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2017 (6) TMI 822 - ITAT HYDERABAD

2017 (6) TMI 822 - ITAT HYDERABAD - TMI - Deduction u/s 36(1)(viia) - Held that:- Assessee has claimed 36(1)(viia) deduction @ 10% on rural advances in its computation of income and carried forward the loss from business. We find that information of provision for bad and doubtful debts are not placed on record before us. Therefore, it is appropriate to remit the matter back to the file of AO with a direction to find out whether assessee has created any provision for bad and doubtful debts and if .....

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idend payable - Held that:- We are in agreement with the ld. AR that dividend is appropriation of profit after subjected to tax and it is not a charge on P&L A/c. Therefore, the above outstanding liability cannot be treated as income of the assessee. Accordingly, we uphold the decision of the CIT(A) and dismiss the ground raised by the revenue in all the AYs under consideration. - Disallowance not obtained the license from the RBI to run the bank as per the provision of section 22 of the Ban .....

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nue : Shri K.J. Rao For The Assessee : Shri S. Rama Rao ORDER PER S. RIFAUR RAHMAN, A.M.: These three appeals are preferred by revenue against orders of CIT(A) - V, Hyderabad, all dated, 28/01/2013 for AYs 2007-08 to 2009-10. As identical issues are involved, these appeals were clubbed and heard together, therefore a common order is passed for the sake of convenience. 2. To dispose of these appeals, we refer to the facts from AY 2007-08. 3. Briefly the facts of the case are that the assessee is .....

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sessee withdrew the deduction u/s 80P and admitted loss of ₹ 12,97,11,438/-. During the course of reassessment proceedings, AO noticed that there were some deficiencies and discrepancies in the books of account maintained. The case was subjected to special audit u/s 142(2A) by the AO. Based on the special audit findings, assessment was completed determining the income at ₹ 8,97,31,422. 4. Aggrieved with the above order, assessee preferred an appeal before the CIT(A). Based on the sub .....

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y, running business of banking and has not obtained any licence from RBI. He noted that assessee has claimed an amount of ₹ 14,61,92,529/- as deduction u/s 36(1)(viia) towards bad and doubtful debts in the computation of income, i.e., 10% rural advances. With regard to the discussions on necessity to have a licence from RBI to run a banking business, AO opined that assessee is a cooperative society and carrying on banking business and registered under AP State Cooperative Societies Act, 19 .....

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hat they have been in the banking business on the date of commencement of the Banking Regulation Act and as per the stipulations therein, they had applied for a license to continue their banking business. However, the Reserve Bank neither granted any license nor rejected their plea as per the provisions mentioned above. The appellant further contended that their banking functions are being monitored by the Reserve Bank of India and statutory inspections, Audit by the NABARD under section 35 of t .....

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in accordance with the regulations framed by the RBI and granting of license from 20.04.2010 has nothing to do away with the business of the appellant, being carried out from the year 1917. Further, the appellant also quoted the provisions of section 36(1)(viia) and claimed that the benefit of the provision of section 36(1)(viia) is to all cooperative banks and no condition set out about the license issued by the RBI. 9. Considering the submissions of the assessee, CIT(A) has allowed the ground .....

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powers under the respective Co-operative Societies Act of the States in regard to incorporation, registration, management, amalgamation, reconstruction or liquidation. The banking related functions, such as issue of license to start new banks / branches, matters relating to interest rates, loan policies, investments, prudential exposure norms etc. are regulated and supervised by the Reserve Bank of India under the provisions of the Banking Regulation Act, 1949(AACS). According to part V Banking .....

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rically mention that the cooperative societies are governed by the said laws. It is also mentioned in clause (a) of the said section 56 with reference to a banking company as under: The provisions of this Act, as in force from the time being, shall apply to, or in relation to cooperative society as they apply to, or in relation to banking companies subject to the following modifications namely: a) Throughout this Act, unless the context otherwise requires I) references to a 'banking company& .....

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o a cooperative society as they apply to a banking company. Therefore, the provisions of the Banking Regulation Act apply to the assessee society. Even as per the Marathe Committee report on licensing of new Urban Co-operative Banks, 1992. once an application is made, the society can carry on the banking business till such time, the said application for recognition has been rejected by the appropriate authority. In the case on hand, the appellant did not receive any communication from the Reserv .....

