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Shri Mahalaxmi Co-op Bank Ltd. Versus The Asst. Commissioner of Income Tax, Circle – 1, Kolhapur

2016 (3) TMI 871 - ITAT PUNE

Deduction claimed on account of provision made in the books of account for bad and doubtful debts u/s 36 - Held that:- The assessee was engaged in the business of banking and in terms of section 36(1)(viia) of the Act, was entitled to claim the deduction in respect of provision made for bad and doubtful debts, on account of aggregate average advances made by the rural branches of the assessee bank. Section 36(1)(viia) of the Act provides that such deduction shall not exceed 7.5% of the total inc .....

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, the assessee’s claim was restricted to ₹ 56 lakhs and the balance was disallowed. The issue arising before us is identical to the issue before the Tribunal in assessment year 2009-10 and following the same parity of reasoning, we dismiss the ground of appeal No.1 raised by the assessee.

Deduction claimed on account of amortization of premium in respect of HTM investments - Held that:- The assessee is entitled to the claim of deduction on account of amortization of premium paid .....

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isallowance of loss on account of sale of Available for Sale (AFS) securities - Held that:- Loss arising on account of sale of AFS securities as per directions of the RBI is allowable in the hands of assessee.r. The perusal of assessment order reflects that while computing the assessed income in the hands of assessee, the Assessing Officer had disallowed the provision debited to Profit & Loss Account of ₹ 49,99,457/- which comprises of provision of ₹ 41,70,140/-. In view of our order .....

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lowable. Where the assessee is following the mercantile system of accounting, the expenditure relatable to the year under consideration though not paid is to be allowed in the hands of assessee. Further, the provisions of section 43B of the Act are not attracted in respect of such payments to the State authorities. Accordingly, we direct the Assessing Officer to allow the contribution - Decided in favour of assessee.

Deduction under section 36(1)(viii) - Held that:- The assessee had f .....

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: Shri S.N. Doshi For The Respondent : Shri Dheeraj Kumar Jain ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of CIT(A), Kolhapur, dated 27.03.2014 relating to assessment year 2011-12 against order passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised the following grounds of appeal:- 1. The learned CIT(Appeals) erred on facts and in law in restricting the deduction to the extent of amount of provision made in .....

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cts and in the circumstances of the case the learned CIT(Appeals) has erred in not allowing the deduction claimed on amortization of premium amounting to ₹ 28,40,605/- in respect of HTM Investments by ignoring CBDT s Instruction and various covered decisions of jurisdictional Tribunal. 3. The learned CIT(Appeals) erred on facts and law by adding amount of ₹ 53.47,812/- on account of interest on NPA accounts which is not recognized as income. Treatment of interest has been correctly m .....

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CBDT's Circular No. 665 and decision of Supreme Court on this issue. 5. On the facts and in the circumstances of the case the learned CIT(Appeals) has erred in disallowing the contribution made towards the Education Fund of ₹ 30,000/- made as per Sec 65 of Maharashtra Co-operative Society Act, 1960. 6. On the facts and in the circumstances of the case the learned CIT(Appeals) has erred in disallowing the deduction of ₹ 96,063/- included in total claim of ₹ 7,07,269/- claime .....

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Tribunal in assessee s own case in ITA No. 162/PN/2013, relating to assessment year 2009-10, order dated 16.04.2014. 5. On perusal of record, we find that the issue arising in the present appeal is with regard to restriction of deduction claimed by the assessee under section 36(1)(viia) of the Act to the actual amount of provision made in the books of account for bad and doubtful debts amounting to ₹ 56 lakhs as against, the assessee claimed deduction of ₹ 1,95,01,379/-. The Tribuna .....

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the business of banking and in terms of section 36(1)(viia) of the Act, it is entitled to claim a deduction in respect of any Provision for bad and doubtful debts made on account of aggregate average advances made by the rural branches of the assessee bank. Section 36(1)(viia) of the Act provides that such deduction shall not exceed 7.5% of the total income (computed before making any deduction under this clause and Chapter VI-A of the Act) and an amount not exceeding 10% of the aggregate averag .....

