Dapoli Urban Co.op. Bank Ltd.,, v. Assistant Commissioner of Income-tax,,

ITA 367/PUN/2014 | 2010-2011
Pronouncement Date: 24-04-2014 | Result: Allowed

Appeal Details

RSA Number 36724514 RSA 2014
Assessee PAN AAAAD1799C
Bench Pune
Appeal Number ITA 367/PUN/2014
Duration Of Justice 1 month(s) 27 day(s)
Appellant Dapoli Urban Co.op. Bank Ltd.,,
Respondent Assistant Commissioner of Income-tax,,
Appeal Type Income Tax Appeal
Pronouncement Date 24-04-2014
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 24-04-2014
Assessment Year 2010-2011
Appeal Filed On 27-02-2014
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B PUNE BEFORE SHRI R.S. PADVEKAR JUDICIAL MEMBER AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO. 367/PN/2014 (ASSESSMENT YEAR 2010-11) DAPOLI URBAN CO-OP BANK LTD. AT POST : DAPOLI DIST : RATNAGIRI 415 712 PAN NO.AAAAD1799C .. APPELLANT VS. ACIT RATNAGIRI CIRCLE RATNAGIRI .. RESPONDENT ITA NO. 484/PN/2014 (ASSESSMENT YEAR 2010-11) ACIT RATNAGIRI CIRCLE RATNAGIRI .. APPELLANT VS. DAPOLI URBAN CO-OP. BANK LTD. POST OFFICE LANE DAPOLI DIST : RATNAGIRI PAN NO.AAAAD1799C .. RESPONDENT ASSESSEE BY : SHRI PRAMOD SHINGTE REVENUE BY : SHRI S.P. WALIMBE DATE OF HEARING : 21-04-2014 DATE OF PRONOUNCEMENT : 24-04-2014 ORDER PER R.S. PADVEKAR JM : THESE ARE CROSS APPEALS. THE FIRST ONE IS FILED BY THE ASSESSEE AND THE SECOND ONE FILED BY THE REVENUE AND ARE DIRECTE D AGAINST THE ORDER DATED 31-12-2013 OF THE CIT(A) KOLHAPUR RELATING T O ASSESSMENT YEAR 2010-11. FOR THE SAKE OF CONVENIENCE THESE WERE H EARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2 ITA NO.367/PN/2014 (A.Y. 2010-11) : 2. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS U NDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE DISALLOWAN CE OF RS.1 43 16 571/- ON ACCOUNT OF INTEREST ON NON-PERFOR MING ASSETS BY DISREGARDING APPELLANTS CONTENTION IN THIS REGARD. 2.1 FACTS OF THE CASE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT INTEREST RECEIVABLE OR ACCRUED ON THE NPAS AMOUNTING TO RS.1 43 16 571/- HAS NOT BEEN CRE DITED OR OFFERED FOR TAXATION BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT BUT WAS DIRECTLY CREDITED TO THE BALANCE SHEET AS ' OVERDUE INTEREST RESERVE' AND DEBITED ON ASSET SIDE AS 'OVERDUE INTE REST RECEIVABLE' . THE ASSESSING OFFICER THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE ACCRUED INTEREST ON NPAS SHOULD NOT BE ADDE D BACK TO INCOME. THE ASSESSEE EXPLAINED THAT IT IS FOLLOWING THE RBI NORMS REGARDING DISCLOSURE OF INCOME. THE BANK MAKES PROV ISIONS FOR DOUBTFUL ASSETS NPAS AND LOSS ASSETS AND THESE CA TEGORIES ARE SEPARATED BY THE PERIOD FOR WHICH PARTICULAR LOAN H AS BEEN SERVICED. IF THE INSTALLMENT ON A LOAN HAS NOT BEEN RECEIVED FOR SPECIFIED NUMBER OF QUARTERS IT IS CONSIDERED AS N PA. SINCE THERE IS A POSSIBILITY THAT THE A DEBT CAN GO BAD THE RB I GUIDELINES ALLOW THE BANK TO APPROPRIATE PART OF ITS PROFIT BY MAKIN G A PROVISION IN RESPECT OF SUCH ASSETS WHICH WILL BE UTILIZED IN CA SE THE DEBT TURNS BAD. 2.2 REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE AND FOLLOWING CBDT GUIDELINES VIDE INSTRUCTION NO.17/2 008 DATED 26-11- 3 2008 THE ASSESSING OFFICER MADE ADDITION OF RS.1 43 16 571/- ON ACCOUNT OF INTEREST ON NPA. 3. BEFORE THE CIT(A) IT WAS SUBMITTED THAT PROVISIONS FOR NPA ARE MADE AS PER GUIDELINES OF RBI. WHEN THE PRINCIPAL A MOUNT ITSELF IS OF DOUBTFUL RECOVERY THE INTEREST CANNOT BE ACCRUE D AND THEREFORE THE ASSESSING OFFICER HAS ERRED IN DISALLOWING THE PROVISION FOR INTEREST. GUIDELINES REGARDING PROVISIONS FOR DEBTS AND NPA HAVE BEEN MADE AS MEASURE OF PRUDENCE. BY SUCH PROVISION ING THE BANK IS CUSHIONED FROM UNNECESSARY SHOCK IF CERTAIN DEBT S TURNED BAD. THE GUIDELINES ISSUED BY RBI ARE MANDATORY ON THE B ANKS WHICH ARE UNDER SUPERVISION OF THE RBI. 4. HOWEVER THE CIT(A) WAS ALSO NOT CONVINCED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE AND UPHELD THE ADDITION MA DE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER : 6. I HAVE GONE THROUGH VARIOUS CASE LAWS CITED BY THE APPELLANT. DEDUCTION FOR INTEREST ON NPAS IS NOT ALLOWED BY AN Y CLAUSE OF SECTION 36 OR ANY OTHER PROVISIONS OF THE ACT. APPE LLANTS HAVE BEEN CLAIMING IT CITING RBI NORMS. THE BANK MAKES PROVIS IONS FOR DOUBTFUL ASSETS NPAS AND LOSS ASSETS AND THESE CA TEGORIES ARE SEPARATED BY THE PERIOD FOR WHICH PARTICULAR LOAN H AS BEEN SERVICED. IF THE INSTALLMENT ON A LOAN HAS NOT BEEN RECEIVED FOR SPECIFIED NUMBER OF QUARTERS IT IS CONSIDERED AS N PA. IF THE LOAN HAS NOT BEEN SERVICE FOR A LONGER PERIOD IT IS CAT EGORIZED AS LOSS ASSET AND SO ON. THE CATEGORY OF LOSS ASSET IS THE ONLY CATEGORY WHICH FALLS INTO THE DEFINITION OF BAD DEBTS AS DES CRIBED IN SECTION 35(L)(VII) OF THE INCOME-TAX ACT. THE OTHER CATEGOR IES FOR WHICH PROVISIONING IS DONE I.E. DOUBTFUL ASSETS AND NPAS HAVE NOT YET GONE BAD. THAT IS WHY NO DEDUCTION IS AVAILABLE IN ANY SECTION OF THE ACT IN RESPECT OF INTEREST ON NPA. SINCE THERE IS A POSSIBILITY THAT THE DEBT CAN GO BAD THE RBI GUIDELINES ALLOW THE BANK TO APPROPRIATE PART OF ITS PROFIT BY MAKING A PROVISIO N IN RESPECT OF SUCH ASSETS WHICH WILL BE UTILIZED IN CASE THE DEBT TURNS BAD. THE PROVISION HOWEVER IS NOT OF 100% OF THE DEBT BUT A FRACTION OF THESE DEBTS. THIS IS EVIDENT THAT THE DEBT IS NOT Y ET A BAD DEBT. RBI GUIDELINES ARE ONLY DISCLOSURE NORMS. THEY HAVE NOTHING TO DO WITH COMPUTATION OF TOTAL TAXABLE INCOME UNDER THE INCOME-TAX ACT. WHEN A LOAN IS GRANTED BY BANK AND FINANCIAL I NSTITUTIONS THERE IS AN AGREEMENT BETWEEN THE LENDER AND THE BO RROWER REGARDING TERMS AND CONDITIONS OF THE SERVICE OF LO AN AND INTEREST. 