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operative society carrying on business as a cooperative bank at the commencement of the Banking Laws Act 1965 (23 of 1965) or a cooperative bank which has come into existence as a result of the division of any other cooperative societies carrying on business as a cooperative bank, or the amalgamation of two or more cooperative societies carrying on banking business at the time commencement of the banking laws (applicable to cooperative societies ) Act, 1965 or at any time thereafter; or a primar .....

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ng. Therefore, the assessing officer is not justified in mentioning that without license the appellant cannot carryon business of banking. 5.9 The claim of the appellant that they are following the norms stipulated by the RBI in running their banking activities is also evidenced from the letter of the RBI, dated 02.09.2005 to the appellant bank. The deposits required under sub-section (2) of Section 11 of the Banking Regulation Act 1949 to be made with the Reserve Bank by a banking company are S .....

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submitted to RBI. As the appellant is furnishing the required Returns to RBI, the RBI referred to the provisions of section 24 of Banking Regulation Act, 1949 (AACS) and warned about the default committed by the appellant on the maintenance of SLRs. 5.10 With this discussion, it is clear that the appellant established before commencement of the Banking Regulation Act, 1949 has been engaged in the 'activity of banking and is following the norms prescribed for cooperative banks. The grant of l .....

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owability of deduction claimed u/s 36(1)(viia) by the appellant. In the return of income, the appellant claimed ₹ 4,24,65,201/- as deduction u/s 36(1)(viia) towards provisions for bad and doubtful debts. The Assessing Officer following her observation that the appellant is a cooperative society and had not obtained a license to be treated as a cooperative bank, disallowed the claim made u/s 36(1)(viia). However, once the appellant is treated as a cooperative bank, there is no point of disa .....

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puted before making any deduction under this clause and Chapter VIA) and an amount not exceeding [ten] percent of the aggregate average advances made by the rural branches of such bank computed In the prescribed manner. 6.1 Therefore, the AO is directed to allow the claim of 36(1)(viia) made at ₹ 4,24,65,201/- to the appellant and accordingly the ground No. 2 is allowed in favour of the appellant. 10. Aggrieved with the above order, revenue is in appeal before us. 11. Ld. DR submitted that .....

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rdinate bench of ITAT, Hyderabad bench in the case of ACIT Vs. M/s Andhra Pradesh Grameena Vikas Bank in ITA No. 610/Hyd/2013 for AY 2009-10, order dated 12/08/2015. 12. Ld. AR submitted that assessee has made an additional ground of appeal before the CIT(A) to claim deduction u/s 36(1)(viia) and also made written submission, which is placed on record at pages 181 to 188 of the paper book. He further submitted that in this AY since there is no profit earned by the assessee, assessee has not clai .....

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ligible to claim deduction u/s 36(1)(viia). He relied on the decision of coordinate bench of ITAT, Hyderabad in the case of M/sAP Grameena Vikas Bank, Warangal in ITA Nos. 715 & 1293/Hyd/2015 and ITA No. 752/Hyd/2015 for AYs 2011-12 and 2012- 13 vide order dated 27/01/2017 (where one of the Member is signatories). 13. Considered the rival submissions and perused the material facts on record. It is noted from the record that AO has denied deduction u/s 36(1)(viia) observing that assessee is a .....

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ntil 06/12/2010, considering the fact that RBI has issued licence to assessee subsequently it has continued to be considered as coop. Society in Banking business. To claim deduction u/s 36(1)(viia), as per the provisions, assessee has to create provision for bad and doubtful debts in its books of account, even though, it is eligible to claim deduction u/s 36(1)(viia), which was upheld by various high courts and in particular, coordinate bench of this Tribunal. AR submitted that since assessee ha .....

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and doubtful debts and if so, following the judicial pronouncements, he is directed to allow deduction u/s 36(1)(viia) to the extent assessee has created provision for bad and doubtful debts in its books of account. Accordingly, grounds are allowed for statistical purposes. 13.1 Appeal in subsequent AYs 2008-09 and 2009-10, for AY 2008- 09 issues are materially identical and in AY 2009-10 assessee has earned profit in this AY. Therefore, the grounds raised in these AYS are allowed for statistic .....

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ing that income recognition should be based on record of recovery and therefore unrealized income should not be taken to P&L A/c. However, in certain cases, where the State Cooperative Act/Rules/Audit Manual provide for taking such unrealized interest to the income head in the profit & loss a/c, it is necessary for such cooperative banks to make full provisioning for equivalent amount by charging to P&L A/c. For this proposition, assessee relied on the following case laws: 1. CIT Vs. .....

