TMI Blog2018 (1) TMI 1621X X X X Extracts X X X X X X X X Extracts X X X X ..... correctness of the claim and just mechanically worked out the disallowance - HELD THAT:- Section 14A has not confirmed specific power to the AO to assume that a part of the expenditure must have necessarily been incurred to earn exempted income which he can estimate and disallow. The AO has no authority to estimate the expenditure which the appellant would have, in his opinion, incurred in relation to the exempted income - Since in the past similar additions were deleted by the CIT(A) and thereafter confirmed by the Hon ble ITAT Bench. We are not inclined to interfere in the order passed by the ld. CIT(A). In our considered opinion, ld. CIT(A) has passed detailed and reasoned order which does not require any kind of interference at our end. - Decided against revenue. - I.T.A. No. 504/Rjt/2015 - - - Dated:- 16-1-2018 - SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER And SHRI MAHAVIR PRASAD, JUDICIAL MEMBER For the Appellant : Shri Praveen Verma, Sr. D.R. For the Respondent : Shri M. J. Ranpura, A.R. ORDER PER MAHAVIR PRASAD, JUDICIAL MEMBER: This is an appeal by the department against the order of the Commissioner of Income Tax(Appeals)-1, Rajkot, vide appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34,73,904/- is required to be offered to tax in view of provisions of section 5 r.w.s sections 43D and 145 of the Act. The observation of the AO is totally erroneous and therefore disallowance made on misinterpretation of legal position is totally unjustified and deserves to be deleted, may kindly be deleted. (c) It is also submitted that in the case of banking companies, any interest accrued on advances classified as non-performing is taxed in the year in which the same is actually received. The theory of only real income is to be taxed is a settled taw and therefore notwithstanding the appellant has been following mercantile system of accounting, the appellant could be taxed on the real income and not on the hypothetical income. So far as nonperforming advances are concerned (i.e. advances categorizing under doubtful and loss advances) it is submitted that recoveries of interest on such accounts is extremely low and possibilities of recovering principal amount is also remote. The appellant submits that nevertheless there is legal right to receive interest on such advances there are ground realities which do not permit enforcement of such right. If such interest on NPA is incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead Profits and gains of business or profession shall be computed in accordance with system of accounting regularly employed by the assesses. Sub-section (2) of the said section has given power to the Central Government to notify from time to time accounting standards to be followed by any class of assessee or in respect of any class of income. In exercise of this power conferred by sub-section (2), the Central Government has hitherto notified two accounting standards, which is required to be followed by all assessee following mercantile system of accounting. It is submitted that nowhere in such accounting standards, it is prescribed that fundamental principle of accounting, i.e. Prudence should not be followed. Prudence suggests that all known liabilities and loss are to be provided for and income should be accounted for in the income statement if there-is certainty regarding its ultimate collections. Since, banking industries are completely governed by the RBI, RBI's guidelines have to be followed irrespective of accounting standards and that is also permitted by the ICAI by prescribing that accounting treatment suggested by governing body shall prevail over accounting trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.481/Rjt/2011deleted the disallowance. (i) In appellant's own case Ld. CIT(A)-1, Rajkot vide order dated 08.07.2014 in appeal No. CIT(A)-I/Rjt/0239/13-14 for immediate preceding assessment year deleted the addition. (j) Reliance is also placed on the following judicial pronouncements: ITAT Pune Bench 'A' in the case of ACIT v. Osmanabad Janta Sah. Bank Ltd. [2013] 32 taxmann.com 229 (Pune-Trib.) wherein it has been held that: 5 We heard the rival submissions of the parties and perused the record. We find that the identical issue has been considered by the ITAT Visakhapatnam Bench, in the case of Dy.CIT v. Durga Co-operative Urban Bank Ltd., [IT Appeal No.511/Vizag/2010), dated 10-03-2011. In the said case also, it was noticed by the Assessing Officer that assessee did not include the interest of ₹ 18,26,306/- on the NPA advances. Again the issue of applicability of 43D was considered to the non-scheduled banks. The Tribunal placed its reliance on the decision of the. Hon'ble High Court of Delhi in the case of CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440/196 Taxman 169/[2010] 8 taxman.com 145 in which the Hon ble Delhi High Court has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received, whichever is earlier, then it is compulsory to abide by the said Rule. According to us, no scope is left with the Revenue Authorities to ignore these provisions due to unambiguous use of language in the Section. (ii) Status of assessee for the purpose of application Section 43-D. As far as the status of the assessee is concerned, the Assessing officer has stated that the assessee-bank is a