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2015 (3) TMI 936 - ITAT BANGALORE

2015 (3) TMI 936 - ITAT BANGALORE - TMI - Interest accrued - interest accounted as income by the assessee - sticky loans & advances - CIT(A) deleting the disallowance on account of accrued interest which is not credited to the P and L account treating it as double taxation - Held that:- The order of the CIT(A) is not clear as to how the interest receivable which are overdue have been accounted for by the assessee in its books of account. Admittedly, the assets side of balance sheet as on 31.3.20 .....

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ining interest income of ₹ 94,06,565 ought to have been accounted as interest income. The explanation of the assessee before the AO was by placing reliance on the decision of UCO Bank (1999 (5) TMI 3 - SUPREME Court). It is thus clear that the claim of the assessee before the AO was that interest accrued not accounted for in its books of account are in relation to sticky loans & advances. The assessee has not furnished any explanation as to how the loans on which interest income was not of .....

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ill not affect any other assessee who is otherwise able to show that the interest income relates to loans which have become doubtful of recovery need not be accounted for as income. We therefore set aside the order of CIT(A) and remand the issue to the AO for fresh consideration - Decided in favour of revenue for statistical purposes.

Disallowance of deductions for creation “BAD AND DOUBTFUL RESERVE” U/s 36(1) (viia) - whether the appellant bank does not come under the definition of “ .....

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fording opportunity of being heard to the assessee. We may also clarify that the deduction has to be computed in the manner laid down in the provisions and to the extent the provision is created in the books of account of the assessee. - Decided in favour of assessee for statistical purposes.

Disallowance of deduction on Interest on loans - Held that:- The AO has proceeded on the basis that since interest has to be accounted on receipt basis under the Karnataka Cooperative Societies R .....

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t basis. As we have already observed, accounting entries in the books of the assessee regarding interest income assumed significance only after A.Y. 2006-07 when interest income became taxable in view of insertion of section 80P(4) to the Act w.e.f. 1.4.2007. Therefore, there is no merit in the observations of the CIT(A) regarding lack of entries in the books of account of the assessee for A.Y. 2005-06 and 2006-07. We are therefore of the view that it would it would just and proper to direct the .....

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Reserve, which represents the accumulated income of earlier years - Held that:- the assessee has started the computation of total income with profit as per P&L account and added and reduced certain sums. One such sum so reduced is ₹ 80 lakhs on account of amount transferred from NPA reserve created out of earlier year profits. The net loss for the year after such additions and reductions is a loss of ₹ 61,14,560. The AO has computed total income in the order of assessment fro the lo .....

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f the AO - Decided against assessee. - ITA No.34/Bang/2011, ITA No.278/Bang/2011 - Dated:- 20-3-2015 - Shri N.V. Vasudevan And Shri Jason P. Boaz JJ For the Appellant : Shri P.K. Srihari, Addl. CIT(DR) For the Respondent : Shri S. Parthasarathi, Advocate ORDER Per N.V. Vasudevan, Judicial Member These are cross appeals by the revenue and assessee directed against the order dated 12.11.2010 of the CIT(Appeals), Belgaum relating to assessment year 2007-08. ITA 34/11 (Revenue s appeal) 2. The asses .....

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added in the statement of total income to the profit as per P&L account. The AO noticed the following:- Balance of overdue interest receivable as on 31-03-2007 8,16,28,582 Less: Balance of overdue interest receivable as on 31-03- 2006 6,61,50,558 Difference amounting to interest for the year accrued but not credited to P&L a/c 1,54,78,024 Less: Income offered out of the above by the assesse 60,71,459 Balance 94,06,565 3. According to the AO, the difference between the overdue interest a .....

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ITR 889 (SC) and accepted the fact that as per the aforesaid decision, interest on sticky loans need not be offered to tax. 4. The AO also, referred to the provisions of section 43D which was introduced w.e.f. 1.4.1991. As per provisions of section 43D, income by way of interest in relation to such categories of bad and doubtful debts as are prescribed having regard to guidelines issued by RBI, can be brought to tax only when such income is credited in the P&L account or the year in which it .....

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he AO was therefore of the view that the sum of ₹ 94,06,565 was accrued interest and ought to have been taxed. Accordingly, he brought the same to tax as interest income accrued, but not offered to tax. 5. Before the CIT(Appeals), the assessee gave a detailed branchwise list of borrowers and interest payable by such borrowers and submitted that only a sum of ₹ 60,71,459 as per the said list was interest receivable which had not been accounted in the books of account. The assessee the .....

