DCIT, Ajmer V. M/S AJMER URBAN CO OPERATIVE BANK, Ajmer

ITA 1/JPR/2011

• Counselvise Citation: 123114 RSA 2011
• Duration Of Justice: 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 18-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 03-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: D P OJHA
• Keywords: Business income; Depreciation; Search and seizure; Bad and doubtful debts; Difference of opinion; Notional interest; Provision of bad debts
• Section: 145; 56

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH B JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO.01/ JP/2011 ASSESSMENT YEAR 2007-08 PAN: AAACR 5290 C THE DCIT VS. M/S. AJMER URBAN COOPERATIVE BANK LTD. CIRCLE- 1, AJMER KAISARGANJ, AJMER (APPELLANT ) (RESPONDENT) C.O. NO, 78/JP/2011 (ARISING OUT OF ITA NO.01/ JP/2011) ASSESSMENT YEAR 2007-08 PAN: AAACR 5290 C M/S. AJMER URBAN COOPERATIVE BANK LTD. VS. THE D CIT KAISARGANJ, AJMER CIRCLE- 1, AJMER (APPELLANT ) (RESPONDENT) DEPARTMENT BY : SHRI SUNIL MATHUR ASSESSEE BY : SHRI D.P. OJHA DATE OF HEARING: 18-11-2011 DATE OF PRONOUNCEMENT: 22-12-2011 ORDER PER N.L. KALRA, AM:- THE REVENUE HAS FILED AN APPEAL AGAINST THE ORDER O F THE LD. CIT(A), AJMER DATED 12-10-2010 FOR THE ASSESSMENT YEAR 2007-08. THE ASS ESSEE HAS FILED THE CROSS OBJECTION. 2.1 THE FIRST GROUND OF APPEAL OF THE REVENUE THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 277.93 LACS MADE BY THE AO ON A CCOUNT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS AS PER PROVISO FIRST TO SECTION 36(1 )(VIIA)(A) OF THE I.T. ACT. 2 2.2 BEFORE THE AO, THE ASSESSEE SUBMITTED THAT ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY THE BANK AT ITS OPTION IS TO BE ALLOW ED IN ANY OF THE RELEVANT ASSESSMENT YEARS. IN CASE SUCH PROVISION IS MADE FOR ANY ASSET S CLASSIFIED BY THE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS ASSETS AND THIS PR OVISION SHOULD NOT EXCEED 5% OF THE AMOUNT OF SUCH DOUBTFUL ASSETS OR LOSS ASSETS SHOWN IN THE BOOKS OF ACCOUNTS ON THE LAST DATE OF THE PREVIOUS YEAR. VIDE REPLY DATED 12 TH AUG. 2009, IT WAS SUBMITTED THAT THE ENTRIES IN THE PROFIT AND LOSS ACCOUNT AND BAD DEB TS RESERVES ACCOUNT WILL SUFFICE IF THE ASSESSEE HAS POSTED ENTRIES IN THE PROFIT AND LOSS ACCOUNT AND THE CORRESPONDING ENTRIES ARE POSTED IN THE BAD DEBTS RESERVE ACCOUNT. THIS W ILL BE A SUFFICIENT COMPLIANCE FOR WRITING OFF AS IRRECOVERABLE THE CONCERNED DEBT. BE FORE THE AO, THE ASSESSEE PLACED RELIANCE ON THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. BANK OF RAJASTHAN, 255 ITR 299. 