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DCIT, Circle-1, Pune Versus Vishweshwar Sahakari Bank Ltd. and vice-versa

2015 (4) TMI 1100 - ITAT PUNE

Addition on account of interest on NPA u/s.43D - Held 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. [2003 (3) TMI 84 - BOMBAY High Court] the question of interest on “sticky loans” was decided in favour of the assessee and held that the question is to be answered in favour of the as .....

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cided in favour of assessee

Disallowance u/s 14A - Held that:- No disallowance u/s.14A is 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 - Ms. Sushma Chowla, Judicial Member and Shri R.K. Panda .....

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l 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 declaring total income of ₹ 18,83,42,860/-. During the course of assessment proceedings, the AO observed that the balance sheet of the assessee for the impugned assessment year shows .....

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ve as per balance sheet As at 31-03-2008 Rs.881.04 lacs Add : Interest on NPA loans credited to Reserve and not credited to Profit and Loss Account during F.Y. 2008-09 Rs.288.29 lacs Less : Interest on NPA loans recovered during the year transferred from Reserve and creditedto P& L A/c. Rs.420.66 lacs Closing balance as on 31-03-2009 Rs.748.67 lacs The AO asked the assessee as to why such interest accrued on NPA should not be treated as income since the assessee is following mercantile syste .....

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section 43D. However, the said provision is applicable only in case of a Scheduled Bank or Financial Corporations. Since the assessee is neither a Scheduled Bank nor a Financial Institution, therefore, it was not entitled to such deduction. The further submission of the assessee that such a treatment was required to be given to the NPA interest in view of the RBI instructions which is the Apex controlling body over banks was also not accepted by the AO on the ground that such guidelines were on .....

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e 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 o .....

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011 order dated 31-08-2012 for A.Y. 2007- 08 it was argued that the issue has been decided in favour of the assessee. 6. Based on the arguments advanced by the assessee and relying on the decision of the Pune Bench of the Tribunal in the case of Osmanabad Janata Sahakari Bank Ltd. vide ITA No.795/PN/2011 the Ld.CIT(A) directed the AO to delete the addition made by the AO on account of interest receivable on NPAs on accrual basis for the impugned assessment year. 7. Aggrieved with such order of t .....

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(Supra) while deciding an identical issue has observed as under : 5. We heard the rival submissions of the parties and perused the record. We find that the identical issue has been considered by the ITAT, Visakhapatnam Bench, in the case of DCIT, Vijayawada vs. The Durga Cooperative Urban Bank Ltd., Vijayawada, in ITA.No.511/Vizag/2010 dated 10.03.2011. In the said case also, it was noticed by the Assessing Officer that assessee did not include the interest of ₹ 18,26,306/- on the NPA adva .....

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l view has been taken by the ITAT, Ahmedabad Bench in the case of Karnavati Cooperative Bank Ltd. Vs. Dy.CIT [134 ITD 486 (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 .....

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nt 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 section in question. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is .....

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sions. Once the Statute has categorically made a law in respect of public financial institutions that interest is chargeable to tax either in the year in which credited or actually received, whichever is earlier, then it is compulsory to abide by the said Rule. According to us, no scope is left with the Revenue Authorities to ignore these provisions due to unambiguous use of language in the Section. (ii) Status of assessee for the purpose of application Section 43-D. As far as the status of the .....

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ty of CBDT Circular. Next issue is that whether a Circular having effect of relaxing rigour of law can be treated as inconsistent with the provisions of a statute. In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes has issued a Circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee s taxable income, provided the Income tax Officer .....

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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 .....

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It credited the interest to a separate account known as interest suspense account . On reference, the Hon'ble Court has held that there was an accrual of income liable to income-tax and the assessee was not justified in not crediting the interest income on such stick advances it its accounts. However, later on at the Hon'ble Apex Court while pronouncing the judgment of the said State Bank of Travancore vs. CIT reported in (1986)158 ITR 102(SC), there were Hon'ble three Judges presidi .....

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l of UCO Bank (supra) by the Hon'ble three Judges of the Supreme Court, already discussed by us supra. We, therefore summarize that as of now the law as laid down in UCO Bank is that in terms of CBDT Circular the interest is to be added as income only when actually received or credited in respect of the sticky advances while making assessment for a financial institution. (iv) Interpretation of the language of the statute : We have reproduced verbatim the provisions of section 43-D of the I.T .....

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g as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to whittle down the statutory language which is other-wise unambiguous. 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 Legislatu .....

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e 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 sticky loans was decided in favour of .....