4 THE CONDITIONS INCLUDE CLAUSES REGARDING PAYMENT OF INSTALLMENTS AND AS PER THESE CLAUSES THE LENDER CREDITS ITS BOO KS AND DEBITS THE ACCOUNT OF BORROWER. THE INTEREST ACCRUES AS PER TH E TERMS AGREED BETWEEN THE LENDER AND BORROWER. NOW AS A PRUDENCE TO TAKE CARE OF UNFORESEEN CIRCUMSTANCES OF A LOAN TURNING BAD RBI PRESCRIBES GUIDELINES FOR CREATING PROVISION OUT OF THE PROFIT OF THE BANKS AND FINANCIAL INSTITUTIONS WHICH ARE REGULATED BY THE R BI ACT BANKING REGULATIONS ACT AND PRUDENTIAL GUIDELINES ISSUED BY THE RBI WHICH ARE MANDATORY ON THE BANKS AND FINANCIAL INSTITUTIO NS. BUT THESE GUIDELINES MAY OR MAY NOT SUPERCEDE THE PROVISIONS OF IT ACT IN COMPUTING INCOME OF AN ASSESSEE ON WHICH TAX HAS TO BE PAID. UNLESS OTHERWISE PROVIDED IN THE IT ACT THE INTERE ST INCOME SHOULD ACCRUE AS PER THE AGREEMENT BETWEEN LENDER A ND BORROWER. NOW IN THE CASE OF VASISTH CHAY VYAPAR LTD. WHICH WAS A NON- BANKING FINANCIAL INSTITUTION BOUND BY PRUDENTIAL N ORMS DIRECTIONS ISSUED BY THE RBI FOR INCOME RECOGNITION AND ASSET CLASSIFICATION THE HONBLE DELHI HIGH COURT TOOK NOTE OF SECTION 4 5Q OF THE RBI ACT WHICH READS AS UNDER : ' CHAPTER IIIB TO OVERRIDE OTHER LAWS. 45Q. THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFE CT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAINED IN ANY OT HER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW.' THE HIGH COURT TOOK NOTE OF THE FACT THAT THE PROVI SION OF SECTION 45Q OF RBI ACT HAS OVERRIDING EFFECT OVER ANY OTHER LAW . THEN THE HONBLE HIGH COURT CONSIDERED ACCOUNTING STANDARD AS-9 OF R EVENUE RECOGNITION AND HAS ALSO CONSIDERED SOME OTHER CASE S OF VARIOUS HIGH COURTS AND HON'BLE SUPREME COURT. IN THE CASE OF SOUTHERN TECHNOLOGIES LTD 320 ITR 577 SC THE HON'BLE SUPREM E COURT HELD THAT BY VIRTUE OF SECTION 45Q AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS OF THE RBI VIS-A-VIS INCOME RECOGNITION PRINCIPLES IN THE COMPANIES ACT 1956. IN SO FAR AS COMPUTATION OF INC OME UNDER THE INCOME-TAX ACT IS CONCERNED THE ADMISSIBILITY OF S UCH DEDUCTIONS SHALL BE GOVERNED BY THE PROVISIONS OF THE INCOME-T AX ACT. THE CONCLUSION OF ALL THE ABOVE DISCUSSIONS IS THAT SINCE THE ASSESSEE IS IN THIS LINE OF BUSINESS HAVE TO MAINTA IN BOOKS OF ACCOUNTS AS PER PRUDENTIAL GUIDELINES ISSUED BY RBI UNDER CHAPTER I1IB OF THE RBI ACT ACCORDING TO WHICH INTEREST ON NPA HAS TO BE DEBITED IN INTEREST RECEIVABLE ACCOUNT AND CREDITED TO OVERDUE INTEREST RESERVE ACCOUNT WITHOUT CARRYING THE INTER EST THROUGH PROFIT AND LOSS ACCOUNT AND SINCE AS PER SECTION 45 Q PROVISIONS OF CHAPTER IIIB SUPERSEDE ALL THE ACTS THEREFORE INTER EST ON NPAS WILL NOT BE CREDITED TO PROFIT AND LOSS ACCOUNT AND THER EFORE WILL NOT FORM PART OF INCOME OF THE ASSESSEE. HOWEVER THE ABOVE DECISION WAS DELIVERED IN THE C ASE OF A NON- BANKING FINANCIAL COMPANY AND IT HAS NO APPLICATIO N IN THE CASE OF A CO-OPERATIVE BANKS AS THE FOLLOWING DISCUSSION WILL SHOW. IF WE REFER TO THE RBI ACT 1934 WE FIND THAT CHAPTER IIIB OF TH E ACT DEALS WITH PROVISIONS RELATING NON-BANKING INSTITUTIONS RECEIV ING DEPOSITS AND FINANCIAL INSTITUTIONS AND THESE PROVISIONS OVERRI DE ALL OTHER ACTS BY VIRTUE OF SECTION 45Q THEREIN. THE CHAPTER IIIB S TARTS WITH SECTIONS 45H AND ALSO INCLUDES SECTION 45 Q. CHAPTER IIIB READS AS UNDER: 5 '1 [CHAPTER IIIB PROVISIONS RELATING TO NON-BANKING INSTITUTIONS REC EIVING DEPOSITS AND FINANCIAL INSTITUTIONS 45H. CHAPTER IIIB NOT TO APPLY IN CERTAIN CASES. TH E PROVISIONS OF THIS CHAPTER SHALL NOT APPLY TO THE STATE BANK OR A BANK ING COMPANY AS DEFINED IN SECTION 5 OF THE 2[BANKING REGULATIONS A CT 1949] OR 3[A CORRESPONDING NEW BANK AS DEFINED IN CLAUSE (DA) OF SECTION 5 OF THAT ACT OR A SUBSIDIARY BANK AS DEFINED IN THE STATE BA NK OF INDIA (SUBSIDIARY BANKS) ACTS 1959] OR 4[A REGIONAL RURA L BANK OR A CO- OPERATIVE BANK] OR A PRIMARY AGRICULTURAL CREDIT SO CIETY OR A PRIMARY CREDIT SOCIETY]: PROVIDED THAT FOR THE PURPOSE OF THIS CHAPTER THE 5LTAM.IL NADU INDUSTRIAL INVESTMENT CORPORATION LIMITED] SHALL NO T BE DEEMED TO BE A BANKING COMPANY. ' 45Q. THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFE CT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAINED IN ANY OT HER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW.' 7. THUS THE VERY FIRST SECTION OF CHAPTER IIIB I.E. SE CTION 45H CLARIFIED THAT PROVISIONS OF CHAPTER IIIB WILL NOT APPLY TO A CO- OPERATIVE BANK. SINCE CHAPTER IIIB IS NOT APPLICABLE TO CO-OPERATIVE BANKS THEREFORE SECTIONS 45Q WHICH IS PART OF CHAP TER IIIB WILL NOT BE APPLICABLE TO CO-OPERATIVE BANKS AND IN RESPECT OF CO-OPERATIVE BANKS THE CHAPTER IIIB WILL NOT OVERRIDE THE IT ACT . THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF VASISTH CHA Y VYAPAR LTD (SUPRA) WILL HAVE NO APPLICATION IN THE CASE OF CO- OPERATIVE BANKS AS THE SAID ASSESSEE WAS AN NBFC WHICH HAD THE BENEFIT OF SECTION 45Q. THIS IS DUE TO THE REASON THAT THE SAID DECISIO N WAS BASED ON THE OVERRIDING POWER OF CHAPTER IIIB OVER OTHER ACT S AND THE CHAPTER IIIB IS APPLICABLE IN THE CASE OF NBFC. BUT THIS OVERRIDING POWER OF CHAPTER IIIB IS NOT AVAILABLE IN THE CASE OF CO-OPERATIVE BANKS. THEREFORE THIS GROUND OF THE APPELLANT IS REJECTED. 4.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET S UBMITTED THAT THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISIONS OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. DHARMVIR SAMBHAJI URBAN CO-OP. BANK LTD. VIDE ITA NO.2010/PN/2012 ORD ER DATED 27-09- 2013 FOR A.Y. 2009-10 AND IN THE CASE OF ACIT VS. T HE OMERGA JANTA SAHAKARI BANK LTD. VIDE ITA NO.350/PN/2013 ORDER DA TED 31-10-2013 6 FOR A.Y. 2007-08. HE ACCORDINGLY SUBMITTED THAT TH IS BEING A COVERED MATTER THE ISSUE SHOULD BE DECIDED IN FAVOUR OF THE ASSESSEE. 6. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND WHILE SUPPORTING THE ORDER OF THE CIT(A) RELIED ON THE DE CISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SAKTHI FIN ANCE LTD. REPORTED IN 352 ITR 102 AND THE DECISION OF THE AHMEDABAD BE NCH OF THE TRIBUNAL IN THE CASE OF THE SARANGPUR CO.OP BANK LT D. VS. DCIT VIDE ITA NO.529 AND 530/AHD./2013 ORDER DATED 21-06-2013 FOR A.YRS. 2007-08 AND 2009-10. 7. THE LD. COUNSEL FOR THE ASSESSEE IN HIS REJOINDE R SUBMITTED THAT THE TRIBUNAL AFTER CONSIDERING THE DECISIONS OF VAR IOUS HIGH COURTS AND SUPREME COURT INCLUDING THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF SAKTHI FINANCE LTD. (SUPRA) HAS TAKE N A CONSCIOUS VIEW HOLDING THAT INTEREST ON NPA ACCOUNT CANNOT BE ADDE D TO THE TOTAL INCOME OF THE ASSESSEE ON NOTIONAL BASIS. FURTHER WHEN D IVERGENT VIEW ARE THERE ON THE IDENTICAL ISSUE THE VIEW WHICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE FOLLOWED. HE ACCORDINGLY SUBMITTED THAT IN VIEW OF THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DHARMVIR SAMBHAJI URBAN CO-OP. BANK LTD. (SUPRA) THE ISSUE HAS TO BE DECIDED IN FAVOUR OF THE ASSESSEE. 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAV E ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND AN IDEN TICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN THE CASE OF THE OMERGA JA NTA SAHAKARI BANK 7 LTD. (SUPRA). WE FIND THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND DISMISSED THE APPEAL FILED BY THE REVE NUE BY OBSERVING AS UNDER : 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S. IN SO FAR AS THE APPLICABILITY OF SECTION 43D OF THE ACT TO THE A SSESSEE IS CONCERNED THERE IS A CONVERGENCE OF OPINION BETWEEN THE ASSESSEE A ND THE REVENUE TO THE EFFECT THAT THE SAME IS NOT APPLICABLE TO THE ASSESSEE. OSTENSIBLY ASSESSEE IS A CO-OPERATIVE BANK CARRYING ON BANKING BUSIN ESS IN TERMS OF A LICENSE GRANTED BY RBI AND IS NOT A SCHEDULED BANK INCLUDED IN SECOND SCHEDULE OF RBI SO AS TO FALL WITHIN THE SCOPE OF SECTIO N 43D OF THE ACT. NOTABLY SECTION 43D OF THE ACT PRESCRIBES THAT INTERE ST INCOME ON SUCH CATEGORIES OF BAD AND DOUBTFUL DEBTS AS PRESCRIBED BY T HE RBI GUIDELINES SHALL BE CHARGEABLE TO TAX IN THE YEAR IN WHICH SUCH INTEREST INCOME IS CREDITED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT OR IN THE YEAR OF ACTUAL RECEIPT WHICHEVER IS EARLIER. SINCE ASSESSEE IS NOT AN ENTITY COVERED WITHIN THE SCOPE OF SECTION 43D OF THE ACT THE PRESENT CONTROVERSY CANNOT BE ADJUDICATED IN THE LIGHT OF SEC TION 43D OF THE ACT AND IT IS LIABLE TO BE DECIDED ON GENERAL PRINCIPLE S AS TO WHETHER THE IMPUGNED INCOME HAS ACCRUED TO THE ASSESSEE DURING THE Y EAR UNDER CONSIDERATION. 9. IN THIS CONNECTION WE FIND THAT THE VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL CONTROVERSY. THE ASSESSEE BEF ORE THE VISAKHAPATNAM BENCH WAS A CO-OPERATIVE BANK OPERATING UNDER A LICENSE ISSUED BY RBI BUT WAS NOT A SCHEDULED BANK SO A S TO FALL WITHIN THE SCOPE OF SECTION 43D OF THE ACT. THE ISSUE RELATE D TO TAXABILITY OF INTEREST INCOME RELATING TO NPAS WHICH AS PER THE REV ENUE WAS LIABLE TO BE TAXED ON ACCRUAL BASIS IN LINE WITH MERCANTILE SYSTE M OF ACCOUNTING ADOPTED BY THE ASSESSEE THEREIN. THE ASSESSEE ON THE OTHE R HAND CONTENDED THAT HAVING REGARD TO THE GUIDELINES ISSUED BY RBI REGARDING ACCOUNTING OF INTEREST ON NPAS NO INTEREST INCOME ACC RUED IN RESPECT OF NPAS AND THAT THE SAME WAS TO BE TAXED ONLY ON RECEIPT BASIS. THE TRIBUNAL OBSERVED THAT THE QUESTION OF TAXABILITY OF INTEREST ON NPAS CLASSIFIED BY RBI WAS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) WHEREIN AFT ER CONSIDERING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IT WAS HELD THAT INTEREST INC OME RELATABLE TO NPAS WAS NOT INCLUDIBLE IN TOTAL INCOME ON ACCRUAL BA SIS SINCE THE SAME DID NOT ACCRUE TO THE ASSESSEE. THE FOLLOWING DISCUSSION BY THE VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF TH E DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) IS WORTHY OF NOTI CE :- 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFUL LY PERUSED THE RECORD. THE QUESTION OF TAXABILITY OF INTEREST ON NPA S HAS BEEN CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CA SE OF M/S VASISTH CHAY VYAPAR LTD (SUPRA); WHEREIN THE HON'BLE DELHI HIGH COURT TOOK INTO ACCOUNT THE DECISION RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD THE ASSESSEE THEREIN WAS A NON BANKING FINA NCIAL COMPANY AND IT WAS ALSO BOUND BY THE PRUDENTIAL NORMS DIRECTI ONS ISSUED BY THE RESERVE BANK OF INDIA FOR INCOME RECOGNITION AND ASSET CLASSIFICATION. THE ASSESSEE DID NOT INCLUDE THE INTEREST INCOME RELATAB LE TO NPA ASSETS IN ITS TOTAL INCOME. THE ASSESSING OFFICER HOWEVER ADD ED THE SAID INTEREST AS THE INCOME OF THE ASSESSEE BY HOLDING THAT IT HAD ACCRUED TO THE ASSESSEE EVEN IT WAS NOT REALIZED AS THE ASSESSEE WAS FOLL OWING 8 MERCANTILE SYSTEM OF ACCOUNTING. THE LEARNED CIT (A) AFFIRMED THE ORDER OF THE ASSESSING OFFICER. HOWEVER THE ITAT DELETED THE AFORESAID INCOME. HENCE THE REVENUE PREFERRED APPEAL BEFORE THE HON'B LE DELHI HIGH COURT. 