TMI Blog2015 (4) TMI 1100X X X X Extracts X X X X X X X X Extracts X X X X ..... required when the assessee earns tax free dividend income on investments which are held as stock in trade of the assessee. - Decided in favour of assessee - ITA No. 358/PN/2014, CO No.11/PN/2015 - - - Dated:- 24-4-2015 - <!--[if gte mso 9]> <![endif]--> Ms. Sushma Chowla, Judicial Member and Shri R.K. Panda, Accountant Member For the Appellant : Shri Sunil Ganoo For the Respondent : Shri Rajesh Damor ORDER PER R.K.PANDA, AM : This appeal filed by the Revenue and CO filed by the assessee are directed against the order dated 09-12-2013 of the CIT(A)-III, Pune relating to Assessment Year 2009-10. For the sake of convenience these were heard together and are being disposed of by this common order. ITA No.358/PN/2014 (By Revenue) : 2. Although a number of grounds have been taken by the Revenue, they all relate to the order of the CIT(A) in deleting the addition of ₹ 2,88,00,000/- made by the AO on account of interest on NPA u/s.43D of the I.T. Act. 3. Facts of the case, in brief, are that the assessee is a Cooperative Society engaged in business of Banking. It filed its return of income on 23-09-2009 declari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions in the balance sheet and it has no effect on the taxability of such income under the I.T. Act. Rejecting the various explanations given by the assessee and following the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd., reported in 320 ITR 577 (SC) the AO held that overdue interest amounting to ₹ 2,88,00,000/- has to be brought to tax. He accordingly made addition of ₹ 2,88,00,000/- to the total income of the assessee. 5. Before CIT(A) it was argued that the interest on NPA quantified at ₹ 2,88,00,000/- was not debited to the profit and loss account as observed by the AO but was shown as a contra entry on the liability side against such interest shown as receivable in the asset side of the balance sheet. It was argued that such quantification was made by the assessee pursuant to the mandatory directions of the RBI in order to arrive at the correct amount of profit before distribution of dividend. It was submitted that the conditions prescribed by RBI for the purpose of identification of NPA proves that such accounts have no certainty of recovery of principal amount itself. Therefore, the question of recovery of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Ahmedabad)]. In the case of Karnavati Cooperative Bank Ltd. (supra), the Tribunal has considered the provisions of section 43D and its application to the non-scheduled banks. The reasons given by the Tribunal in the case of Karnavati Cooperative Bank Ltd. (supra) for holding that interest on the sticky advances/NPA advances cannot be brought to tax by following the decision in the case of UCO Bank (supra), which is as under: 15.1. On careful analysis of this section our first observation is that Section 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The words credited and actually received has been highlighted hereinabove while reproducing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n certain Rules and then direct the sub-ordinate authorities, such directions are required to be followed and such Circular would be binding on the Department unless and until held as ultra vires by a court of law. The Board has powers to relax the severity or the strictness of law and the authorities are required to follow those instructions as held in the case of C.B. Gautam vs. Union of India 108 CTR 304 (SC) 110 CTR 179 (SC); Navnitlal C.Zaveri 56 ITR 198(SC) and K.P.Varghese 131 ITR 597 (SC). In the land-mark decision, the Hon'ble Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC) has therefore held, first, that a beneficial circular is not to be treated as inconsistent with the provisions of statute and binding on the authorities. Second, that in respect of interest on sticky advances interest income is to be taxed only when actually received as prescribed by CBDT Circular. However, in the past an interesting turn had taken place by an order of the Hon ble Kerala High Court in the case of State Bank of Travancore reported in 110 ITR 336 (Ker.), wherein it was held that the assessee, a banking company, did not credit in its account the interest th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in subsequent legislation in the same or similar context. To say that the court could not resort to the so-called equitable construction of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation, another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes. We can therefore safely draw a conclusion that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. section 43-D has to be applied in its letter and spirit. It is pertinent to mention that later on, in the case of CIT vs. Bank of America S.A. 262 ITR 504 (Bom) the question of interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of scheduled banks, public financial institutions etc., were not sufficient for recognition of income on cash basis for the purposes of income-tax. The income of such assessees was determined as per circular dated 9-10-1984. Because of this reason, section 43Dwas inserted in the statute. RBI Guidelines in case of NBFC are for the purpose of control and supervision with respect to public interest and viability of the NBFC. The Guidelines never intended for taking the interest income accrued as per section 5 out of the scope of the Act. If the contention of assessee was accepted, it would amount to insertion of 'NBFC' in section 43D, that too by a Guideline issued for different purposes by an authority other than the Parliament In other words, the doctrine of 'Casus Omissus' will deem to have been applied which is contrary to law of land. Unquote. The basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of the Respected Tribunal was that if the contention of the assessee was to be accepted, then it would amount to insertion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n short, the view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted. Now at present the situation is that the Hon'ble Madras High Court in the case of CIT vs. Elgi Finance Ltd. 293 ITR 357 (Mad.) has taken a view that the assessee is a company engaged in the business of lease, finance and hire purchase and that the principle of accrual comes into play without income was recognized and that the assessee had classified its assets on the basis of notification issued by R.B.I. and found that certain assets came under the category of NPA and that from such NPA the assessee had not recognized any income in consonance with the notification issued by RBI and AS-9 issued by ICAI and that the assessee was justified in not recognizing such income. The Court had further expressed that there was no occasion to consider whether the principle of accrual would arise or not, nevertheless, the interest from such NPA would be taxed in the appropriate assessment year on the basis of actual receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was further submitted that since the assessee bank has mixed funds it is not possible to identify source of investments in the captioned securities. It was argued that when the assessee has sufficient own funds as well as borrowed funds then in the absence of evidence that the borrowed funds were utilized for making investments no disallowance of interest u/s.14A can be made. For the above proposition the decision of the Pune Bench of the Tribunal in the case of Mahavir Steel Industries decided on 31-05-2011 and the decision of the Mumbai bench of the Tribunal in the case of ACIT Vs. K. Raheja Corporation Pvt. Ltd., which has been upheld by the Hon ble Bombay High Court on 08-08-2011 were relied upon. 14. As regards the disallowance in respect of administrative and other expenses is concerned it was argued that the dividend income is directly credited to the bank accounts through ECS and the assessee bank does not have to incur any expenditure for earning this tax free income. It was argued that the onus to prove that the assessee had to incur expenditure for earning tax free income shifts upon the department and unless that onus is discharged no disallowance on this account can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO as well as before the CIT(A) that the investments yielding tax free dividend income are the stock in trade of the business of banking carried on by the assessee. Since this fact has not been negated by the revenue authorities, therefore, in view of the decision of the Pune Bench of the Tribunal no disallowance u/s.14A is called for. 18. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). 19. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also gone through the various decisions cited before us. The only dispute in the impugned ground is regarding the disallowance of ₹ 5,21,005/- u/s.14A made by the AO and upheld by the CIT(A). It is the submission of the Ld. Counsel for the assessee that since the investments yielding tax free income are the stock in trade of the business of banking carried on by the assessee, therefore, no disallowance u/s.14A can be made. From the submissions made by the assessee before the AO we find the assessee had categorically stated before the AO that the invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares are retained. It has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside. Accordingly, we pass the following: ORDER i) Appeal is allowed. ii) Impugned orders are hereby set aside. iii) The substantial question of law is answered in favour of the assessee and against the revenue. In view of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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