2.3 THE AO HAS REPRODUCED SECTION 36(1)(VII) AND (V IIA) OF THE ACT. ACCORDING TO THE AO , THE ASSESSEE IS ELIGIBLE TO CLAIM DEDUCTION U/ S 36(VIIA) TO THE EXTENT OF 7 % OF THE INCOME COMPUTED BEFORE MAKING ANY DEDUCTION UNDER C HAPTER VIA. ADDITIONAL PROVISIONS OF 10% OF AGGREGATE AVERAGE ADVANCES WOU LD NOT APPLY IN THE CASE SINCE THE ASSESSEE DOES NOT HAVE RURAL BRANCH IN RURAL AREAS. THE CLAIM OF THE ASSESSEE WAS REJECTED AND BAD DEBTS PROVISION TO THE EXTENT OF OF RS. 277 .93 LACS WAS DISALLOWED. 2.4 BEFORE THE LD. CIT(A), THE ASSESSEE RELIED UPON THE PROVISO TO SECTION 36(1)(VIIA) OF THE ACT. AS PER THIS PROVISO, A SCHEDULED BANK O R A NON-SCHEDULED BANK IS ALLOWED DEDUCTION OF PROVISIONS IN RESPECT OF DOUBTFUL ASS ETS OR LOSS ASSETS PROVIDED SUCH PROVISION DOES NOT EXCEED 5%OF THE AMOUNT OF SUCH A SSETS SHOWN IN THE BOOKS OF ACCOUNTS OF THE BANK ON THE LAST DATE OF THE PREVIO US YEAR. BEFORE THE LD. CIT(A), IT WAS 3 SUBMITTED THAT COOPERATIVE BANK IS COVERED UNDER TH E PROVISO SECTION 36(1)(VIIA) OF THE ACT. THE LD. CIT(A) UPHELD THE CLAIM OF THE ASSESSE E. 2.5 WE HAVE HEARD BOTH THE PARTIES. BEFORE WE PROCE ED FURTHER IT WILL BE USEFUL TO REPRODUCE SECTION 36(VIIA) ALONGWITH PROVISOS. (VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND D OUBTFUL DEBTS MADE BY- (A) A SCHEDULED BANK NOT BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A NON-SCHEDULED BANK 3OR A CO- OPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURAL CR EDIT SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BAN K, AN AMOUNT [NOT EXCEEDING SEVEN AND ONE-HALF PER CENT. OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND C HAPTER VI-A) AND AN AMOUNT NOT EXCEEDING TEN PER CENT. OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER : PROVIDED THAT A SCHEDULED BANK OR A NON-SCHEDULED B ANK REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS OPTION, BE ALLOWED IN ANY OF THE RELEVANT ASSESSMENT YEARS, DEDUCTION IN RESPECT OF ANY PROVI SION MADE BY IT FOR ANY ASSETS CLASSIFIED BY THE RESERVE BANK OF INDIA AS D OUBTFUL ASSETS OR LOSS ASSETS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY IT IN THIS BEHALF, FOR AN AMOUNT NOT EXCEEDING FIVE PER CENT. OF THE AMOUNT O F SUCH ASSETS SHOWN IN THE BOOKS OF ACCOUNT OF THE BANK ON THE LAST DAY OF THE PREVIOUS YEAR : PROVIDED FURTHER THAT FOR THE RELEVANT ASSESSMENT Y EARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2003 A ND ENDING BEFORE THE 1ST DAY OF APRIL, 2005, THE PROVISIONS OF THE FIRST PROVISO SHALL HAVE EFFECT AS IF FOR THE WORDS 'FIVE PER CENT.', THE WORDS 'TE N PER CENT.' HAD BEEN SUBSTITUTED : PROVIDED ALSO THAT A SCHEDULED BANK OR A NON-SCHEDU LED BANK REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS OPTION , BE ALLOWED A FURTHER DEDUCTION IN EXCESS OF THE LIMITS SPECIFIED IN THE FOREGOING PROVISIONS, FOR AN AMOUNT NOT EXCEEDING THE INCOME DERIVED FROM RED EMPTION OF SECURITIES IN ACCORDANCE WITH A SCHEME FRAMED BY TH E CENTRAL GOVERNMENT : PROVIDED ALSO THAT NO DEDUCTION SHALL BE ALLOWED UN DER THE THIRD PROVISO UNLESS SUCH INCOME HAS BEEN DISCLOSED IN TH E RETURN OF INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION' : 4 EXPLANATION.