EXPENSES AS MAY B E PRESCRIBED. FREE RESERVES MEANS ALL RESERVES CREATED OUT OF PROFITS AND SHARE PREMIUM ACCOUNT BUT DOES NOT INCLUDE RESE RVE CREATED OUT OF REVALUATION OF ASSETS WRITE BACK OF DEPRECIATION P ROVISIONS AND AMALGAMATION. BAD DEBTS RESERVE IS NOT FREE RESERVE FREE RESERVE IS WHAT WAS SET APART OUT OF PROFITS/GENERAL RESERVE TO ILLUSTRATE S.2(43) COMPANIES ACT 2013 DEFINE D FREE RESERVES AS THOSE RESERVES WHICH AS PER THE LATEST AVAILAB LE BALANCE SHEET ARE AVAILABLE FOR DISTRIBUTION AS DIVIDEND. 7. THE LD. A.R. RELIED ON THE DECISION OF KESHKAL C O-OPERATIVE MARKETING SOCIETY LIMITED VS. CIT REPORTED IN (1987 ) 165 ITR 437 (MP) ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 8 AND VARIOUS OTHER DECISIONS AND ARGUED THAT THE ASS ESSEE IS ENTITLED FOR DEDUCTION OF THE STATUTORY RESERVE BY DIVERSION OF INCOME BY OVERRIDING TITLE AND ACCORDINGLY REQUESTED TO ALLOW THE SAME A ND UPHOLD THE ORDER OF THE LD. CIT(A). 8. WE HAVE HEARD BOTH THE PARTIES PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. WE HAVE ALSO GONE THROUGH THE APCS ACT REFERRED TO BY THE ASSESSEE. BEFORE THE A.O. AND THE LD. CIT(A) THE ASSESSEE HA S ARGUED THAT THE STATUTORY RESERVE WAS CREATED AS PER SECTION 46(E) OF APCS ACT. ON CAREFUL VERIFICATION OF THE APCS ACT SECTION 46(E) WAS OMITTED W.E.F. 25.4.2001 THEREFORE RELIANCE PLACED BY THE ASSESS EE AS WELL AS THE LD. CIT(A) WHILE ALLOWING THE APPEAL ON SECTION 46(E) I S MISPLACED AND THE LD. CIT(A) HAS NOT EXAMINED THE ISSUE PROPERLY AND HAS NOT CORRECTLY APPLIED THE PROVISIONS OF SECTION 46(E) OF THE APCS ACT. 9. SECTION 46 OF THE APCS ACT DEALS WITH INVESTMENT OF FUNDS. THE SECTION 46 OF THE APCS ACT SUGGESTS THE INVESTMENT OF SURPLUS FUNDS WHICH ARE NOT IMMEDIATELY REQUIRED FOR THE BUSINESS OF THE SOCIETY TO MAKE INVESTMENTS IN VARIOUS TYPES OF SECURITIES SUC H AS POSTAL SAVINGS BANKS ANY OTHER SECURITIES SPECIFIED IN SECTION 20 OF THE INDIAN TRUST ACT SHARES AND SECURITIES OF THE SOCIETY OR WITH N ATIONALIZED BANK OR SCHEDULED BANKS. PROVISO TO SECTION 46 DEALS WITH THE INVESTMENT OF ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 9 0.25% OF SHORT TERM AND MEDIUM TERM LOANS GRANTED B Y THE BANK OUT OF THE FUNDS BORROWED FROM THE CO-OPERATIVE FINANCIAL INSTITUTIONS FOR CREATION OF RESERVE TOWARDS BAD DEBTS. FURTHER TH E PROVISO ALSO PROVIDES FOR NOT TO MAKE ANY INVESTMENT ONCE THE BA D DEBTS RESERVE BECOMES EQUAL TO THE TOTAL AMOUNT OF BAD DEBTS. FO R READY REFERENCE WE EXTRACT RELEVANT SECTION 46 OF THE APCS ACT WHI CH READS AS UNDER: 46. INVESTMENT OF FUNDS: [A SOCIETY MAY BY A RESOLUTION OF MAJORITY OF CO MMITTEE WITH DUE CARE AND DILIGENCE INVEST OR DEPOSIT ITS FUNDS WHICH ATE NOT IMMEDIATELY REQUIRED FOR THE BUSINESS OF THE SOCIETY ] (A) IN THE POSTAL SAVINGS BANKS ; (B) IN ANY OF THE SECURITIES SPECIFIED IN SECTION 2 0 OF THE INDIAN TRUST ACT 1982 ; (C) IN THE SHARES OF SECURITIES OF ANY OTHER SOCIET Y ; [(D) WITH ANY NATIONALISED BANK OR SCHEDULED BANK ; ] [OR THE CONCERNED DISTRICT CO- OPERATIVE CENTRAL BANK.] (E) [X X X] [PROVIDED THAT EVERY PRIMARY AGRICULTURAL CREDIT SO CIETY AND EVERY CO-OPERATIVE CENTRAL BANK SHALL INVEST OR DEPOSIT IN EACH CO-OPE RATIVE YEAR TOWARDS THE BAD DEBTS RESERVE OF THE SAID SOCIETY OR BANK A SUM EQUAL TO ONE-FOURTH PER CENTUM OF THE AMOUNT GRANTED BY IT AS SHORT TERM LOANS OR MEDIUM TERM LOANS TO ITS MEMBERS DURING THE CO-OPERATIVE YEAR FROM OUT OF THE AMOUNT S BORROWED BY IT FROM OTHER CO- OPERATIVE FINANCIAL INSTITUTIONS FOR GRANTING SUCH LOANS ; SO HOWEVER THAT NO SUCH INVESTMENT OR DEPOSIT SHALL BE NECESSARY WHEN THE T OTAL AMOUNT SO INVESTED OR DEPOSITED TOWARDS BAD DEBTS RESERVE BECOMES EQUAL T O THE TOTAL AMOUNT OF BAD DEBTS OF THE SOCIETY AS ESTIMATED BY THE AUDITOR AP POINTED UNDER SECTION 50.] EXPLANATION: FOR THE PURPOSES OF THIS SECTION SUB-SECTION (3 ) OF SECTIONS 47 AND 71 THE EXPRESSION PRIMARY AGRICULTURAL CREDIT SOCIETY MEANS THE SOCIETY REFERRED TO IN CLAUSE (I) OF EXPLANATION TO SECTION 36. 10. PLAIN READING OF SECTION 46 OF THE APCS ACT CLE ARLY SHOWS THAT THE SECTION DEALS WITH THE SOURCES OF FUNDS AND ITS AP PLICATION OF FUNDS. THE SECTION MANDATES THE SOCIETY TO CREATE BAD DEBTS RE SERVE OUT OF ITS SOURCES OF FUNDS EQUALIENT TO BAD DEBTS. IT DOES N OT GIVE ANY DIRECTION ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 10 OR ANY MANDATE TO THE ASSESSEE SOCIETY TO DIVERT TH E INCOME TOWARDS THE BAD DEBTS RESERVE. SECTION 45 OF THE APCS ACT DEAL S WITH THE DISPOSAL OF PROFITS SECTION 44 DEALS WITH FUNDS OTHER THAN NET PROFITS NOT TO BE DIVIDED AMONG THE MEMBERS. THEREFORE THE BAD DEBT S RESERVE IS CREATED NOT OUT OF THE PROFITS BUT OUT OF THE FUNDS OTHER THAN THE PROFITS OF THE SOCIETY. WHEN SPECIFIC SECTION IS PROVIDED TO DISPOSE OF PROFITS THERE IS NO NEED TO INTERPRET THE INVESTMENTS REQUI RED TO BE MADE AS PER THE PROVISO TO SECTION 46 OF THE APCS ACT AS INCOME BY OVER RIDING TITLE. THEREFORE WE HOLD THAT SECTION 46 OF THE APCS ACT DEALS WITH THE INVESTMENT OF AVAILABLE FUNDS OF THE SOCIETY SUCH A S SHARE CAPITAL LOANS DEPOSITS ETC. IN SPECIFIED ASSETS IN THE FOR M OF POSTAL SAVINGS BANK NATIONALIZED BANK ETC.. BUT NOT DISTRIBUTION OF PROFITS OR DIVERSION OF INCOME BY OVER RIDING TITLE. HENCE THIS ARGUMENT OF THE ASSESSEE IS THAT THE RESERVE IS CREATED BY DIVERSION OF INCOME BY OVER RIDING TITLE IS INCORRECT AND ACCORDINGLY REJECTED. 