TMI Blog2017 (11) TMI 1645X X X X Extracts X X X X X X X X Extracts X X X X ..... bank is eligible for deduction u/s 36(1)(viia) of the APCS Act @ 7.5% of the profits and 10% of its rural advances. The deduction claimed by the assessee as a provision for doubtful debts or NPA is within the limit provided by the Income Tax Act u/s 36(1)(viia) inclusive of the expenses. Therefore, the above sums are allowable u/s 36(1)(viia) of the Act, accordingly, we uphold the order of the Ld. CIT(A) and dismiss the appeal of the revenue on this ground. Reserve created for sundry debtors - Held that:- The assessee is a Cooperative Bank following the mercantile system of accounting. The subsidy released to PACS was not a loan, it was the assistance of funds in lieu of expected subsidy. Therefore, the order of the Ld. CIT(A) on this issue cannot be sustained, hence set aside and the order of the A.O. is restored and the addition is upheld. DCCB’s share of 35% of waiver of penal interest and interest on overdue deposits - Held that:- Though the subject expenditure does not fall u/s 36(2) or 36(1)(viia) of the Act, undoubtedly, the same is business loss and the aggregate amount of overdue interest and penal interest and the NPA provision did not exceed the limit for allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution to co-operative educational fund is diversion of profits at source by over riding title under the Act. Hence, we do not find any reason to interfere with the order of the Ld. CIT(A) and the same is upheld. - I.T.A.Nos.120&121/Vizag/2013, I.T.A.No.200/Vizag/2016, C.O. Nos.68 & 69/Vizag/2013 (Arising out of I.T.A.Nos.120&121/Vizag/2013) , C.O. No.2/Vizag/2017 (Arising out of I.T.A.No.200/Vizag/2016) - - - Dated:- 8-11-2017 - SHRI V. DURGA RAO, JUDICIAL MEMBER SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER Appellant by : Shri T.S.N. Murthy, DR Respondent by : Shri K. Siva Ram Kumar, AR O R D E R PER D.S. SUNDER SINGH, Accountant Member: These appeals filed by the revenue are directed against order of the Commissioner of Income Tax (Appeals) {CIT(A)}, Vijayawada vide Appeal No.207/MTM/CIT(A)/VJA/2009-10 dated 19.12.2012, ITA No.406/VJA/CIT(A)/VJA/2010-11 dated 19.12.2012 and ITA No.78/CIT(A)/VJA/2013-14 dated 12.1.2016 for the assessment years 2007-08, 2008-09 2010-11. The cross objections filed by the assessee are in support of the order passed by Ld. CIT(A). 2. The first issue in this case is related to the statutory reserve created u/s 46(e) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated by section 46(e) of the APCS Act, the sub-section (e) of section 46 was omitted w.e.f. 25.4.2001 and it is no more in existence. Therefore, the D.R submitted that the reliance placed by the assessee as well as the Ld. CIT(A) while deleting the appeal on section 46(e) of the APCS Act is misplaced. The Ld.D.R further submitted that as per proviso to section 46 of the APCS act 1964, the assessee required to invest its funds @ 0.25% in securities as specified in section 46 in Postal savings Banks, Nationalised Banks , or in shares of any other societies etc.. (as bad debts Reserve) of the amounts granted by it as short term loans and medium term loans to its members, out of the funds borrowed by it from Co-operative Financial Institutions for granting such loans. Further, it was also submitted by the Ld. D.R. that it is not necessary to make any such investments, once the bad debts reserve becomes equal to the total amounts of the bad debts of the society. The Ld. D.R. argued that firstly, section 46 deals with the investment of its funds i.e. the investments of available funds by the society. It is not dealing with appropriation or diversion of the income of society. Section ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... binding on the assessee. The bad debts reserve created is not freely available to the assessee and it is a charge on profits but not appropriation of profits and the investments are to be made irrespective of profits or losses. The Ld. D.R. further argued that the assessee has no domain over the amount or the bad debts reserve and it is not being treated as society s Net worth . The Ld. A.R. further argued that net worth as defined in section 12A(13) explanation (b) of APCS Act reads as follows: NET WORTH means the sum total of the paid up capital and free reserves after deducting the provisions of expenses as may be prescribed. FREE RESERVES means all reserves created out of profits and share premium account but does not include reserve created out of revaluation of assets, write back of depreciation provisions and amalgamation . BAD DEBTS RESERVE IS NOT FREE RESERVE, FREE RESERVE IS WHAT WAS SET APART OUT OF PROFITS/GENERAL RESERVE To illustrate, S.2(43), Companies Act, 2013 defined Free Reserves as those reserves, which, as per the latest available Balance sheet are available for distribution as Dividend. 