DCIT, Udupi v. M/s. Syndicate Bank, Manipal

ITA 227/BANG/2008 | 2004-2005
Pronouncement Date: 16-03-2011 | Result: Dismissed

Appeal Details

RSA Number 22721114 RSA 2008
Bench Bangalore
Appeal Number ITA 227/BANG/2008
Duration Of Justice 2 year(s) 3 month(s) 2 day(s)
Appellant DCIT, Udupi
Respondent M/s. Syndicate Bank, Manipal
Appeal Type Income Tax Appeal
Pronouncement Date 16-03-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 16-03-2011
Date Of Final Hearing 03-02-2011
Next Hearing Date 03-02-2011
Assessment Year 2004-2005
Appeal Filed On 14-12-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY ACCOUNTANT MEMBER ITA NOS. 116 TO 118/BANG/2008 ASSESSMENT YEARS : 2002-03 TO 2004-05 SYNDICATE BANK CENTRAL ACCOUNTS DEPARTMENT TAX CELL MANIPAL 567 104. KARNATAKA. : APPELLANT VS. THE ASST. COMMISSIONER OF INCOME TAX CIRCLE 1 CANARA TOWERS MISSION HOSPITAL ROAD UDUPI 576 101. : RESPONDENT ITA NOS. 225 TO 227/BANG/2008 ASSESSMENT YEARS : 2002-03 TO 2004-05 THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 1 UDUPI 576 101. : APPELLANT VS. SYNDICATE BANK H.O. ACCOUNTS DEPARTMENT MANIPAL : RESPONDENT ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 2 OF 16 ASSESSEE BY : SHRI K.P. KUMAR SR. ADVOCATE REVENUE BY : SHRI G.V. GOPALA RAO CIT-I(DR) O R D E R PER BENCH THESE CROSS APPEALS PREFERRED BY THE ASSESSEE BANK AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE INDIVIDUAL ORDERS OF THE CIT(APPEALS) MANGALORE DATED 14.11.2007 (EACH ASSESSMENT YEAR-WI SE) FOR THE ASSESSMENT YEARS 2002-03 TO 2004-05 . ASSESSEES APPEALS (ITA NO.116 TO 118/B/08) A.Y. 2002-03 2. THERE ARE TWELVE GROUNDS OF APPEAL RAISED OUT OF WHICH GROUND NO.12 BEING GENERAL IN NATURE IT DOES NOT SURVIVE FOR ADJUDICATION. IN RESPECT OF GROUND NOS. 4 TO 7 8(C) 8(D) & 10 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED A PAPER BOOK [SOURCE: P 10 OF PB AR] FAIRLY STATING THAT SINCE COD REJECTED PERMISSION FOR THESE GROUNDS AND THEREFORE THEY ARE DISMISSED AS NOT MAINTAINABLE. THE REMAINING GROUN DS ARE BRIEFLY STATED AS UNDER: GROUND 1 2 & 3 ( 1) THAT THE CIT (A) ERRED IN SUSTAINING THE AOS A CTION IN ADDING RS.72 72 776/- REPRESENTING PROVISION FOR TE LEPHONE DEPOSITS. (2) THAT AT THE TIME OF CREATION OF THE PROVISION B Y DEBITING THE P&L ACCOUNT DURING 1998-99 THE APPELLANT HAD ADDED BACK THE SAME WHILE ARRIVING AT THE TOTAL INCOME. THE APPEL LANTS ACTION IN NOT TAKING INTO INCOME WHEN THE PROVISION REVERS ED WAS TOTALLY JUSTIFIABLE BOTH IN LAW AND EQUITY. ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 3 OF 16 (3) THAT THE AO AND THE CIT(A) GROSSLY ERRED IN ASS UMING THAT THE APPELLANT WAS SEEKING DEDUCTION OF THE ABOVE AM OUNT WHILE COMPUTING THE TOTAL INCOME WHEREAS IN REALITY IT W AS A CASE OF WITHDRAWAL OF PROVISION. GROUND NO.8 SINCE COD PERMISSION IS GRANTED ON THE ISSUE OF BOO K PROFITS ONLY IN RESPECT OF THE PROVISION FOR BAD AND DOUBTF UL DEBTS (NPAS) AND PROVISION FOR STANDARD ASSETS I.E. GROU ND NOS. 8 (A) AND 8(B) RESPECTIVELY GROUND NO.8 IS ACCORDINGLY MODIFIED AND REFORMULATED BELOW: (8) THAT THE CIT (A) ERRED IN SUSTAINING ADDITION S WHILE ARRIVING AT THE BOOK PROFIT