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The Solapur District Central Co-operative Bank Ltd. Versus ITO, Ward-2 (4) , Solapur

2016 (7) TMI 308 - ITAT PUNE

Addition on account of interest overdue on NPA - Held that:- Since the Tribunal has already decided the issue in favour the assessee by deleting the disallowance of overdue interest on NPA in A.Yrs. 2008-09 and 2009-10, therefore, following the order of the Tribunal in assessee’s own case in the preceding 2 years and in absence of any contrary material brought to our notice by the Ld. Departmental Representative against the order of the Tribunal, the order of the CIT(A) on this issue is set asid .....

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Shri S.N. Puranik For the Revenue : Shri Narendra Kumar ORDER Per R. K. Panda, AM This appeal filed by the assessee is directed against the order dated 06-06-2014 of the CIT(A)-III, Pune relating to Assessment Year 2010-11. 2. In grounds of appeal No.1 and 2 the assessee has challenged the order of the CIT(A) in confirming the addition of ₹ 8,26,20,529/- made by the AO on account of interest overdue on NPA. 3. Facts of the case, in brief, are that the assessee is a Cooperative society inc .....

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The Ld. Counsel for the assessee at the outset submitted that identical issue has been decided in favour of the assessee by the Tribunal in ITA No.495/PN/2012 order dated 29-09-2014 for A.Y. 2008-09. Following the above decision the Tribunal vide ITA No.1295/PN/2013 order dated 30-12-2014 for A.Y. 2009-10 has deleted such disallowance. Thus the issue is covered in favour of the assessee by the decision of the Tribunal for A.Yrs. 2008-09 and 2009-10. 6. The Ld. Departmental Representative on the .....

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on of ₹ 7,68,22,858, on account of interest on non-performing assets (in short NPAs ). At the time of hearing, it was a common ground between the parties that the facts and circumstances with respect to the said dispute are similar to those considered by the Tribunal in the assessee s own case for the assessment year 2008-09, vide ITA no.495/PN/2012, order dated 29th September 2014. It was also a common point that the rival contentions in the instant year remain the same as were considered .....

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s a co-operative bank carrying on banking business in terms of a license issued by Reserve Bank of India (RBI). Therefore, assessee is governed by the Circulars and Guidelines issued by the RBI, in particular relating to Prudential Norms, Income Recognition, Asset Classification, Provisioning and other related matters. In terms of such Prudential Norms of RBI, assessee asserts that it did not recognize interest income on account of NPAs i.e. the loans/advances to customers which have been classi .....

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case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order dated 31.10.2013 and also other subsequent decisions of the Pune Bench of the Tribunal. Apart therefrom, the Hon ble Bombay High Court in the case of CIT vs. M/s KEC Holdings Limited vide Income Tax Appeal No.221 of 2012 dated 11.06.2014 has also approved the proposition that the interest income on NPAs is not recognizable on accrual basis. The aforesaid matrix is not challenged by the Revenue also. So however, in the present case, .....

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verdue interest and it is not an allowable deduction. 6. In the above background, we have considered the rival stands. The assessee has also furnished an affidavit on oath dated 05.10.2013 enumerating the various factual aspects and in response the Revenue has also furnished its say in terms of written comments dated 18.11.2013 by the Assistant Commissioner of Income Tax, Circle-2, Solapur, the Assessing Officer in this case. Before dwelling on the rival arguments on the objections raised by the .....

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Loss Account for the financial year under consideration, a copy of which is at page 51 of the Paper Book, on the credit side under the heading Interest Received , interest from Society Loan and from Individual Loans have been reflected at ₹ 167,02,91,981/- and ₹ 13,66,79,692/- respectively. It has been explained that the aforesaid interest income credited in the Profit & Loss Account include ₹ 46,30,12,177/- and ₹ 71,73,189/- on account of Society Loans and Individua .....

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erve appears. It has been explained that the term Reserve has been mistakenly used and infact the said amount reflects a contra entry for Interest Receivable on NPAs, which is appearing on the Assets side on the Balance- Sheet under the heading Interest Receivable , with sub-headings On Society Loans and On Individual Loans . 8. Due to the aforesaid depiction in financial statements, the case of the Revenue is that the interest on NPAs have been credited in the Profit & Loss Account and thus .....

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the bank has shown the gross interest on credit side of the Profit & Loss Account and on the debit side of the Profit & Loss Account the amount of interest on NPAs has been separately shown. It is further pointed out that amount on the debit side of the Profit & Loss Account is not appearing as a Provision. Further, even in the Balance-Sheet, it is pointed out that amount of ₹ 82,81,68,339/- on the Liabilities side of the Balance-Sheet does not appear under the head Reserve and .....

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side there appears an entry for ₹ 82,81,68,339.10 styled as Overdue Interest Reserve. The bank submits that the term Reserve is mistakenly used and is erroneous and in fact it is a Contra Entry for Interest Receivable on N.P.A. which is appearing on Asset side of the Balance Sheet under the heading Interest Receivable and sub heading On Society Loans and On Individual Loan. The bank submits that the said amount of ₹ 82,81,68,339.10 is not appearing on Liability side of the Balance Sh .....