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is in appeal before us. 17. Ld. DR agreed that this issue was squarely covered against the department by various decisions of the Courts while ld. AR relied on the orders of CIT(A) and relied on the following case laws: 1. ACIT Vs. Singadi Urban Coop. Bank Ltd., [2015] 59 Taxmann.com 78 (Bangalore Trib.) 2. Nanded District Central Cooperative Bank Ltd., [2015] 57 Taxmann.com 422 (Pune Trib.) 3. ACIT Vs. Sunderlal Sawji Urban Coop Bank Ltd., [2014] 42 Taxmann.com 392 (Pune Trib.) 4. DCIT Vs. The .....

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squarely covered against the department and in favour of the assessee in the aforesaid mentioned cases. In the case of DCIT Vs. The Gandhi Coop Urban Bank Ltd., (supra), the Vizag Bench of ITAT, on similar issue, observed as under: 6. We have heard both the parties and perused the materials available on record. The assessee is a co-operative bank, regularly following mixed system of accounting, wherein it is following cash system for recognizing interest on loans and advances and mercantile syst .....

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(A), by relied upon the judgement of the ITAT, Hyderabad bench in the case of TCI Finance Ltd. Vs. ACIT (2004) 91 ITO 573 and also the Hon'ble Madras High Court judgement in the case of CIT Vs. Annamalai Finance Ltd. (2005) 275 ITR 451, held that when the principal amount itself is doubtful of recovery, it cannot be said that any interest accrued on such principal amount is recoverable. As the appellant is following the established method of accounting and recognizing the interest on NPAs at .....

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esent case and find that the ITAT, Visakhapatnam bench in the above mentioned case on similar facts held the issue in favour of the assessee. The relevant portion is reproduced as under: "10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it .....

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directions 1998, as held by the Hon ble Supreme Court. 10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant: "What to talk of interest, .....

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dentical issue came up for consideration before the ITAT Pune Bench in the case of Vaidyanath Urban Co-op. Bank Ltd. Vs. CIT in ITA No,413/PN/2014 dated 31.3.2015, wherein the ITAT under similar set of facts held as under: "10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equa .....

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to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Han 'ble Delhi High Court in the above cited case are releva .....

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hold his order. " Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. 9. The Honble Supreme Court of India, in the case of UCO Bank Vs. CIT had an occasion to consider the issue. The Honble Supreme Court, while dealing with similar issue held as under: "The method of accoun .....

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while from the asst. yr. 1979-80, the CBDT's circular of 9th Oct., 1984 is made applicable. In the present case, the assessment was made on the basis of the CBDT's circular of 9th oct; 1984, since the assessment pertains to asst. yr. 1981-82 to which the circular of 9th Oct., 1984, is applicable. Under sub-so (2) of S. 119, without prejudice to the generality of the Board's power set out in sub-s. (1), a specific power is given to the Board for the purpose of proper and efficient ma .....

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ne down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under S. 119 which are binding on the authorities in the administration of the Act. Under s.119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forego the advantage when required to wield it in a manner it considers just b .....

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t of relaxation of law by issuing circulars binding on the taxing authorities. If the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that ITOs should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under s. 119. Such a circular is binding under s. 119. The circular of 9th Oct., 1984, therefore, .....

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the income of the assesse. The C!T(A) rightly deleted the additions towards interest on NPAs. There is no error or infirmity in the order of C!T(A). Accordingly, we direct the A.D. to delete the additions made towards interest on NPAs. As the issue under consideration similar to the above case, following the decision of the Vizag bench in that case, we direct the AO to delete the addition made towards interest on NPAs. Accordingly, this ground is allowed in all the AYs under consideration. 19. A .....

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therefore, the same was treated as income and brought to tax in the AY under consideration. 20. On appeal before the CIT(A), the CIT(A) based on the submissions of the assessee held that dividend is appropriation and it is not a charge on P&L A/c, therefore, subjecting the amount of dividend payable to tax leads to double taxation. Accordingly, he deleted the addition made by the AO on this count. 21. Aggrieved by the order of CIT(A), the revenue is in appeal before us. 22. Considering the .....

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ces made by the AO since the assessee has not obtained the license from the RBI to run the bank as per the provision of section 22 of the Banking Regulation Act, 1949. 24. It was agreed by the ld. DR that this ground raised considering the fact that assessee has originally claimed deduction u/s 80P and to deny deduction u/s 36(1)(viia) considering assessee is only a cooperative society, not a banking company. However, assessee has withdrawn deduction u/s 80P and assessee has proved that assessee .....

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