11. THE NEXT ARGUMENT OF THE ASSESSEE WAS THAT CREA TION OF BAD DEBTS RESERVE AS PER PROVISO TO SECTION 46. AS PER PROVI SO THE BAD DEBTS RESERVE REQUIRED TO BE CREATED @ 0.25% OF THE MEDIU M TERM LOANS AND SHORT TERM LOANS GRANTED BY THE SOCIETY OUT OF THE BORROWINGS MADE FROM THE CO-OPERATIVE FINANCIAL INSTITUTIONS. THE ASSESSEE HAS NOT GIVEN THE DETAILS OF THE SHORT TERM AND MEDIUM TERM LOANS GRANTED BY IT OUT OF ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 11 THE BORROWINGS MADE FROM THE CO-OPERATIVE FINANCIAL INSTITUTIONS. THE ASSESSEE HAS COMMON KITTY OF FUNDS CONSISTING OF RE SERVES THE SHARE CAPITAL DEPOSITS AND BORROWINGS. IT IS NECESSARY T O ASCERTAIN WHAT WAS THE AMOUNTS ADVANCED FOR SHORT TERM AND LONG TERM L OANS OUT OF THE BORROWINGS OF THE SOCIETY AND OTHER SOURCES REQUIRE D TO BE ASCERTAINED AND THE CORRECT AMOUNT OF STATUTORY RESERVE SHOULD BE CREATED. THE SAME WAS NOT FURNISHED BY THE ASSESSEE. THE BAD DE BTS RESERVE NEED NOT BE CREATED ONCE THE BAD DEBTS RESERVE BECOMES E QUAL TO THE TOTAL AMOUNT OF BAD DEBTS. THE ASSESSEE HAS NOT FURNISHE D THE OUTSTANDING BAD DEBTS AS AT THE END OF THE YEAR AND THE ACCUMUL ATED AMOUNT OF BAD DEBTS RESERVE CREATED AND THE BALANCE TO BE CREATED .THE ASSESSE IS CREATING THE RESERVE YEAR AFTER YEAR WITHOUT FURNIS HING THE DETAILS. FURTHER AS PER THE PROVISIONS OF SECTION 36(1)(VII ) & 36(1)(VIIA) OF THE INCOME ACT THE BAD DEBTS AS WELL AS THE PROVISION FOR BAD AND DOUBTFUL DEBTS ARE ALLOWED AS A DEDUCTION. THEREFORE NO SE PARATE DEDUCTION IS REQUIRED TO BE ALLOWED TOWARDS THE BAD DEBTS RESERV E. IN CASE IF THE BAD DEBTS AS WELL AS THE BAD DEBTS RESERVE IS ALLOW ED AS DEDUCTION THE SAME WOULD BE AMOUNT TO DOUBLE DEDUCTION ONCE AS B AD DEBTS AND SECONDLY AS BAD DEBTS RESERVE. THEREFORE THE DEDUC TION CLAIMED BY THE ASSESSEE ON ACCOUNT OF BAD DEBTS RESERVE IS NOT ALL OWABLE. THE ASSESSEE RELIED ON THE DECISION OF KESHKAL CO-OPERA TIVE MARKETING ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 12 SOCIETY LIMITED (SUPRA). THE ISSUE WITH REGARD TO THE BAD DEBTS AND BAD DEBTS RESERVE WAS NOT DEALT WITH BY THE HONBLE HIG H COURT OF M.P. IN ITS ORDER. THE ISSUE WITH REGARD TO THE DOUBLE DEDUCTI ON OF THE BAD DEBTS AND THE BAD DEBTS RESERVE WAS ALSO NOT CONSIDERED BY THE HONBLE HIGH COURT THEREFORE THE FACTS OF THE HONBLE M.P. HIGH COURTS DECISION IN THE CITED CASE LAW IS DISTINGUISHABLE HENCE NOT APPLICA BLE. FURTHER THE SECTION DOES NOT PLACE ANY RESTRICTION AS ARGUED BY THE LD. A.R. THAT THE AMOUNT IS NOT AVAILABLE TO THE ASSESSEE FOR ITS BUS INESS PURPOSE. THE ASSESSEE HAS EXTENDED ITS MEANING BY INTERPRETING N ET WORTH AND THE COMPANIES ACT. THEREFORE WE ARE UNABLE TO ACCEPT THE ARGUMENT OF THE ASSESSEE THAT THE BAD DEBTS RESERVE IS ALLOWABLE AS A DEDUCTION AND THIS GROUND OF APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2007-08 2008-09 & 2010-11 ARE DISMISSED. 12. THE SECOND ISSUE IS WITH REGARD TO THE RESERVE FOR BAD AND DOUBTFUL DEBTS RELATING TO THE A.Y. 2007-08. THE A SSESSEE HAS CLAIMED THE RESERVE FOR BAD AND DOUBTFUL DEBTS AS UNDER: S.NO. ISSUE AMOUNT (`) A.Y. 2007-08 1. RESERVE CREATED FOR SUNDRY DEBTORS DUE TO 62 61 426 2. RESERVE CREATED FOR SUNDRY DEBTORS DUE TO INDVLS. 45 88 706 3. RESERVE CREATED FOR SUNDRY DEBTORS DUE TO INSTNS. 36 15 339 4. NPA PROVISION TOTAL 1 44 65 471/- ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 13 13. THE ASSESSEE CLAIMED DEDUCTION OF ` 1 44 65 471/- UNDER THE PROVISION OF SUNDRY DEBTORS. THE ASSESSEE SUBMITTE D THAT OUT OF THE TOTAL AMOUNT OF PROVISION OF SUNDRY DEBTORS ` 1 68 61 426/- A SUM OF ` 1.06 CRORES WAS NPA AT BRANCH LEVEL AND THE SUM OF ` 62 61 426/- WAS RELATED TO THE CHARGES RECOVERABLE FROM THE BORROWE RS SUCH AS LEGAL NOTICE CHARGES NOTICE CHARGES ETC.. INCURRED BY TH E HEAD OFFICE. THE A.O. DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESS EE WITH A REASON THAT THE ASSESSEE SHOULD HAVE CLAIMED THE SAME AS E XPENDITURE INSTEAD OF BAD AND DOUBTFUL DEBTS. THE LD. A.R. SUBMITTED THAT THE DEBT INCLUDES PRINCIPAL AMOUNT PLUS ALL SUMS RECEIVABLE FROM THE ASSESSEE. THEREFORE THE LD. A.R. ARGUED THAT THE LD. A.O. MI SUNDERSTOOD THE TERM DEBT AND DISALLOWED THE SUM OF RS. 62 61 426/-. SIM ILARLY THE AO DISALLOWED THE SUMS OF RS. 45 88 706/- RESERVE CREATED FOR SUNDRY DEBTORS DUE TO INDVLS RS. 36 15 339/- RESERVE CREATED FOR SUNDRY DEBTORS DUE TO INSTNS FOR THE A.Y.2007-08. 14. AGGRIEVED BY THE ORDER OF THE A.O. THE ASSESSE E WENT ON APPEAL BEFORE THE CIT(A) AND THE LD. CIT(A) ALLOWED THE AP PEAL OF THE ASSESSEE STATING THAT THE A.O. REQUIRED TO ALLOW THE DEDUCTI ON EITHER AS NPA OR AS EXPENDITURE TO THE PROFIT & LOSS ACCOUNT. FOR THE SAKE OF CLARITY WE REPRODUCE THE RELEVANT PARAGRAPHS OF THE LD. CIT(A) S ORDER: ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 14 6B. SECOND ISSUE IS A COMMON ISSUE COMPRISING (I) RESERVE CREATED FOR SUNDRY DEBTORS DUE TO ACCOUNTS AMOUNTING TO RS.62 6 1 426 (II) PROVISION ON SUNDRY DEBTORS-INDIVIDUALS AMOUNTING T O RS. 45 88 706 AND (III) PROVISION ON SUNDRY DEBTORS- INSTITUTIONS AMOUNTING TO RS. 36 15 339 WHICH WERE DEBITED TO THE PROFIT AND LOS S ACCOUNT. IT IS EXPLAINED THAT ALL THESE WERE PROVISIONS FOR BAD AN D DOUBTFUL DEBTS CREATED IN COMPLIANCE TO THE PRUDENTIAL NORMS OF TH E RESERVE BANK OF INDIA TO BE STRICTLY OBSERVED BY ALL THE BANKS IN THE COUNTRY AS PER THE RBI ACT AND THE BANKING REGULATION ACT. THE INCOME TAX ACT 1961 HAS ALSO CARVED OUT A DEDUCTION TOWARDS PR OVISION FOR BAD AND DOUBTFUL DEBTS AND ALSO SPELT OUT THE MONETARY LIMITS WITHIN WHICH BANKS ARE ENTITLED TO THE SAID DEDUCTION. IT WAS ALSO ARGUED THAT THE OVER-ALL PROVISION FOR BAD AND DOUBTFUL DE BTS CREATED BY THE BANK WAS WELL WITHIN THE LIMITS SET OUT IN SEC.36 ( 1)(VIIA) AS AMENDED FROM TIME TO TIME. THE APPELLANT'S AR HAS D RAWN ATTENTION TO THE AMENDMENT