TMI Blog2017 (11) TMI 1746X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 allowable u/s 36(1)(viia) of the Act, accordingly, we uphold the order of the CIT(A) and dismiss the appeal of the revenue on this ground. Allowability of reserve created for sundry debtors Government - Held that:- A.R argument that on receipt of the subsidy the same was offered to the income in subsequent year is not tenable because the income of each assessment year has to be assessed independently and the assessee cannot postpone the income to the next assessment year. The assessee is a Cooperative Bank following the mercantile system of accounting. The subsidy released to PACS was not a loan, it was the assistance of funds in lieu of expected subsidy. Therefore, the order of the CIT(A) on this issue cannot be sustained, hence 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. DCCB’s share of 35% of waiver of penal interest and interest on overdue deposits - Held that:- In this case, during the appeal hearing, the Ld. A.R. did not fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat:- A.O. disallowed the above expenditure under the impression that the said amount was not an expenditure but it was related to the investments. However, during the appeal hearing, before the CIT(A) and before us, the assessee argued that the item represents the interest paid by the bank to the depositors. Since the amount is interest paid on the deposits of the co-operative societies relating to fund called agricultural credit stabilization fund, the same is a business expenditure and the CIT(A) has allowed the same correctly. There 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 profits and it was the interest paid on the deposits of PACS. The appeal of the revenue on this ground is dismissed. Reserve for Co-operative Educational fund - Held that:- As gone through the orders of the authorities below. As per section 45(1) of A.P. Co-operative Societies Act, 1964, 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 Societies Act, it is mandat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CS Act and observed that since the section 46 deals with the investment of funds, the Ld. A.O. held that it is the reserve created for appropriation but not the expenditure. The Ld. A.O. relied on the decision of Hon ble ITAT A Bench, Hyderabad in the case of Andhra Bank Vs. DCIT, Circle-1(1) in ITA Nos.615 to 619/H/2007 and ITA No.711/H/2008, wherein Hon ble coordinate bench has rejected the claim of the assessee with regard to the general provision of 25% on standard assets. The coordinate bench further observed that the Act has given option to the assessee to make provision for bad and doubtful debts or loss of assets and while agreeing with the assessee that the bank has to follow the Reserve Bank of India 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 appeal 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 excludible from the total income liable to tax under the Income Tax Act. Accordingly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to invest 0.25% of its short term and medium term loans, out of the funds borrowed from Cooperative Finance Institutions, the assessee has not submitted the amounts borrowed from Co-operative Finance Institutions and the loans granted out of the funds borrowed by the assessee s society. The assessee society has received the deposits from public 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 Financial Institutionssociety. Instead, the assessee has created reserve on total amount of borrowings and claimed the deduction which is incorrect computation. Thirdly, as per proviso to section 46 of the APCS Act, the bad debts reserve required to be created to the extent bad debts of the society and thereafter no reserve required to be created. The assessee has not furnished the details of bad debts as per section 36(1)(vii) 36(1)(viia) of the Act, bad debts and provision for bad and doubtful debts are allowed as deduction, therefore, no separate deduction required to be allowed under bad debts reserve. If the same is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee as well as the Ld. CIT(A) while allowing the appeal on section 46(e) is 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 such as postal savings banks, any other securities specified in section 20 of the Indian Trust Act, shares and securities of the Society or with nationalized bank or scheduled banks. Proviso to section 46 deals with the investment of 0.25% of short term and medium term loans granted by the bank out of the funds borrowed from the co-operative financial institutions for creation of reserve towards bad debts. Further, the proviso also provides for not to make any investment once the bad debts reserve becomes equal to the total amount of bad debts. For ready reference we extract relevant section 46 of the APCS Act, which reads as under: 46. Investment of funds: [A Society may by a resolution of majori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. in specified assets in the form 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 creation of bad debts reserve as per proviso to section 46. As per proviso the bad debts reserve required to be created @ 0.25% of the medium 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 the borrowings made from the co-operative financial institutions. The assessee has common kitty of funds consisting of reserves, the share capital deposits and borrowings. It is necessary to ascertain what was the amounts advanced for short term and long term loans out of the borrowings of the society and other sources required to be ascertained and the correct amount of statutory reserve should be created. The same was not furnished by the assessee. The bad debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve created for Sundry Debtors due to Instns. 36,15,339 4. NPA Provision Total 1,44,65,471/- 13. The assessee claimed deduction of ₹ 1,44,65,471/- under the provision of sundry debtors. The assessee submitted 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 borrowers such as legal notice charges, notice charges etc.. incurred by the Head office. The A.O. disallowed the deduction claimed by the assessee with a reason that the assessee should have claimed the same as expenditure 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. misunderstood the term debt and disallowed the sum of ₹ 62,61,426/-. Similarly the AO disallowed the sums of ₹ 45,88,706/- Reserve created for Sundry Debtors due to Indvls, ₹ 36,15,339/- Reserve created for Sundry Debtors due to In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 82 ITR 363 (SC), wherein it has been held that where liability exists in presenti, the claim for the same cannot be denied merely because it has been disputed, where the appellant maintains his book of account on the mercantile system of accounting. I find force in the submissions made by the AR and I hold that the three items aforementioned merit deduction in the light of the categorical finding of the AG that the debits represented expenditure incurred 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 AG has also given a finding that the debit represented business expenditure. In the circumstances, I am inclined to allow the appellant's claim duly following the Hon'ble SC decision, which mandated the allowance of the expenditure once there was a finding of incurrence of legitimate business expenditure, no matter even when there was a defect in the accounting procedures or other technicalities. Hence, the A.O. is directed to allow the above three items of expenditure debited to the profit and loss account. 