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r the said reason assessee s claim for deduction u/s 36(1)(viia) of the Act was restricted the extent of Provision for bad and doubtful debts made in the account books i.e. ₹ 66,22,634/- and the balance of ₹ 1,04,17,894/- was disallowed. The aforesaid controversy is before us. In the immediately preceding assessment year of 2008-09 also the Revenue had denied the claim of the assessee u/s 36(1)(viia) of the Act by restricting it to the extent of the Provision for bad and doubtful deb .....

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We have also anxiously perused the authorities cited at Bar in order to determine the controversy on hand. The relevant portion of Section 36(1)(viia) of the Act, as applicable for the assessment year under consideration i.e. A.Y. 2008-09 reads as under : - [(viia) [in respect of any provision for bad and doubtful debts made by- (a) a scheduled bank [not being [* * *] a bank incorporated by or under the laws of a country outside India] or a nonscheduled bank [or a co-operative bank other than a .....

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is in respect of any provision for bad and doubtful debts made by…….. an eligible assessee. The presence of the aforesaid expression in the section supports the plea of the Revenue, which is to the effect that the deduction allowable under Section 36(1)(viia) of the Act is in respect of the provision made by the assessee. In our considered opinion, the judgement of the Hon ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra) clearly covers the controvers .....

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dvances made by rural branches of the bank, whichever was higher. On account of the amended provisions, assessee filed a revised return of income on 24.04.1986 enhancing the claim for deduction from ₹ 1,90,36,000/- to ₹ 1,94,21,000/-. The Assessing Officer restricted the deduction under Section 36(1)(viia) of the Act to ₹ 1,90,36,000/- only and disallowed the balance on the ground that in the books of account pertaining to the relevant assessment year, assessee had made a Provi .....

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ll by making an adequate Provision in the Balance-Sheet of the subsequent assessment year. On this basis, it was sought to be made out that there was substantial compliance with the requirement of law of making Provision for bad and doubtful debts and therefore assessee justified the claim of deduction for the complete amount of ₹ 1,94,21,000/- and not restricted to ₹ 1,90,36,000/-. The CIT(A) as well as the Tribunal negated the plea of the assessee and accordingly, the matter was ca .....

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na High Court, in our view, the position sought to be canvassed by the assessee deserves to be repelled. We reproduce hereinafter the relevant portion of the order of the Hon ble High Court, which reads as under :- 5. Sec.36(1)(viia) of the Act as applicable to the asst. yr. 1985- 86, reads as under : in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of cl.(viiia) or a bank incorporated by or unde .....

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fore, making of a provision for bad and doubtful debts equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to cl.(vii) of s.36(1) of the Act, which reads as under : Provided that in the case of an assessee to which cl.(viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof ex .....

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reserve in the account books before the completion of the assessment. It has been correctly pointed out that in all those cases, reserves/provisions had been made in the books of account of the same assessment year and not of the subsequent assessment year. 8. In the present case, the assessee has not made any provision in the books of account for the assessment year under consideration, i.e., 1985-86, by making supplementary entries and by revising its balance sheet. The provision has been made .....

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this Court. 11. In view of the aforesaid interpretation of Section 36(1)(viia) of the Act by the Hon ble Punjab & Haryana High Court, the orders of the lower authorities deserve to be upheld inasmuch as the assessee has not made a Provision for bad and doubtful debts in the books of account equal to the amount of deduction sought to be claimed under Section 36(1)(viia) of the Act, and therefore, in our view, the lower authorities were justified in restricting the deduction to ₹ 50,00, .....

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case of State Bank of Patiala (supra), which is contrary to the decisions of the Tribunal relied upon by the assessee; and being solitary judgement of a High Court, is required to be applied, having regard to the established norms of judicial discipline. For the said reason, we refrain from discussing each of the decisions of the Tribunal relied by the assessee before us. 13. The other plea of the assessee was that the contents of the CBDT Circular dated 26.11.2008 (supra) is contrary to the pr .....

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36(1)(viia), whichever is less. is in line with the interpretation of the section rendered by the Hon ble Punjab & Haryana High Court and cannot be said to be contrary to the provisions of the Act. Therefore, the reliance placed by the lower authorities on the CBDT Circular dated 26.11.2008 (supra) cannot be faulted. 14. Before parting, we may refer to the decision of the Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) relied upon by the assessee and also the decision .....