MADE BY THE FINANCE ACT 2007 WHER EBY THE AGGREGATE PROVISION AVAILABLE UNDER THIS SECTION TO ALL THE BANKS INCLUDING THE NON-SCHEDULED CO-OPERATIVE BANKS LIKE THE APPELLANT BANK IS 7.5% OF THE NET PROFIT BEFORE MAKING THE DE DUCTION UNDER THIS STATUTORY PROVISION PLUS 10% OF THE AGGREGATE AVERAGE RURAL ADVANCES. THE RESTRICTION OF THE SAME TO 7.5% OF TH E NET PROFIT BEFORE MAKING THIS DEDUCTION AS CANVASSED BY THE A O WAS STATED AS NOT THE CORRECT LEGAL POSITION. IT WAS ALSO ARGUED THAT ALTERNATIVELY THE ABOVE THREE ITEMS OF DEBIT TO THE PROFIT AND LO SS ACCOUNT BE ALLOWED AS DEDUCTIONS IN COMPUTING THE PROFITS AND GAINS OF THE APPELLANT'S BUSINESS AS THE AG HIMSELF ADMITTED TH AT THE THREE ITEMS REPRESENT LEGAL AND OTHER EXPENSES INCURRED BY THEM DURING THE CURSE OF THEIR BUSINESS' WHICH HAVE TO BE ALLOWED. THE APPELLANT'S AR RELIED ON THE DECISION OF THE HON'BLE SUPREME CO URT IN THE CASE OF KEDARNATH JUTE MFG.CO LTD VS. CIT (CENTRAL) REPORT ED IN (1971) 82 ITR 363 (SC) WHEREIN IT HAS BEEN HELD THAT WHERE L IABILITY EXISTS IN PRESENTI THE CLAIM FOR THE SAME CANNOT BE DENIED M ERELY BECAUSE IT HAS BEEN DISPUTED WHERE THE APPELLANT MAINTAINS HI S BOOK OF ACCOUNT ON THE MERCANTILE SYSTEM OF ACCOUNTING. I F IND FORCE IN THE SUBMISSIONS MADE BY THE AR AND I HOLD THAT THE THRE E ITEMS AFOREMENTIONED MERIT DEDUCTION IN THE LIGHT OF THE CATEGORICAL FINDING OF THE AG THAT THE DEBITS REPRESENTED EXPENDITURE I NCURRED IN THE COURSE OF THE APPELLANT'S BUSINESS. IT MAY BE NOTED HERE THAT THE APPELLANT INCURRED THE EXPENDITURE AND DEBITED THE SAME TO THE PROFIT AND LOSS ACCOUNT BUT UNDER A DIFFERENT HEAD. THE A G HAS ALSO GIVEN A FINDING THAT THE DEBIT REPRESENTED BUSINESS EXPEN DITURE. IN THE CIRCUMSTANCES I AM INCLINED TO ALLOW THE APPELLANT 'S CLAIM DULY FOLLOWING THE HON'BLE SC DECISION WHICH MANDATED T HE ALLOWANCE OF THE EXPENDITURE ONCE THERE WAS A FINDING OF INCURRE NCE OF LEGITIMATE BUSINESS EXPENDITURE NO MATTER EVEN WHEN THERE WAS A DEFECT IN THE ACCOUNTING PROCEDURES OR OTHER TECHNICALITIES. HEN CE THE A.O. IS DIRECTED TO ALLOW THE ABOVE THREE ITEMS OF EXPENDIT URE DEBITED TO THE PROFIT AND LOSS ACCOUNT. ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 15 15. AGGRIEVED BY THE ORDER OF THE A.O. THE REVENUE IS IN APPEAL BEFORE THIS TRIBUNAL. 16. WE HAVE HEARD BOTH THE PARTIES PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE ASSESSEE HAS CREATED RESERVE FOR SUNDRY DEBTORS DUE TO ACCOUNTS AMOUNTED TO ` 62 61 426/-. PROVISION FOR SUNDRY DEBTORS INDIVI DUALS -- AMOUNTING TO ` 45 88 706/- AND PROVISION FOR SUNDRY DEBTORS INSTI TUTIONS AMOUNTING TO ` 36 15 339/- WHICH WAS DEBITED TO THE PROFIT & LOS S ACCOUNT UNDER THE HEAD RESERVES OTHERS. THE AMOU NT RELATING TO SUNDRY DEBTORS DUE TO ACCOUNTS REPRESENT OTHER RECE IVABLES FROM THE DEBTORS AS STATED BY THE ASSESSEE. THIS FACT WAS N OT DISPUTED BY THE A.O. THE CONTENTION OF THE A.O. WAS THAT THIS WAS AN EXPENDITURE WHICH SHOULD HAVE BEEN DEBITED TO THE PROFIT & LOSS ACCOU NT. THE DEDUCTION OF SUNDRY DEBTORS INDIVIDUALS AMOUNTING TO ` 45 88 706/- WAS ALSO ADMITTEDLY THE LEGAL AND OTHER EXPENSES INCURRED BY THE ASSESSEE DURING THE COURSE OF RECOVERY OF THE LOAN. THE LAST ONE I S SUNDRY DEBTORS INSTITUTIONS WHICH WAS DISALLOWED BY THE A.O. HOLD ING THAT THE AMOUNT OF ` 36.15 LAKHS WAS RELATED TO THE EXPENDITURE INCURRE D BY THE ASSESSEE FOR RECOVERY OF LOAN. ACCORDING TO THE A.O. SINCE THE ABOVE SUMS REPRESENT THE EXPENSES INCURRED BY THE ASSESSEE IN THE PROCESS OF ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 16 RECOVERY OF LOANS AND ADVANCES THE SAME SHOULD HAVE BEEN CLAIMED AS EXPENDITURE INSTEAD OF BAD AND DOUBTFUL DEBTS. ACC ORDING TO THE A.O. IT IS NOT COVERED U/S 36(2) OR 36(1)(VIIA) OF THE I NCOME TAX ACT. HOWEVER IT IS ESTABLISHED FACT THAT THE DEBT INCLU DES THE PRINCIPAL AMOUNT AS WELL AS THE OTHER RECEIVABLES/EXPENSES IN CURRED BY THE ASSESSEE DUE FROM THE BORROWER. THE ASSESSEE HAS TO COLLECT THE ENTIRE AMOUNT OF THE PRINCIPAL AMOUNT AS WELL AS THE EXPEN SES INCURRED FOR COLLECTION OF THE AMOUNTS ADVANCED THEREFORE THE FACT THAT THE AMOUNTS ARE DUE FROM THE CUSTOMERS OF THE BANK WAS NOT DISP UTED BY THE A.O. THE A.O. ACCEPTED THE GENUINENESS OF THE EXPENDITUR E AND ALSO DID AGREE THAT THE ASSESSEE SHOULD HAVE WRITTEN OFF THE ENTIRE AMOUNT BY DEBITING THE P&L ACCOUNT. THE ASSESSEES ARGUMENT WAS THAT IF THE ENTIRE AMOUNT WAS DEBITED TO THE P&L ACCOUNT THE S AME CANNOT BE COLLECTED FROM THE CUSTOMERS. THEREFORE THE ASSES SEE HAS DEBITED THE SAME AMOUNT TO THE ACCOUNT OF THE CUSTOMERS. IT IS NORMAL PRACTICE OF THE BANKS TO DEBIT THE EXPENSES RELATING TO THE CUS TOMER TO THEIR ACCOUNT SO AS TO ENABLE THE BANK TO COLLECT THE ENT IRE OUTSTANDING ALONG WITH THE EXPENSES INCURRED IN THE PROCESS OF RECOVE RY OF LOANS. THEREFORE WE AGREE WITH THE ASSESSEES ARGUMENT TH AT IF THE EXPENDITURE IS DEBITED TO THE P&L ACCOUNT BANK WOU LD INCUR A LOSS THEREFORE THE ASSESSEE HAS RIGHTLY DEBITED THE EXP ENSES TO THE ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 17 CUSTOMERS ACCOUNT. HENCE THE SAME SHOULD BE INCLUD ED IN THE OUTSTANDING BALANCE OF THE DEBTS AND WHILE CREATING THE PROVISION THE DEBT SHOULD BE INCLUDED BY THE EXPENSES INCURRED BY THE BANK. THE CO- OPERATIVE BANK IS ELIGIBLE FOR DEDUCTION U/S 36(1)( VIIA) OF THE APCS ACT @ 7.5% OF THE PROFITS AND 10% OF ITS RURAL ADVANCES. THE DEDUCTION CLAIMED BY THE ASSESSEE AS A PROVISION FOR DOUBTFUL DEBTS OR NPA IS WITHIN THE LIMIT PROVIDED BY THE INCOME TAX ACT U/S 36(1)(VIIA) INCLUSIVE OF THE EXPENSES. THEREFORE THE ABOVE SUMS ARE ALLO WABLE U/S 36(1)(VIIA) OF THE ACT ACCORDINGLY WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE APPEAL OF THE REVENUE ON THIS GROUN D. 17. THE NEXT ISSUE IN THE ASSESSMENT YEAR 2007-08 I S RESERVE CREATED FOR SUNDRY DEBTORS GOVERNMENT AMOUNTING TO ` 1 49 00 971/-. THIS AMOUNT REPRESENTS THE INTEREST SUBSIDY RECEIVABLE F ROM THE GOVERNMENT OF INDIA FOR THE EARLIER YEARS. THE BANK GIVES ADV ANCES TO THE PRIMARY AGRICULTURAL COOPERATIVE SOCIETY (PACS) AT CERTAIN RATES PRESCRIBED BY THE ANDHRA PRADESH CENTRAL CO-OPERATIVE BANK (APCOB ). THE GOVERNMENT REIMBURSES CERTAIN PERCENTAGE OF SUCH IN TEREST ON THE LOANS GIVEN TO FARMERS BY SUCH PACS. INTEREST OVER AND A BOVE 6% ON THE LOANS TAKEN BY FARMERS FROM THE PACS WOULD BE REIMB URSED BY THE GOVERNMENT TO THE PRIMARY AGRICULTURAL CO-OPERATIVE SOCIETIES (PACS). ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 18 THE ASSESSEE BANK HAS RELEASED THE SUM EQUAL TO SUB SIDY RECEIVABLE FROM THE GOVERNMENT TO PACS TO ENABLE THE PACS TO H AVE SUFFICIENT LIQUIDITY AND FUNCTION EFFECTIVELY SINCE THE DISTRI CT CO-OPERATIVE CENTRAL BANK (DCCB) IS A REGULATOR OF PACS IN THE DISTRICT AND ALL OF THEM ARE AFFILIATED TO THE DCCB. THE SUBSIDY DUE TO PACS FR OM THE GOVERNMENT WOULD BE MADE OVER TO BANK AS AND WHEN THE SAME IS RECEIVED BY THEM FROM THE GOVERNMENT. SINCE THE SUBSIDY OF THE EARL IER YEAR WAS NOT RECEIVED BY THE END OF THE RELEVANT PREVIOUS YEAR A PROVISION WAS MADE FOR THE SUBSIDY RECEIVABLE AND CLAIMED AS DEDUCTION . THE ASSESSEE HAD RECEIVED THE SUBSIDY IN THE SUBSEQUENT FINANCIAL YE AR WHICH WAS OFFERED TO INCOME. THE A.O. DISALLOWED THE SAID SUM HOLDIN G THAT THE AMOUNTS RECEIVABLE FROM GOVERNMENT CANNOT BE TREATED AS A D OUBTFUL DEBT AT ANY STRETCH OF IMAGINATION AND PLACED RELIANCE ON HONB LE MADRAS HIGH COURT DECISION IN THE CASE OF SOUTH INDIA SURGICAL COMPAN Y LIMITED VS. ACIT 287 ITR 62. 18. AGGRIEVED BY THE ORDER OF THE A.O. THE ASSESSE E WENT ON APPEAL BEFORE THE CIT(A) AND THE LD. CIT(A) ALLOWED THE AP PEAL OF THE ASSESSEE HOLDING THAT THE ASSESSEE IS JUSTIFIED IN CREATION OF A PROVISION IN THE FIRST PLACE AND REVERSAL OF THE SAME SUBSEQUENTLY AND ON RECEIPT OF THE SUBSIDY THE ASSESSEE HAD OFFERED THE SAME TO THE IN COME. ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 19 19. WE HAVE HEARD BOTH THE PARTIES PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. AT THE OUTSET THE AMOUNT OF ` 1 00 49 971/- WAS INTEREST SUBSIDY RECEIVABLE FROM THE GOVERNMENT AND THE SAME IS RELATABLE TO PA CS. WITHOUT WAITING FOR THE INTEREST SUBSIDY BY THE PACS THE B ANK HAS RELEASED FUNDS TO THE PACS AND TO BOLSTER THE LIQUIDITY. HO WEVER SINCE THE INTEREST SUBSIDY WAS NOT RECEIVED BEFORE THE END OF THE FINANCIAL YEAR THE ASSESSEE HAS CREATED RESERVE FOR SUNDRY DEBTORS AND CLAIMED AS DEDUCTION WHICH IS INCORRECT APPROACH. THE SUBSID Y IS RECEIVABLE FROM THE GOVERNMENT WHICH SHOULD BE REIMBURSED TO THE PA CS AND IN TURN PACS REQUIRED TO REMIT TO THE DISTRICT CO-OPERATIVE CENTRAL BANK. TILL SUCH TIME IT WAS NEITHER AN EXPENDITURE NOR AN OBL IGATION ON THE PART OF THE DCCB. THOUGH WITH AN ENTHUSIASM THE DCCB HAS R ELEASED THE SUBSIDY AMOUNT TO IMPROVE THE LIQUIDITY OF THE PACS THE DCCB CANNOT CREATE A RESERVE AND CLAIM IT AS A BAD AND DOUBTFUL DEBT WITHOUT WAITING FOR THE REPLY FROM THE GOVERNMENT. IN THIS CASE T HE GOVERNMENT HAS NOT REPUDIATED ITS OBLIGATION. IN GOVERNMENT DEBTS UNLESS THE GOVERNMENT REPUDIATES ITS LIABILITY BANKS CANNOT T REAT THE SAME AS BAD AND DOUBTFUL DEBT AND CATEGORIZE AS NON PERFORMING ASSET AND CLAIM IT AS A DEDUCTION. THIS VIEW IS SUPPORTED BY THE MASTER CIRCULAR - PRUDENTIAL NORMS ON INCOME RECOGNITION ASSET CLASS IFICATION ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 20 OF RESERVE BANK OF INDIA VIDE RBI/2015-16/101 DBR.NO.BP.BC.2/21.04.048/2015-16. THE LD. A.R ARGUMENT THAT ON RECEIPT OF THE SUBSIDY THE SAME WAS OFFERED TO THE INCOME IN SUBSEQUENT YEAR IS NOT TEN ABLE BECAUSE THE INCOME OF EACH ASSESSMENT YEAR HAS TO BE ASSESSED I NDEPENDENTLY AND THE ASSESSEE CANNOT POSTPONE THE INCOME TO THE NEXT ASSESSMENT YEAR. THE ASSESSEE IS A COOPERATIVE BANK FOLLOWING THE ME RCANTILE SYSTEM OF ACCOUNTING. THE SUBSIDY RELEASED TO PACS WAS NOT A LOAN IT WAS THE ASSISTANCE OF FUNDS IN LIEU OF EXPECTED SUBSIDY. T HEREFORE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE CANNOT BE SUSTAINED H ENCE SET ASIDE AND THE ORDER OF THE A.O. IS RESTORED AND THE ADDITION IS UPHELD. THE APPEAL OF THE REVENUE ON THIS ISSUE IS ALLOWED. 20. THE NEXT ISSUE IS DCCBS SHARE OF 35% OF WAIVER OF PENAL INTEREST AND INTEREST ON OVERDUE DEPOSITS. THIS ISSUE IS IN VOLVED FOR THE A.Y.S 2007-08 2008-09 AND 2010-11 AS FOLLOWS: S.NO. ISSUE AMOUNT ( ` ) A.Y. 2007-08 AMOUNT ( ` ) A.Y. 2008-09 AMOUNT ( ` ) A.Y. 2010-11 1. DCCB SHARE OF 35% OF WAIVER AND PENAL INTEREST AND IOD 1 74 22 643/- (1 12 36 487+ 61 86 165) 95 61 180/- 2 90 75 132/- (86 88 231+9 22 019+ 1 94 64 882) 21. THESE AMOUNTS RELATED TO THE DCCB SHARE OF 35% WAIVER OF PENAL INTEREST AND INTEREST ON OVERDUE DEPOSITS. THE ASS ESSEE IS LENDING ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 21 AGENCY TO PACS AND PACS LENDS THE MONIES TO FARMERS . UNLESS THE MONIES LENT BY PACS ARE RECOVERED THE SAME CANNOT BE REPAID TO THE BANK. APCOB IS THE MAIN LENDING AGENCY OF THE DCCB . THEREFORE THERE IS DIRECT INTERCONNECTION OF LENDING TO FARMERS WIT H THE APCOB DCCB AND THE PACS. AS PER THE DIRECTIONS OF THE APCOB THE PACS WAS TO COLLECT THE DUES OF LOAN AND INTEREST FROM SMALL AN D MARGINAL BORROWERS AND THE PACS CHARGES THE OVERDUE INTEREST AND THE P ENAL INTEREST FOR DEFAULTS IN PAYMENTS. ON