PROVISIONS FOR: (A) BAD AND DOUBTFUL DEBTS; (B) STANDARD ASSETS. THE OTHER ISSUES IN THIS GROUND VIZ. 8(C) VIZ. PR OVISION FOR SUIT FILED ACCOUNTS; AND 8(D) PROVISION FOR FRAUDS WHER EIN THE COD PERMISSION IS REJECTED THESE GROUNDS DO NOT SURVIV E FOR ADJUDICATION AND ARE DISMISSED ACCORDINGLY. GROUND NO.9 SIMILARLY IN GROUND NO.9 THE COD HAVING REJECTED THE ISSUE OF PROVISION FOR SUIT FILED ACCOUNTS FOR ADJUDICATION THE SAME STANDS DISMISSED AND GROUND NO.9 IS REFORMULATED BELOW WIT H REGARD TO THE OTHER ISSUES. (9) THAT THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE PROVISIONS FOR BAD AND DOUBTFUL DEBTS AND STANDARD ASSETS DID NOT RELATE TO ANY LIABILITY BUT REPRESENTED DIMIN UTION /EROSION IN VALUES OF ASSETS AND AS SUCH EXPLANATION (C) TO SEC TION 115JB(2) HAD NO APPLICATION WHATEVER TO JUSTIFY ADDITION . GROUND NO.11 (11) THAT THE CIT(A) OUGHT TO HAVE HELD THAT (I) TAX CREDIT FOR MAT PAID U/S. 115JA FOR A.Y. 1998-99 1999-2000 AND 2000-01 HAD TO BE GIVEN WHILE QUANTIFYING BALANCE TAX PAYAB LE; AND (II) INTEREST UNDER SECTION 234B LEVIABLE ONLY ON SUCH N ET TAX LIABILITY AND NOT TAX BEFORE MAT CREDIT. ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 4 OF 16 A.Y. 2003-04 2.1 FOR THE A.Y. 2003-04 THE LD. AR REFERRING TO THE PAPER BOOK SUBMITTED THAT IN THIS APPEAL COD PERMISSION IS GR ANTED ONLY IN RESPECT OF GROUND NO.6 (A) AND (B). ACCORDINGLY THE OTHER G ROUNDS ARE DISMISSED SINCE THE COD HAD REJECTED THESE GROUNDS FOR ADJUDI CATION. GROUND NO.7 IS GENERAL IN NATURE. THEREFORE GROUND NO.6 (A) A ND (B) WHICH SURVIVES FOR ADJUDICATION IS REPRODUCED BELOW: 6. THAT THE CIT(A) ERRED IN SUSTAINING ADDITIONS WH ILE ARRIVING AT THE BOOK PROFIT PROVISIONS FOR: (A) BAD AND DOUBTFUL DEBTS; AND (B) STANDARD ASSETS. A.Y. 2004-05 2.2 FOR THE A.Y. 2004-05 COD PERMISSION IS GRANTE D ONLY IN RESPECT OF GROUND NOS.1 & 2 WHICH IS REPRODUCED BELOW; AND H ENCE THE OTHER GROUNDS ARE DISMISSED AS NOT MAINTAINABLE. 1. THAT THE CIT (A) ERRED IN SUSTAINING THE ASSESS ING OFFICERS ACTION IN ADDING BACK RS.9 71 05 525/- RE PRESENTING PROVISION FOR DEPRECIATION ON INVESTMENT WITHDRAWN. 2. THAT AT THE TIME OF CREATION OF THE PROVISION BY DEBITING THE P&L A/C DURING THE RELEVANT YEARS THE APPELLANT HA VING ADDED BACK THE SAME WHILE ARRIVING AT THE TOTAL INCOME T HE WITHDRAWAL OF THE PROVISION UNDER ANY CIRCUMSTANCES CANNOT BE CONSTRUED AS INCOME TO BE RENDERED LIABLE TO TAX. ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 5 OF 16 REVENUES APPEALS (ITA 225 TO 227/B/08) 3. FOR THE ASSESSMENT YEARS 2002-03 TO 2004-05 THOUGH THERE ARE SEVERAL GROUNDS IN THESE APPEALS FROM THE PAPERBOO K PRODUCED BY THE LD. AR FOR THE ASSESSEE IT IS CLEAR THAT COD PERMISSIO N IS GRANTED ON THE FOLLOWING ISSUES WHICH ARE REPRODUCED BELOW (IN ASS ESSMENT YEAR-WISE): A.Y. 2002-03 WHETHER REVERSAL OF INTEREST AMOUNTS TO BE BAD DEBT S? A.Y. 2002-03 & 2003-04 WHETHER INTEREST ON ZERO COUPON BONDS WILL FORM PAR T OF BOOK PROFIT U/S. 115 JB? A.Y. 2003-04 WHETHER PENALTY PAID TO RBI IS ALLOWABLE U/S. 37 OF THE ACT? A.Y. 2003-04 & 2004-05 WHETHER DEDUCTION CLAIMED TOWARDS BAD AND DOUBTFUL DEBTS WITHOUT MAKING PROVISION