8.1 AFTER HEARING THE RIVAL SUBMISSIONS THE HON'BLE DE LHI HIGH COURT TOOK NOTE OF SEC.45Q OF RESERVE BANK OF INDIA ACT WHI CH READS AS UNDER: CHAPTER IIIB TO OVERRIDE OTHER LAWS. 45Q. THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAI NED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY IN STRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. THE HIGH COURT TOOK NOTE OF THE FACT THAT THE PROVI SION OF 45Q OF RESERVE BANK OF INDIA HAS OVERRIDING EFFECT OVER ANY OTHER L AW. THEN THE HON'BLE HIGH COURT ALSO CONSIDERED ACCOUNTING STANDARD AS-9 ON REVENUE RECOGNITION AND ALSO EXTRACTED FOLLOWING RELEVANT P ORTION FROM THE SAID ACCOUNTING STANDARD: 9. EFFECT OF UNCERTAINTIES ON REVENUE RECOGNITION 9.1 RECOGNITION OF REVENUE REQUIRES THAT REVENUE IS A MEASURABLE AND THAT AT THE TIME OF SALE OR THE RENDER ING OF THE SERVICE IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIM ATE COLLECTION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAISIN G ANY CLAIM E.G. FOR ESCALATION OF PRICE EXPORT INCENTIVES INT EREST ETC. REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES IT MAY BE APPROPRIATE TO RECOGNIZE REVENUE ONLY WHEN IT IS REASONABLY CERTAIN THAT THE ULTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAINTY AS TO ULTIMATE COLLECTI ON REVENUE IS RECOGNIZED AT THE TIME OF SALE OR RENDERING OF SERVI CE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENTS. 9.3 WHEN THE UNCERTAINTY RELATING TO COLLECTABILITY ARISES SUBSEQUENT TO THE TIME OF SALE OR THE RENDERING OF THE SERVICE IT IS MORE APPROPRIATE TO MAKE A SEPARATE PROVISION TO REFL ECT THE UNCERTAINTY RATHER THAN TO ADJUST THE AMOUNT OF REVE NUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RECOGNITION OF REV ENUE IS THAT THE CONSIDERATION RECEIVABLE FOR THE SALE OF GOODS TH E RENDERING OF SERVICES OR FROM THE USE OF OTHERS OF ENTERPRISE RESOURCE S IS REASONABLY DETERMINABLE. WHEN SUCH CONSIDERATION IS NO T DETERMINABLE WITHIN REASONABLE LIMITS THE RECOGNITI ON OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO T HE EFFECT OF UNCERTAINTIES IT IS CONSIDERED AS REVENUE OF THE PE RIOD IN WHICH IT IS PROPERLY RECOGNIZED. 8.2 THE DELHI HIGH COURT ALSO CONSIDERED THE DECISION RENDERED IN THE FOLLOWING CASES: I) CIT VS. ELGI FINANCE LTD. 293 ITR 357 (MAD) II) CIT VS. KKM INVESTMENTS (CAL) SLP DISMISSED BY SUPR EME COURT (310 ITR 4) 9 III) CIT VS. MOTOR CREDIT CO (P) LTD. 127 ITR 572 ( MAD) IV) UCO BANK VS. CIT 237 ITR 889 (SC) V) CIT VS. SHOORJI VALLABHDAS & CO 46 ITR 144 (SC) VI) GODHRA ELECTRICITY CO. LTD. VS.CIT 225 ITR 746 VII) CIT VS. GOYAL M G GASES (P) LTD. 303 ITR 159 (DE L) VIII) CIT VS. EICHER LTD. ITA NO.431/2009 DATED 15. 7.2009 (DEL) 8.3 AFTER CONSIDERING THE ACCOUNTING STANDARD 9 AND THE VARIOUS CASE LAW LISTED ABOVE THE HON'BLE DELHI HIGH COURT HELD THAT THE INTEREST ON NPA ADVANCE CANNOT BE TREATED AS ACCRUED TO THE ASSE SSEE. 8.4 BEFORE THE DELHI HIGH COURT THE REVENUE TOOK SU PPORT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). THE DELHI HIGH COURT CONSID ERED THE SAID DECISION OF HON'BLE APEX COURT AND EXPLAINED THE SAME AS UNDER: WE HAVE ALREADY HELD THAT EVEN UNDER THE INCOME TA X ACT INTEREST INCOME HAD NOT ACCRUED. MOREOVER THIS SUBMISSI ON OF MR. SABHARWAL IS BASED ENTIRELY ON THE JUDGMENT OF THE SU PREME COURT IN THE CASE OF SOUTHERN TECHNOLOGY (SUPRA). NO DOUBT IN FIRST BLUSH READING OF THE JUDGMENT GIVES AN INDIC ATION THAT THE COURT HAS HELD THAT RESERVE BANK OF INDIA ACT D OES NOT OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT. HOWEVER WHEN WE EXAMINE THE ISSUE INVOLVED THEREIN MINUTELY AND DE EPLY IN THE CONTEXT IN WHICH THAT HAD ARISEN AND CERTAIN OBSERVAT IONS OF THE APEX COURT CONTAINED IN THAT VERY JUDGMENT WE FIND THAT THE PROPOSITION ADVANCED BY MR.SABHARWAL MAY NOT BE ENTI RELY CORRECT. IN THE CASE BEFORE THE SUPREME COURT THE ASSESSEE A NBFC DEBITED RS.81 68 516 AS PROVISION AGAINST NPA IN THE PROFIT AND LOSS ACCOUNT WHICH WAS CLAIMED AS DEDUC TION IN TERMS OF SECTION 36(1) (VII) OF THE ACT. THE ASSESSING OFFICER DID NOT ALLOW THE DEDUCTION CLAIMED AS AFORESAID ON THE G ROUND THAT THE PROVISION OF NPA WAS NOT IN THE NATURE OF EXPENDI TURE OR LOSS BUT MORE IN THE NATURE OF A RESERVE AND THUS NOT DED UCTIBLE UNDER SECTION 36(I)(VII) OF THE ACT. THE ASSESSING OFFICER HOWEVER DID NOT BRING TO TAX RS.20 34 605/- AS INCOME (BEING IN COME ACCRUED UNDER THE MERCANTILE SYSTEM OF ACCOUNTING). THE DISPUTE BEFORE THE APEX COURT CENTERED AROUND DEDUCT IBILITY OF PROVISION FOR NPA. AFTER ANALYZING THE PROVISIONS OF THE RESERVE BANK OF INDIA ACT THEIR LORDSHIPS OF THE A PEX COURT OBSERVED THAT IN SO FAR AS THE PERMISSIBLE DEDUCTIO NS OR EXCLUSIONS UNDER THE ACT ARE CONCERNED THE SAME AR E ADMISSIBLE ONLY IF SUCH DEDUCTIONS/EXCLUSIONS SATIS FY THE RELEVANT CONDITIONS STIPULATED THEREFORE UNDER THE ACT. TO THAT EXTENT IT WAS OBSERVED THAT THE PRUDENTIAL NO RMS DO NOT OVERRIDE THE PROVISIONS OF THE ACT. HOWEVER THE APEX COURT MADE A DISTINCTION WITH REGARD TO INCOME RECOGNITIO N AND HELD THAT INCOME HAD TO BE RECOGNIZED IN TERMS OF THE PRUDENT IAL NORMS EVEN THOUGH THE SAME DEVIATED FROM MERCANTIL E SYSTEM OF ACCOUNTING AND/OR SECTION 45 (SIC. 145) O F THE INCOME TAX ACT. IT CAN BE SAID THEREFORE THAT THE APEX COURT APPROVED THE REAL INCOME THEORY WHICH IS ENGRAINED IN THE PRUDENTIAL NORMS FOR RECOGNITION OF REVENUE BY NBFC . 