TMI Blog2013 (12) TMI 1609X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was determined atRs.5,79,79,440 in view of the following disallowances/additions were made to the returned income. i) Interest received on loans relating to earlier years disallowed as inadmissible. ₹ 3,24,32,000. ii) Stale drafts/pay orders : ₹ 73,58,708. 2.2 Aggrieved by the order of assessment for assessment year 2007-08 dt.22.12.2009, the assessee preferred an appeal before the CIT(Appeals), Hubli who disposed off the assessee's appeal by order dt.30.3.2012 deleting the disallowance made by the Assessing Officer at (i) above and upholding the addition made at (ii) above at para 2.1. 3. Aggrieved by the order of the CIT(Appeals), Hubli dt.30.3.2012 for Assessment Year 2007-08, both the assessee and revenue are in appeal before us raising the following grounds : 3.1 ITA No.876/Bang/2012 - Assessee's appeal for Assessment Year 2007-08. 1. On the facts and in the circumstances of the case, the learned CIT (Appeals) erred in passing the order in the manner in which he did. 2. On the facts and in the circumstances of the case, the learned CIT (Appeals) erred in treating the Demand Draft and Pay Orders payable as on the last date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... craves leave to add, alter, amend and delete any of the grounds of appeal. ITA No.890/Bang/2012 - Revenue s appeal for Assessment Year 2007-08. 4. The Grounds raised by Revenue at S.No.1 and 7 are general in nature and therefore no adjudication is called for thereon. 5.1 In the Grounds raised at S.Nos.2 to 6, Revenue has challenged the order of the learned CIT (Appeals) in deleting the disallowance of interest amounting to ₹ 3,24,32,000 claimed by assessee towards interest received during the period under consideration pertaining to earlier years. It is contended by the learned Departmental Representative that the deduction of ₹ 3,24,32,000 is in violation of provisions of section 145 of the Act, as per which any income chargeable under the head Profits and Gains of Business or Profession shall be computed in accordance with either the cash or mercantile system of accounting regularly used by the assessee. In short, the contention of revenue is that the assessee should follow either the cash system of accounting or mercantile system of accounting and it cannot follow a hybrid system of accounting as the assessee in the case on hand is attempting to do. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance of ₹ 3,24,32,000 claimed by assessee towards interest relating to loans of earlier years is correct, the order of the learned CIT (Appeals) ought to be upheld and the ground raised by revenue on this issue be dismissed. 5.3.1 We have heard the rival submissions and perused and carefully considered the material on record. As per the details that emanate from the record, we find that in the course of assessment proceedings, the Assessing Officer observed that in the computation of income filed along with the return of income, the assessee had added an amount of ₹ 2,05,44,000 as interest receivable but deducted a sum of ₹ 3,24,32,000 towards interest received on loans for earlier years. As per the accounting policy followed by the assessee, it accounts only the interest received in its books of account and does not account for interest receivable in its books. According to the Assessing Officer, this method is not correct and he therefore disallowed the deduction of ₹ 3,24,32,000 claimed by the assessee in the computation towards interest received on loans of earlier years. 5.3.2 On appeal, the learned CIT (Appeals) deleted the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench of the Tribunal had an occasion to deal with a similar issue raised by the Revenue in the case of ITO v. Shiva Sahakari Bank Niyamitha (supra). After due consideration of rival submissions and also perusing various case laws, the Hon ble earlier Bench had recorded its findings which are extracted as under: 8. Having heard both the parties and having considered their rival contentions, we find that undisputedly the assessee is in the banking business and is also governed by the banking regulations. Whether the interest accrued on NPA s which are doubtful of being recovered should be recognized as assessee s income on accrual or on receipt basis is the question before us. Let us first consider the applicability of the decisions relied upon by the learned DR. The Hon ble Supreme Court in the case of Southern Technologies Ltd was considering the issue of allowability of provisions of NPA u/s 36(1)(vii) of the Income-tax Act while the case before us is with regard to the accrual of interest on NPA s and recognition of the same on receipt basis and not on accrual basis. Further, the Hon ble Supreme Court, while holding that the RBI directions are only norms and act in a differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not possible to recover the same, then it cannot be said to have been accrued and the said amount cannot be brought to tax. In the instant case, we are concerned with a non-performing asset. As the definition of non-performing asset shows an asset becomes non-performing when it ceases to yield income. Non-performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non-performing asset then the assumption is it is not yielding any revenue. 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 recognized 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 of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. In that view of the matter, the second substantial question framed is answ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee bank under section 41(1) of the Act; (ii) Unclaimed accounts constitute trading receipts as per the decision in the case of Batliboi Co. ;Pvt. Ltd. (supra); (iii) Any amount received by the assessee on account of business regulations shall be treated as income of the previous years in which it ceases to be repayable to the persons from whom it was collected, as decided in the case of TVS Sundaram Iyengar Sons Ltd. (222 ITR 344) (SC). 8.4.1 In support of the Grounds raised, the learned Authorised Representative contended that the case of the assessee is that the above sums amounting to ₹ 73,58,708 do not represent income u/s.41(1) of the Act. It is submitted that for any amount to constitute income u/s.41(1) of the Act it ought to have been treated as an allowance or deduction in an assessment year earlier to the previous year in which it is sought to be treated as income. It is submitted by the learned Authorised Representative that the amounts collected to issue Drafts and Pay Orders are held in trust by the Bank and these amounts have never even been treated as an allowance or deduction. The only income that the bank earns for issue of Dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission from the RBI to do so. The Assessing Officer in that case treated the above amount as income of the bank. The Tribunal, in that case also, after duly considering the decision of the Hon'ble Apex Court in the case of TV Sundaram Iyengar Sons (supra) held, at paragraph 12 of its order as under : 12. In the present case the assessee never wanted the amount to be treated as its income by credit to the profit and loss account. It was only because of RBI s direction the amount was credited to the profit and loss account. The RBI s directions are also clear that the assessee should not use the amount transferred to General Reserve for any purpose other than meeting any future claims by the persons entitled to claim the aforesaid amount. The amount was also not available for distribution of dividend. In the light of the aforesaid facts and circumstances prevailing in the case of the assessee, we are of the view that the decision of the Hon'ble Supreme Court in the case of TV Sundaram Iyengar and Sons (supra) will not be applicable to the facts of the present case. The learned Authorised Representative strongly contends that the case of the assessee in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter, we find that the authorities below have failed to establish the primary requisite for invoking the provisions of section 41(1) of the Act and hold that the provisions of section 41(1) of the Act would not be attracted in the case on hand in respect of the outstanding liability of ₹ 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 it gets transferred to the RBI. In these circumstances, the liability would not become the income of the assessee bank. 8.5.3 In the case on hand, the fact that the assessee has not credited the amount of ₹ 73,58,708 received for making of Drafts and Pay Orders to its profit and loss account in the period under consideration, is not in dispute. In fact, the said amount admittedly appeared as an o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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