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2014 (11) TMI 94 - AT - Income TaxAddition of accrued interest on loans and advances remitted - Amendment to section 145 of the Act w.e.f. 1.4.1997 not appreciated – Directions made by CIT(A) amounts to remitting back for fresh adjudication or not - Whether the interest accrued on NPAs, which are doubtful of being recovered, should be recognised as income on accrual basis or on receipt basis - Held that:- The assessee is in the business of banking and is governed by the Banking Regulations Act, 1949 – Following the decision in Commissioner of Income-Tax Davanagere and Income Tax Officer Ward-2, Shimoga. Versus The Urban Co-Operative Bank Limited [2014 (10) TMI 740 - KARNATAKA HIGH COURT] - if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax - His accounts should reflect true and correct statement of affairs - Merely because the amount accrued was not realised immediately cannot be a ground to avoid payment of tax - But, if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the same, then it cannot said to have been accrued and the said amount cannot be brought to tax - the contention of the revenue that in respect of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. The assessee also pointed out certain mistakes in the computation of interest, the CIT(A) has directed the AO to compute the quantum of interest to be allowed correctly, by considering the submissions put forth by the assessee in this regard - This direction of the CIT(A) cannot be construed as remitting back the substantive issue to the AO, as he has only directed the Assessing Officer to compute the quantum correctly – thus, there was no infirmity in the order of the CIT(A) – Decided against revenue. Provision for Non-Performing Assets ('NPA') – Mandatory requirement of RBI Guidelines to follow mercantile system of accounting fulfilled or not - Held that:- Section 36(1)(viia) of the Act provides for allowance of any provision for bad and doubtful debts - Although the assessee has used the nomenclature for the provision as "Provision for NPAs", but in pith and substance the provision has been created for bad and doubtful debts and in doing so, the assessee has followed the RBI Guidelines – relying upon UCO Bank Versus Commissioner of Income-Tax [1999 (5) TMI 3 - SUPREME Court] – the order of the CIT(A) for allowing the claim of deduction on account of provision for NPA is upheld – Decided against revenue. Provision for Audit Cost – Mercantile system of accounting followed - Held that:- The assessee is following the mercantile system of accounting and is booking expenditure on accrual basis - The provision for audit fees has been made as per the rules specified for this purpose; i.e. as per the directions of the Deputy Director of Co-operative Audit under Rule 441 of the Karnataka Civil Service Rules - the assessee is mandated to make the payment as per the Rules, the liability of the assessee has got crystallised - once a liability is crystallised, it is liable to be provided for even if the actual payment is made later – thus, the order fo the CIT(A) is upheld – Decided against revenue. Disallowance u/s.40(a)(ia) - Non-deduction of tax at source – Held that:- CIT(A) rightly directed the AO to examine and verify the TDS payments related to only one item of expenditure i.e. building rent payments - This direction too has been made because the assessee claimed that TDS has been made on building rental payments and the disallowance thereof amounts to double deduction – the action of the CIT (A) cannot be construed as if the CIT (A) has remitted the matter to the file of the AO for fresh adjudication – Decided against revenue.
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