10 9. THE HON'BLE SUPREME COURT IN THE CASE OF M/S SOUTH ERN TECHNOLOGIES LTD (SUPRA) DISSECTED THE MATTER INTO TWO PARTS VIZ. A) INCOME RECOGNITION AND B) PERMISSIBLE DEDUCTION/EXCLU SIONS UNDER THE INCOME TAX ACT. IN SO FAR AS INCOME RECOGNITION IS CON CERNED THE HON'BLE SUPREME COURT HELD THAT SECTION 145 OF THE INCOME T AX ACT HAS NO ROLE TO PLAY AND THE ASSESSING OFFICER HAS TO FOLLOW RESERVE BANK OF INDIA DIRECTIONS 1998 SINCE BY VIRTUE OF 45Q OF THE RESERVE BANK OF INDIA ACT AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS OF R ESERVE BANK OF INDIA VIS--VIS INCOME RECOGNITION PRINCIPLES IN THE COMPAN IES ACT 1956. IN SO FAR AS COMPUTATION OF INCOME UNDER THE INCOME TAX AC T IS CONCERNED (WHICH INVOLVES DEDUCTION OF PERMISSIBLE DEDUCTIONS AND EXCLUSIONS) THE ADMISSIBILITY OF SUCH DEDUCTIONS SHALL BE GOVERNED BY TH E PROVISIONS OF THE INCOME TAX ACT. THE RELEVANT OBSERVATIONS OF THE HON'BLE SUPREME COURT ARE EXTRACTED BELOW: APPLICABILITY OF SECTION 145 40. AT THE OUTSET WE MAY STATE THAT IN ESSENCE RBI DIR ECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI U NDER CHAPTER IIIB OF THE RBI ACT 1934. THESE NORMS DEAL E SSENTIALLY WITH INCOME RECOGNITION. THEY FORCE THE NBFCS TO DISC LOSE THE AMOUNT OF NPA IN THEIR FINANCIAL ACCOUNTS. THEY FORC E THE NBFCS TO REFLECT TRUE AND CORRECT PROFITS. BY VIRTUE OF SECTION 45Q AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS 1998 V IS--VIS INCOME RECOGNITION PRINCIPLES IN THE COMPANIES AC T 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER THESE DIRECTIONS 1998 AND THE IT ACT OPERATE IN DIFFERENT AREAS. THESE DIRECTIONS 1998 HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THESE DIRECTIONS CANNOT OVERRULE THE PERMISSIBLE DEDUCTIONS OR THEIR EXCLUSION UNDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND COMPANIES AC T IS ONLY IN THE MATTER OF INCOME RECOGNITION AND PRESENT ATION OF FINANCIAL STATEMENTS. THE ACCOUNTING POLICIES ADOPTE D 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 W OULD RESULT IN UNDERSTATEMENT OF PROFITS. HOWEVER HERE IS THE CASE WHERE THE AO HAS TO FOLLOW THE RESERVE BANK OF INDI A DIRECTIONS 1998 IN VIEW OF SECTION 45Q OF THE RESER VE BANK OF INDIA ACT. HENCE AS FAR AS INCOME RECOGNITION IS C ONCERNED SECTION 145 OF THE IT ACT HAS NO ROLE TO PLAY IN TH E PRESENT DISPUTE. 10. TURNING TO THE FACTS OF THE CASE BEFORE US THE AS SESSEE HEREIN IS A COOPERATIVE BANK AND IT IS NOT IN DISPUTE THAT IT IS A LSO GOVERNED BY THE RESERVE BANK OF INDIA. HENCE THE DIRECTIONS WITH REGA RD TO THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDIA ARE EQUALLY A PPLICABLE TO THE ASSESSEE AS IT IS APPLICABLE TO THE COMPANIES REGISTERED U NDER THE COMPANIES ACT. THE HON'BLE SUPREME COURT HAS HELD IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA) THAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA ACT HAS AN OVERRIDING EFFECT VIS--VIS INCOME RECOGNITION PRINCIPLE UNDER THE COMPANIES ACT. HENCE SEC.45 Q OF THE RBI ACT SHALL HAVE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIVE BANKS ALSO. HENCE THE ASSESSING OFFICER HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998 AS HELD BY THE HON'BLE SUPREME COURT. 10.1 BASED ON THE PRUDENTIAL NORMS THE ASSESSEE HEREIN D ID NOT ADMIT THE INTEREST RELATABLE TO NPA ADVANCES IN ITS TOTAL I NCOME. THE HON'BLE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LT D (SUPRA) HAS HELD THAT THE INTEREST ON NPA ASSETS CANNOT BE SAID TO HAVE ACCRUED TO THE 11 ASSESSEE. IN THIS REGARD THE FOLLOWING OBSERVATIONS OF HO N'BLE DELHI HIGH COURT IN THE ABOVE CITED CASE ARE RELEVANT: WHAT TO TALK OF INTEREST EVEN THE PRINCIPLE AMOUNT ITSELF HAD BECOME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LE GITIMATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NOT ACCRUED. THE SAID DECISION OF THE HON'BLE DELHI HIGH COURT IS E QUALLY APPLICABLE TO THE ISSUE IN OUR HANDS. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY WITH THE DECISION OF THE LEARNED CIT (A) IN HOLDING THAT THE INTEREST INCOME RELATABLE ON NPA ADVANCES DID NOT ACCRUE TO THE ASSESSEE . ACCORDINGLY WE UPHOLD HIS ORDER. 10. FOLLOWING THE AFORESAID DISCUSSION WHICH HAS BEEN RENDERED ON AN IDENTICAL ISSUE UNDER SIMILAR CIRCUMSTANCES WE FIND NO REASONS TO INTERFERE WITH THE ULTIMATE CONCLUSION OF THE CIT(A) IN DELETING THE IMPUGNED ADDITION RELATING TO INTEREST INCOME IN RESP ECT OF NPAS. 11. SO HOWEVER THE LEARNED DEPARTMENTAL REPRESENTA TIVE HAS SUBMITTED THAT THE HONBLE MADRAS HIGH COURT IN THE C ASE OF CIT VS. SAKTHI FINANCE LTD. (2013) 31 TAXMANN.COM 305 (MAD RAS) HAS DIFFERED WITH THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) ON A SIMILAR ISSUE I.E. RELATING TO INTEREST INCOME ON NPAS. THE LEARNED DEPARTMENTAL RE PRESENTATIVE FURTHER POINTED OUT THAT THE HONBLE MADRAS HIGH COU RT FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IN HOLDING THAT INTEREST ON NPAS WAS ASSESSABLE TO TAX ON ACCRUAL BASIS. WE HAVE CAREFULLY CO NSIDERED THE SUBMISSIONS PUT-FORTH BY THE LEARNED DEPARTMENTAL REPRE SENTATIVE BASED ON THE JUDGEMENT OF THE HONBLE MADRAS HIGH CO URT IN THE CASE OF SAKTHI FINANCE LTD. (SUPRA). THE CONTROVERSY BEFORE THE HONBLE MADRAS HIGH COURT RELATED TO NON-RECOGNITION OF INTEREST IN COME ON NPAS BY THE ASSESSEE FOLLOWING THE RBI GUIDELINES. THE HONBLE MADR AS HIGH COURT TOOK THE VIEW THAT THE JUDGEMENT OF THE HONBLE SUP REME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) ALSO APPLIED TO THE INCOME RECOGNITION NORMS PROVIDED BY RBI AND THEREFORE IT H ELD THE INTEREST INCOME ON NPAS IS LIABLE TO BE TAXED ON ACCRUAL BASIS A ND NOT IN TERMS OF RBIS GUIDELINES. BUT THE HONBLE DELHI HIGH COURT I N THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) HAS TAKEN A VIEW THAT SOUTHERN TECHNOLOGIES LTD. (SUPRA) CASE DID NOT APPLY TO THE IN COME RECOGNITION NORMS PRESCRIBED BY RBI. OSTENSIBLY THERE IS DIVERGENC E OF OPINION BETWEEN THE HONBLE DELHI HIGH COURT AND THE HONBL E MADRAS HIGH COURT AS NOTED BY THE HONBLE MADRAS HIGH COURT IN IT S ORDER. 12. IN SO FAR AS PRESENT CASE IS CONCERNED THERE IS NO J UDGMENT OF THE JURISDICTIONAL HIGH COURT. WE ARE FACED WITH TWO CO NTRARY JUDGMENTS OF THE NON-JURISDICTIONAL HIGH COURT. IN SUCH A SITUATI ON WE ARE INCLINED TO PREFER A VIEW WHICH IS FAVOURABLE OF THE ASSESSEE FOLLOW ING THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS. VEGETABLE PRODUCTS LTD. (1973) 88 ITR 192 (SC). 