7. The Ld. A.R. relied on the decision of Keshkal Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (e) [x x x] [Provided that every primary agricultural credit society and every Co-operative Central Bank shall invest or deposit in each co-operative year towards the bad debts reserve of the said society or bank, a sum equal to one-fourth per centum of the amount granted by it as short term loans or medium term loans to its members during the co-operative year from out of the amounts borrowed by it from other cooperative financial institutions for granting such loans ; so however that no such investment or deposit shall be necessary when the total amount so invested or deposited towards bad debts reserve becomes equal to the total amount of bad debts of the society as estimated by the auditor appointed under Section 50.] Explanation: For the purposes of this section, sub-section (3) of Sections 47 and 71, the expression primary agricultural credit society means the society referred to in clause (i) of Explanation to Section 36. 10. Plain reading of section 46 of the APCS Act clearly shows that the section deals with the sources of funds and it s application of funds. The section mandates the society to create bad debts reserve out of its sources of funds equalient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Act, the bad debts as well as the provision for bad and doubtful debts are allowed as a deduction. Therefore, no separate deduction is required to be allowed towards the bad debts reserve. In case if the bad debts as well as the bad debts reserve is allowed as deduction, the same would be amount to double deduction, once as bad debts and secondly as bad debts reserve. Therefore, the deduction claimed by the assessee on account of bad debts reserve is not allowable. The assessee relied on the decision of Keshkal Co-operative Marketing Society Limited (supra). The issue with regard to the bad debts and bad debts reserve was not dealt with by the Hon ble High Court of M.P. in its order. The issue with regard to the double deduction of the bad debts and the bad debts reserve was also not considered by the Hon ble High court, therefore the facts of the Hon ble M.P. High Court s decision in the cited case law is distinguishable hence not applicable. Further, the section does not place any restriction as argued by the Ld. A.R. that the amount is not available to the assessee for its business purpose. The assessee has extended its meaning by interpreting net worth and the Companies A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is a common issue, comprising (i) reserve created for sundry debtors due to accounts amounting to ₹ 62,61,426 (ii) provision on sundry debtors-individuals amounting to ₹ 45,88,706 and (iii) provision on sundry debtors- institutions amounting to ₹ 36,15,339, which were debited to the profit and loss account. It is explained that all these were provisions for bad and doubtful debts created in compliance to the Prudential Norms of the Reserve Bank of India, to be strictly observed by all the Banks in the country, as per the RBI Act and the Banking Regulation Act. The Income Tax Act,1961 has also carved out a deduction towards Provision for bad and doubtful debts and also spelt out the monetary limits within which Banks are entitled to the said deduction. It was also argued that the over-all provision for bad and doubtful debts created by the bank was well within the limits set out in Sec.36 (1)(viia), as amended from time to time. The appellant's AR has drawn attention to the amendment made by the Finance Act, 2007 whereby the aggregate provision available under this Section to all the Banks including the non-scheduled Co-operative banks like the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for sundry debtors institutions amounting to ₹ 36,15,339/-, which was debited to the Profit loss account under the head reserves others . The amount relating to sundry debtors due to accounts represent other receivables from the debtors as stated by the assessee. This fact was not disputed by the A.O. The contention of the A.O. was that this was