IS ALLOWABLE? ASSESSEES APPEAL A.Y. 2002-03 - GROUND NOS.1 2 & 3 ADDITION ON ACCOUNT OF PROVISION FOR TELEPHONE DEPO SIT OF RS.72 72 776/- 4. THE LD. AR EXPLAINED THAT THE TELEPHONE DEPOSIT S ARE DEPOSITS WITH POST AND TELEGRAPH DEPARTMENT HELD UNDER THE SCHEME OYT (OWN YOUR TELEPHONE). YEAR AFTER YEAR THE POSTAL AND TELEPHON E AUTHORITIES HAVE BEEN REDUCING A SPECIFIC AMOUNT FROM THESE DEPOSITS AGAI NST THE RUNNING TELEPHONE BILLS OF THE APPELLANT. SINCE THE POST & TELEGRAPH DEPARTMENT DID NOT DISCLOSE THE EXACT AMOUNT OF SUCH ADJUSTMENTS M ADE TO THE APPELLANT ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 6 OF 16 THE APPELLANT WAS NOT IN A POSITION TO MAKE THE COR RESPONDING ADJUSTMENTS IN ITS BOOKS OF ACCOUNTS. IN THE A.Y. 1998-99 THE AUDITORS OF THE APPELLANT ADVISED THE APPELLANT TO MAKE PROVISION ON THIS DEP OSITS AS THERE WAS A POSSIBILITY THAT THE ENTIRE DEPOSIT MIGHT HAVE EROD ED DUE TO SUCH ADJUSTMENTS MADE BY THE POST & TELEGRAPH AUTHORITIE S OVER A PERIOD OF TIME. THOUGH THE APPELLANT MADE SUCH PROVISION ON THE ADV ICE OF THE AUDITORS DID NOT CLAIM THIS AMOUNT AS A DEDUCTION IN THE COMPUTA TION STATEMENT. THE APPELLANT HAD IN FACT ADDED BACK THIS AMOUNT IN ARR IVING AT THE PROFITS. SUBSEQUENTLY IN THE PREVIOUS YEAR 2001-02 AFTER A SCERTAINING THAT ALL THE BRANCHES OF THE APPELLANT HAD TAKEN APPROPRIATE COR RECTIVE ACTION REVERSED THE PROVISION BY CREDITING THE P&L ACCOUNT. THUS THIS REVERSAL OF ENTRY IN THE BOOKS OF ACCOUNTS WAS NOT DUE TO THE ACCRUAL OF INCOME OF THE APPELLANT BUT ONLY DUE TO WRITE OFF OF THE PROVIS ION PROVIDED BY THE APPELLANT WHICH WAS NOT CLAIMED AS A DEDUCTION IN T HE YEAR IN WHICH SUCH PROVISION WAS MADE. 4.1 AT THE OUTSET THE LD. DR MAGNANIMOUSLY SUBMI TTED BEFORE THE BENCH A LETTER DATED 22/09/2009 NO. DCIT/CIR.1/UDP/ S.B./ITAT/09-10 OF THE DCIT CIRCLE1 UDUPI STATING THAT THE ASSESSEES PLEA HAD BEEN VERIFIED AND THE AMOUNT OF RS. 72 72 771/- WAS ADDED BACK FO R ARRIVING AT THE TOTAL INCOME IN THE YEAR IN WHICH THE PROVISION WAS MADE. IN VIEW OF THE ABOVE WE HOLD THE ISSUE IN FAVOUR OF THE ASSESSEE AND DIRECT THE LD. AO TO DELETE THE ADDITION OF RS. 72 72 776/- MADE O N ACCOUNT OF WRITE OF PROVISION ON TELEPHONE DEPOSITS. ACCORDINGLY GR OUND NO. 1 2 AND 3 ARE DISPOSED OF. ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 7 OF 16 GROUND NOS. 8(A) & 8(B) & 9 ADDITION ON ACCOUNT OF BAD AND DOUBTFUL DEBTS AND S TANDARD ASSETS BEING ADDED TO BOOK PROFIT FOR ARRIVING AT THE BOOK PROFI T U/S 115JB OF THE ACT. 4.2 THE LD. AR EXPLAINED THAT THE ASSESSING OFFI CER WHILE COMPUTING THE BOOK PROFITS FOR THE PURPOSE OF SECTION 115JB H AD COMMENCED THE EXERCISE FROM THE PROFIT & LOSS ACCOUNT PREPARED IN ACCORDANCE WITH FORM B PRESCRIBED UNDER THE BANKING REGULATIONS ACT 1949 (B.R. ACT). THE PROVISIONS OF B.R. ACT AND FORM B RELATING TO THE P REPARATION OF P&L ACCOUNT DIFFER FROM THE PROVISIONS OF PARTS II & II I OF SCHEDULE VI TO THE COMPANIES ACT 1956 PARTICULARLY IN REGARD TO DEBIT S FROM PROVISION. THE LD. AR THOUGH VEHEMENTLY ARGUED ON THE MERITS OF TH E CASE BY CITING THE DECISION OF THE CASE CITED IN 305 ITR 409 - CIT V. HCL COMNET