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bad and doubtful debts equal to the amount mentioned in Section 36(1)(viia) of the Act is must for claiming such deduction. Therefore, the judgement of the Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) does not help the assessee in the present controversy before us. Further, even in the case of Jaysingpur Udgaon Sahakari Bank Ltd. (supra), the Tribunal has merely set-aside the matter for adjudication afresh back to the file of the Assessing Officer and it does not conta .....

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ised by the assessee is liable to be dismissed. We hold so. 6. The issue arising before us is similar that where the assessee was engaged in the business of banking and in terms of section 36(1)(viia) of the Act, was entitled to claim the deduction in respect of provision made for bad and doubtful debts, on account of aggregate average advances made by the rural branches of the assessee bank. Section 36(1)(viia) of the Act provides that such deduction shall not exceed 7.5% of the total income i. .....

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assessee s claim was restricted to ₹ 56 lakhs and the balance was disallowed. The issue arising before us is identical to the issue before the Tribunal in assessment year 2009-10 and following the same parity of reasoning, we dismiss the ground of appeal No.1 raised by the assessee. 7. The issue in ground of appeal No.2 raised by the assessee is with regard to deduction claimed on account of amortization of premium amounting to ₹ 28,40,605/- in respect of HTM investments. 8. The lear .....

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ore the CIT(A) assessee raised an Additional Ground which was hitherto not before the Assessing Officer, to the effect that it was liable to claim deduction of ₹ 51,95,263/- on account of amortization of premium paid on Government Securities in the category of investments Held to Maturity (i.e. HTM). The said premium represented the excess of acquisition cost over the face value of the securities and the claim of the assessee was that the same was to be amortized over the remaining period .....

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as the action of the CIT(A) in admitting the Additional Ground raised by the assessee on the impugned issue is concerned, the same is not challenged by the Revenue, as is evident from the Grounds of Appeal Nos.3 & 4 raised by the Revenue before us, which read as under :- 3. Whether on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in allowing amortization of premium paid on Government Securities by the assessee of ₹ 51,95,263/-. 4. Whether on the facts .....

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im is concerned, it was a common point between the parties before us that similar issue has been decided in favour of the assessee by Mumbai Bench of the Tribunal in the case of DCIT vs. Bank of Rajasthan Ltd. vide ITA No.3238/Mum/2011 order dated 09.09.2011 and also the Bangalore Bench of the Tribunal in the case of Sri Subramanyeswara Cooperative Bank Ltd. vs. ACIT vide ITA No.488/Bang/2011 order d ated 06.06.2012. No decision to the contrary has been brought out by the learned Departmental Re .....

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, however, was disallowed by the Assessing Officer holding that the expenditure incurred on premium paid for securities held under HTM category was a capital expenditure not allowable as deduction. He held that the said securities were in the nature of investment and not stock in trade. On appeal, the learned CIT(Appeals) deleted the disallowance made by the AO on this issue. Besides relying on his own order in assessee's own case on a similar issue for the earlier year, the learned CIT(Appe .....

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ld that the claim of the assessee thus was as per RBI guidelines and CBDT Instruction which clarified that premium amortized over the period remaining to maturity was liable to be allowed as deduction. 10. At the time of hearing before us, the learned representatives of both the sides have agreed that this issue is also squarely covered in favour of the assessee by the various orders of the Tribunal passed in assessee's own case for earlier years. Copies of the said orders are placed on reco .....

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ssessee's own case for earlier years, we uphold the impugned order of the learned CIT(Appeals) giving relief to the assessee on this issue and dismiss ground No. 3 of the Revenue's appeal. 17. Following the aforesaid precedent we find that the CIT(A) made no mistake in allowing the claim of the assessee for deduction of ₹ 51,95,263/- representing amortization of premium paid on Government Securities under the HTM category. Thus on this Ground also, Revenue fails. 10. Further, the H .....

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, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT(Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT(Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr Mistry, the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgmen .....