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been vehemently relied upon and this is the basic reason of the elaborate discussion made hereinabove so as to unfold the controversy. In the said decision of the Tribunal, viz. Jt.CIT v/s. India Equipment leasing Ltd. (2008)111 ITD 37 (Chennai), the Respected Co-ordinate Bench has expressed that quote Prior to insertion of section 43D with effect from 1-4-1991, recognition of income was on the basis of circular of 9-101984. It said that for first three years the income may be taken on accrual .....

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only in the year in which the interest is actually received or credited to the profit and loss account. This benefit was extended with effect from 1-4- 2000 in the case of public companies engaged in long-term financing of housing projects approved by National Housing Banks. The Legislature in their wisdom did not extend the same benefit to NBFCs which has been given to scheduled banks, public financial institutions, etc. The provisions of section 43D as stood at relevant time contained an expre .....

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ax. 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 4 .....

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cepted, then it would amount to insertion of NBFC in section 43-D of the I.T.Act. As against that, as far as the assessee is concerned, it is an accepted fact that the assessee is a cooperative bank and not a non-banking financial company and this noteworthy distinction has already been appreciated by us in one of the paragraphs above. There is one more decision of the Hon ble Apex Court which is yet to be mentioned while discussing the arguments raised from the side of the Revenue. A decision i .....

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what will be the legal position of the applicability of Explanation to section 36(1)(vii) of the I.T. Act. For the sake of ready reference, relevant paragraph from the held portion is reproduced below: The income-tax is a tax on real income , i.e., the profits arrived at on commercial principles subject to the provisions of the Act. Therefore, if by the Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of bad debt which is written off, then one has to take .....

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of interest income on sticky loan but in this cited decision the question before he Apex court was about the admissibility of provision made in respect of doubtful debts. ( vi ) Concept of real income approved in the case of banking business: Before us, the theory of real income has also been argued and in support a decision of Hon'ble Court pronounced in the case of CIT vs. Godhra Electricity Co. 225 ITR 746 (SC). In short, the view expressed was that if income does not result at all, there .....

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s 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, .....

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. Moreover, the issue of the taxability of the interest on the sticky losses/advances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Cooperative Urban Bank Ltd., Vijayawada (supra) and Karnavati Cooperative 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. 10. Respectfully following the decision of the Coordin .....

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ondonation petition explaining the reasons for delay. After considering the contents of the affidavit and after hearing both the sides the delay in filing of CO is condoned. 12. In ground No.1 of CO the assessee has challenged the order of the CIT(A) in confirming the disallowance of ₹ 5,21,005/- made by the AO u/s.14A of the I.T. Act. 13. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted that assessee has claimed dividend/exempt income of ͅ .....

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t 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 decide .....

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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 made. Without prejudice to the above and as an alternate submission it was submitted that as on the first day and last day of the previous year the investment in mutual funds was NIL and therefore the computation provisions of Rule 8D fails miserably. Accordingly, it was argued that no disallowan .....

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sessee has taken this ground in the CO. 17. The Ld. Counsel for the assessee at the outset referring to page 10 of the assessment order drew the attention of the Bench where the AO has computed the disallowance under Rule 8D and submitted that such computation is not in accordance with the provisions of Rule 8D. He submitted that the own funds of the assessee are more than the investments made and therefore the assessee need not have to incur any expenditure on account of interest. So far as the .....

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para 29 at page 17 of the order and submitted that the Tribunal following the decision of the Hon ble Karnataka High Court in the case of M/s. CCI Ltd. Vs. JCIT vide ITA No.359/2011 order dated 28-02-2012 has held that in case where the assessee has not retained shares with the intention of earning dividend income and dividend income is incidental to the business of sale of shares, it cannot be said that the expenditure incurred in acquiring the share has to be apportioned to the extent of divi .....

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y 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 investm .....

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decision of the Hon ble Karnataka High Court in the case of Smt. Leena Ramchandran (Supra). However, the AO has not commented upon the above submission of the assessee. Even though such an argument was taken before the CIT(A), however, the Ld.CIT(A) also decided the issue against the assessee. We find the Pune Bench of the Tribunal in the case of Shri Apoorva Patni and other connected appeals (Supra) while deciding an identical issue deleted the disallowance made u/s.14A wherein the assessee was .....

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had also incurred brokerage for arranging such loans. The Assessing Officer held that such expenditure was directly attributable to the earning of dividend income and invoked section 14A of the Act read with Rule 8D of the Incometax Rules, 1962, to disallow the expenditure The Hon ble High court was seized of the following question in the above background: Whether the provisions of section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merel .....

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he benefit of dividend. 63% of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37% of the shares 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 b .....

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ry 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 judgment, it is clear that where no expenditure is canvassed to have been incurred by the assessee in earning dividend income, no notional expenditure .....

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