TMI Blog2014 (4) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... - Dated:- 24-4-2014 - R. S. Padvekar (Judicial Member) And R. K. Panda (Accountant Member) For the Assessee : Pramod Shingte For the Revenue : S. P. Walimbe ORDER R. S. Padvekar (Judicial Member) These are cross appeals. The first one is filed by the assessee and the second one filed by the Revenue and are directed against the order dated 31-12-2013 of the CIT(A), Kolhapur relating to Assessment Year 2010-11. For the sake of convenience, these were heard together and are being disposed of by this common order. ITA No.367/PN/2014 (A.Y. 2010-11) : 2. Ground of appeal No.1 by the assessee reads as under : 1. On the facts and in the circumstances of the case and in law, the lower authorities have erred in making the disallowance of ₹ 1,43,16,571/- on account of interest on Non-Performing Assets by disregarding Appellant s contention in this regard. 2.1 Facts of the case, in brief, are that the AO during the course of assessment proceedings observed that interest receivable or accrued on the NPAs amounting to ₹ 1,43,16,571/- has not been credited or offered for taxation by the assessee in the profit and loss account but was direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as loss asset and so on. The category of loss asset is the only category which falls into the definition of bad debts as described in section 35(l)(vii) of the Income-tax Act. The other categories for which provisioning is done i.e. doubtful assets and NPAs have not yet gone bad. That is why no deduction is available in any section of the Act in respect of interest on NPA. Since there is a possibility that the debt can go bad, the RBI guidelines allow the bank to appropriate part of its profit by making a provision in respect of such assets which will be utilized in case the debt turns bad. The provision however, is not of 100% of the debt but a fraction of these debts. This is evident that the debt is not yet a bad debt. RBI guidelines are only disclosure norms. They have nothing to do with computation of total taxable income under the Income-tax Act. When a loan is granted by bank and financial institutions, there is an agreement between the lender and the borrower regarding terms and conditions of the service of loan and interest. The conditions include clauses regarding payment of installments and as per these clauses the lender credits its books and debits the account of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount and since as per section 45 Q, provisions of Chapter IIIB supersede all the Acts, therefore, interest on NPAs will not be credited to profit and loss account and therefore will not form part of income of the assessee. However, the above decision, was delivered in the case of a nonbanking financial company, and it has no application in the case of a co-operative banks as the following discussion will show. If we refer to the RBI Act 1934, we find that Chapter IIIB of the Act deals with provisions relating non-banking institutions receiving deposits and financial institutions, and these provisions override all other Acts by virtue of section 45Q therein. The Chapter IIIB starts with sections 45H and also includes section 45 Q. Chapter IIIB reads as under: '1 [CHAPTER IIIB PROVISIONS RELATING TO NON-BANKING INSTITUTIONS RECEIVING DEPOSITS AND FINANCIAL INSTITUTIONS 45H. Chapter IIIB not to apply in certain cases. The provisions of this Chapter shall not apply to the State Bank or a banking company as defined in section 5 of the 2[Banking Regulations Act, 1949] or 3[a corresponding new bank as defined in clause (da) of section 5 of that Act or a subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the Tribunal in the case of The Sarangpur Co.op Bank Ltd. Vs. DCIT vide ITA No.529 and 530/Ahd./2013 order dated 21-06-2013 for A.Yrs. 2007-08 and 2009-10. 7. The Ld. Counsel for the assessee in his rejoinder submitted that the Tribunal after considering the decisions of various High Courts and Supreme Court including the decision of the Hon ble Madras High Court in the case of Sakthi Finance Ltd. (Supra) has taken a conscious view holding that interest on NPA account cannot be added to the total income of the assessee on notional basis. Further, when divergent view are there on the identical issue the view which is favourable to the assessee has to be followed. He accordingly submitted that in view of the decision of the Coordinate Bench of the Tribunal in the case of Dharmvir Sambhaji Urban Co-op. Bank Ltd. (Supra) the issue has to be decided in favour of the assessee. 8. 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 considered the various decisions cited before us. We find an identical issue had come up before the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) is worthy of notice :- 8. We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd (Supra); wherein the Hon'ble Delhi High Court took into account the decision rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). In the case of M/s Vasisth Chay Vyapar Ltd, the assessee therein was a non banking financial company and it was also bound by the Prudential norms directions issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The Assessing Officer, however, added the said interest as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized . 8.2 The Delhi High Court also considered the decision rendered in the following cases: i) CIT vs. Elgi Finance Ltd., 293 ITR 357 (Mad) ii) CIT vs. KKM Investments (Cal) SLP dismissed by Supreme Court (310 ITR 4) iii) CIT vs. Motor Credit Co (P) Ltd., 127 ITR 572 (Mad) iv) UCO Bank vs. CIT 237 ITR 889 (SC) v) CIT vs. Shoorji Vallabhdas Co 46 ITR 144 (SC) vi) Godhra Electricity Co. Ltd., Vs.CIT 225 ITR 746 vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del) viii) CIT vs. Eicher Ltd., ITA No.431/2009 dated 15.7.2009 (Del) 8.3 After considering the Accounting Standard 9 and the various case law listed above, the Hon'ble Delhi High Court held that the interest on NPA advance cannot be treated as accrued to the assessee. 8.4 Before the Delhi High Court, the revenue took support of the decision of the Hon'ble Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue by NBFC . 9. The Hon'ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis- -vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon'ble Supreme Court are extracted below: Applicability of Section 145 40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not accrued . The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order. 