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DCIT, Circle 30 (1) , New Delhi Versus The Vaish Cooperative Adarsh Bank Ltd.,

2015 (11) TMI 642 - ITAT DELHI

Addition under the head income from NPA (non performing assets)- CIT(A) deleted the addition as the same has not been actually received by the assessee - Held that:- We respectfully take cognizance of the judgment of coordinate bench of Delhi ‘H’ Bench in asessee’s own group cooperative bank case wherein it has been expressly held that as per RBI guidelines, the interest on NPA is not to be recognised and also as per Accounting Standard 9 issued by Institute of Chartered Accountants of India, th .....

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Govt. securities - whether the buy and sale of the Govt. securities is a normal business activity and the premium expenditure is a normal business expenditure - CIT(A) deleted the addition - Held that:- CIT(A) was right in granting relief to the assessee on this issue as to when the assessee cooperative bank is holding government securities till its maturity, the premium paid by the assessee cooperative bank thereon is a necessary expenditure for the purpose of business of the assessee cooperati .....

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t the order of the CIT(A)-XXV, New Delhi dated 19.4.2012 in Appeal No.153/2011-12 for AY 2009-10. 2. The Revenue has raised mainly following two grounds in this appeal:- 1. "On the facts and in circumstances of the case, Ld. CIT(A) XXV, New Delhi has erred in deleting the addition of ₹ 4,04, 15,564/- made by the AO under the head income from NPA (non performing assets) on the grounds that the same has not been actually received by the assessee." 2. "On the facts and in circu .....

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order, impugned order and other relevant orders of Hon ble High Court and Tribunal including paper book of the assessee spread over 100 pages. Ld. DR submitted that the AO was correct in making addition under the head income from non-performing assets (NPA) because circular or any other guidelines issued by RBI cannot override the express provisions of Income Tax Act, 1961 (for short the Act) and are not binding upon the income tax authorities. Secondly, Form No. 3CD of the tax audit report fur .....

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notional interest income which has not been actually received by the assessee and as such it was not taken in the profit and loss account, therefore, in the light of guidelines of RBI dated 28.2.2000 and RBI Circular No. UBD dated 6.6.1995, policy of income recognition has to be objective and based on the record of recovery and hence income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Ld. counsel further pointed ou .....

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ee is a Co-operative Bank and is engaged in banking business and the assessee was claiming deduction u/s 80P(2)(a)(i) up to AY 2006-07 @ 100%. It is submitted that the assessee has claimed the interest income amount of ₹ 4,04,16,564/- as interest income from the NPA (Non-performing assets) but since the loans/principal amounts have become bad the assessee has neither received the loan amount nor the interest income. The assessee has treated the interest amount as "interest receivable& .....

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the order of the AO and it is submitted that the AO is not justified to make the addition as the loan/principal amount has become bad (NPA) and at the same time, the assessee has not received any interest income and as such no real income has accrued to the assessee. It is submitted that in the case of interest on NP As the party account is debited and the interest account is credited in the P&L account and since the interest is actually not received a reverse entry is passed at the year-end .....

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e assessee in the relevant FY. It is also submitted that only the real income of the assessee may be taxed and not the notional income. The assessee also submitted that no interest would be said to have accrued to the assessee on the loans of doubtful recovery and the assessee also relied on various case laws some of which are as under:- (1) CIT Vs Shoorji Vallabhdas & Co, 46 ITR 144 (SC) [1962] (2) CIT Vs Vasisth Chay Vyapar Ltd, 330 ITR 440 (Delhi), 2011 (3) DIT Vs Brahmaputra Capital Fina .....

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the assessee with following observations and conclusion:- 4.3 I have considered the order of the AO and the submissions of the assessee and I find considerable merit in the submission of the assessee that since the assessee has not actually received the income as the loan/principal amount itself has become bad and as such the AO is not justified to treat the notional interest as income of the assessee. A perusal of the case laws cited by the assessee also supports the case of the assessee that .....

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from what had been entered in the books of account. This was not a case of a gift by the assessee to the managed companies of a portion of income which 'had already accrued, but an agreement to receive a lesser remuneration that what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time .....

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e, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Decision of the Bombay High Court in Commissioner of Income-tax v. Shoorji Vallabhdas & Co. [1959] 36 I.T.R. 25 affirmed. Commissioner of Income-tax v. Chamanlal Mangaldas & Co. [1960] 39 I.T.R. 8 (S.C.) followed. 4.4. It has also been held in the case of CIT V .....

