TMI Blog2012 (9) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... d thus qualify to be a conscious disregard of its obligations. - Benefit of section 273B not extended - penalty confirmed. Taxability of interest 'accruing' on the non-performing asset (NPA) - whether non-recognizing interest income on NPAs by the assessee-bank following RBI guidelines, as a matter of accounting policy, would by itself constitute a valid ground for not recognizing the said income on the basis of its non-accrual; the adopted method of accounting being admittedly mercantile? - held that:- even section 43D gives primacy to the bank's accounts, so that where interest stands credited to the profit and loss account for a particular year, the same is to be treated as its income for that year even where not received. - Decided against assessee. Accrual (or otherwise) of an income (or expenditure) is matter of fact, to be decided separately for each case, on the basis of the assessment of the obtaining facts and circumstances. The same cannot be stated as an accounting policy - which by its very nature is to be applied uniformly, except where it is stated in broad terms, bearing the necessary ingredients of the qualifying criterion, i.e., existence of a reasonable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at Mahoba (UP). We shall take up the appeals in seriatim, which corresponds with the chronological order of their respective years, as also of the passing of the primary orders by the Assessing Officer (AO). I.T.A. No.114/Lkw/2012 (A.Y. 2007-2008) Background Facts 2. The facts of the case are abundantly clear and undisputed. The assessee, a cooperative bank, governed by the Banking Regulations Act, 1949, filed its return of income for the year on 31/10/2007 at an income of Rs.20.16 lakhs. The same was selected for scrutiny under the verification procedure under the Act vide notice u/s. 143(2) dated 26/09/2008. The assessee had claimed tax credit in respect of advance-tax paid for the relevant year at Rs.12.24 lakhs. As the same did not find reflection in the assessee's audited balance-sheet, filed along with its return of income, the source of the payment of tax was enquired into by the AO during the course of the assessment proceedings. The assessee explained the same to be out of its accounted sources, duly debited to the profit loss account for the year. The details of the various expenses called for by the AO revealed the same to have been included as part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no intention thereof. This is borne out from the fact that the assessee furnished the factual position qua the various queries raised per its replies before the AO, while the fact of payment of advance-tax was borne out by the income-tax return itself. The assesse-bank is a legal person, governed by its rules and regulations, and run by democratically elected members. There is therefore no personal interest in its finances and, thus, no personal element involved in the impugned discrepancies, which is only a result of unintentional clerical and a bonafide mistake. No case, as such, for the levy of penalty u/s. 271(1)(c) of the Act is made out. In fact, the ld. CIT(A) has not even met the abundant case law relied upon by the assessee's counsel before him, including in the case of CIT vs. Sonali Jain (ITA. No. 88 of 2008, copy enclosed) by the hon'ble jurisdictional High Court. 3.2 The Revenue's case, on the other hand, is that there is no presumption as to ignorance of law, which could in any case not operate as an excuse, particularly considering that the assessee is a bank. The penalty levied is for a statutory offence. There is no indication in the return of income that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y competent people. Apart there-from, we find no difference qua the primary facts, including the assessee's acceptance of the two sums debited to its profit loss account as being not deductible in the computation of its assessable income; rather, stating of the claim (for deduction) made in their respect as being the result of an inadvertent and bonafide mistake or omission, and which, therefore, should not saddle it with a punitive liability. That, in fact, defines and sums up the assessee's case. That being the case, the difference between the two, i.e., the assessee and the Revenue, would lie in a finding of fact; the Revenue holding it to be not a case of ignorance of law, as claimed by the assesse, but of a deliberate and intentional omission. The issue arising for determination thus is one of application of law to the given factual situation, and which may include that on inferential fact/s as well. Further, we may clarify that the penalty under reference being only a civil liability for a statutory offence, which stands to be attracted where a reasonable cause is not shown, the question of guilty mind, which the argument qua intention entails, is of little conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed." The words employed by the statute are important. The expressions 'concealed' and 'inaccurate' having not been defined under the Act, their