13. THEREFORE IN VIEW OF THE AFORESAID DISCUSSION WE ARE INCLINED TO FOLLOW THE DECISION OF OUR CO-ORDINATE BENCH IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) AND ACCORDINGLY THE ORDER OF THE CIT(A) IS LIABLE TO THE AFFIRMED. WE HOLD SO. 12 8.1 RESPECTFULLY FOLLOWING THE DECISION OF THE COOR DINATE BENCH OF THE TRIBUNAL IN THE CASE OF THE OMERGA JANTA SAHAKA RI BANK LTD. (SUPRA) WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. WE ACCORDINGLY SET-ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OF FICER TO DELETE THE ADDITION OF RS.1 43 16 571/- BEING INTEREST ACCRUED ON NPA. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 9. GROUND OF APPEAL NO. 2 BY THE ASSESSEE READS AS UNDER : 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE DISALLOWAN CE OF RS.11 54 019/- BEING AMORTIZATION OF PREMIUM ON GOVE RNMENT SECURITIES DEBITED TO PROFIT AND LOSS ACCOUNT BY DISREGARDING APP ELLANTS CONTENTION IN THIS REGARD. 9.1 FACTS OF THE CASE IN BRIEF ARE THAT THE ASSES SEE IS A SCHEDULED COOPERATIVE BANK DOING BANKING BUSINESS WHICH IS RE GULATED UNDER BANKING REGULATION ACT 1949 AND RBI GUIDELINES ISS UED FROM TIME TO TIME. THE ASSESSING OFFICER HELD THAT AS PER THE INCOME-TAX ACT AND THE ACCOUNTANCY NORMS ANY LOSS OR PROFIT ON SECURITIES HELD AS INVESTMENT CAN BE RECOGNISED AND CLAIMED ONLY AT THE TIME OF S ALE/TRANSFER OF SUCH SECURITIES. HE WAS OF THE OPINION THAT THE RBI GUI DELINES ARE BINDING ON BANKS BUT DO NOT HAVE SAME EFFECT AS FAR AS APPLICA TION OF THE INCOME-TAX LAW IS CONCERNED. REJECTING THE EXPLANATION GIVEN BY THE ASSESSEE THE AO DISALLOWED THE CLAIM OF AMORTIZATION OF PREMIUM PAID ON GOVERNMENT SECURITIES PURCHASED BY THE ASSESSEE AND CLASSIFIED UNDER HTM CATEGORY AT RS.11 54 019/-. 10. BEFORE THE CIT(A) IT WAS SUBMITTED THAT ASSESSE E IS A COOPERATIVE BANK REGISTERED UNDER MAHARASHTRA COOPERATIVE SOCIE TIES ACT 1960. RESERVE BANK OF INDIA ISSUES DIRECTIVES AND CIRCULA RS FROM TIME TO TIME 13 AS REGARDS INTEREST RATES LOANS AND ADVANCES INVE STMENT OF FUNDS NPA ETC. ALL THE BANKS HAVE TO CLASSIFY THE SECURITIES AS PER RBI'S PRUDENTIAL NORMS UNDER HTM AFS & HFT SO AS TO MANAGE THE PORT FOLIO EFFICIENTLY AND WITH THE MINIMIZATION OF THE RISK. AS PER THE P RUDENTIAL NORMS BANK HAS MADE PROVISION FOR AMORTIZATION OF PREMIUM ON I NVESTMENT IN GOVT. SECURITIES HELD IN HTM CATEGORY. IT WAS CONTENDED T HAT GUIDELINES ISSUED BY THE RBI ARE BINDING ON BANKS AND THOSE GUIDELINE S ARE ISSUED UNDER THE RBI ACT 1934.WHICH SUPERSEDES ALL OTHER ACT BY VIRTUE OF SECTION 45Q OF RBI ACT. 11. HOWEVER THE CIT(A) ALSO WAS NOT CONVINCED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE AND UPHELD THE ADDITION MA DE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER : 10. I HAVE CONSIDERED THE SUBMISSION AND GONE THROUGH THE ASSESSMENT ORDER. THE CONTENTION OF THE APPELLANT THAT RBI GUI DELINE SUPERCEDE ALL OTHER LAWS IS NOT CORRECT AND EXCEPT IN THE CASE OF NO N-BANKING FINANCIAL COMPANIES THE RBI ACT DOES NOT SUPERCEDE OTHER LAWS OF THE COUNTRY. IF WE GO THROUGH THE RBI ACT 1934 CHAPTER IIIB OF TH E ACT GOVERNS AFFAIRS OF NON-BANK COMPANIES AND IT RUNS FROM SECTION 45H TO 45QB. AS PER SECTION 45Q OF CHAPTER IIIB THE PROVISION OF CHAPTER IIIB WILL APPLY NOTWITHSTANDING ANY PROVISION IN ANY OTHER LAW. HOWEV ER THE VERY FIRST SECTION OF CHAPTER IIIB I.E. SECTION 45H SPECIFIES THA T CHAPTER IIIB WILL NOT APPLY TO CO-OPERATIVE SOCIETIES / BANKS. THEREFORE B Y VIRTUE OF SECTION 45H THE CHAPTER IIIB OF RBI ACT WILL NOT SUPERSEDE I NCOME-TAX ACT OR ANY OTHER LAW FOR THAT MATTER IN RESPECT OF CO-OPERATIVE SOCIETIES AND BANKS. THIS LEADS TO THE CONCLUSION THAT WHEREAS CO-OPERATIVE BANKS WILL FOLLOW THE GUIDELINES OF RBI IN DISPLAYING THE SIX CLAUSES OF I NVESTMENT UNDER THREE CATEGORIES OF AFS HFT AND HTM AS FAR AS THE CO MPUTATION OF INCOME UNDER INCOME-TAX ACT IS CONCERNED PROVISIONS O F INCOME-TAX ACT WILL BE FOLLOWED. THE GUIDELINES ISSUED BY RBI MAY BE BINDING ON THE APPELLANT AS PRUDENTIAL NORMS BUT WHEN IT COMES TO COM PUTING TAXABLE INCOME IT WILL BE COMPUTED UNDER SECTION 28 AND SUBSE QUENT SECTION RELATING TO COMPUTATION OF INCOME OF BUSINESS / PROFESSI ON. 11. HTM SECURITIES ARE INVESTMENT ASSETS. ANY PROFIT/LO SS ON ASSET IS TAXED TO INCOME IN THE YEAR OF ITS SALE. PREMIUM IS A DDITIONAL EXPENSES IN ACQUISITION OF ASSET AND THE SAME CAN BE EFFECT AGAINST SALE PRICE AT THE TIME OF COMPUTING CAPITAL GAINS. THE DEPARTMENT HAS TAKEN CONSISTENT STAND THAT DEPRECIATION IN VALUE OF SECURITIES IS ALLOW ABLE IN CASES WHERE SECURITIES ARE HELD AS STOCK IN TRADE AND NOT AS CAPIT AL INVESTMENTS IN THE FORM OF HTM. IN VIEW OF THE ABOVE DISCUSSION CLAIM O F THE APPELLANT HAS BEEN REJECTED AND AMOUNT OF CLAIM HAS BEEN ADDED TO TOTAL INCOME. 14 12. IN VIEW OF THE ABOVE DISCUSSIONS THE GROUND TAKEN BY THE APPELLANT IS REJECTED. 11.