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ng the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has materialised, there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is whether the income has really materialised or resulted to the assesse .....

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uch the AO is not justified to make the addition on the basis of notional interest income only and accordingly, the addition made by the AO is deleted. 7. During the argument, ld. Counsel of the assessee submitted various orders and judgments of the Tribunal including judgment of ITAT Delhi Bench H in the case of assessee s cooperative bank in I.T.A. No. 5549/D/12 dated 21.6.13 for Assessment Year 2009-10 in the case of DCIT vs Vaish Cooperative New Bank Ltd. wherein the issue of notional intere .....

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It was further submitted that no interest would be said to have accrued to the assessee as the loans thereof was of doubtful recovery. In this regard, assessee referred to various case laws as under :- (1) CIT Vs. Shoorji Vallabhdas & Co. 46 ITR 144 (SC) [1962] (2) CIT Vs. Vasisth Chay Vyapar Ltd., 330 ITR 440(Delhi),2011, (3) DIT Vs. Brahmaputra Capital Financial Services Ltd, 335 ITR 182 (Delhi), 2011 (4) TRO Vs. Custodian, 293 ITR 369 (Del) (5) Barkha Investment & Trading Co. P.Ltd. V .....

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by the assessee and as such the Assessing Officer is not justified to make the addition on the basis of notional interest income only and accordingly, the addition made by the Assessing Officer was deleted. 7. Against the above order, revenue is in appeal before us. We have heard both the counsels and perused the records. We find that the interest in this case was due on non-performing assets (NPA). As per the RBI guideline in this regard, interest on NPAs is not to be recognized. Accounting sta .....

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issued by the Institute of Chartered Accountant of India. 8. In the light of aforesaid discussion and precedents. We do not find any infirmity in the order of Ld. CIT(A). Accordingly, we uphold the same. In view of above, at the very outset, we may point out that the AO wrongly mentioned that the guidelines of RBI and Circulars are not binding upon the income tax authorities as urban cooperative banks are bound to follow income recognition policy decided by the RBI and when RBI has made it clear .....

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ncome accrued to the assessee merely on the ground that the assessee had been following the mercantile system of accounting. We are unable to agree with the conclusion of the CIT(A) that if no income has materialised in the hands of the assessee as actual accrual of interest from NPA, then there can be no liability to tax on hypothetical income. It is not a hypothetical accrual income based on mercantile system of accounting followed by the assessee that has to be taken into account but the crux .....

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C.3/09.14.000/2009-10 dated 1.7.2009, the income recognition policy from NPA has been set out as follows:- 4.1 Income Recognition - Policy 4.1.1 The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis. 9. It is pertinent to mentio .....

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and income tax authorities have to consider this aspect before making any disallowance or addition in this regard. 10. At this point, we respectfully take cognizance of the judgment of coordinate bench of Delhi H Bench dated 21.6.13 in asessee s own group cooperative bank case (supra) wherein it has been expressly held that as per RBI guidelines, the interest on NPA is not to be recognised and also as per Accounting Standard 9 issued by Institute of Chartered Accountants of India, that income i .....

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T(A) erred in deleting the addition of ₹ 6,20,669/- made by the AO under the head premium expenditure on Govt. securities on the basis of that the buy and sale of the Govt. securities is a normal business activity and the premium expenditure is a normal business expenditure Ld. DR supporting the action of the Assessing Officer submitted that premium paid on government securities was an expenditure being admissible in nature which was not allowable, therefore, the Assessing Officer rightly .....

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iness of the assessee. On behalf of the assessee, it was also submitted that the buying and sale of government securities is a part of normal business activity of the assessee, as such, the premium expenditure or deduction or write off should be allowed. Ld. Counsel vehemently contended that the assessee was granted relief on correct and justified reasons, therefore, impugned order may kindly be upheld. 13. Learned counsel of the assessee also pointed out some orders of the Tribunal including or .....

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e expenditure on account of amortisation of premium held till maturity (HTM) government securities and therefore, the first appellate authority was quite correct in granting relief to the assessee on this issue. Ld. Counsel has also drawn our attention towards chart filed along with written submissions of the assessee dated 27.6.15 which explicitly clarify the details of government securities purchased at premium as on 31.3.2009 amounting to ₹ 6,20,669 wherein amortisation during financial .....