an expenditure which should have been debited to the profit loss account. The deduction of sundry debtors individuals amounting to ₹ 45,88,706/- was also admittedly the legal and other expenses incurred by the assessee during the course of recovery of the loan. The last one is sundry debtors institutions, which was disallowed by the A.O. holding that the amount of ₹ 36.15 lakhs was related to the expenditure incurred by the assessee for recovery of loan. According to the A.O., since the above sums represent the expenses incurred by the assessee in the process of recovery of loans and advances the same should have been claimed as expenditure instead of bad and doubtful debts. According to the A.O., it is not covered u/s 36(2) or 36(1)(viia) of the income tax Act. However, it is established fact that the debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en by farmers from the PACS would be reimbursed by the Government to the Primary Agricultural Co-operative Societies (PACS). The assessee bank has released the sum equal to subsidy receivable from the Government to PACS to enable the PACS to have sufficient liquidity and function effectively since the District Co-operative Central Bank (DCCB) is a regulator of PACS in the District and all of them are affiliated to the DCCB. The subsidy due to PACS from the Government would be made over to bank as and when the same is received by them from the Government. Since the subsidy of the earlier year was not received by the end of the relevant previous year, a provision was made for the subsidy receivable and claimed as deduction. The assessee had received the subsidy in the subsequent financial year, which was offered to income. The A.O. disallowed the said sum holding that the amounts receivable from Government cannot be treated as a doubtful debt at any stretch of imagination and placed reliance on Hon ble Madras High Court decision in the case of South India Surgical Company Limited Vs. ACIT 287 ITR 62. 18. Aggrieved by the order of the A.O., the assessee went on appeal before the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal of the revenue on this issue is allowed. 20. The next issue is DCCB s share of 35% of waiver of penal interest and interest on overdue deposits. This issue is involved for the A.Y.s 2007-08, 2008-09 and 2010-11 as follows: S.No. Issue Amount (`) A.Y. 2007-08 Amount (`) A.Y. 2008-09 Amount (`) A.Y. 2010-11 1. DCCB Share of 35% of waiver and penal interest and IOD 1,74,22,643/- (1,12,36,487+ 61,86,165) 95,61,180/- 2,90,75,132/- (86,88,231+9,22,019+ 1,94,64,882) 21. These amounts related to the DCCB share of 35% waiver of penal interest and interest on overdue deposits. The assessee is lending agency to PACS and PACS lends the monies to farmers. Unless the monies lent by PACS are recovered, the same cannot be repaid to the bank. APCOB is the main lending agency of the DCCB. Therefore, there is direct interconnection of lending to farmers with the APCOB, DCCB and the PACS. As per the directions of the APCOB, the PACS was to collect the dues of loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, where governments order for waivers or write-offs for the benefit of farmers. I have examined the claim with reference to its genuineness and the compliance with Sec.36(2) and hold that the claims made by the appellant satisfy the requirements of law inasmuch as the same is complied with the dictum of write-off in the books and not being out of any earlier provisions and allow the same as complying with the Act. The Hon'ble Supreme Court also held that the write-offs made by banks not forming part of earlier provisions need to be allowed as business expenditure, in the case of City Union Bank's case. 22. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has waived the interest on short term and long term loans given to the farmers. This is evidenced by page no.28 of paper book submitted before us. As per the scheme of waiver 35% of the interest relating to waiver of penal interest and Interest on deposits (IOD) is borne by the assessee. There is no dispute that 35% of the share was borne by the bank relating to IOD and penal interest. This is on repayment of the loans collected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concept of prior period expenditure enunciated in Acc.Std.5 of ICAI defines the same as expenditure incurred in a preceding year but omitted to be recorded therein , which is not the case here. All waivers or write-offs invariably relate to earlier years and they can't be disallowed on that ground. 