10. 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. 11. So, however, the learned Departmental Representative has submitted that the Hon ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras) has differed with the judge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer to delete the addition of ₹ 1,43,16,571/- being interest accrued on NPA. The ground raised by the assessee is accordingly allowed. 9. Ground of appeal No. 2 by the assessee reads as under : 2. On the facts and in the circumstances of the case and in law, the lower authorities have erred in making the disallowance of ₹ 11,54,019/- being amortization of premium on Government Securities debited to Profit and Loss Account by disregarding appellants contention in this regard . 9.1 Facts of the case, in brief, are that the assessee is a scheduled cooperative bank doing banking business which is regulated under Banking Regulation Act, 1949 and RBI guidelines issued from time to time. The Assessing Officer held that as per the Income-tax Act and the accountancy norms, any loss or profit on securities held as investment can be recognised and claimed only at the time of sale/transfer of such securities. He was of the opinion that the RBI guidelines are binding on banks but do not have same effect as far as application of the Income-tax law is concerned. Rejecting the explanation given by the assessee the AO disallowed the claim of amortization of premium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be computed under section 28 and subsequent section relating to computation of income of business/profession. 11. HTM securities are investment assets. Any profit/loss on asset is taxed to income in the year of its sale. Premium is additional expenses in acquisition of asset and the same can be effect against sale price at the time of computing capital gains. The Department has taken consistent stand that depreciation in value of securities is allowable in cases where securities are held as stock in trade and not as capital investments in the form of HTM. In view of the above discussion, claim of the appellant has been rejected and amount of claim has been added to total income. 12. In view of the above discussions, the ground taken by the appellant is rejected . 11.1 Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 12. After hearing both the sides, we find the issue stands decided in favour of the assessee by the decision of the Coordinate Bench of the Tribunal in the case of Solapur Janta Sahakari Bank Ltd. vide ITA No.2534/PN/2012 order dated 27-01-2014 for A.Y. 2009-10 where the Tribunal has held as under : 3. We have heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at acquisition cost unless it is more than the face value, in which case the premium should be amortized over the period remaining to maturity. Vide RBI circular No.DBOD No.BP.B.C 32/21.04.08/2000-01 dated 16/10/2000, Bank may shift Investment to/from HTM category with approval of Board From/to other category. Further in terms of above referred circular, Profit on sale of Investments in HTM category should be taken to the profit and loss account. There it is very clear that securities held under HTM category can be sold by Bank at any point of time. Therefore, these securities are being as stock in trade and profit/loss on sale of these securities are treated as business income/loss. 20. The assessee has further filed a copy of CBDT Instruction No.17 dated 26/11/2008 Published in 220 CTR (Statute Pages 41 to 44). The CBDT in para (VII) of this instruction has stated that in the cases of banks where RBI had issued guidelines for allowing deduction of amortization premium paid on securities under HTM category. The relevant portion of Instruction is as under: As per RBI guidelines dated 16th October, 2000, the investment portfolio of the banks is required to be classified und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of Hon ble Supreme Court in the case of United Commercial Bank (Supra). 15. In the case of United Commercial Bank (Supra), even the issue of valuation of the stock in trade of the investment was before the Hon ble Supreme Court. In the case of the assessee, the issue is regarding allowability of the loss on the sale of the Securities. Merely because the Securities are kept under the head till the maturity, the said Security cannot be treated as a purely investment. Law is well settled that the Securities held by the Bank are in the nature of Stock-in-Trade. We may like to quote here the decision of the Hon ble High Court of Kerala in the case of CIT Vs. Nedungadi Bank Ltd., 264 ITR 545. In the said case, the Hon ble High Court has held that the securities held by the Bank are in the nature of stock-in-trade. Both the authorities below has merely gone on the nomenclature of the head under which the Securities are held. In our considered view, nomenclature cannot be decisive for the assessee Bank. We, therefore, hold that the loss on the sale of the Securities is revenue in nature and same is allowable. Accordingly, Ground No. 2 is allowed. 5. So far as the refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such order of the CIT(A) the Revenue is in appeal before us with the following grounds : 1. On the facts and in the circumstances of the case, and in law, the CIT(A) is not justified in ignoring the provisions of Rule 46A(1) to 46A(3), particularly when the records do not show existence of any of the circumstances mentioned in Rule 46A(1)(a) to 46A(1)(e) 2. On the facts and in the circumstances of the case, and in law, the CIT(A) is not justified in admitting the evidence from the assessee in respect its claim of provision of leave salary being paid before the date of filing of return in contravention to the provisions of section 251(1) of the I.T. Act, 1961 r.w. Rule 46A(1) to 46A(3) of the I.T. Rules, 1961. 3. On the facts and in the circumstances of the case, and in law, the CIT(A) erred in directing the Assessing Officer to . . . . examine this evidence which will be submitted by the appellant before his and any other document which he may find necessary, and if found in order, allow the provision leave salary paid prior to the date of filing of return . . . . . . thereby effectively setting aside the assessment of the A.O. to this extent when the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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