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de by the Assessee in M/s Reliance Gas Ltd. and M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed ₹ 43.62 crores by way of issue of debentures and the said amount was utilized as capital expenditure and inter-corporate deposit. It was the Assessee s submission that no part of the interest bearing funds (viz. Issu .....

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e investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appea .....

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High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact .....

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ning of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presum .....

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tual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, ar .....

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International Banking Corporation v/s Commissioner of Income Tax, reported in (2002) 258 ITR 601. On going through the said judgment, we find that question (B) reproduced above and projected as substantial by Mr Suresh Kumar is squarely answered by the judgment of this Court in the case of American Express International Banking Corporation (supra). In view thereof, we do not find that even question (B) gives rise to any substantial question of law that needs to be answered by this Court. 7. As f .....

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on of law that requires an answer from us. 11. Following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction on account of amortization of premium paid on Government securities held in HTM category. Reversing the order of CIT(A), we allow the ground of appeal No.2 raised by the assessee. 12. The issue in ground of appeal No.3 raised by the assessee is in relation to the treatment of interest income arising on Non-Performing Assets (NPAs). 13. Briefly, in .....

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to be offered to tax. However, the Assessing Officer was of the view that where the assessee was following mercantile system of accounting, the interest accrued on NPAs is to be added in the hands of assessee and addition to that extent was made in the hands of assessee. 14. The CIT(A) upheld the order of Assessing Officer, against which the assessee is in appeal. 15. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the present appeal is s .....

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e assessee is a Co-operative Bank engaged in the business of accepting deposits from members and giving loans to members. It has filed its return of income on 11.09.2009 for the year under consideration declaring total income at ₹ 14,57,840/-. In the scrutiny assessment, the Assessing Officer noticed that the assessee had not credited interest receivable or accrued on non-performing assets (hereinafter referred to as NPA) to its profit and loss account for financial year 2008-09. The Asses .....

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tely the Assessing Officer taxed on accrued interest of ₹ 25,20,022/- advance claimed to be NPA account. The matter was carried before the first appellate authority wherein, following the Osmanabad Janta Sahakari Bank Ltd. in ITA No.795/PN/2011, the CIT(A) has decided the issue in favour of the assessee and the same has been opposed before us on behalf of revenue. 2.1 After going through the rival submissions and material on record, we find that in Osmanabad Janta Sahakari Bank Ltd. (supra .....

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tive Bank Ltd. (supra). We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue s ground is dismissed. The above decision has been followed in (i) ACIT, Circle -3, Nanded V/s Bhagyalaxmi Mahila Sahakar Bank Ltd. ITA No.793/PN/2011, (ii) ACIT, Circle -3 V/s Sidheshwar Sahakari Bank Ltd. ITA No.794/PN/2011, (iii) ACIT (Central) V/s Latur Urban Co-operative Bank Ltd. ITA No.792/PN/2011 and (iv) Asst. CIT, Circle-1 V/ .....

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at the interest accrued on NPAs is not taxable in the hands of assessee, in view of the guidelines issued by the RBI. 18. Following the same parity of reasoning, we hold that no addition is warranted on account of interest accrued on NPAs. Accordingly, we reverse the order of CIT(A) in this regard. The ground of appeal No.3 raised by the assessee is thus, allowed. 19. The issue in ground of appeal No.4 is against disallowance of loss of ₹ 41,70,140/- on account of sale of Available for Sal .....

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its Profit & Loss Account towards Investment Depreciation Reserve (IDR), which consisted of amount on account of IIBI Bonds of ₹ 1,27,50,000/- and for other at ₹ 2,51,542/-. However, before filing the return of income, IIBI Bonds were disposed of by the assessee for ₹ 85,20,000/- resulting into the loss of ₹ 42,30,000/-. The other AFS securities had depreciated fully i.e. ₹ 2,51,542/- and hence, loss on AFS securities was worked out at ₹ 44,81,542/-. Anot .....

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377; 41,70,140/-, but no such disallowance was made by the Assessing Officer in the assessment order. The CIT(A) also observed that the return of income of the assessee for ₹ 1.70 crores and the Assessing Officer made addition of ₹ 3.27 crores on account of provision debited to Profit & Loss Account, amortization of premium on HTM securities, excess provision for BDDR and accrued interest on NPAs and also disallowance of deduction under section 36(1)(viii) of the Act, hence, the .....

