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2018 (7) TMI 1876 - AT - Income TaxAccrual of income - Income recognition - interest on accounts classified as NPA has in fact accrued or not? - Held that:- Reasonable certainty, on the basis of objective material and available information, as to the ultimate realizability of the income, is a pre-condition for recognition of income, for which reference may be made to Accounting Standard (AS) 9 issued by the ICAI, also adverted to in Vasisth Chay Vyapar Ltd. [2010 (11) TMI 88 - DELHI HIGH COURT]. The same being missing, there is no accrual of income, i.e., on facts, the obligation to pay interest under the loan contract notwithstanding. We say so as the Revenue has not at any stage challenged the said uncertainty or contended of the income recognition norms stated to be followed by the assessee as either not relevant or not having a direct bearing on the said uncertainty. Rather, we find it queer that, on one hand, the Revenue itself notifies accounting standards which provide primacy to ‘prudence’, while, on the other, objects when the assessee, in pursuance to those norms, refrains from booking income! No hesitation in, accepting the assessee’s claim, directing the deletion of the amount of interest income. There is, we may though add, no question of the Revenue being not entitled to proceed in the matter in the absence of non-rejection of accounts. - Decided in favour of assessee Disallowance of fuel and hire charges u/s. 37(1) - Held that:- The (statutory) obligation was by itself not sufficient if the purpose of the expenditure was not for the benefit of or the running of the assessee’s business. In the instant case, we find neither of these two conditions being satisfied; the former being in fact incidental in-as-much as a voluntary expenditure, shown to be for the purpose of the assessee’s business, would qualify for deduction. In our considered view, therefore, the impugned expenditure does not meet the test of section 37(1), and stands rightly disallowed by the Revenue. We decide accordingly, and the Revenue succeeds. Income from other sources on account of non payment of dividend distribution tax by the assessee-company, which in fact claims to be not liable for the said tax - CIT-A deleted the addition - Held that:- We find no basis for the said addition. Even assuming, for the sake of argument, that the dividend distribution tax was indeed payable by the assessee-company, the Revenue can only proceed under law to exact the same. It does not in any manner lead to the inference of any income having accrued to the assessee as a result. Rather, the said tax, where paid, would stand to be debited to its operating statement (P&L A/c) for the year. We decide accordingly. Disallowance of the provision on standard assets, made by the assessee-bank at the rate of 0.25%, on the ground it being only a contingent liability - CIT-A deleted the addition - Held that:- The assessee has not been shown to us as falling within the excluded categories, which we note to be the same as those saved u/s. 80P(4). As such, clearly either of the two sections, i.e., 36(1)(viia) or section 80P, shall apply to the assessee, who cannot take an ambivalent stand with regard to its status. The parameters of a primary agricultural credit society or a primary cooperative agricultural and rural development bank, i.e., two specified excluded categories, are well settled. The AO shall accordingly examine the matter, and decide the same issuing definite findings of fact, of course, after hearing the assessee in the matter. In fact, as it appears, the assessee has not claimed deduction u/s. 80P, for otherwise this itself would have been the subject matter of dispute between the parties, with the AO clearly adverting to section 80P(4), excluding the assessee from the purview of section 80P. Why, in that case, i.e., of the assessee being considered as eligible for deduction u/s. 80P even for AY 2007-08 onwards, all the other issues would get subsumed therein as the assessee’s entire income from banking business would get deducted u/s. 80P(1) r.w.s. 80P(2)(a)(i). As such, it is rather the AO who appears to be ambivalent by denying the assessee deduction u/s. 36(1)(viia) as well as u/s. 80P. We decide accordingly. Addition of interest - assessee Under-charged as well as over-charged interest to its customers (i.e., on loans) as well as its depositors - Held that:- AO added the entire excess interest, i.e., at ₹ 1,27,980. He, as apparent, has taken only a part of the auditor’s observation per their report. Taken in totality, it would imply that the income would stand reduced by ₹ 48,691. The ld. CIT(A) accordingly held that there was no ground for making the impugned addition, and directed its deletion. The facts are not in dispute, and we find no infirmity in the adjudication by the ld. CIT(A). We decide accordingly, and the assessee succeeds Disallowance of provision (at the rate of 0.25% on standard loans) - Held that:- for AY 2007-08, accepted the assessee’s claim as, in his view, there was nothing to show that the claim was not covered by the provision of section 36(1)(viia). The provision against standard loans being only a provision for bad and doubtful debts, would stand to be covered u/s. 36(1)(viia). That being the case, we find no reason for the Revenue impugning the provision against standard assets. Thus, subject to the limit prescribed u/s. 36(1) (viia), i.e., 7.5% of the income, being not breached, the assessee would be entitled to the provision against standard assets. Assessee’s claim u/s. 36(1)(viia) - Held that:- assessee has to specify the provision where-under the said claim is admissible. Why, the ld. AR, on being queried by the Bench during hearing in this regard, was unable to specify the same or even the nature of the articles, stated to have since perished, or even if the said article stood included in the assessee’s block of assets. That is, their accounting treatment. While, therefore, no case for a set aside is made out, we, yet, in the interest of justice, consider it proper to allow the