SOLUTIONS SYSTEMS & SERVICE LTD. AGREED TO THE PROPOSITION B ROUGHT OUT BY THE LD. DR THAT THE MATTER BE REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR EXAMINATION OF THE FINANCIAL STATEMENTS PREPARED AS PER THE COMPANIES ACT 1956. IN VIEW OF THE SAME WE REMIT BACK THIS ISSUE TO TH E FILE OF THE LD. AO AND THE APPELLANT IS ALSO DIRECTED TO PR EPARE THE PROFIT & LOSS ACCOUNT AND BALANCE SHEET IN ACCORDANCE WITH T HE PROVISIONS OF THE COMPANIES ACT 1956. ACCORDINGLY GROUND NOS.8 (A) & (B) AND 9 ARE DISPOSED OF. GROUND 11 : LEVY OF INTEREST U/S. 234B 4.3 THE LD. AR CONTENDED THAT THE INTEREST UNDER THE AFORESAID PROVISIONS WOULD BE LEVIABLE ONLY ON THE NET AMOUNT OF TAX ARRIVED AT AFTER TAKING MAT CREDIT AS PROVIDED U/S. 115JAA OF THE AC T. HE SUBMITTED THAT ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 8 OF 16 THE ASSESSING OFFICER HAS ERRED IN QUANTIFYING THE INTEREST WITH REFERENCE TO THE SHORTFALL BEFORE ALLOWING MAT CREDIT U/S. 115JA OF THE ACT AND RELIED UPON THE CASE REPORTED IN 314 ITR 231 CIT V. CHEMPL AST SANMAR (MAD) AND IN THE CASE CIT V. JINDAL EXPORTS REPORTED IN 3 14 ITR 137 (DEL). FURTHER RELIANCE WAS PLACED UPON THE CASE REPORTED IN 92 ITD 441 - CIT V. PHILIPS INDIA LTD. CHANDIGARH BENCH. SINCE WE HAVE REMITTED BACK THE ISSUE WITH REGARD TO COMPUTATION OF MAT TO THE FILE OF AO WE FIND IT APPROPRIATE TO REMIT BACK THIS ISSUE ALSO WITH RESP ECT TO LEVY OF INTEREST U/S. 234B OF THE ACT TO THE FILE OF AO TO EXAMINE THE MA TTER IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENTS PUT FORTH BY THE LD. AR AND PASS APPROPRIATE ORDER ON MERITS. A.Y. 2003-04 ADDITION ON ACCOUNT OF BAD AND DOUBTFUL DEBTS AND S TANDARD ASSETS BEING ADDED TO BOOK PROFIT FOR ARRIVING AT THE BOOK PROFI T U/S 115JB OF THE ACT. 4.4 THIS ISSUE IS IDENTICAL TO THE ISSUE ADJUDICA TED HEREINABOVE FOR THE A.Y. 2002-03 IN PARA 4.2.2 THEREFORE THIS ISSUE I S ALSO REMITTED BACK TO THE FILE OF LD. AO WITH SIMILAR DIRECTIONS. A.Y. 2004-05 ADDITION ON ACCOUNT OF PROVISION FOR DEPRECIATION O N INVESTMENT WITHDRAWN FOR RS.9 71 05 525. 4.5 THE LD. AR SUBMITTED BEFORE US THAT THE APP ELLANT HAD BEEN PROVIDING DEPRECIATION FOR FALL IN MARKET VALUE OF THE INVESTMENTS BY DEBITING P&L ACCOUNT AND CORRESPONDINGLY CREDITING PROVISION ACCOUNT. THE AMOUNT ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 9 OF 16 SO PROVIDED BY THE APPELLANT WAS NOT CLAIMED AS DED UCTION WHILE COMPUTING THE TOTAL INCOME IN THE YEAR IN WHICH SUCH PROVISIO N WAS MADE. IN FACT THE AMOUNT WAS ADDED BACK TO THE PROFIT WHILE COMPUTING THE TOTAL INCOME FOR TAX PURPOSE. IN THE CURRENT YEAR THESE PROVISIONS WERE FOUND TO BE IN EXCESS AND THEREFORE AN AMOUNT TO THE TUNE OF RS. 9 71 05 525 WAS WRITTEN BACK BY DEBITING THE PROVISION ACCOUNT AND CREDITIN G TO THE P&L ACCOUNT. SINCE THE ASSESSEE HAD NOT CLAIMED THIS PROVISION A S A DEDUCTION IN THE YEAR IN WHICH THE PROVISION WAS MADE THIS AMOUNT C ANNOT BE CONSIDERED AS THE INCOME OF THE ASSESSEE AS IT IS ONLY A REVER SAL ENTRY PASSED IN THE BOOKS OF ACCOUNTS. THE LD. AR SUBMITTED STATEMENT OF TOTAL INCOME AND OTHER FINANCIAL STATEMENTS IN ANNEXURE C1 TO C3 AND ANNEXURE D