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n Reserve, against which, it had claimed the deduction in the computation of total income on account of net loss of ₹ 41,70,140/-, an error had crept in the order of CIT(A). It was further pointed out by the learned Authorized Representative for the assessee that the issue in the present appeal is squarely covered by the order of Tribunal in Kallapanna Awade Ichalkaranji Janata Sah. Bank Ltd. Vs. DCIT in ITA Nos.1765 & 1766/PN/2013, relating to assessment years 2007-08 & 2010-11, o .....

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record. The issue raised by the assessee vide ground of appeal No.4 is against the disallowance of loss on sale of AFS securities i.e. Available For Sale securities. The case of the assessee before us was that it had made investment in IIBI Bonds totaling ₹ 1,27,50,000/-. As per Statutory Inspection Report of RBI, dated 15.03.2011, the RBI directed the assessee bank to write off its cost of investment in IIBI Bonds since the said investment was found to be not safe. The assessee for the ye .....

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tent of ₹ 2,51,542/-, hence, the loss on AFS securities worked out to ₹ 44,81,542/-, against which the interest of ₹ 3,11,403/-, which was not credited by the assessee to its Profit & Loss Account, was set off and the net loss of ₹ 41,70,140/- was claimed by the assessee in the computation of total income. 25. The first issue arising before us is whether the said loss on AFS securities is allowable in the hands of assessee. The said addition has been made in the hands .....

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AFS securities as per directions of the RBI is allowable in the hands of assessee. 26. The second aspect of the issue raised before us is the observation of CIT(A) that no such addition has been made by the Assessing Officer. The perusal of assessment order reflects that while computing the assessed income in the hands of assessee, the Assessing Officer had disallowed the provision debited to Profit & Loss Account of ₹ 49,99,457/- which comprises of provision of ₹ 41,70,140/-. In .....

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to contribute to the aforesaid Education Fund of the State Government and the same is allowable as deduction. However, the Assessing Officer denied the said claim of the assessee as the assessee had made a provision and had not paid the said amount. The CIT(A) confirmed the order of Assessing Officer and observed that there is no merit in the claim of the assessee since the provisions of section 43B of the Act are attracted. 29. The learned Authorized Representative for the assessee pointed out .....

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on made by the assessee as business expenditure, which was by virtue of section 68 of the Maharashtra Co-operative Societies Act. The assessee before us was cooperative society and had made the contribution of ₹ 30,000/- to the Education Fund of the State Federal Society in line with the requirement of section 68 of the Maharashtra Co-operative Societies Act. The said claim of the assessee was rejected by the Assessing Officer since the payment was made in the succeeding year i.e. after cl .....

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Krishna Sahakari Sakhar Karkhana Ltd. Vs. CIT (supra), wherein similar expenditure claimed by the assessee was held as allowable. Where the assessee is following the mercantile system of accounting, the expenditure relatable to the year under consideration though not paid is to be allowed in the hands of assessee. Further, the provisions of section 43B of the Act are not attracted in respect of such payments to the State authorities. Accordingly, we direct the Assessing Officer to allow the cont .....

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- Trib.). 34. The issue arising in the present appeal is in relation to the claim of deduction of ₹ 96,063/- under section 36(1)(viii) of the Act. The assessee had failed to create a special reserve in its books of account out of eligible profits of the year and in view thereof, the assessee was not entitled to the claim of benefit of deduction under section 36(1)(viii) of the Act in view of the ratio laid down by the Pune Bench of Tribunal in Shree Sharada Sahakari Bank Ltd. Vs. ITO (sup .....

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in the case of State Bank of Patiala vs. CIT (supra) which, in turn, has been applied by the Pune Bench of the Tribunal in the case of Shri Mahalaxmi Coop. Bank Ltd. vs. ITO (supra). In the absence of any reserve being created the assessee is not entitled to the said claim of deduction under section 36(1)(viii) of the Act. The second aspect of the issue is the plea of the assessee that it should be allowed an opportunity to create the said reserve in its books of account now. From the plain rea .....

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