THE DIRECTIONS OF THE APC OB THE ASSESSEE HAS DIRECTED THE PACS TO WAIVE THE OVERDUE INTEREST AND PENAL INTEREST SUBJECT TO PAYMENT OF THE PRINCIPAL ALONG WITH THE INTEREST. IN THE PROCESS THE PACS WOULD LOOSE THE OVER DUE INTEREST AND THE PENAL INTEREST WHICH WILL BE SHARED BETWEEN THE APCOB TH E ASSESSEE AND THE PACS. AS PER THE DIRECTION OF APCOB THE ASSESSEE HAS TO BEAR 35% OF THE OVERDUE INTEREST AND PENAL INTEREST AS ITS SHAR E ON LOANS COLLECTED BY THE PACS ALONG WITH THE INTEREST. THE ASSESSEE HAS EXPLAINED THAT IT WAS THE REIMBURSEMENT OF THE LOSS INCURRED BY THE P ACS ON ACCOUNT OF LOSS OF OVERDUE INTEREST AND PENAL INTEREST AS PER THE DIRECTIONS OF THE APCOB. ONCE THE LOANS ARE COLLECTED ALONG WITH INT EREST THE BANK IS BENEFITTED AND BANK HAS TO SHARE THE LOSS OF PACS. THE LD. A.R. SUBMITTED THAT THE WAIVERS ARE FACTUAL AND INCURRED IN THE COURSE OF BUSINESS. IT WAS A BUSINESS EXPENDITURE WHICH REQ UIRED TO BE ALLOWED ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 22 AS DEDUCTION. THE LD. A.R. RELIED ON THE DECISION OF NIZAMABAD DISTRICT CO-OPERATIVE CENTRAL BANK VS. ITO WARD-2. NOT BEIN G CONVINCED WITH THE EXPLANATION OF ASSESSEE THE A.O. MADE THE ADDI TION. AGGRIEVED BY THE ORDER OF THE A.O. THE ASSESSEE WE NT ON APPEAL BEFORE THE CIT(A) AND THE LD. CIT(A) DELETED THE AD DITION OBSERVING THAT THE WAIVERS WERE MADE PURSUANT TO BANKS BOARD RESO LUTION AND THE GOVERNMENT ORDERS. FOR THE SAKE OF CLARIFICATION A ND CONVENIENCE WE EXTRACT THE RELEVANT PARAGRAPH OF THE LD. CIT(A)S ORDER WHICH READS AS UNDER: 6C. THIRD ISSUE RELATES TO THE DISALLOWANCE OF THE CLAIM TOWARDS 'WAIVER OF PENAL INTEREST AND 100 AMOUNTING TO RS. 95 61 810/- FOR FINANCIAL YEAR 2006- 07'. DURING THE PROCEEDINGS BEFORE ME THE WAIVERS WERE SUBMITTED AS FACTUAL AND WERE MADE IN THE COURSE OF APPELLANT'S BUSINESS . THEY WERE ALSO NOT MADE OUT OF ANY EARLIER PROVISIONS AS PROVISIONS FOR BA D AND DOUBTFUL DEBTS ARE MADE BY ALL BANKS IN RESPECT OF 'PRINCIPAL' PART OF THE LOANS ONLY AND NOT ON THE 'INTEREST' PORTION. THE WAIVER WAS MADE IN PURS UANCE OF THE APPELLANT- BANK'S BOARD RESOLUTION AND WAS 'WRITTEN-OFF' IN TH E APPELLANT'S BOOKS OF ACCOUNT AND SHOWN IN THE PROFIT AND LOSS ACCOUNT. I T WAS ALSO SUBMITTED THAT THESE WAIVERS ARE COMMON IN THE CO-OPERATIVE SECTOR WHERE GOVERNMENTS ORDER FOR WAIVERS OR WRITE-OFFS FOR THE BENEFIT OF FARMERS. I HAVE EXAMINED THE CLAIM WITH REFERENCE TO ITS GENUINENESS AND THE COM PLIANCE WITH SEC.36(2) AND HOLD THAT THE CLAIMS MADE BY THE APPELLANT SATISFY THE REQUIREMENTS OF LAW INASMUCH AS THE SAME IS COMPLIED WITH THE DICTUM OF WRITE-OFF IN THE BOOKS AND NOT BEING OUT OF ANY EARLIER PROVISIONS AND ALL OW THE SAME AS COMPLYING WITH THE ACT. THE HON'BLE SUPREME COURT ALSO HELD T HAT THE WRITE-OFFS MADE BY BANKS NOT FORMING PART OF EARLIER PROVISIONS NEED T O BE ALLOWED AS BUSINESS EXPENDITURE IN THE CASE OF CITY UNION BANK'S CASE. 22. WE HAVE HEARD BOTH THE PARTIES PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 23 ASSESSEE HAS WAIVED THE INTEREST ON SHORT TERM AND LONG TERM LOANS GIVEN TO THE FARMERS. THIS IS EVIDENCED BY PAGE NO .28 OF PAPER BOOK SUBMITTED BEFORE US. AS PER THE SCHEME OF WAIVER 3 5% OF THE INTEREST RELATING TO WAIVER OF PENAL INTEREST AND INTEREST O N DEPOSITS (IOD) IS BORNE BY THE ASSESSEE. THERE IS NO DISPUTE THAT 35 % OF THE SHARE WAS BORNE BY THE BANK RELATING TO IOD AND PENAL INTERES T. THIS IS ON REPAYMENT OF THE LOANS COLLECTED ALONG WITH INTERES T. WAIVER OF OVER DUE INTEREST AND THE PENAL INTEREST IS AN INCENTIVE TO THE BORROWERS TO MAKE THEM TO REPAY THE LOAN GRANTED BY THE BANK. T HERE IS NO DISPUTE REGARDING THE GENUINENESS OF THE WAIVER. THE LD. A .R. SUBMITTED THAT IT IS ON ACCOUNT OF REIMBURSEMENT GIVEN TO PACS ON COM PLETE REPAYMENT OF LOANS. THE SIMILAR ISSUE WAS CONSIDERED BY THE COORDINATE BENCH OF ITAT HYD IN NIZAMABAD CO-OPERATIVE SOCIETY AND HELD THE SAME AS ALLOWABLE. FOR READY REFERENCE WE EXTRACT THE REL EVANT PARAGRAPHS OF THE COORDINATE BENCH OF ITAT HYDERABAD IN NIZAMABA D DISTRICT CO- OPERATIVE CENTRAL BANK VS. ITO WARD-2 ITQA NO.905 & 906/H/2013 WHICH READS AS UNDER: 1. WAIVERS OF PENAL INTEREST AND IOD AS PER THE APCOB - CIRCULARS WERE EXPLAINED DURING THE ASSESSMENT. OUR LETTER DT. 24.12.2009 SHOWS OUR SUBMISSION ON THE ISSUE AND REFERENCE TO OUR EARLIER SUBMISSIONS VIDE OUR LETTER DT.15.9.2009. THE PROCEDURE OF WAIVER AMOUNTS PASSED ON TO PACSS WAS ALSO EXPLAINED. AS P ER THE APCOB CIRCULARS AND OUR OWN CIRCULARS TO PACSS THE PACSS W ERE TO COLLECT THE DUES OF LOANS AND INTEREST FROM SMALL A ND MARGINAL-FARMER- BORROWERS AND THE BALANCE OF IOD AND PENAL INTEREST ARE BORNE BY ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 24 CONCERNED PACS CONCERNED DCCB AND APCOB IN THE RATI O OF 25% 35% AND 40% RESPECTIVELY. IT WAS NOT OUT OF ANY EAR LIER PROVISION AND LAID OUT WHOLLY AND EXCLUSIVELY FOR BUS INESS. 2. IT WAS HELD BY THE HON'BLE ITAT HYDERABAD A BENCH IN THE CASE OF NIZAMABAD DIST. CO-OP CENTRAL BANK LTD VS. ITO WARD -2 HYD (ITA NOS. 905/H/13 906/H/13) THE SAME AMOUNT OF WA IVER WAS HELD AS ALLOWABLE U/S.37(1). 3. THE REIMBURSEMENT OF WAIVERS ON PENAL INTEREST A ND IOD WERE EXPLAINED BY WAY OF CIRCULAR DT. 7.3.2006 (COPY OF THE CIRCULAR IN TELUGU IS FILED IN THE MATERIAL PAPER BOOK FOR AY:2007-08 AT PAGE NO. 28 AND ITS TRANSLATION IS ENCLOSED HEREIN AS PAGE NOS.61-63 WHICH SHOWS THAT THE IMPUGNED WAIVER WAS IN FACT A REIMBURSEMENT TO PACS S BY DCCB AND APCOB. IT GOT CRYSTALLIZED AND QUANTIFIED ONLY IN TH E RELEVANT PREVIOUS YEAR AND HENCE THE RESPONDENT-ASSESSEE MADE THE CLAIM FO R DEDUCTION RIGHTLY IN THE RELEVANT PREVIOUS YEAR WHICH WAS DULY ALLOW ED BY THE LEARNED CIT- APPEALS. 