AND E OF THE PAPER BOOK DURING THE COURSE OF HEARING. ON PE RUSING THE ASSESSMENT ORDER WE FIND THAT THE LD. AO HAS MADE THIS ADDITI ON ON THE BASIS THAT THE PROVISIONS ARE NOT CREATED AGAINST ANY LIABILITY B UT CREATED AGAINST AN ASSET AND ALSO THE ADDITIONS WERE MADE ON THIS ISSUE IN E ARLIER YEARS. THE LD. CIT (A) HAS ALSO DISMISSED THE GROUND OF THE APPELL ANT ONLY WITH AN OBSERVATION THAT THE EXPLANATION GIVEN BY THE APPEL LANT AT THE ASSESSMENT STAGE BEFORE THE AO IS TOO CRYPTIC AND THE EXPLANAT ION GIVEN AT THE APPELLATE STAGE WAS NOT FURNISHED BEFORE THE AO. I N THESE CIRCUMSTANCES WE ARE OF THE CONSIDERED OPINION THAT THE BASIC FAC TS HAVE TO BE PROPERLY EXAMINED AND THE SCHEME OF ENTRIES PASSED HAS TO BE VERIFIED BEFORE ARRIVING TO A CONCLUSION. THEREFORE IT WOULD BE APPROPRIATE TO REMIT BACK THE ISSUE TO THE FILE OF AO WITH A DIRECTION T O EXAMINE THE BOOKS OF ACCOUNTS OF THE ASSESSEE WITH RESPECT TO THE REL EVANT ASSESSMENT ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 10 OF 16 YEARS AND PASS APPROPRIATE ORDERS ON MERITS BY AFFO RDING REASONABLE OPPORTUNITY OF BEING HEARD. IT IS ORDERED ACCORDI NGLY. REVENUES APPEALS (ITA 225 TO 227/B/08) 5. IN THE REVENUES APPEAL FOR THE A.Y. 2002-03 T O 2004-05 THOUGH THERE ARE SEVERAL GROUNDS IT WAS BROUGHT OUT BY THE LD. DR THAT COD PERMISSION IS GRANTED FOR THE FOLLOWING ISSUES AS L ISTED BELOW AND TAKEN UP FOR ADJUDICATION. A.Y. 2002-03 WHETHER REVERSAL OF INTEREST AMOUNTS TO BAD DEBTS? A.Y. 2002-03 & 2003-04 WHETHER INTEREST ON ZERO COUPON BONDS WILL FORM PAR T OF BOOK PROFIT U/S. 115 JB? A.Y. 2003-04 WHETHER PENALTY PAID TO RBI IS ALLOWABLE U/S. 37 OF THE ACT? A.Y. 2003-04 & 2004-05 WHETHER DEDUCTION CLAIMED TOWARDS BAD AND DOUBTFUL DEBTS WITHOUT MAKING PROVISION IS ALLOWABLE? A.Y. 2002-03 WHETHER REVERSAL OF INTEREST AMOUNTS TO BAD DEBTS. 5.1 THE REVENUE HAS CONTENDED THAT THE LD. CIT(A) HAS ERRED IN ALLOWING DEDUCTION U/S. 36(1)(VII) R.W.S. 36(2) OF THE ACT F OR THE REVERSAL OF INTEREST CONSIDERING IT TO BE BAD DEBT. IT WAS ARGUED THAT AS PER THE GUIDELINES OF RESERVE BANK OF INDIA WHICH IS BINDING ON THE ASSE SSEE U/S. 43B ONCE A DEBT BECOMES NPA ONLY THE INTEREST CREDITED IN THE CURRENT YEAR CAN BE ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 11 OF 16 REVERSED AND INTEREST ALREADY CREDITED IN THE PRECE DING PREVIOUS YEAR CANNOT BE REVERSED. IT WAS FURTHER ARGUED THAT THE RE IS A DISTINCTION BETWEEN BAD DEBT AND NON-PERFORMING ASSET AND BOTH CANNOT BE EQUATED. LD. AR STOUTLY REBUTTED TO THE ARGUMENTS MADE BY TH E LD. DR. IT WAS SUBMITTED THAT THE BANK STRICTLY OBSERVED THE RBI G UIDELINES IN REGARD TO INCOME RECOGNITION AND CLASSIFICATION OF NPAS THERE BY REVERSED THE INTEREST DEBITED TO THE BORROWERS ACCOUNT AND CREDITED TO T HE INCOME ACCOUNT ON THE DEBT BECOMING A NPA. BY REASON OF SUCH REVERSAL THE BANK WROTE OFF THE UNREALIZED INTEREST BY CREDITING THE BORROWERS ACCOUNT AND DEBITING THE P&L ACCOUNT. IT WAS FURTHER SUBMITTED THE INTERES T INCOME WAS TAKEN INTO CONSIDERATION FOR COMPUTATION OF INCOME IN THE EARL IER YEARS AND NOW SINCE FROM THE PERSONS ON WHOM INTEREST WAS DUE HAS BECOM E IRRECOVERABLE