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nk would reveal that it has never created any provision or reserve in respect of Overdue Interest on N.P.A. as alleged by the tax authorities. The entries as appearing in the Profit and Loss Account and the Balance Sheet for the F.Y. 2007-08 appear to have created some confusion in the minds of the learned Assessing Officer. It is false and incorrect to say that the bank has created a Reserve/ Provision in respect of the overdue interest on N.P.A. which has been treated as Interest accrued in th .....

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ime of preparation of consolidated Profit and Loss Account and Balance Sheet as on 31/03/2008 [the copies of which are filed before the various tax authorities] solely with a view to make a disclosure of Gross Interest that would have been received by the bank, the interest on N.P.A. is disclosed on credit side of the Profit and Loss Account and a contra entry is made on debit side under the head Interest Paid. This accounting treatment does not by any logic convert the interest on N.P.A. in to .....

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rdue Interest Account [on Liability side] 8. The bank most respectfully submits that the aforesaid factual position was explained by it to the learned Assessing Officer during the assessment proceedings as well as to the learned C.I.T.[A] during the appellate proceedings. However both the authorities have failed to appreciate the facts in the proper perspective. 9. The bank most respectfully submits that entries made while presentation of final accounts to the shareholders for better understandi .....

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ncial statement. It was therefore contended that presentation in the Annual financial statements would not justify the income-tax authorities to treat the claim of the assessee differently than an assessee who would have netted the interest on loans. 11. We have carefully considered the rival submissions. As noted earlier, the crux of the controversy is with regard to assessee s claim that income with respect to the Interest on NPAs classified as per RBI norms is not assessable on accrual basis .....

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. However, with regard to the recognition of income on NPAs, it has applied the RBI guidelines which say that such income is not to be recognized on accrual basis but is to be recognized as income only when it is actually received. The RBI guidelines also prescribe the manner in which the interest in relation to NPAs is to be shown in the Annual financial statements. In terms of the Master Circular on Income Recognition, Asset Classification, Provisioning & Other Related Matters issued by th .....

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to borrowal accounts but shown separately under Interest Receivable Account on the Property and Assets side of the Balance-Sheet and corresponding amount shown under the Overdue Interest Reserve Account on the Capital and Liabilities side of the Balance-Sheet. In-fact, as a preface in para 4.5.3 the RBI has laid down that the aforesaid guideline be adopted notwithstanding the existing provisions in the respective State Co-operative Societies Act. Notably, the Balance- Sheet format prescribed un .....

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that the assessee has not debited the interest on NPAs to the accounts of the respective borrowals but it has been shown separately under Interest Receivable Account on the Property and Assets side of the Balance-Sheet. and corresponding amount has been shown under Overdue Interest Reserve Account on the Capital and Liabilities side of the Balance-Sheet. Thus, the depiction in the Balance-Sheet is in adherence to the prescription contained in the Banking Regulation Act, 1949 (as applicable to C .....

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ugned interest on NPAs under the heading Interest paid and subheadings Overdue Interest from Society Loans and Overdue Interest from Individual Loans . The assessee is a society registered under the Maharashtra Cooperative Societies Act, 1960 and it is also governed by the Maharashtra Cooperative Societies Rules, 1961. Section 65 of the Maharashtra Societies Act, 1960 deals with Ascertainment and appropriation of profits by a society. Subsection (1) of section 65 of the Maharashtra Co-operate So .....

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would suffice to examine Item (i) of the amounts deductible, which reads as under :- (i) all interest accrued and accruing on amounts of overdue loans (except in overdue amounts of loans against fixed deposit, gold, etc. 15. The aforesaid would show that while constructing its Profit & Loss Account to arrive at its net Profit or Loss, a Co-operative Society is required to show interest accrued/accruing on amounts of Overdue Loans separately. This is precisely what has been done by the assess .....

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valuate assessability or otherwise of an income. In our considered opinion, it would inappropriate to be merely guided by a presentation in the annual financial statements to infer assessee s perception that an income had accrued, without considering the entries made in the financial statements in toto. In the present case, it is quite clear that assessee has drawn up its annual financial statement in compliance with the requirements of the statutes under which it functions and/or is incorporate .....

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ctually resulted. In the present case, the crediting of gross interest in the Profit & Loss Account, which includes interest on NPAs cannot be taken as a proof that such income has accrued to the assessee unless the statutory guidelines applicable on the said subject are ignored. Obviously, when the banking institutions following mercantile system accounting are permitted to treat the income on NPAs as assessable on receipt basis, such a position cannot be ignored in the case of present asse .....

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Loss Account, the amount of interest on NPAs. In other words, instead of netting of the interest the two amounts have been shown separately one on the credit side and other on the debit side. The net effect of the said presentation is the same. Therefore, in our view, the lower authorities have misguided themselves in rejecting the claim of the assessee for non-recognition of interest income on NPAs. 16. In view of the aforesaid, we setaside the order of the CIT(A) and direct the Assessing Offi .....

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