15. Aggrieved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the customer to their account so as to enable the bank to collect the entire outstanding along with the expenses incurred in the process of recovery of loans. Therefore, we agree with the assessee s argument that if the expenditure is debited to the P L account, bank would incur a loss, therefore, the assessee has rightly debited the expenses to the customer s account. Hence the same should be included 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 Cooperative 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 allowable 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 ground. 17. The next issue in the assessment year 2007-08 is reserve created for sundry debtors Government amounting to ₹ 1,49,00,971/-. This amount represents the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as deduction, which is incorrect approach. The subsidy is receivable from the Government which should be reimbursed to the PACS and in turn PACS required to remit to the District Co-operative Central Bank. Till such time, it was neither an expenditure nor an obligation on the part of the DCCB. Though with an enthusiasm the DCCB has released 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, the Government has not repudiated its obligation. In Government debts, unless the Government repudiates its liability, banks cannot treat 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 Classification 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 tenable because the income of each assessment year has to be assessed independently and the assessee cannot postpone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 required to be allowed as deduction. The Ld. A.R. relied on the decision of Nizamabad District Co-operative Central Bank Vs. ITO Ward-2. Not being convinced with the explanation of assessee, the A.O. made the addition. Aggrieved by the order of the A.O. the assessee went on appeal before the CIT(A) and the Ld. CIT(A) deleted the addition observing that the waivers were made pursuant to bank s Board resolution and the Government orders. For the sake of clarification and 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 ₹ 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 bad and doubtful debts are made by all banks in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submissions vide our letter dt.15.9.2009. The procedure of waiver amounts passed on to PACSs was also explained. AS PER THE APCOB CIRCULARS AND OUR OWN CIRCULARS TO PACSs, THE PACSs were to collect the dues of loans and interest from small and marginal-farmerborrowers and the balance of IOD and Penal interest are borne by CONCERNED PACS,CONCERNED DCCB and APCOB in the ratio of 25%, 35% and 40% respectively. IT WAS NOT OUT OF ANY EARLIER PROVISION AND LAID OUT WHOLLY AND EXCLUSIVELY FOR BUSINESS. 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 waiver was held as allowable u/s.37(1). 3. The reimbursement of waivers on penal interest and 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 PACSs by DCCB and APCOB. It got crystallized and quantified only in the relevant previous year and hence the respondent-assessee made the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tile 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 36(2) or 36(1)(viia) of the Act, undoubtedly, the same is business loss and the aggregate amount of overdue interest and penal interest 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 expenditure is genuine and incurred in the ordinary course of business, we hold that the IOD interest and the penal interest should be allowed as 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 interest and the equal amount was debited to the P L account. The A.O. held that the overdue interest need not be recognised as income in the first place as ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest on NPA advances. The assesse claimed the same as mandatory reserve as per the RBI guidelines. The assessing Officer viewed that when the assessee earns income on non performing assets, such asset cannot be treated as non performing asset and the income on such asset required to be taxed and relied on the decision of Hon ble ITAT, Hyderabad A bench in the case of Andhra Bank Vs. DCIT Circle-1(1) in ITA No.615 to 619/H/2007 and ITA No.711/H/2008. 26. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assesse holding that the deduction is allowable u/s 36(1)(viia) of I.T.Act. We extract the relevant paragraph of the Ld.CIT(A) order which reads as under: 6B. Second issue relates to provision for NPA at ₹ 2,84,11,535/-, which was debited to the profit and loss account. It is submitted that as a Bank, the appellant is entitled to claim deduction 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 proceedings. The AO disallowed the impugned deduction on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion36(1)(viia). Since the deduction claimed by the assessee is within the limit of section 36(1)(viia) of the Act, the same is allowable as per the provisions of section 36(1)(viia) of the Act, therefore, we do not 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 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 them in the prescribed modes. PACs shall invest the Fund in DCCBs. The Primary Agri. Co-operative Societies in the District keep their Agrl. Credit Stabilization Fund by way of Deposits with the bank. (The bank also transfer a portion of it s profits to Agri. Credit Stabilization Fund). The funds so invested by the PACS shall bear interest @3% p.a., which is paid by debiting to Interest on Deposits and credit an equal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erabad. Since the payment was made to A.P. State Co-operative Union, the Ld. A.O. viewed that the said sum was not in the nature of expenditure, accordingly disallowed balance amount of ₹ 40,000/- as appropriation of expenditure and not a statutory obligation. Aggrieved by the order of the A.O., the assessee went 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 the Ld. A.O. and the said sum was paid to the A.P. State Co-operative Union for providing training to the staff. The Ld. CIT(A) relied on the decision of Hon ble Karnakata High Court in the case of CIT Vs. Pandavpura Sahakara Sakkera Kharkhana Ltd. 174 ITR 475 ( Karnataka) and allowed the deduction. 31. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. As per section 45(1) of A.P. Co-operative Societies Act, 1964, 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 Societies Act, it is mandatory to the bank t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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