natural, common use meaning would apply. The Law Lexicon explains the word 'conceal' to mean 'to hide or to keep secret, i.e., to hide or withdraw from observing; to cover or keep from sight; to prevent discovery or to withhold knowledge of.' Again, the dictionary meaning of the word 'inaccurate' (Webster's Dictionary) is 'not accurate, not exact or correct; not according to truth; erroneous; an incorrect statement, copy or transcript' [source : Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519 (at page 546)]. As per the Law Lexicon, the meaning of the word 'particulars' is a detail or details (in plural sense); the details of a claim; or the separate items of an account (refer : C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able in law, i.e., where he either substantiates the explanation/s offered by him or the explanation/s, even if not substantiated, is found to be bonafide . If the explanation is either not substantiated or not shown to be bonafide coupled with the disclosure of material facts, Explanation 1 to section 271(1)(c) would come into play, and the assessee will be liable for penalty thereunder. Explanation 1 to the provision, thus, balances the primary condition of the default of non-disclosure or improper disclosure or claim qua the impugned 'income' (per the return of income) as being only a result of a deliberate act on the assessee's part, with the fact that is only the assesse, who being in the intimate know of its own affairs, could explain the reasons motivating or informing the said non or improper disclosure/claim on its part. Further, this is also in tandem and harmony with the principles of jurisprudence with regard to penalty, which finds mention in, inter alia , 85 corpus juris secundum , paragraph 1023 (refer 291 ITR at page 543): "A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gains of the business. The first, i.e., income-tax, is a statutory liability on the profits and gains of a business, while the latter, an appropriation of the business profits made by creating certain 'reserve funds' for some specified purposes. An explanation contemplated by the provision, and as referred to in Explanation 1(A) or Explanation 1(B) , implies a proper, reasonable and acceptable explanation , as regards the basis or the reason/s informing the claim qua an item of income (or deduction of expenditure) in computing the assessable income under the Act, even as clarified by the hon'ble apex court in the case of CIT v. Mohanakala P. [2007] 291 ITR 278 (SC) in the context of clarifying the scope of the words 'offers no explanation' occurring in section 68 of the Act, and which would be equally valid and applicable in the context of section 271(1)(c) of the Act as well. The said applicability, apart from being guided by the reason of parity, is apparent, as without doubt an explanation which is not proper or reasonable can hardly be termed as an explanation. In fact, the assessee's admission of the claim under reference as being a mistake is itself sufficient t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he law, by including even the spectre of an unsubstantiated explanation, endeavors to render itself complete and justifiable under all circumstances, so that even though an explanation is not substantiated by the assessee, penalty ought not to be levied in genuine cases, i.e., where the assessee proves the bonafides of the explanation, having disclosed all the material facts in relation thereto. In fact, the two requirements are not separate and distinct, but composite the disclosure (of the relevant facts) itself enables and only goes to establish the bonafides of the explanation. As also afore-stated (in the preceding paragraph), the plea of a mistake itself is an admission of there being no explanation, and ousts the same for being considered as an explanation under Explanation1 to section 271(1)(c). Continuing further, and without prejudice, we consider it to be a case of serious and grave error, and a conscious disregard of its legal obligations, if not intentional, rather than that of a bonafide mistake, which would save penalty. The assessee is obliged to pay advance-tax equal to the whole of its tax liability for the relevant year during the course of the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis (refer para 4.6). Other Arguments 4.6 At this juncture, we would also like to deal with the assessee's claim of being not adequately serviced in this regard. Though, we consider to have adequately demonstrated it to be not so that being our finding, in our view, there is in law no scope for taking such a plea. The assessee is required to get its accounts audited u/s. 44AB of the Act by an Accountant, which term is also defined thereunder. It matters little, therefore, whether or not the assessee's auditors is a firm of Chartered Accountants, being in either case qualified to act as tax auditors. Further, could the assessee, a bank, most of whose assets are in the form of financial assets, function as a business entity, without proper accounts ? In fact, the accounting and the tax regime under which it operates, besides