DUE TO WHICH IT IS WRITTEN OFF IN THE BOOKS OF ACCOUNTS AS BAD DEBTS. THE LD. AR RELIED ON THE DECISION OF THE CASE IN ITA NO.1283 & 1284/2007 DATED 9.10.09 IN THE ASSESSEES OWN CASE FOR THE A.Y. 200 0-01 AND 2001-02. THE RELEVANT PORTION OF THE ORDER IS REPRODUCED HER E-BELOW FOR REFERENCE: THE ASSESSEE IS BOUND TO FOLLOW THE RBI GUIDELINES AND SECONDLY THE SAME METHOD OF ACCOUNT WAS BEING FOLLOWED BY THE AS SESSEE CONSISTENTLY WHICH WAS ALWAYS ACCEPTED BY THE REVEN UE. SINCE THE ASSESSEE IS BOUND TO FOLLOW AND HAS ONLY FOLLOWED T HE RBI GUIDELINES THE REVERSAL OF ENTRY CANNOT BE FAULTED WITH. WE H OLD ACCORDINGLY. 5.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. THERE IS A CLEAR CUT FINDING BY THE LD. CI T (A) THAT (1) THE DEBT HAS BECOME BAD (2) THE INTEREST INCOME HAD BEEN TAKEN INTO CONSIDERATION FOR COMPUTATION OF INCOME IN THE EARLIER YEARS (3) THE INTEREST INCOME PAYABLE BY THE DEBTORS HAVE BECOME BAD AND IRRECOVERABLE ( 4) THE DEBTS WHICH ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 12 OF 16 HAS BECOME IRRECOVERABLE AND IS WRITTEN OFF IN THE BOOKS OF ACCOUNT BY THE APPELLANT. CONSIDERING THESE FINDINGS OF THE LD. CI T(A) AND BY FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL CITED ABOVE WE UPHOL D THE DECISION OF THE LD. CIT(A) WHICH IS IN FAVOUR OF THE ASSESSEE. A.Y. 2002-03 & 2003-04 WHETHER INTEREST ON ZERO COUPON BONDS WILL FORM PAR T OF BOOK PROFIT U/S. 115 JB. 6. THE GROUSE OF THE REVENUE WAS THAT THE LD. CIT( A) HAS ERRED IN DELETING THE DEEP DISCOUNT BOND RELYING ON THE CBDT CIRCULARS. ON PERUSING THE ASSESSMENT ORDER IT IS FOUND THAT THE LD. AO HAS DISALLOWED THIS CLAIM ONLY WITH THE REASONING THAT THE ASSESSE ES CLAIM FOR EXEMPTION OF INTEREST ON ZERO COUPON BONDS WERE NOT ALLOWED I N THE EARLIER YEARS. HOWEVER THE CIT(A) IN HIS ORDER HAS RELIED ON THE ORDER OF THE TRIBUNAL IN ITA NO.326/BANG/2002 FOR THE A.Y. 1998-99 DATED 8.6 .2005. THE RELEVANT PORTION OF THE ORDER IS REPRODUCED HERE-BELOW FOR R EFERENCE: WE HAVE CAREFULLY CONSIDERED THE RELEVANT FACTS AND ARGUMENTS ADVANCED. THE CBDT BY ITS CIRCULAR AFORESAID OPINE D THAT INTEREST ON ZERO COUPON BONDS IS NOT AN INTEREST IN STRICT SENSE AS IT ENCOMPASSES OVER CERTAIN PERIOD OF TIME. THE CIRCULAR ISSUED BY CBDT ARE BINDING UPON THE AUTHORITIES WOR KING UNDER IT. SIMILAR VIEW HAS BEEN ADOPTED BY HONBLE SUPREME COURT IN THE CASE OF UCO BANK V CIT 237 ITR 889 IN THE CASE OF COLLECTOR OF CENTRAL EXCISE V. DHIREN CHEMICAL I NDUSTRIES (254 ITR 554) AND IN THE CASE OF COMMISSIONER OF CU STOMS V. INDIAN OIL CORPORATION LTD. AND ANOTHER (267 ITR 27 2). THE ENTRY BY WAY OF CREATING THE PROFIT AND LOSS ACCOUN T IN RESPECT OF INTEREST ON ZERO COUPON BONDS IS OF NOTIONAL CREDIT AND NOT IN RESPECT OF INTEREST ACCRUING DURING THE YEAR. THE BONDS ARE MATURING OVER LONG PERIOD OF TIME AND THE ENTIRE IN COME BY WAY OF DIFFERENCE BETWEEN ACQUISITION PRICE AND REDEMPT ION PRICE DO NOT ACCRUE TO THE ASSESSEE DURING THE FINANCIAL YEA R. THUS THOUGH THE ASSESSEE HAS CREDITED THE INCOME THE SA ME IS NOT STRICTLY IN ACCORDANCE WITH PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT 1956. HONBLE SUPREME COURT IN THE ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 13 OF 16 CASE OF APPOLLO TYRES LTD. (255 ITR 272) HELD THAT THE AO HAS NO POWER TO REWORK THE BOOK PROFIT IF THE PROFITS A RE COMPUTED IN ACCORDANCE WITH PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT 1956. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V VEEKAYLAL INVESTMENT CO. P. LTD. (249 ITR 597) HELD THAT IF THE PROFIT IS NOT COMPUTED IN ACCORDANCE WI TH PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT 1956 THE AO HAS POWER TO RECOMPUTE SUCH BOOK PROFITS. THUS IT CAN BE HELD THAT IF THE AO CAN AMEND THE BOOK PROFIT IF IT IS NOT IN ACCORDANCE WITH PART II AND PART III OF SCHEDULE VI TO THE COM PANIES ACT 1956 LIKEWISE THE ASSESSEE ALSO CAN RECOMPUTE THE BOOK PROFIT FOR THE PURPOSE OF SECTION 115JA. SINCE IN THE PRE SENT CASE THE ENTIRE INCOME BY WAY OF INTEREST ON ZERO COUPON BON D HAS NOT ACCRUED DURING THE YEAR THE SAME CANNOT BE CONSIDE RED AS TO DISCLOSE THE RESULT OF WORKING OF THE COMPANY DURIN G THE FINANCIAL YEAR AS PROVIDED UNDER PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT 1956. WE ACCORDI NGLY HOLD THAT THE NOTIONAL INCOME BY WAY OF INTEREST ON ZERO COUPON BONDS HAS TO BE EXCLUDED WHILE COMPUTING BOOK PROFI TS AS PER SECTION 115JA OF THE ACT. 6.1 FOLLOWING THE DECISION OF THE TRIBUNAL FO R THE EARLIER YEAR WE UPHOLD THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. A.Y. 2003-04 WHETHER PENALTY PAID TO RBI IS ALLOWABLE U/S. 37 OF THE ACT? 7. THE LD. DR VEHEMENTLY ARGUED STATING THAT THE A SSESSEE HAS PAID A PENALTY FOR CONTROVERTING THE LAW AND THEREF ORE IT IS NOT AN ALLOWABLE DEDUCTION AS PER THE EXPLANATION TO SECTI ON 37 OF THE ACT. LD. AR EXPLAINED BEFORE US THAT THE AMOUNT PAID WAS NOT FOR CONTROVERTING A LAW BUT FOR NON-COMPLIANCE OF THE NORMS ISSUED BY THE RBI IN FEW BRANCHES OF THE APPELLANT UNDER THE SCHE ME KNOW YOUR CUSTOMER. LD. AR STRONGLY ARGUED STATING NON-COMP LIANCE OF A NORM DUE TO UNFORESEEN CIRCUMSTANCE CANNOT AMOUNT TO AN OFFENCE AND THEREFORE THE SAID PROVISION OF THE ACT WILL NOT BE APPLICABLE. ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 14 OF 16 7.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND ARE OF THE OPINION THAT THE APPELLANT HAS NOT COMMITTED ANY OFFENCE WHICH I S PROHIBITED BY LAW AND THEREBY INCURRED THE EXPENDITURE. IT IS ONLY A BURDEN LEVIED ON THE ASSESSEE FOR NON-COMPLIANCE OF CERTAIN NORMS PRESCR IBED BY THE RBI. THEREFORE WE HOLD THIS ISSUE IN FAVOUR OF THE ASSE SSEE. A.Y. 2003-04 & 2004-05 WHETHER DEDUCTION CLAIMED TOWARDS BAD AND DOUBTFUL DEBTS WITHOUT MAKING PROVISION IS ALLOWABLE? 8. WHILE COMPUTING THE TOTAL INCOME THE BANK HAS BEEN MAKING CLAIMS IN RESPECT OF AMOUNTS DEDUCTIBLE U/S. 36(1)( VII). THE ASSESSING OFFICER DID NOT ALLOW THE CLAIM TO THE EXTENT OF RS .1 92 53 21 426 AND RS.95 16 87 871 ON THE PREMISES THAT THE BANK HAD N OT MADE PROVISIONS IN ITS BOOKS OF ACCOUNTS. HOWEVER LD. CIT(A) ACCEPTED THE ASSESSEES PLEA BY HOLDING THAT THERE IS NO NEED TO MAKE A FORMAL PROVISION IN THE BOOKS OF ACCOUNTS FOR THE PURPOSE OF DEDUCTION U/S. 36(1)(VIIA) BY FOLLOWING THE DECISION IN THE ASSESS EES OWN CASE FOR THE A.Y. 1987-88 DATED 23.6.2000 IN ITA 1247/1991 REPOR TED IN 78 ITD 103. 