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The Commissioner of Income Tax, The Deputy Commissioner of Income Tax Versus The Raddi Sahakara Bank Niyamitha Bank Road, Dharwad

2017 (2) TMI 734 - KARNATAKA HIGH COURT

Addition u/s 41 - Demand Drafts and Pay Orders payable as on the last date of the Financial Year, which were not so far encashed by the concerned customers - Held that:- Addition cannot be made under Section 41(1) of the Act, since the liability of the assessee Bank to pay back the amounts to the customers in respect of such stale Demand Drafts and Pay Orders does not cease in law. See The Commissioner of Income Tax, Asst. Commissioner of Income Tax Versus Karnataka Vikas Grameen Bank [2015 (12) .....

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ort) on 31.12.2013, deleting the addition made in the hands of the petitioner-assessee, which is the Co-operative Bank, under Section 41(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act, for short), to the extent of ₹ 73,58,708/- for A.Y.2007-08. 2. The learned Assessing Authority has made the said addition in the income of the petitioner-assessee on the ground of Demand Drafts and Pay Orders payable as on the last date of the Financial Year, which were not so far encashe .....

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has invoked the provisions of Section 41(1) of the Act to bring the amount of ₹ 73,58,708 received for making drafts and pay orders to tax in the hands of the assessee in the period under consideration. Section 41(1) of the Act, specifically deals with amounts that were allowed as a deduction in the past assessments as trading liabilities which in a later year ceases OR are remitted by the creditors. If and when in a later year there is evidence to show that the liability is remitted, it c .....

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ot bring about a cessation or remission as a remission can only be granted by a creditor and cessation can only occur either by operation of law or the debtor by unequivocally declaring intention not to honour his liability when payment is demanded by the creditor. In the case on hand, taking into account the facts and circumstances involved, we find merit in the arguments put forth by the learned Authorised Representative since the outstandingly liability of ₹ 73,58,708 on account of Dema .....

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377; 73,58,708. 8.5.2 As per the RBI Circular referred to by the assessee it is required to keep the amounts related to such stale drafts / pay orders as a liability in the books of account for ten years after which the amount would be transferred to the RBI. A reading of this Circular would indicate that there is no cessation of liability in favour of the bank at all. For ten years the stale DDs/Pay orders remain as a liability of the concerned persons, in the books of the bank and thereafter i .....

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.3.2007. We, therefore find merit in the arguments put forth by the learned Authorised Representative which is further fortified by the decisions rendered by the co-ordinate bench of this Tribunal in the cases of Canara Bank (ITA No.390/Bang/2011 dt.8.6.2012) and Vijay Bank (ITA No.455/Bang/2011 dt.22.4.2012). Following, the aforesaid decisions of the co- ordinate bench of the Tribunal (supra), we delete this addition of ₹ 73,58,708 made by the Assessing Officer under Section 41(1) of the .....

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n 41(1) of the Act, since the liability of the assessee Bank to pay back the amounts to the customers in respect of such stale Demand Drafts and Pay Orders does not cease in law. The relevant extract from the judgment of the Division Bench of the Court as contained in para 18 thereof including the extract from the decision of the Hon ble Supreme Court is quoted below for ready reference: 18. A careful perusal of the above provision leads us to infer that Section 41(1) can be pressed into service .....

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e dealing with a situation of unclaimed amount, the Hon ble Supreme Court in the case of T.V. Sundaram Iyengar (1996) 222 ITR 344, has held as follows:- 12. We are unable to uphold the decision of the Tribunal. The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constitutents. As it appears from the facts of the case, the amounts were depleted by adjustments made from time to time. The CIT(A) found that the assessee wrote back the amoun .....

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ot; (underlining is by us) 19. The Tribunal adverting to the above ruling has rightly deleted the sum of ₹ 58,38,581/- added by the assessing authority by holding it as unsustainable in law. 5. Having perused the record, we are in respectful agreement with the aforesaid decision of the Division Bench of this Court and we do not find any reason to take a different view of the matter and in view of the aforesaid, we do not find any substantial question of law arising in the present case. 6. .....

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n the case of Commissioner of Income Tax and another Vs. Canfin Homes Ltd., reported in (2012) 347 ITR 382 (Karn), has held that such accrued interest on non-performing assets cannot be brought to tax in the hands of the assessee. The relevant portion of the judgment of the Division bench of this Court in Commissioner of Income Tax Vs. Shri. Siddeshwar Co- Operative Bank Limited (supra) is also quoted below for ready reference: 5. One other substantial question of law framed is, Whether interest .....

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e adopts the mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realised immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the sam .....

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When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the National Housing Bank, the income from non-performing asset should be recognised only when it is actually received. That is what the Tribunal held in the instant case. Therefore, the contention of the Revenue that in respect of non- performing assets even though it does not yield any income as the assessee has adopted a mercantile system o .....

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ssee would point out that non- performing assets would include the other categories of substandard assets, doubtful assets, loss assets, etc., all of which would come within the purview of non-performing assets. In this regard, he would draw attention to the prudential norms for income recognition, asset classification and provisioning pertaining to advances. Volume I of Tannan s Banking Law and Practice in India , has extracted these prudential norms in line with the international practices and .....

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s to generate income from the bank. A non-performing asset (NPA)is a loan or an advance where; (i) The interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan; (ii) the account remains out of order for a period of more than 90 days as indicated below, in respect of an Overdraft/Cash Credit (OD/CC); (iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted; (iv) the installment of prin .....

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