5. THE NATURE OF THE EXPENDITURE WAS SUCH THAT THE SAME HAD TO BE INCURRED IN THE RELEVANT PREVIOUS YEAR ONLY ON FULFILMENT OF THE CONDITIONS LAID OUT IN THE SCHEME OF WAIVER. WE ENCLOSE A TRANSLATION OF OUR CIRCULAR NO. ADM/PENAL INTEREST/ 2005/06 DT.7.3.2006 WHICH POSTULATES THAT A PACS IS ENTITLED TO GET REIMBURSEMENT OF PENAL INTEREST AND IOD , ONLY ON ITS REALISATION OF THE OVERDUE LOANS FROM FARMERS IN FULL WITH PRINCIPAL AND INTEREST. AS THE SAID CONDITIONS WERE FULFILLED IN THE RELEVANT PREVIOUS YEAR, WE INCURRED THE EXPENDITURE ALSO IN THE SAME PREVIOUS YEAR, DEBITED THE SAME AND CLAIMED DEDUCTION, WHICH IS SUBMITTED AS APPROPRIATE. We submitted that as the expenditure for reimbursement of penal interest hOD was laid out /expended irretrievably during the relevant previous year, the same was claimed as expenditure in the previous year and the said claim is in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee, placing reliance in the case of Durga Co-operative and Urban Bank Ltd. ITAT Visakhapatnam, ITA No.511/Vizag/2010 the decision of Delhi High Court in the case of M/s. Vasisht Chai Vyapar Ltd. 196 Taxmann 169 (Delhi) wherein it was held that absence of sureness of recovery does not make the interest accrue in the real sense. In this case, during the appeal hearing, the Ld. A.R. did not furnish the details with regard to what was the exact nature of overdue interest created for reserve. As per the RBI guidelines, the assessee need not recognize the interest on bad and doubtful debts. Such interest neither credited to the profit loss account nor offered as income. The assessee requires to record such accrued interest in a Memorandum of account in their books. It is not known whether the interest related to the overdue interest is on NPA advances or not. In case the interest is related to the non performing assets (NPA) as claimed by the assessee, the same required to be allowed as a deduction since the same cannot be recognised as income and the treatment given by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om A.Y.2007-08 for all banks including cooperative banks is the aggregate of 7.5% of the net profit before making the deduction under this statutory provision and 10% of the aggregate average rural advances on the other. It is submitted that the memorandum explaining the provisions of Finance Bill, 2007 clearly brought out the scope of the amendment made to Sec.36(1)(viia), which supports the impugned claim. The ITAT decision referred to by the AO was explained as regarding the provision made on standard assets by the banks 0.25% as ordained by the RBI's Prudential Norms. The ITAT held that to get a deduction under the IT Act, the provision shall be on bad and doubtful debts and though the RBI stipulated provision on standard assets, the Bank can't make a claim for deduction under section 36(1)(viia), which deals with a provision on bad and doubtful debts. The A.R. argued that the decision is inapplicable to this issue. In the circumstances, it is held that the rejection of the appellant's claim is patently unjust, since the provision created satisfies the requirements of law and also is well within the maximum amount of deduction prescribed under Sec.36(1)(viia) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest and added back to the income. Aggrieved by the order of the AO, the assesse went on appeal before the CIT(A) and the Ld.CIT(A) allowed the claim of the assesse stating that item represents the interest paid by assessee to the depositors, who are the Primary Agricultural Co-operative Societies (PACSs). The PACSs in the District have deposited a part of their profits with the assessee bank and interest of ₹ 44,61,929/- was paid by them to the various PACSs. The relevant account copy was furnished by the assessee during the assessment on 23.12.2010 and the Ld. CIT(A) found that the said expenditure was akin to any Interest paid on depositors by the Bank. 29. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed the above expenditure under the impression that the said amount was not an expenditure but it was related to the investments. However, during the appeal hearing, before the CIT(A) and before us, the assessee argued that the item represents the interest paid by the bank to the depositors. Since the amount is interest paid on the deposits of the co-operative societ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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