- FOR THE PURPOSES OF THIS SUB-CLAUSE, 'RELEVANT ASSESSMENT YEARS' MEANS THE FIVE CONSECUTIVE ASSESS MENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2000, AND ENDING BEFORE THE 1ST DAY OF APRIL, 2005 ; (B) A BANK, BEING A BANK INCORPORATED BY OR UNDER T HE LAWS OF A COUNTRY OUTSIDE INDIA, AN AMOUNT NOT EXCEEDING FIVE PER CENT. OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A) ; (C) A PUBLIC FINANCIAL INSTITUTION OR A STATE FINAN CIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPORATION, AN AMOUN T NOT EXCEEDING FIVE PER CENT. OF THE TOTAL INCOME (COMPUTED BEFORE MAKI NG ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A) : PROVIDED THAT A PUBLIC FINANCIAL INSTITUTION OR A S TATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPOR ATION REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS OPTION, BE ALLOWED IN ANY OF THE TWO CONSECUTIVE ASSESSMENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2003 AND ENDING BEFORE THE 1ST DAY OF APRIL, 2005, DEDUCTION IN RESPECT OF ANY PROVISION MADE BY IT FOR ANY ASSETS CLASSIFIED BY T HE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS ASSETS IN ACCORDANCE WIT H THE GUIDELINES ISSUED BY IT IN THIS BEHALF, OF AN AMOUNT NOT EXCEEDING TE N PER CENT. OF THE AMOUNT OF SUCH ASSETS SHOWN IN THE BOOKS OF ACCOUNT OF SUC H INSTITUTION OR CORPORATION, AS THE CASE MAY BE, ON THE LAST DAY OF THE PREVIOUS YEAR : EXPLANATION.- FOR THE PURPOSES OF THIS CLAUSE,- (I) 'NON-SCHEDULED BANK' MEANS A BANKING COMPANY A S DEFINED IN CLAUSE (C) OF SECTION 5 OF THE BANKING REGULATION A CT, 1949 (10 OF 1949), WHICH IS NOT A SCHEDULED BANK ; (IA) 'RURAL BRANCH' MEANS A BRANCH OF A SCHEDULED B ANK [OR A NON- SCHEDULED BANK] SITUATED IN A PLACE WHICH HAS A POP ULATION OF NOT MORE THAN TEN THOUSAND ACCORDING TO THE LAST PRECEDING C ENSUS OF WHICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFORE THE FIR ST DAY OF THE PREVIOUS YEAR ; (II) 'SCHEDULED BANK' MEANS THE STATE BANK OF INDIA CONSTITUTED UNDER THE STATE BANK OF INDIA ACT, 1955 (23 OF 1955 ), A SUBSIDIARY BANK AS DEFINED IN THE STATE BANK OF INDIA (SUBSIDIARY BANK S) ACT, 1959 (38 OF 1959), A CORRESPONDING NEW BANK CONSTITUTED UNDER S ECTION 3 OF THE BANKING COMPANIES (ACQUISITION AND TRANSFER OF UNDE RTAKINGS) ACT, 1970 (5 OF 1970), OR UNDER SECTION 3 OF THE BANKING COMP ANIES (ACQUISITION AND TRANSFER OF UNDERTAKINGS) ACT, 1980 (40 OF 1980 ), OR ANY OTHER BANK 5 BEING A BANK INCLUDED IN THE SECOND SCHEDULE TO THE RESERVE BANK OF INDIA ACT, 1934 (2 OF 1934) ; (III) 'PUBLIC FINANCIAL INSTITUTION' SHALL HAVE THE MEANING