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US. 12. AFTER HEARING BOTH THE SIDES WE FIND THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE COORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF SOLAPUR JANTA SAHAKARI BANK LTD. VIDE ITA NO.2534/PN/2012 ORDER DATED 27-01-2014 FOR A.Y. 200 9-10 WHERE THE TRIBUNAL HAS HELD AS UNDER : 3. WE HAVE HEARD THE PARTIES. WE FIND THAT THE ISSU E STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT MUMBAI BENCH MUMBAI IN THE CASE OF ACIT CENTRAL CIRCLE 23 3 MUMBAI VS. BANK OF RAJASTHAN LTD. ITA NO. 2246 TO 2250/MUM/2009 ORD ER DATED 22-12- 2010. IN THE SAID DECISION THE TRIBUNAL HAS REFERRED TO SUBSEQUENT DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF UCO BANK 240 ITR 355. THE OPERATIVE PART OF THE FINDING OF THE CO-O PERATIVE BENCH IN THE CASE OF BANK OF RAJASTHAN LTD. (SUPRA) IS AS UNDER: 17. IN THE CASE OF THE BANK ALL INVESTMENTS ARE ST OCK IN TRADE AS HELD BY HON'BLE SUPREME COURT IN THE CASE OF UCO BANK REPOR TED AT 240 ITR 355. THERE IS NO INVESTMENT IN THE NATURE OF INVESTMENT ON WHICH THE EXPENDITURE/LOSS CAN BE TREATED IN THE NATURE OF CA PITAL EXPENDITURE. THE SECURITIES ARE CATEGORIZED AS PER THE NORMS OF THE RBI. AS PER THE 'SIGNIFICANT ACCOUNTING POLICIES' GIVEN IN SCHEDULE 17 ATTACHED WITH THE BALANCE SHEET EVERY YEAR THE FACT THAT ALL INVESTM ENTS ARE STOCK IN TRADE HAS BEEN CLARIFIED IN THE CASE OF THE ASSESSEE. IT DOES NOT MEAN THE SECURITIES KEPT IN CATEGORY OF HTM CANNOT BE SOLD BEFORE THE M ATURITY. THE HTM HAS BEEN SOLD IN SUBSEQUENT YEAR AND INCOME/LOSS TREATE D AS BUSINESS INCOME/LOSS AND NOT AS CAPITAL GAIN/LOSS AT ALL. 18. ALL INCOME/LOSS WHATEVER ARISING ON ACCOUNT OF INVESTMENT(STOCK IN TRADE) INTEREST LOSS/PROFITS OR DIMINISHING OF INVE STMENT INCLUDING SECURITIES HELD UNDER HTM CATEGORY HAS BEEN TREATED AS BUSINESS INCOME/LOSS AND ALWAYS HAS BEEN TREATED BY DEPARTME NT AS BUSINESS AND ASSESSED ACCORDINGLY IN ALL PAST YEAR ASSESSMENT BY DEPARTMENT. THE INTEREST EARNED IN THE CASE OF THE BANK ON ALL SHA RE AND SECURITY ASSETS ARE STOCK IN TRADE AND WHATEVER THE LOSS/PROFIT ARE NOT IN THE NATURE OF CAPITAL. THE ENTIRE INTEREST INCOME OF SECURITIES UNDER WHAT EVER CATEGORY HAD BEEN AND IS BEING ASSESSED IN ALL THESE YEARS AS BUSINES S INCOME. THEREFORE AS SUCH DIFFERENT CATEGORIES OF THE INCOME DOES NOT FO RM(HTM) AS CAPITAL IN NATURE. 19. AS STATED EARLIER THE FIGURE OF RS. 65.62 LAC S REPRESENTS THE AMORTIZATION OF PREMIUM FOR SECURITIES HELD UNDER H TM CATEGORY WHICH HAS BEEN WRITTEN OFF IN TERMS OF THE RBI CIRCULAR D ATED 16/10/2000. PARA 14 OF THE SAID CIRCULAR READS AS UNDER: '14. INVEST MENTS CLASSIFIED UNDER HELD TO MATURITY CATEGORY NEED NOT TO BE MARKED TO MARKET AND WILL BE 15 CARRIED AT ACQUISITION COST UNLESS IT IS MORE THAN THE FACE VALUE IN WHICH CASE THE PREMIUM SHOULD BE AMORTIZED OVER THE PERIO D REMAINING TO MATURITY.' VIDE RBI CIRCULAR NO.DBOD NO.BP.B.C 32/2 1.04.08/2000-01 DATED 16/10/2000 BANK MAY SHIFT INVESTMENT TO/FROM HTM CATEGORY WITH APPROVAL OF BOARD FROM/TO OTHER CATEGORY. FURTHER I N TERMS OF ABOVE REFERRED CIRCULAR PROFIT ON SALE OF INVESTMENTS IN HTM CATEGORY SHOULD BE TAKEN TO THE PROFIT AND LOSS ACCOUNT. THERE IT IS V ERY CLEAR THAT SECURITIES HELD UNDER HTM CATEGORY CAN BE SOLD BY BANK AT ANY POINT OF TIME. THEREFORE THESE SECURITIES ARE BEING AS STOCK IN T RADE AND PROFIT/LOSS ON SALE OF THESE SECURITIES ARE TREATED AS BUSINESS IN COME/LOSS. 20. THE ASSESSEE HAS FURTHER FILED A COPY OF CBDT INSTRUCTION NO.17 DATED 26/11/2008 PUBLISHED IN 220 CTR (STATUTE PAGE S 41 TO 44). THE CBDT IN PARA (VII) OF THIS INSTRUCTION HAS STATED T HAT IN THE CASES OF BANKS WHERE RBI HAD ISSUED GUIDELINES FOR ALLOWING DEDUCT ION OF AMORTIZATION PREMIUM PAID ON SECURITIES UNDER HTM CATEGORY. THE RELEVANT PORTION OF INSTRUCTION IS AS UNDER: 'AS PER RBI GUIDELINES DAT ED 16TH OCTOBER 2000 THE INVESTMENT PORTFOLIO OF THE BANKS IS REQUIRED T O BE CLASSIFIED UNDER THREE CATEGORIES VIZ. HELD TO MATURITY (HTM) HELD FOR TRADING (HFT) AND AVAILABLE FOR SALE (AFS). INVESTMENTS CLASSIFIED UN DER HTM CATEGORY NEED NOT BE MARKED TO MARKED AND ARE CARRIED AT ACQUISIT ION COST UNLESS THESE ARE MORE THAN THE FACE VALUE IN WHICH CASE THE PRE MIUM SHOULD BE AMORTIZED OVER THE PERIOD REMAINING TO MATURITY. IN THE CASE OF HFT AND AFS SECURITIES FORMING STOCK IN TRADE OF THE BANK THE DEPRECIATION/APPRECIATION IS TO BE AGGREGATED SCRIP WISE AND ONLY NET DEPRECIATION IF ANY IS REQUIRED TO BE PROVIDED FO R THE ACCOUNTS. THE LATEST GUIDELINES OF THE RBI MAY BE REFERRED TO FOR ALLOWI NG ANY SUCH CLAIMS.' 21. SINCE THE CLAIM OF THE ASSESSEE IS AS PER RBI GUIDELINES AND CBDT HAS ALSO ISSUED DIRECTIONS TO ALLOW PREMIUM TO BE A MORTIZED REMAINING WITH THE MATURITY THEREFORE THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE AMOUNTING TO RS. 65 51 826/-. 4. WE FURTHER FIND THAT THIS ISSUE STANDS COVERED IN FAV OUR OF THE ASSESSEE BY THE DECISION OF THE ITAT PUNE IN THE CASE OF LATUR URBAN CO- OP. BANK LIMITED LATUR VS. DY. CIT CIRCLE-3 NANDE D ITA NOS. 778 & 792/PN/2011 ORDER DATED 31-08-2012. IN THE SAID CASE THE TRIBUNAL HAS HELD THAT ALL THE SECURITIES HELD BY THE BANK FORM PA RT OF THE STOCK-IN- TRADE RESPECTIVE OF THE CLASSIFICATION MADE AS PER THE RBI GUIDELINES. THE OPERATIVE PART OF THE DECISION OF THE TRIBUNAL IS AS U NDER: 14. WE HAVE HEARD THE PARTIES. THE LD COUNSEL PLAC ED HIS HEAVY RELIANCE ON THE DECISION OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. BANK OF BARODA AND IN THE CASE OF UCO BANK VS. CIT 240 ITR 355 (SC). IN THE CASE OF BANK OF BARODA (SUPRA) THE I SSUE BEFORE THEIR LORDSHIP WAS WHETHER THE ASSESSEE WAS ENTITLED FOR DEDUCTION ON ACCOUNT OF DEPRECIATION IN THE VALUE OF INVESTMENTS. THE METH OD OF VALUATION FOLLOWED BY THE ASSESSEE BANK WAS TO VALUE INVESTMENTS AT CO ST OR MARKET VALUE WHICHEVER WAS LOWER. THE ASSESSEE HAD CLAIMED THE DEPRECIATION TO THE TUNE OF RS. 11 82 35 007/- AND THE SAID DEPRECIATIO N WAS CLAIMED AS A DEDUCTION WHICH WAS DISALLOWED BY THE A.O BUT THE ASSESSEE BANK SUCCEEDED BEFORE THE CIT(A). THE TRIBUNAL CONFIRMED THE ORDER OF THE CIT(A). THE REVENUE CARRIED THE ISSUE BEFORE THE H ONBLE HIGH COURT. THE CORE ISSUE WAS THE METHOD OF VALUATION ADOPTED BY T HE ASSESSEE BANK FOR VALUING THE STOCK OF THE SECURITIES. THE HONBLE H IGH COURT FOLLOWED THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF UN ITED COMMERCIAL BANK (SUPRA). 