assessee a final opportunity to present its case before the AO in the appeal effect giving proceedings. The AO shall, where a case duly substantiated, is made out by the assessee, consider the assessee’s contention and adjudicate per a speaking order. Without doubt, the onus to prove its claim, both on facts and in law, would be on the assessee. Provision for bad and doubtful debts - assessee’s claim is that the interest, booked as income for fy. 2006-07 (AY 2007-08), being not realized even during fy. 2007-08 (AY 2008-09), was reversed - Held that:- The assessee bank, following accrual system of accounting, had booked income for AY 2007-08 even as the interest was pending realization. The same having not been realized even during AY 2008-09, the current year, the same was reversed. The assessee has itself claimed this reversal as a provision for bad and doubtful debts. If the income had been, as claimed, already booked as income (for AY 2007-08), all that needs to be done is to the debit the provision (for bad and doubtful debts) account, with a corresponding credit to the respective debtors account/s, whose account/s would have been debited on charge of interest for fy. 2006-07 (AY 2007-08). We find nothing wrong in the adjudication by the ld. CIT(A), nor could the ld. AR during hearing point out to any. Provision u/s. 36(1)(viia) at the rate of 7.5% of income working he provision, it needs to be appreciated, is against an asset, i.e., recognizes the risk associated with its realisability and, therefore, is valid only with reference to the extant assets, i.e., as obtaining at the relevant time. The provision as on 31.03.2008 (asset) would therefore have to be reckoned with reference to the advances (by rural branches of the bank, speaking in the context of section 36(1)(viia)) as on 31.03.2008. The said provision may include that made during the earlier years, i.e., where not reversed, which thus would have to be taken into account while computing the upper limit specified qua rural advances u/s. 36(1)(viia). And in which case, therefore, the provision based on income (for each year u/s. 36(1)(viia) would have to be made, accounted for and reckoned (for the breach of the limit specified in its respect) separately. The argument aforesaid appealing at first blush, does not hold. Disallowance u/s. 37(1) - deposits in a scheme framed by LIC of India - assessments are to be proceeded with and framed on the basis that section 43B(f) - Held that:- Exception is made for liabilities accruing during the relevant year, where paid by the due date of filing the return of income u/s. 139(1) for that year. It is in this context that the ld. counsel was enquired by the Bench as to how the payment of premium stands accounted for, which ought to be therefore adjusted against (debited to) the provision account. As it appears, the assessee has made a provision of ₹ 200 lacs on account of liability toward staff leave encashment, also paying this amount to the LIC of India (during the year). The assessee, making the payment to LIC is in fact discharging its liability toward leave encashment. As such, to the extent of payment the assessee’s claim shall not be hit by section 43B(f). The matter, for factual verification, is restored back to the file of the AO who, upon satisfaction, shall allow the assessee’s claim qua the said expenditure to the extent of payment made to LIC of India during the year, i.e., in terms of section 43B. We say so as the provision made is not for the liability accruing during the year, but that since accrued, so that the deduction shall be restricted to the amount paid/discharged during the year. We decide accordingly. Disallowance of a payment of Annual Maintenance Charges (AMC) - Held that:- True, once a liability has accrued, in terms of the liability to pay, on the basis of a contract, it cannot be said that the expenditure had not accrued. The expenditure, however, is for the purpose of the assessee’s business, i.e., for maintenance of CCTV cameras installed at the different branch offices of the bank. As such, the payee is obliged under the contract to provide support services as envisaged under the contract for full one year, i.e., a period of 365 days, beginning 27.03.2010. The probability of this services being required, which would be for regular (periodic) maintenance or on breakdown, etc. spreads evenly throughout the year. It would be a different matter, we may add, where the benefit that stands to be derived from the expenditure incurred is tenuous or not liable to be suitably quantified. This is not so in the instance case, as without doubt, the contract is time based, so that the benefit there-under inures only during the said period. It is in that sense similar to the estimate for liability to pay interest under a contract, which arises only at the end of the account (contract) period. Interest expenditure, over the period for which the interest bearing loan (liability) outstands during the relevant year, can only be said to have accrued during the relevant year. That is, the liability to interest, irrespective of the contractual obligation in its respect, arises on lapse/efflux of time. The assessee’s having availed the ‘benefit’ of the loan for a definite period of time during the year, interest liability to the corresponding extent would, independent of the contractual obligation as to payment, be deductible on matching principle basis. We therefore find no infirmity in the orders by the Revenue Authorities on this issue. Why, however, we fail to understand, should not the Revenue allow the balance amount (Rs.18.85 lacs) as deduction for the following year, i.e., AY 2011-12, also in appeal before us. Though no ground in its respect has been taken by the assessee, who does not appear to have raised this issue by way of rectification application u/s. 154, that would not detain us to state that the assessment for AY 2011-12, subject to verification by the AO, the Revenue should have allowed the assessee’s claim for the balance amount in the following year (AY 2011-12).
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