4. THE LEARNED AO-APPELLANT'S OBJECTION AS TO THE NON-ALLOWABILITY OF THE IMPUGNED AMOUNT AS AN EXPENDITURE OF THE RELEVA NT PREVIOUS YEAR AS THE SAME RELATES TO EARLIER ASSESSMENT YEARS IS SUB MITTED AS NOT CORRECT AS THE CONCEPT OF 'PRIOR PERIOD EXPENDITURE ' ENUNC IATED IN ACC.STD.5 OF ICAI DEFINES THE SAME AS ' EXPENDITURE INCURRED IN A PRECEDING YEAR BUT OMITTED TO BE RECORDED THEREIN' WHICH IS NOT THE C ASE HERE. ALL WAIVERS OR WRITE-OFFS INVARIABLY RELATE TO EARLIER YEARS AND T HEY CAN'T BE DISALLOWED ON THAT GROUND. 5. THE NATURE OF THE EXPENDITURE WAS SUCH THAT THE SAME HAD TO BE INCURRED IN THE RELEVANT PREVIOUS YEAR ONLY ON FULFILMENT OF THE CONDITIONS LAID OUT IN THE SCHEME OF WAIVER. WE ENCLOSE A TRANSLATION OF OUR CIRCULAR NO. ADM/PENAL INTEREST/ 2005/06 DT.7.3.2006 WHICH POSTULATES THAT A PACS IS ENTITLED TO GET REIMBURSEMENT OF PENA L INTEREST AND IOD ONLY ON ITS REALISATION OF THE OVER DUE LOANS FROM FARMERS IN FULL WITH PRINCIPAL AND INTEREST . AS THE SAID CONDITIONS WERE FULFILLED IN THE RELEVANT PRE VIOUS YEAR WE INCURRED THE EXPENDITURE ALSO IN THE SAME P REVIOUS YEAR DEBITED THE SAME AND CLAIMED DEDUCTION WHICH IS SUBMITTED AS APPROPRIATE. WE SUBMITTED THAT AS THE EXPENDITURE FOR REIMBURSEMENT OF PENAL INTEREST HOD WAS LAID OUT /E XPENDED IRRETRIEVABLY DURING THE RELEVANT PREVIOUS YEAR THE SAME WAS CLA IMED AS EXPENDITURE IN THE PREVIOUS YEAR AND THE SAID CLAIM IS IN ACCORDAN CE WITH THE LANGUAGE OF SEC. 37( 1). 6. THERE CAN'T BE AN INSISTENCE FOR CLAIM OF EXPEND ITURE AT A DIFFERENT POINT OF TIME BECAUSE WE SUBMIT THAT WE WERE INSTR UCTED BY APCOB TO IMPLEMENT A WAIVER SCHEME THE EXPENDITURE WAS CLAI MED IN THE RELEVANT PREVIOUS YEAR ONLY WHEN WE IRRETRIEVABLY SPENT THE AMOUNT TOWARDS REIMBURSEMENT OF PENAL INTEREST AND IOD IN PURSUAN CE OF THE SCHEME AND ON FULFILMENT OF THE SCHEME CONDITIONS BY ELIGI BLE FARMER-BORROWERS (FOR A MOMENT IF THE APCOB RESOLVES DIFFERENTLY A S PER ANY MODIFICATION ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 25 IN GOVT. INSTRUCTIONS ON WAIVER CLAIM OF EXPENDITU RE BY US ON MERE RESOLUTION WOULD HAVE BEEN UNFAIR AND WOULD HAVE BE EN WITHOUT ACTUAL INCURRENCE OF THE EXPENDITURE.) 7. WE RELY ON 'SAURASHTRA CEMENT & CHEMICALS INDUSTRIES LTD. VS. CIT'( 213 ITR 523 GUJ HC) WHEREIN IT WAS HELD THAT EVEN FOR AN ASSESSEE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AN EXPENDITURE SHALL BE ALLOWED UNDER SEC.37(1) ON THE ACTUAL INCURRENCE OF THE EXPENDITURE ON ITS CRYSTALLIZATION . THIS DECISION WAS CITED BY US BEFORE THE LEARNED CIT(APPEALS) TOO. THOUGH THE SUBJECT EXPENDITURE DOES NOT FALL U/S 3 6(2) OR 36(1)(VIIA) OF THE ACT UNDOUBTEDLY THE SAME IS BU SINESS LOSS AND THE AGGREGATE AMOUNT OF OVERDUE INTEREST AND PENAL INTE REST AND THE NPA PROVISION DID NOT EXCEED THE LIMIT FOR ALLOWING THE DEDUCTION U/S 36(1)(VIIA) OR 36(1)(VII) OF THE ACT. SINCE THE EX PENDITURE IS GENUINE AND INCURRED IN THE ORDINARY COURSE OF BUSINESS WE HOL D THAT THE IOD INTEREST AND THE PENAL INTEREST SHOULD BE ALLOWED A S BUSINESS LOSS AND ACCORDINGLY THE APPEAL OF THE REVENUE IS DISMISSED AND THE ORDER OF THE LD. CIT(A) IS UPHELD. 23. THE NEXT ISSUE FOR ALL THE ASSESSMENT YEARS IS OVERDUE INTEREST. THIS ISSUE IS INVOLVED FOR THE ASSESSMENT YEAR 2007 -08 & 2008-09. THE A.O. DISALLOWED OVERDUE INTEREST STATING THAT THIS INTEREST WAS DUE BUT NOT REALIZED. THE ASSESSEE HAS CREDITED THE INTERE ST AND THE EQUAL AMOUNT WAS DEBITED TO THE P&L ACCOUNT. THE A.O. HE LD THAT THE OVERDUE INTEREST NEED NOT BE RECOGNISED AS INCOME I N THE FIRST PLACE AS ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 26 EVEN THE ACCRUAL SYSTEM ACCOUNTING PRESCRIBED THAT THE INCOME DOUBTFUL OF RECOVERY NEED NOT BE RECOGNISED AS INCOME. THE A SSESSING OFFICER WAS OF THE VIEW THAT THE INTEREST INCOME WHICH WAS CREDITED TO THE P&L ACCOUNT CANNOT BE CLAIMED AS SET OFF IMMEDIATELY AN D ACCORDINGLY ADDED BACK TO THE INCOME. 24. AGGRIEVED BY THE ORDER OF THE A.O. THE ASSESSE E WENT ON APPEAL BEFORE THE CIT(A) AND THE LD. CIT(A) ALLOWED THE AP PEAL OF THE ASSESSEE PLACING RELIANCE IN THE CASE OF DURGA CO- OPERATIVE AND URBAN BANK LTD. ITAT VISAKHAPATNAM ITA NO.511/VIZAG/2010 THE DECISION OF DELHI HIGH COURT IN THE CASE OF M/S. VASISHT CHAI V YAPAR LTD. 196 TAXMANN 169 (DELHI) WHEREIN IT WAS HELD THAT ABSENC E OF SURENESS OF RECOVERY DOES NOT MAKE THE INTEREST ACCRUE IN THE R EAL SENSE. IN THIS CASE DURING THE APPEAL HEARING THE LD. A.R. DID N OT FURNISH THE DETAILS WITH REGARD TO WHAT WAS THE EXACT NATURE OF OVERDUE INTEREST CREATED FOR RESERVE. AS PER THE RBI GUIDELINES THE ASSESSEE N EED NOT RECOGNIZE THE INTEREST ON BAD AND DOUBTFUL DEBTS. SUCH INTEREST NEITHER CREDITED TO THE PROFIT & LOSS ACCOUNT NOR OFFERED AS INCOME. THE A SSESSEE REQUIRES TO RECORD SUCH ACCRUED INTEREST IN A MEMORANDUM OF ACC OUNT IN THEIR BOOKS. IT IS NOT KNOWN WHETHER THE INTEREST RELATED TO T HE OVERDUE INTEREST IS ON NPA ADVANCES OR NOT. IN CAS E THE INTEREST IS ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 27 RELATED TO THE NON PERFORMING ASSETS (NPA) AS CLAIM ED BY THE ASSESSEE THE SAME REQUIRED TO BE ALLOWED AS A DEDUCTION SINC E THE SAME CANNOT BE RECOGNISED AS INCOME AND THE TREATMENT GIVEN BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT APPEARS TO BE CORRECT. SINCE THE ISSUE INVOLVE VERIFICATION WITH REGARD TO THE TRUE AND CORRECT NA TURE OF THE OVERDUE INTEREST BOTH THE PARTIES HAVE AGREED TO REMIT THE MATTER BACK TO THE FILE OF THE A.O. TO VERIFY THE TRUE AND CORRECT NAT URE OF INTEREST