cooperative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an Explanation (d) r.w.s. 36(I)(viia) annexed to section 43-D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, we hereby hold that the assessee is covered by one of the entities, hence the provisions of section 43-D are to be applied. (iii) Applicability of CBDT Circular. Next issue is that whether a Circular having effect of relaxing rigour of law can be treated as inconsistent with the provisions of a statue. In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes has issued a Circular dated October 6, 1952, providing that where interest accruing on doubtfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t whether an income on receipt basis or on accrual basis, it is the real income and not any hypothetical income which may have theoretically accrued, i.e. subject to tax under the Act. Nevertheless, that decision was not followed while deciding the appeal of UCO Bank (supra) by the Hon'ble three Judges of the Supreme Court, already discussed by us supra. We, therefore summarize that as of now the law as laid down in UCO Bank is that in terms of CBDT Circular the interest is to be added as income only when actually received or credited in respect if the sticky advances while making assessment for a financial institution. (iv) Interpretation of the language of the statute: We have reproduced verbatim the provisions of section 43-D of the I.T. Act and expressed an opinion that if the statute has used the terminology for the chargeability of interest on the basis when credited or actually received , then in our opinion no ambiguity has been left by the Statute. If the statute is so clear that an interpretation can easily be made, then that exact meaning should be given to the language of the Section. For this legal proposition we place reliance on Keshavji Ravji and Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o insertion of section 43D with effect from 1-4- 1991, recognition of income was on the basis of circular of 9-10- 1984. It said that for first three years the income may be taken on accrual basis and from 4th year onwards, the income in respect of doubtful debts was to be recognized on receipt basis. Since the income was to be assessed for first three years on accrual basis, provisions of section 43D were inserted in the Act. Circular No. 621, dated 19-12-1991 gives the legislative intention stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc., so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or credited to the profit and loss account. This benefit was extended with Effect from 1-4-2000 in the case of public companies engaged in long-term financing of housing projects approved by National Housing Banks. The Legislature in their wisdom did not extend the same benefit to NBFCs which has been given to scheduled banks, public financial institutions, etc. The provisions of section 43D as stood at relevant time contained an expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration before the Hon'ble Court was that if a provision for doubtful debt is made then what will be the legal position of the applicability of Explanation to section 36(1)(vii) of the IT. Act. For the sake of ready reference, relevant paragraph from the held portion is reproduced below: The income-tax is a tax on real income , i.e., the profits arrived at on commercial principles subject to the provisions of the Act. Therefore, if by the Explanation to section 36(I)(vii) a provision for doubtful debt is kept out of the ambit of bad debt which is written off, then one has to take into account the Explanation in computing the total income under the Income-tax Act falling which one cannot ascertain the real profits. The provision for non-performing assets debited in the profit and loss account under the Reserve Bank Directions of 1998 is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the Incometax Act. Therefore the distinction can easily be drawn that in the appeal before us the questtion is accrual of interest income on sticky loan but in this cited decision the question before the Apex court was about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-3, Vs. Samarth Urban Co-operative, Bank Ltd., in ITA.No.1558/PN/2011 has taken similar view. Hon'ble ITAT Pune Bench B in the case of DCIT Vs. Laxmi Urban Co operative Bank Ltd., in ITA No.351/PN/2013. (j) Considering the facts and submission as above the addition made by the AO is totally unjustified on facts as also in law and deserves to be deleted and may kindly be deleted. 3. Against the said order appellant preferred appeal before the ld. CIT(A) who partly allowed the appeal of the appellant. 4. Now appeal is before us. 5. We have gone through the relevant record and impugned order. In this case, assessee cited an order of coordinate bench and stated that similar additions were allowed by the co-ordinate bench in assessee s own case and cited an order of coordinate bench in ITA No.504/Rjt/2015 for Asst. Year 2012-13. In this case, appellant is a co-operative society is assessed to tax and engaged in the business of banking and governed by the banking Regulation Act, 1949. Return of income for assessment year under consideration was e-filed declaring total income at ₹ 2,59,94,100/-. The AO vide order u/s.143(3) of the Act dated 11.03.2015 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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