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ppeal:- 1. Learned CIT(A) failed to appreciate that the assessee is claiming the expenditure on accrual basis and the income on interest on cash basis. 2. Learned CIT(A) ignored the fact that such mixed/hybrid system of accounting is not allowed as per the provisions of sec. 145(1) of the Income Tax Act, 1961. 3. Learned CIT(A) erred in appreciating the fact that the over due interest is not credited to profit and loss account on accrua1 basis, as Contra entry on either sides to balance sheet. T .....

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ed interest which is not credited to the P and L account treating it as double taxation. The CIT(A) has not examined the correctness of this accrued interest arrived at by the assessee. 8. We have considered the rival submissions. In our view, the issue requires a fresh consideration by the AO and therefore the order of the CIT(Appeals) is set aside. The reasons for doing so are that the order of the CIT(A) is not clear as to how the interest receivable which are overdue have been accounted for .....

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n the computation of total income, the assessee had only added a sum of ₹ 60,71,459. The remaining interest income of ₹ 94,06,565 ought to have been accounted as interest income. The explanation of the assessee before the AO was by placing reliance on the decision of UCO Bank (supra). It is thus clear that the claim of the assessee before the AO was that interest accrued not accounted for in its books of account are in relation to sticky loans & advances. The assessee has not fur .....

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do so by credit the P&L account or the year of receipt. The said provisions will not affect any other assessee who is otherwise able to show that the interest income relates to loans which have become doubtful of recovery need not be accounted for as income. We therefore set aside the order of CIT(A) and remand the issue to the AO for fresh consideration and direct the assessee to show before the AO as to how the interest income in question cannot be considered as having accrued or arisen t .....

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xplanation offered and refrained from giving directions to the Assessing Officer not to allow the deductions for creation BAD AND DOUBTFUL RESERVE U/s 36(1) (viia) of Income Tax Act to the extent of 10% of the aggregate average advances made by the RURAL BRANCHES of the appellant bank. 3. The learned Commissioner of Income Tax (Appeals) ought to have appreciated that, the appellant bank is entitled to claim the deduction U/s 36(1) (viia) of Income Tax Act for creation of BAD AND DOUBTFUL RESERVE .....

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ion to bad and doubtful . The real nomenclature ought to have been provision for bad and doubtful debts . The assessee made a claim for such a deduction u/s. 36(1)(viia) of the Act. The relevant provisions of section 36(1)(viia) as substituted by the IT (Amendment) Act, 1986 by the Finance Act, 1985 and as amended from time to time reads as follows:- SECTION 36- OTHER DEDUCTIONS Other deductions.- (1) The deductions provided for in the following clauses shall be allowed in respect of the matters .....

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eduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner; (b) ………. Explanation : For the purposes of this clause- …… (vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to t .....

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the provisions of section 36(1)(viia), the quantum of deduction that has to be allowed is the amount not exceeding 7½% of the total income computed before making deduction u/s. 36(1)(viia) of Chapter VI + the amount not exceeding 10% of the aggregate average advances made by the rural branches of the assessee, computed in the prescribed manner. 14. The assessee had computed the quantum of admissible deduction u/s. 36(1)(viia) at ₹ 1,36,67,562, but nevertheless made a claim for S .....

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licable only to banking sector. According to the AO, assessee cannot be said to be in the banking sector. The AO therefore rejected the claim of assessee for deduction of a sum of ₹ 1.5 crores. Alternatively, the AO also held that in case it is held that assessee is entitled to claim deduction u/s. 36(1)(viia), then the quantum of deduction cannot, in any event, be more than ₹ 1,30,61,552 as per computation given in the order of assessment. It is to be mentioned that no such computat .....

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he order of the CIT(A), the assessee has raised grounds 2 to 4 before the Tribunal. 18. We have heard the rival submissions. The ld. counsel for the assessee brought to our notice the decision relied upon by the CIT(Appeals) was in relation to the assessment year prior to the amendment of the provisions of section 36(1)(viia) by the Finance Act, 2007 w.e.f. 1.4.2007. According to him, as per law as it exists as on the 1st day of the previous year, the assessee was entitled to claim deduction u/s .....

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on 1.4.2007 applicable to A.Y. 2007-08, the assessee which is a cooperative bank was entitled to deduction on account of provision for bad and doubtful debts. The AO as well as CIT(Appeals) have overlooked this aspect. We are, however, of the view that quantum of deduction to be allowed has to be worked out by the AO afresh, after affording opportunity of being heard to the assessee. We may also clarify that the deduction has to be computed in the manner laid down in the provisions and to the ex .....

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Officer, being the Interest on loans received during the year, but pertains to earlier years . 6. The learned Commissioner of Income Tax (Appeals) ought to have appreciated that, the income pertains to earlier years cannot be taxed in the current year under any provisions of Income Tax Act. 7. The learned Commissioner of Income Tax (Appeals) was not justified in contending that, in order to get out of clutches of tax incidence, the appellant has claimed the deduction of ₹ 1,65,96,821/- bei .....