16 15. IN THE CASE OF UNITED COMMERCIAL BANK (SUPRA) EVEN THE ISSUE OF VALUATION OF THE STOCK IN TRADE OF THE INVESTMENT W AS BEFORE THE HONBLE SUPREME COURT. IN THE CASE OF THE ASSESSEE THE IS SUE IS REGARDING ALLOWABILITY OF THE LOSS ON THE SALE OF THE SECURIT IES. MERELY BECAUSE THE SECURITIES ARE KEPT UNDER THE HEAD TILL THE MATURIT Y THE SAID SECURITY CANNOT BE TREATED AS A PURELY INVESTMENT. LAW IS WELL SETTLED THAT THE SECURITIES HELD BY THE BANK ARE IN THE NATURE OF ST OCK-IN-TRADE. WE MAY LIKE TO QUOTE HERE THE DECISION OF THE HONBLE HIGH COURT OF KERALA IN THE CASE OF CIT VS. NEDUNGADI BANK LTD. 264 ITR 545. IN THE SAID CASE THE HONBLE HIGH COURT HAS HELD THAT THE SECURITIES HEL D BY THE BANK ARE IN THE NATURE OF STOCK-IN-TRADE. BOTH THE AUTHORITIES BEL OW HAS MERELY GONE ON THE NOMENCLATURE OF THE HEAD UNDER WHICH THE SECURI TIES ARE HELD. IN OUR CONSIDERED VIEW NOMENCLATURE CANNOT BE DECISIVE FO R THE ASSESSEE BANK. WE THEREFORE HOLD THAT THE LOSS ON THE SALE OF TH E SECURITIES IS REVENUE IN NATURE AND SAME IS ALLOWABLE. ACCORDINGLY GROUND NO. 2 IS ALLOWED. 5. SO FAR AS THE REFERENCE BY THE ASSESSING OFFICER TO T HE DECISION OF THE VIJAYA BANK LTD. (SUPRA) IS CONCERNED IN OUR OPI NION IN THE SUBSEQUENT DECISION IN THE CASE OF UNITED COMMERCIAL BA NK VS. CIT 240 ITR 355 (SC) THE ISSUE OF VALUATION OF STOCK-IN-TRADE OF SECURITIES HELD BY THE BANK WAS REFERRED TO THE HON'BLE SUPREME COURT A ND IT IS HELD THAT IT IS OPEN TO THE ASSESSEE TO VALUE IT AT THE COST OR MARKET VALUE WHICHEVER IS LOWER AND METHOD OF ACCOUNTING ADOPTED BY THE TAX PAYER CONSISTENTLY AND REGULARLY CANNOT BE DISCARDED BY THE DEPARTMENT AUTHORITY. THE LAW IS WELL SETTLED THAT ALL THE SECURITIES HELD BY THE BANK ARE PART OF THE STOCK-IN-TRADE IRRESPECTIVE OF THE FACT HOW THE CLASSIF ICATION IS MADE. IN THE LIGHT OF THE ABOVE DISCUSSION AND FOLLOWING THE DE CISION IN THE CASE OF BANK OF RAJASTHAN LTD. (SUPRA) AND THE LATUR URBAN CO -OP. BANK LIMITED (SUPRA) WE ALLOW THE APPEAL FILED BY THE ASSESSEE AND DELETE THE ADDITION MADE BY THE ASSESSING OFFICER. 12.1 RESPECTFULLY FOLLOWING THE DECISION OF THE COO RDINATE BENCH OF THE TRIBUNAL AND IN ABSENCE OF ANY CONTRARY MATERIA L BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE WE S ET-ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING O FFICER TO DELETE THE ADDITION OF RS.11 54 019/- MADE ON ACCOUNT OF AMORT IZATION OF PREMIUM ON GOVERNMENT SECURITIES. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. ITA NO.484/PN/2014 (A.Y. 2010-11) (BY REVENUE) : 13. FACTS OF THE CASE IN BRIEF ARE THAT THE AO DU RING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSE E HAS DEBITED PROVISION FOR LEAVE SALARY AT RS.11 20 000/- TO PRO FIT AND LOSS 17 ACCOUNT. SINCE THE SAME HAS NOT BEEN PAID ACTUALLY BY THE ASSESSEE BEFORE THE DUE DATE OF FILING OF RETURN OF INCOME H E DISALLOWED AN AMOUNT OF RS.11 20 000/- U/S.43B(F) OF THE I.T. ACT . 14. BEFORE THE CIT(A) IT WAS SUBMITTED THAT DURING F.Y. 2010-11 AN AMOUNT OF RS.10 76 903/- WAS PAID UPTO 30-09-201 0. A STATEMENT OF PAYMENT OF LEAVE SALARY BY VARIOUS BRA NCHES DURING F.Y. 2010-11 WAS FURNISHED BEFORE HIM. SINCE THIS EVIDENCE WAS NOT FURNISHED BEFORE THE AO THE LD.CIT(A) DIRECTED THE AO TO EXAMINE THIS EVIDENCE AS WELL AS ANY OTHER DOCUMENT WHICH THE AO MAY FIND NECESSARY AND IN CASE THE SAME IS FOUND IN ORDER ALLOW THE PROVISION OF LEAVE SALARY PAID PRIOR TO THE DAT E OF FILING OF THE RETURN. 15. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) IS NOT JUSTIFIED IN IGNORING THE PROVISIONS OF R ULE 46A(1) TO 46A(3) PARTICULARLY WHEN THE RECORDS DO NOT SHOW EXI STENCE OF ANY OF THE CIRCUMSTANCES MENTIONED IN RULE 46A(1)(A) TO 46A( 1)(E) 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE CIT(A) IS NOT JUSTIFIED IN ADMITTING THE EVIDENCE FRO M THE ASSESSEE IN RESPECT ITS CLAIM OF PROVISION OF LEAVE SALARY BEING P AID BEFORE THE DATE OF FILING OF RETURN IN CONTRAVENTION TO THE PROVISIONS O F SECTION 251(1) OF THE I.T. ACT 1961 R.W. RULE 46A(1) TO 46A(3) OF THE I. T. RULES 1961. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO . . . . EXAMINE THIS EVIDENCE WHICH WILL BE SUBMITTED BY THE APPELLANT BE FORE HIS AND ANY OTHER DOCUMENT WHICH HE MAY FIND NECESSARY AND IF FO UND IN ORDER ALLOW THE PROVISION LEAVE SALARY PAID PRIOR TO THE DA TE OF FILING OF RETURN . . . . . . THEREBY EFFECTIVELY SETTING ASIDE THE ASSESSMENT OF THE A.O. TO THIS EXTENT WHEN THE PROVISIONS OF SECTION 251(1) HAS BEEN A MENDED W.E.F. 01-06-2001. 4. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) KOLHAPUR BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 18 16. AFTER HEARING BOTH THE SIDES WE FIND NO INFIRM ITY IN THE ORDER OF THE LD.CIT(A). HE HAS SIMPLY DIRECTED THE AO TO VERIFY THE EVIDENCES FILED BEFORE HIM AS WELL AS ANY OTHER DOC UMENT WHICH THE AO MAY REQUIRE TO ALLOW THE CLAIM OF THE ASSESS EE IF THE SAME IS IN ORDER. THE REVENUE SHOULD NOT HAVE ANY GRIEV ANCE IF THE AO IS GIVEN AN OPPORTUNITY TO VERIFY THE DOCUMENTS AND ALLOW THE CLAIM IF IT IS LEGALLY ALLOWABLE. IN THIS VIEW OF THE MATTER WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). ACCORDING LY THE SAME IS UPHELD AND THE GROUNDS RAISED BY THE REVENUE ARE DI SMISSED. 17. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 24-04-2014. SD/- SD/- (R.K. PANDA) (R.S .PADVEKAR) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE DATED: 24 TH APRIL 2014 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A) KOLHAPUR 4 CIT KOLHAPUR 5. THE D.R B PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT PUNE BENCHES PUNE