the regulatory framework by the RBI as also NABARD, exclude any such possibility, which rather is the primary requirement of any business entity, besides being the statutory requirement per its governing law (as well as of the Act per section 44AA). Further, the assessee's balance-sheet as at the year-end, forming part of its paper-book (PB pages 5 -1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been specified as to who was the person(s) preparing the return, on what basis; who checked the same, leave alone the nature and the basis of the mistaken belief that led to the 'mistake'. The return of income, as it appears, was prepared merely by adopting the figure of net profit as per the profit loss account without any adjustments. Why, even the simple exercise of examining the details of various expenses, furnished before the Assessing Officer during the course of assessment proceedings, and which would exhibit it to bear sums which are clearly not allowable; rather, do not even qualify as expenditure, was not undertaken . It is rather, as we see it, a case of gross negligence and dereliction of duty and by more than one person, and would thus qualify to be a conscious disregard of its obligations. Holding it out to be a 'genuine or bona fide mistake' and, again, without basis, is only an alibi or a pretence . Case law 4.7 Finally, we may discuss the decision by hon'ble jurisdictional high court in the case of CIT vs. Sonali Jain (I.T.A. No. 88/2008 dated 29/07/2011), relied upon by the assessee (PB pages 79-82). We have carefully perused the said j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y upheld. We decide accordingly. I.T.A. No. 115/Lkw/2012 (A.Y. 2008-09) The respective cases 6.1 The only issue in this appeal by the assessee is the maintainability in law of the taxability of interest 'accruing' on the non-performing asset (NPA) accounts in its portfolio. The assessee having, though provided for the same in its accounts by debiting the interest contractually arising on the said loan and advances to the account of the respective borrowers, simultaneously provided for the same by debiting its profit and loss account (P L a/c) for the relevant year, with a corresponding credit to the account head 'Provision for bad and doubtful debts' a balance-sheet item, following the prudential norms issued by National Bank of Agricultural and Rural Development (NABARD)/Reserve Bank of India (RBI), under whose auspices the assesse-bank operates. The basis of the Revenue's action in bringing the said amount (Rs.19,23,403/-) to tax by disallowing the provision for bad and doubtful debts to that extent, is that the said norms do not over-ride the provisions of the Act, which is a separate code in itself for the computation of income liable to tax there-under, even as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Coimbatore Lakshmi Investment Finance Co. Ltd . (2011) 331 ITR 229 (Mad.) has held that assessee was justified in not recognizing income on non-performing assets. The Controversy 7. We have heard the parties, and perused the materials on record as well as the decisions relied upon by them, including those cited at bar. The controversy arising for consideration and determination in the present case is whether non-recognizing interest income on NPAs by the assessee-bank following RBI guidelines, as a matter of accounting policy, would by itself constitute a valid ground for not recognizing the said income on the basis of its non-accrual; the adopted method of accounting being admittedly mercantile? Findings 8.1 Interest income accrues, under most circumstances, on the basis of time; interest, by definition, being a charge toward the opportunity (or time) cost of funds placed at the disposal of the borrower user. In fact, the rate of interest is itself stated in terms of per unit of time. So however, it may well be that despite lapse of time, so that interest is contractually due, the lender considers it as having not accrued for the reason that there is considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined with certainty, and represents a best estimate in light of the information available. AS-II mandates that any change in its accounting policy by an enterprise shall be made only where the adoption of a different policy is required by the statute or where the change would result in a more appropriate presentation of its financial statements by an assessee. 