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vant to A.Y. 2007-08, but was not recognized in the books of account on accrual basis. The assessee follows mercantile system of accounting. Therefore the interest income that accrued to the assessee ought to have been included as income of the period prior to the previous year relevant to A.Y. 2007-08. The assessee did not do so, but accounted the interest income on receipt basis. According to the assessee, interest income has to be accounted only on receipt basis, as per the Karnataka Co-opera .....

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2007 provided that provisions of Sec.80P will not apply to a co-operative Bank. The assessee, thus, pointed out that interest income which accrues or arises during the previous year relevant to A.Y. 2007-08 alone can be taxed. Interest income that accrues or arises for the period earlier to previous year relevant to A.Y. 2007-08 cannot be brought to tax, just because the same is recorded in the books of account of previous year relevant to A.Y. 2007-08 on receipt basis. 23. The AO held that inte .....

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also perused the assessment order. A perusal of the statement of computation sheet reveals that a sum of ₹ 60,7l,459/- was added and then deducted of ₹ 1,65,96,812/- stating that interest received during the year but pertains to earlier year . It is not disputed fact that the appellant adopted mercantile system of accounting and following the same years to year. The appellant contended that income pertains to the relevant assessment year should alone to be taxed and not the income p .....

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ent as below:- Y.E. on 31.03.2005 In Rs. Y.E. on 31.03.2006 In Rs. Y,E. on 31.03.2007 In Rs. Interest on loan and Advances 7,74,03,010 8,26,70,388 9,10,13,106 Interest on investment 1,92,46,213 1,98,18,048 1,55,35,868 Aforesaid interest has been received/receivable from loans advances and from investment in Government securities year wise details as under - Loans and Advances 58,34,96,310 64,60,92,353 73,89,62,726 Investment 13,75,32,500 14,10,32,500 25,35,37,500 From the above it indicates that .....

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ins to the financial year relevant to the assessment year 2006-07. 14. The appellant following mercantile system of accounting, shows following facts and figures - Y.E. on 31.03.2005 Y.E. on 31.03.2006 Y,E. on 31.03.2007 Interest receivable on overdue 4,84,08,853 6,61,50,558 8,16,28,582 Interest receivable on investment 34,15,500 34,00,000 - 15. A verification of the return of income for the assessment year 2005-06 and 2006-07 reveals that no adjustments were made on account of interest pertaini .....

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l in this issue thus fails. 25. Aggrieved by the order of CIT(A), the assessee has raised ground Nos. 5 to 8 before the Tribunal. 26. We have heard the rival submissions. The ld. counsel for the assessee submitted that the AO accepted the fact that interest income of ₹ 1,65,96,821 was interest which accrued to the assessee during the period earlier to previous year relevant to A.Y. 2007-08 and was accounted by the assessee in the books of the previous year relevant to A.Y. 2007-08 on recei .....

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ngs of the CIT(A) in para 13 of his order are incorrect and contrary to the findings of the AO. He submitted that there was no basis for the AO to consider that the interest income in question was interest on sticky loans. The other submissions made before the AO were reiterated. 27. The ld. DR relied on the order of the CIT(A). 28. We have given a very careful consideration to the rival submissions. At page 7 of the assessee s paperbook, a copy of the particulars of interest on loans recovered .....

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e in this regard about the nature of interest income and its time of accrual has to be accepted. The conclusions of the CIT(A) in para 13 of his order, in our view, is again based on surmises and cannot be sustained. Neither the AO nor the CIT(A) called upon the Assessee to explain as to whether the interest income in question is interest on sticky loans which was accounted for as income only on receipt basis. As we have already observed, accounting entries in the books of the assessee regarding .....

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s not interest on sticky loans which was accounted for as income only on receipt basis. For the reasons stated above, we set aside the order of the CIT(A) on this issue and remand the issue with regard to taxing the sum of ₹ 1,65,96,812 to the AO for fresh consideration. Ground Nos.5 to 7 are thus allowed for statistical purpose. 29. Ground Nos. 8 to 10 raised by the assessee read as follows:- 8. On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (App .....

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visions of Income Tax Act. 10. Without prejudice the directions given by the Commissioner of Income Tax (Appeals) are arbitrary and unjustified in the eyes of law and the same are liable to be cancelled. 30. At the time of hearing of the appeal, it was noticed from the computation of total income, a copy of which is placed at page 5 of assessee s paperbook and which is enclosed as Annexure-I to this order, that the assessee has started the computation of total income with profit as per P&L a .....

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