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considering the proposition laid down by ITAT Pune Bench itself in the case of Pune District Central Co. Op. Bank Ltd. vs DCIT (supra) in ITA No. 1796/PN/2013 order dated 28.11.14 relating to AY 2009-10, it has been held that the assessee is entitled to the claim of expenditure on account of amortisation premium held till maturity government securities. The relevant operative part of the order of the Tribunal reads thus:- 8. The assessee is in appeal against the order of the learned CIT(A). The .....

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sue arising in the present appeal is with regard to amortization of premium on HTM securities. The case of the assessee was the Banks were given permission to shift securities from AFS to HTM on or before 31st March 2005. For the purpose, year and valuation of AFS was done and price paid for the HTMs over the face value was amortized for a period of five years and booked as expenditure, as per RBI norms. The case of the Revenue was that the HTM securities were held on capital account and the pre .....

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795/PN/2013 relating to assessment year 2008-09 vide order dated 22.09.2014 wherein, it was held as under:- 2.1 The only issue remains is with regard to disallowance made by the Assessing Officer of ₹ 2,20,68,302/- claimed by the assessee as amortization of premium expenditure for HTM securities by payment of over and above the value of such securities. The learned Authorized Representative has pointed out that this issue is covered in favour of the assessee by order of the Hon ble Bombay .....

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Mr. Suresh Kumar fairly stated that question (C) reproduced above is covered by the said order. In view thereof, we are of the view that even question (C) does not arise any substantial question of law that requires an answer from us. And a similar view has been taken by ITAT, Pune A Bench in the case of Dy.CIT vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. in ITA No.449/PN/2012 and another by observing as under: 10. We have considered the rival arguments made by both the sides, pe .....

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of section 80P(4) w.e.f. A.Y, 2007-08 has closed the doors for cooperative banks for claiming the benefit of deduction u/s.80P(2)(a)(i) from this total income. However, the cooperative society should now be entitled to be assessed as normal banking company. The clause (4) inserted in section 80P has taken away the benefit of the erstwhile deduction available to cooperative society in carrying on business of banking or providing credit facility to its members. The new clause (4) inserted by the .....

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edit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Bank (PCARDB) stand on a special footing and will continue to be exempt under section 80P of the Income Tax Act. However, I propose to exclude all other co-operative banks from the scope of that section". Accordingly, section 80P is to be amended to give effect to the above proposal. It is also proposed to amend section 8 The Satara District Central Co. Op. Bank Ltd. 2(24) to provide that profits and gains of b .....

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ot available to an assessee unless specifically provided under the Act. This is irrespective of accounting treatment provided by the assessee in its books of accounts. But at the same time it was well settled that deduction expressly mentioned under the Act are not exhaustive and profit is to be derived according to ordinary commercial principles. As per the extant RBI guidelines dated 01-07-2009 the investment portfolio of the banks is required to be classified under 3 categories viz., Held the .....

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(2011) TIOL-35- ITAT-Mumbai, has held that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. It has also been held in the case of Catholic Syrian Bank Ltd. Vs. ACIT that amortization on purchase of Government securities was made as per prudential norms of the RBI .....

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gal finding of the CIT(A) needs no interference from our side. We uphold the same. 9. As a result, the appeal filed by the Revenue is dismissed . 10.1 Respectfully following the decision of the Coordinate Bench of the Tribunal and in absence of any contrary material brought to our notice against the above cited decision we find no infirmity in the order of the Ld.CIT(A) deleting the addition. Accordingly, the order of the Ld.CIT(A) is upheld and the grounds raised by the Revenue are dismissed. 2 .....

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mortization of premium in excess of face value securities as HTM, period remaining difference was found reasonable. Accordingly, the disallowance of ₹ 2,20,68,302/- made by the Assessing Officer claimed as amortization of premium expenditure for HTM securities by payment of premium over and above the face value of such securities is directed to be allowed. 11. The Hon ble Bombay High Court in CIT Vs. HDFC Bank (supra) held that the assessee therein was entitled to deduction with respect to .....

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expenditure in the case of assessee. The grounds of appeal No.1 and 2 raised by the assessee are thus, allowed. 10 The Satara District Central Co. Op. Bank Ltd. 11. Following the same parity of reasoning, we hold that the assessee is entitled to the claim of expenditure of ₹ 31,73,359/-, on account of amortization of premium on HTM securities. Thus, the ground of appeal no.1 raised by the assessee is allowed. 15. It is also relevant to note that as per Instruction No. 17/2008 dated 26.11.2 .....

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