8.1 THE LD. DR CAME OUT WITH THE ARGUMENTS PUT FORT H BEFORE THE LD. CIT(A) AND RELIED UPON THE ORDER OF THE LD. AO. TH E LD. AR RELIED ON THE CIT(A)S ORDER AS WELL AS THE TRIBUNALS ORDER REFERRED ABOVE. 8.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. THE GIST OF THE DECISION CITED ABOVE BY THE TRIBUNAL IS BROUGHT DOWN HEREIN-BELOW FOR REFERENCE: ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 15 OF 16 ON GOING THROUGH THE STATEMENT OF ACCOUNT SUBMITTE D BY THE BANK BEFORE THE LOWER AUTHORITIES IT WAS SEEN THAT THE BANK HAD CERTIFIED TO THE EFFECT THAT THE BAD DEBTS CLAIMED AS WRITTEN OFF UNDER SECTION 36(1)(VII) WERE EXCLUSIVE OF THE PROV ISIONS MADE FOR BAD AND DOUBTFUL DEBTS FOR WHICH DEDUCTION WAS CLAIMED SEPARATELY UNDER SECTION 36(1)(VIIA). THERE WAS NO THING ON RECORD TO SUGGEST THAT THE ASSESSEE WAS CLAIMING DO UBLE DEDUCTION IN RESPECT OF THE SAME ITEMS OF DEBTS. THE COMMISSIONER HAD ALSO ACTED UNDER THE MISCONCEP TION THAT DEDUCTION UNDER CLAUSE (VIIA) WAS RELATED TO THE AC TUAL AMOUNT OF PROVISION MADE BY THE ASSESSEE FOR BAD AND DOUBT FUL DEBTS. THE TRUE MEANING OF THE CLAUSE AS INDICATED EARLIE R IS THAT ONCE A PROVISION FOR BAD AND DOUBTFUL DEBTS IS MADE BY A SCHEDULED BANK HAVING RURAL BRANCHES THE ASSESSEE IS ENTITLED TO A DEDUCTION WHICH IS QUANTIFIED NOT WITH RESPECT TO THE AMOUNT PROVIDED FOR IN THE ACCOUNTS BUT WITH RESPE CT TO A CERTAIN PERCENTAGE OF THE TOTAL INCOME AND ALSO A C ERTAIN PERCENTAGE OF THE AGGREGATE AVERAGE ADVANCES MADE B Y THE RURAL BRANCHES OF THE BANK. IN OTHER WORDS THIS I S A SPECIFIC DEDUCTION GIVEN BY THE STATUTE IRRESPECTIVE OF THE QUANTUM PROVIDED BY THE ASSESSEE IN ITS ACCOUNTS TOWARDS PR OVISION FOR BAD AND DOUBTFUL DEBTS. IN THE LIGHT OF THE DISCUSSION ABOVE AND ALSO IN VI EW OF THE FACT THAT THE ASSESSEE-BANK HAD TO COMPLY WITH THE VARIO US NORMS AND GUIDELINES PRESCRIBED BY THE RBI IN RESPECT OF RURAL ADVANCES AND MATTERS RELATING TO CREDIT POLICY ACC OUNTING STANDARDS AND REPORTING SYSTEM THERE WAS NO MERIT IN THE REASONING ADOPTED BY THE COMMISSIONER IN DIRECTING THE ASSESSING OFFICER TO DISALLOW THE CLAIM UNDER SECTI ON 36(1)(VIIA) IN TOTO AND ON THE VERY SAME ISSUE IN CRYSTAL CLEAR TERMS TO THE EFFECT THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION AT 5 PER CENT OF THE TOTAL INCOME AND ALSO AT 2 PER CENT OF THE ADVA NCES MADE BY THE RURAL BRANCHES IN ACCORDANCE WITH THE PROVISION S OF THIS SECTION. IN THE LIGHT OF THE FOREGOING DISCUSSION IT WAS TO BE HELD THAT THE IMPUGNED ORDER WAS LIABLE TO BE CANCELLED ON GROUND OF JURISDICTION AS WELL AS ON MERITS. 8.3 FOLLOWING THE DECISION OF THE TRIBUNAL WE UPHO LD THE ORDER OF THE LD. CIT (A) WHICH IS IN FAVOUR OF THE ASSESSEE. ITA NOS. 116 TO 118/B/08 & 225 TO 227/B/08 PAGE 16 OF 16 9. IN THE RESULT (I) THE ASSESSEES APPEALS ARE PARTLY ALLOWED; & (II) THE REVENUES APPEALS ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF MARCH 2011. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE DATED THE 16 TH MARCH 2011. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.