8.3 Examining the assessee's accounting policy of recognition of income on NPAs subject to realization, we find the same to be, firstly, rather, in satisfaction of the mandate of prudence inasmuch as, without doubt, where realizability is characterized by uncertainty, income cannot be said to have accrued . As long as a reasonable certainty (as to ultimate realizability) cannot be entertained at the time of raising a claim, it would be futile to suggest or contend that the underlying income has accrued. And, as such, it would only be prudent to postpone recognition of income to the point in time of realizability or till the time the uncertainty is resolved, and to the extent it is. If that be so, we do not think it necessary to examine the question of satisfaction of the condition of change in an accounting poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n more broad terms, as (say) where in the opinion of the Management no reasonable certainty exists ( i.e., on the assessment of the obtaining facts and circumstances) as to the realizability of the principal and income. However, when income is not taken into account solely on the ground of the account being a NPA, de hors the other relevant facts and circumstances, it may lead to an incongruity, as where the same suggest otherwise. It would, nevertheless, still be within the competence of the Management to follow the same as an accounting policy, for which it may have its own reasons, as (say) the binding nature of the guidelines by NABARD/RBI. The same, however, could not be said to be in conformity with section 145 of the Act or as binding on the Income Tax authorities, who are obliged to examine the reasonability of the assessee's claim/s with reference to the provisions of the Act. Where, on the basis of the said examination, it is found that a reasonable uncertainty with regard to any of the NPA accounts exists, the assesseee's claim would stand to be accepted to that extent, else not. That is, it is purely a question of fact and, resultantly, to be decided on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fact accepted the assessee's claim toward non-recognition of interest for Rs.20.34 lakhs, the said decision, as would be apparent from a reading thereof, as well as the foregoing, deals with the latter aspect, i.e., income recognition norms as spelt out by the RBI, as well. Further, vide paragraph31 (page 606) of its decision it clarifies, in no uncertain terms, once more, that the RBI's directions and the Act operate in different fields. And, further, that the assessee has to prove, in each case, that interest not recognized or taken into account was in fact due to uncertainty in collection of income, and it was for the AO to accept the assessee's said claim under the Act or not to . In fact, per section 43D r/w rules 6EA/6EB, which though are not applicable to the assessee, a co-operative bank, the Act has addressed this issue, i.e., income recognition norms for schedule banks and financial companies, comprehensively, providing a complete framework for identification of bad and doubtful debt assets for the purpose of income recognition. Thereby, thus, dovetailing and aligning the requirements of the Act with the guidelines issued and the parameters prescribed for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c). The recognition of income in books of account is complete at this stage . What the assessee states as non-recognition of income is essentially by way of providing for bad and doubtful debts. To the extent the interest is not received as at the year-end, the same is not written off but debited to the profit loss account by way of provision for bad and doubtful debts, where the account is a NPA. The same, thus, forms a part of the said provision, much in the same manner, and as also made in respect of, inter alia , the principal amount outstanding in such accounts. Once an amount is credited to the said provision account, it is immaterial whether the same is qua principal or interest; the interest amount having in fact merged with the principal on being debited to the account of the borrower. That is, the provision toward non-recoverable interest is at par with any other sum forming part of the said provision for bad and doubtful debts. The same would, thus, even has held by ld. CIT(A), be considered for deduction; the assessee being a co-operative bank, in terms of u/s. 36(1)(viiia), to which the assessee is clearly entitled. In fact, considering a part of it as qua non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming part of its asset base. The assessee has not made any claim u/s. 36(1)(vii), as also observed by the ld. CIT(A), and which would, as explained by the hon'ble apex court in the case of Vijaya Bank v. CIT (2010) 323 ITR 166 (SC), require the transfer of the 'provision for bad and doubtful debts' to the corresponding asset (even though it may be the total or control) account as at the year-end, so that the said provision ceases to be on the assessee's books as at the year-end. Conclusion 8.6 Accrual (or otherwise) of an income (or expenditure) is matter of fact, to be decided separately for each case, on the basis of the assessment of the obtaining facts and circumstances. The same cannot be stated as an accounting policy - which by its very nature is to be applied uniformly, except where it is stated in broad terms, bearing the necessary ingredients of the qualifying criterion, i.e., existence of a reasonable certainty as to ultimate realization at the time of raising the claim or even as at the end of the accounting period. Clearly, the same would require an assessment of the relevant facts, and income to that extent shall not be recognized unless there is reas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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