WHETHER IT IS RELATING TO BAD AND DOUBTFUL DEBTS OR NPA OR ON PERFORMING ASSETS. THEREFORE WE DIRECT THE A.O. TO VERIFY THE TRUE NA TURE OF THE OVERDUE INTEREST AND DECIDE THE ISSUE AFRESH ON MERITS. TH IS GROUND OF APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 25. THE NEXT ISSUE FOR THE ASSESSMENT YEAR 2008-09 IS PROVISION FOR NPA AMOUNTING TO ` 2 84 11 535/-. THE ASSESSING OFFICER IN THE ASSESSMENT ORDER STATED THAT THE ASSESSEE HAD OFFE RED A SUM OF RS.72.05 CRORES AS INTEREST INCOME AND CLAIMED A SU M OF RS.2 84 11 535/- RELATING TO THE INTEREST ON NPA AD VANCES. THE ASSESSE CLAIMED THE SAME AS MANDATORY RESERVE AS PER THE RB I GUIDELINES. THE ASSESSING OFFICER VIEWED THAT WHEN THE ASSESSEE EAR NS INCOME ON NON PERFORMING ASSETS SUCH ASSET CANNOT BE TREATED AS NON PERFORMING ASSET AND THE INCOME ON SUCH ASSET REQUIRED TO BE T AXED AND RELIED ON ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 28 THE DECISION OF HONBLE ITAT HYDERABAD A BENCH IN THE CASE OF ANDHRA BANK VS. DCIT CIRCLE-1(1) IN ITA NO.615 TO 619/H/20 07 AND ITA NO.711/H/2008. 26. AGGRIEVED BY THE ORDER OF THE A.O. THE ASSESSE E WENT ON APPEAL BEFORE THE CIT(A) AND THE LD. CIT(A) ALLOWED THE AP PEAL OF THE ASSESSE HOLDING THAT THE DEDUCTION IS ALLOWABLE U/S 36(1)(V IIA) OF I.T.ACT. WE EXTRACT THE RELEVANT PARAGRAPH OF THE LD.CIT(A) ORD ER WHICH READS AS UNDER: 6B. SECOND ISSUE RELATES TO PROVISION FOR NPA AT R S. 2 84 11 535/- WHICH WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT. I T IS SUBMITTED THAT AS A BANK THE APPELLANT IS ENTITLED TO CLAIM DEDUC TION IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS AS PER SEC.36 (1)(VIIA) INCOME TAX ACT 1961. THE DISALLOWANCE WAS MADE BY THE AO WITHOUT ANY DELIBERATIONS ON THE SAME DURING THE ASSESSMENT PRO CEEDINGS. THE AO DISALLOWED THE IMPUGNED DEDUCTION ON THE SOLE GR OUND THAT THE RBI'S DIRECTIONS CAN'T OVERRIDE THE PROVISIONS OF I T ACT 1961. THUS THE CONTENTION OF THE APPELLANT HAS BEEN THAT THE P ROVISION FOR BAD AND DOUBTFUL DEBTS AS DEBITED TO ITS PROFIT AND LOS S ACCOUNT IS CLEARLY COVERED BY SEC.36 (1) (VIIA) ON ONE HAND AND THAT T HE LIMITS FOR THE ALLOWANCE WITH EFFECT FROM A.Y.2007-08 FOR ALL BANK S INCLUDING CO- OPERATIVE BANKS IS THE AGGREGATE OF 7.5% OF THE NET PROFIT BEFORE MAKING THE DEDUCTION UNDER THIS STATUTORY PROVISION AND 10% OF THE AGGREGATE AVERAGE RURAL ADVANCES ON THE OTHER. IT I S SUBMITTED THAT THE MEMORANDUM EXPLAINING THE PROVISIONS OF FINANCE BILL 2007 CLEARLY BROUGHT OUT THE SCOPE OF THE AMENDMENT MADE TO SEC.36(1)(VIIA) WHICH SUPPORTS THE IMPUGNED CLAIM. THE ITAT DECISION REFERRED TO BY THE AO WAS EXPLAINED AS REG ARDING THE PROVISION MADE ON STANDARD ASSETS BY THE BANKS 0. 25% AS ORDAINED BY THE RBI'S PRUDENTIAL NORMS. THE ITAT HE LD THAT TO GET A DEDUCTION UNDER THE IT ACT THE PROVISION SHALL BE ON BAD AND DOUBTFUL DEBTS AND THOUGH THE RBI STIPULATED PROVIS ION ON STANDARD ASSETS THE BANK CAN'T MAKE A CLAIM FOR DEDUCTION U NDER SECTION 36(1)(VIIA) WHICH DEALS WITH A PROVISION ON BAD AN D DOUBTFUL DEBTS. THE A.R. ARGUED THAT THE DECISION IS INAPPLICABLE T O THIS ISSUE. IN THE CIRCUMSTANCES IT IS HELD THAT THE REJECTION OF THE APPELLANT'S CLAIM IS PATENTLY UNJUST SINCE THE PROVISION CREATED SATISF IES THE ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 29 REQUIREMENTS OF LAW AND ALSO IS WELL WITHIN THE MAX IMUM AMOUNT OF DEDUCTION PRESCRIBED UNDER SEC.36(1)(VIIA) AND ACCO RDINGLY THE A0 IS DIRECTED TO ALLOW THE SAME. 27. WE HAVE HEARD BOTH THE PARTIES PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S 36(1)(VIIA) OF THE ACT TO THE EXTENT OF 7 % OF TOTAL INCOME AND 10% OF RURAL ADVANCES A S NPA. THE ASSESSEE HAS CATEGORIZED THE INTEREST OF ` 2 84 11 535/- AS NPA PROVISION. THE ASSESSEE ARGUED THAT IT IS AN INTERE ST PART OF THE ADVANCES WHICH WAS CATEGORIZED AS NPA. THE LD.AO DID NOT DIS PUTE THE FACT THAT THE SUM REPRESENTED THE INTEREST ON ADVANCE WHICH W AS CATEGORIZED AS NPA. THE AO DID NOT BRING ANY EVIDENCE TO SHOW THAT THE SAME WAS NOT NPA AND NOT COVERED BY THE PRUDENTIAL NORMS OF RBI. THE LD. D.R DID NOT CONTROVERT THAT THE PROVISION FOR BAD AND DOUBT FUL INCLUSIVE OF NPA PROVISION CROSSED THE LIMIT PROVIDED IN SECTION36(1 )(VIIA). SINCE THE DEDUCTION CLAIMED BY THE ASSESSEE IS WITHIN THE LIM IT OF SECTION 36(1)(VIIA) OF THE ACT THE SAME IS ALLOWABLE AS PE R THE PROVISIONS OF SECTION 36(1)(VIIA) OF THE ACT THEREFORE WE DO N OT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND THE SAME IS UPHELD. 28. THE NEXT ISSUE FOR THE ASSESSMENT YEAR 2008-09 IS 3% INTEREST ON AGRICULTURAL STABILIZATION FUND AMOUNTING TO ` 44 61 929/-. BEFORE THE ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 30 AO THE ASSESSE SUBMITTED EVERY BANK AND PACS SHALL TRANSFER A PART OF THEIR PROFITS TO AGRI. CREDIT STABILISATION FUND AS PER THE STIPULATIONS OF NABARD ACT 1981 AND INVEST THE M IN THE PRESCRIBED MODES. PACS SHALL INVEST THE FUND IN DCC BS. THE PRIMARY AGRI. CO-OPERATIVE SOCIETIES IN THE DISTRIC T KEEP THEIR AGRL. CREDIT STABILIZATION FUND BY WAY OF DEP OSITS WITH THE BANK. (THE BANK ALSO TRANSFER A PORTION OF ITS PROFITS TO AGRI. CREDIT STABILIZATION FUND). THE FUNDS SO INVE STED BY THE PACS SHALL BEAR INTEREST @3% P.A. WHICH IS PAID BY DEBITING TO 'INTEREST ON DEPOSITS' AND CREDIT AN EQ UAL AMOUNT TO AGRI. CREDIT STABILIZATION FUND OF PACSS (WHICH IS IN THE NATURE OF CUSTOMERS' DEPOSITS WITH THE BANK) . HOWEVER DURING THE YEAR UNDER CONSIDERATION THE PA RTICULAR AMOUNT OF RS.44 61 929/- REPRESENTING INTEREST ON CREDIT STABILSATION FUND OF PACSS WAS DEBITED TO 'LOSS' A CCOUNT INSTEAD OF TO 'INTEREST ON DEPOSITS'. IT WAS ACTUAL LY INCURRED AS BUSINESS EXPENDITURE AND WAS REALLY AN ITEM OF D EBIT TO THE P&L ACCOUNT. NOT BEING CONVINCED WITH THE EXPLANATION THE AO DISALLOWED THE INTEREST AND ADDED BACK TO TH E INCOME. ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 31 AGGRIEVED BY THE ORDER OF THE AO THE ASSESSE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) ALLOWED THE CLAIM OF THE ASSESSE STATING THAT ITEM REPRESENTS T HE INTEREST PAID BY ASSESSEE TO THE DEPOSITORS WHO AR E THE PRIMARY AGRICULTURAL CO-OPERATIVE SOCIETIES (PACSS) . THE PACSS IN THE DISTRICT HAVE DEPOSITED A PART OF THEI R PROFITS WITH THE ASSESSEE BANK AND INTEREST OF RS. 44 61 92 9/- WAS PAID BY THEM TO THE VARIOUS PACSS. THE RELEVANT ACC OUNT COPY WAS FURNISHED BY THE ASSESSEE DURING THE ASSES SMENT ON 23.12.2010 AND THE LD. CIT(A) FOUND THAT THE SAI D EXPENDITURE WAS AKIN TO ANY INTEREST PAID ON DEPOSI TORS BY THE BANK. 29. WE HAVE HEARD BOTH THE PARTIES PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. DISALLOWED THE ABOVE EXPENDITURE UNDER THE IMP RESSION THAT THE SAID AMOUNT WAS NOT AN EXPENDITURE BUT IT WAS RELAT ED TO THE INVESTMENTS. HOWEVER DURING THE APPEAL HEARING B EFORE THE CIT(A) AND BEFORE US THE ASSESSEE ARGUED THAT THE ITEM RE PRESENTS THE INTEREST PAID BY THE BANK TO THE DEPOSITORS. SINCE THE AMOU NT IS INTEREST PAID ON THE DEPOSITS OF THE CO-OPERATIVE SOCIETIES RELATING TO FUND CALLED ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 32 AGRICULTURAL CREDIT STABILIZATION FUND THE SAME IS A BUSINESS EXPENDITURE AND THE CIT(A) HAS ALLOWED THE SAME CORRECTLY. THE RE IS NO DISPUTE WITH REGARD TO THE GENUINENESS OF THE EXPENDITURE AND WE AGREE WITH THE LD. CIT (A) THAT IT WAS NOT AN APPROPRIATION OF THE PRO FITS AND IT WAS THE INTEREST PAID ON THE DEPOSITS OF PACS. THE APPEAL OF THE REVENUE ON THIS GROUND IS DISMISSED. 30. THE NEXT ISSUE IS RELATED TO THE RESERVE FOR CO -OPERATIVE EDUCATIONAL FUND FOR THE ASSESSMENT YEAR 2010-11. DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR THE ASSESSEE HAD CREATED A FUND WITHIN A SUM OF ` 2 LAKHS AS A.P. STATE CO-OPERATIVE UNION EDUCATION AL FUND. THE A.O. NOTED THAT THE ASSESSEE HAD INCURRE D AN EXPENDITURE OF ` 1 60 000/- TOWARDS TRAINING FEE AND ` 60 000/- TOWARDS A.P. STATE CO- OPERATIVE UNION HYDERABAD. SINCE THE PAYMENT WAS MADE TO A.P. STATE CO-OPERATIVE UNION THE LD. A.O. VIEWED THAT THE SA ID SUM WAS NOT IN THE NATURE OF EXPENDITURE ACCORDINGLY DISALLOWED B ALANCE AMOUNT OF ` 40 000/- AS APPROPRIATION OF EXPENDITURE AND NOT A STATUTORY OBLIGATION. AGGRIEVED BY THE ORDER OF THE A.O. THE ASSESSEE WE NT BEFORE THE CIT(A) AND THE LD. CIT(A) ALLOWED THE EXPENDITURE HOLDING THAT THE SAID SUM WAS NOT A CONTRIBUTION TO UNION AS UNDERSTOOD BY TH E LD. A.O. AND THE SAID SUM WAS PAID TO THE A.P. STATE CO-OPERATIVE UN ION FOR PROVIDING ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 33 TRAINING TO THE STAFF. THE LD. CIT(A) RELIED ON TH E DECISION OF HONBLE KARNAKATA HIGH COURT IN THE CASE OF CIT VS. PANDAVP URA SAHAKARA SAKKERA KHARKHANA LTD. 174 ITR 475 ( KARNATAKA) AND ALLOWED THE DEDUCTION. 31. WE HAVE HEARD BOTH THE PARTIES PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. AS PER SECTION 45(1) OF A.P. CO-OPERATIVE SOCIETIES ACT 1 964 THE SOCIETY WAS SUBJECT TO SUCH LIMITS AS MAY BE PRESCRIBED CREDIT OF 1% OF GROSS PROFIT OR GROSS INCOME IN A YEAR AS THE CASE MAY BE TO THE CO-OPERATIVE EDUCATIONAL FUND. AS PER THE A.P. C-OPERATIVE SOCI ETIES ACT IT IS MANDATORY TO THE BANK TO CREATE EDUCATIONAL FUND AN D HONBLE M.P. HIGH COURT IN THE CASE OF KESHKAL CO-OPERATIVE MARKETING SOCIETY CITED (SUPRA) HELD THAT THE PAYMENT TO THE RESERVE FUND W AS AN OBLIGATION CREATED UNDER THE STATUTE. IN THE INSTANT CASE TH E ASSESSEE HAD CREATED THE EDUCATIONAL FUND AS MANDATED BY THE CO-OPERATIV E CREDIT SOCIETY. THE ASSESSEE SUBMITTED THAT THE PAYMENT WAS MADE TO A.P. STATE CO- OPERATIVE UNION TO GIVE TRAINING TO THEIR STAFF BUT NOT THE CONTRIBUTION TO THE UNION. THEREFORE AS RIGHTLY HELD BY THE CIT( A) THE PAYMENT OR CONTRIBUTION TO CO-OPERATIVE EDUCATIONAL FUND IS DI VERSION OF PROFITS AT SOURCE BY OVER RIDING TITLE UNDER THE ACT. HENCE WE DO NOT FIND ANY ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 34 REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A ) AND THE SAME IS UPHELD. 32. IN THE RESULT ALL THE APPEALS FILED BY THE REV ENUE FOR THE ASSESSMENT YEARS 2007-08 2008-09 & 2010-11 ARE PAR TLY ALLOWED FOR STATISTICAL PURPOSES. 33. THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE IN SUPPORT OF THE ORDERS OF LD. CIT(A). IN VIEW OF THE PRECEDING PAR AGRAPHS THE CROSS OBJECTIONS FILED BY THE ASSESSEE ALSO ALLOWED PARTL Y FOR STATISTICAL PURPOSES. 34. IN THE RESULT THE APPEALS OF THE REVENUE ARE P ARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJECTIONS ARE P ARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 8 TH NOV17. SD/- SD/- ( . ) ( . . ' ) (V. DURGA RAO) (D.S. SUNDER SINGH) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 08.11.2017 VG/SPS ITA NOS.120&121/VIZAG/2013 ITA 200/VIZAG/2016 C.O. NOS.68&69/VIZAG/2013 & CO NO.2/VIZAG/2017 M/S.THE KRISHNA DISTRICT CO-OPERATIVE CENTRAL BANK MACHILIPATNAM 35 )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANTS THE DCIT CIRCLE-2(1) VIJAYAWA DA & THE JCIT CIRCLE- 2(1) VIJAYAWADA 2. / THE RESPONDENT M/S. KRISHNA DISTRICT CO-OPERAT IVE CENTRAL BANK LTD. 11/717 JAGANNATHAPURAM MACHILIPATNAM. 3. + / THE CIT VIJAYAWADA 4. + ( ) / THE CIT (A) VIJAYAWADA 5. # . . # / DR ITAT VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT VISAKHAPATNAM