ASSIGNED TO IT IN SECTION 4A OF THE COMPANIES ACT, 1956 (1 O F 1956) ; (IV) 'STATE FINANCIAL CORPORATION' MEANS A FINANCIA L CORPORATION ESTABLISHED UNDER SECTION 3 OR SECTION 3A OR AN INS TITUTION NOTIFIED UNDER SECTION 46 OF THE STATE FINANCIAL CORPORATIONS ACT, 1951 (63 OF 1951) ; (V) 'STATE INDUSTRIAL INVESTMENT CORPORATION' MEANS A GOVERNMENT COMPANY WITHIN THE MEANING OF SECTION 617 OF THE CO MPANIES ACT, 1956 (1 OF 1956), ENGAGED IN THE BUSINESS OF PROVIDING L ONG-TERM FINANCE FOR INDUSTRIAL PROJECTS AND ELIGIBLE FOR DEDUCTION UNDE R CLAUSE (VIII) OF THIS SUB-SECTION ; 4(VI) 'CO-OPERATIVE BANK', 'PRIMARY AGRICULTURAL CR EDIT SOCIETY' AND 'PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELO PMENT BANK' SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO THEM IN THE E XPLANATION TO SUB- SECTION (4) OF SECTION 80P ; IN SECTION 36(1)(VIIA) AS MENTIONED ABOVE, THE FOLL OWING WORDS WERE INTRODUCED BY THE FINANCE ACT 2007 W.E.F. 01-04-2007. OR A CO-OPERATIVE BANK, OTHER THAN A PRIMARY AGRI CULTURAL CREDIT SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK 2.6 THE FIRST PROVISO IS APPLICABLE TO SCHEDULED BA NK OR NON-SCHEDULED BANK. THE DEFINITION OF SCHEDULED BANK AND NON-SCHEDULED BANK IS GIVEN IN EXP TO 36(I)(VIIA) OF THE ACT. IT IS AN ADMITTED POSITION THAT THE ASSESS EE CANNOT BE CONSIDERED AS A SCHEDULED BANK BEFORE AMENDMENT IN 36(1)(VIIA) BY FINANCE ACT , 2007 . THE CONTENTION OF THE ASSESSEE IS THAT THE COOPERATIVE BANK IS INCLUDED I N THE SCHEDULED BANK AFTER AMENDMENT. THE AMENDMENT MADE BY FINANCE ACT 2007 I N SECTION 36(1)(VII) WAS ARGUED TO BE CLARIFICATORY AND THEREFORE, THE ASSESSEE BAN K SHOULD BE TREATED AS SCHEDULED BANK OR NON-SCHEDULED BANK AND THE PROVISO SHOULD BE CON SIDERED AS APPLICABLE. 6 2.7 BEFORE AMENDMENT BY FINANCE ACT , 2007, SECTION 36(1)(VIIA) WAS APPLICABLE ON SCHEDULED BANK AND NON-SCHEDULED BANK. IN CASE THE COOPERATIVE BANK IS INCLUDED IN THE NON-SCHEDULED BANK THEN THERE WAS NO PURPOSE OF MAKING ANY AMENDMENT. THE NON-SCHEDULED BANK AS PER EXPLANATION (1) TO SECTIO N 36(1)(VIIA) MEANS A BANKING COMPANY AS DEFINED IN CLAUSE (C) OF SECTION 5 OF TH E BANKING REGULATION ACT, 1949. SECTION 5 (C) OF THE BANKING REGULATION ACT DEFINE S BANKING COMPANY MEANS ANY COMPANY WHICH TRANSACTS BUSINESS OF BANKING. INITIA LLY, THE ACT WAS TO BE CALLED AS BANKING COMPANIES ACT. THE LAW WAS MADE APPLICABLE TO COOPERATIVE SOCIETIES AND THEREAFTER, THE ACT WAS NAMED AS BANKING REGULATION ACT, 1949. FOR MAKING THE ACT APPLICABLE TO THE COOPERATIVE SOCIETIES, SECTION 56 WAS INSERTED IN BANKING REGULATION ACT. AS PER THIS SECTION 56, IT WAS MENTIONED THAT REFERENCE TO BANKING COMPANY OR THE COMPANY OR SUCH COMPANY SHALL BE CONSTRUED AS REFER ENCE TO A COOPERATIVE BANK. AFTER CLAUSE 5 (CC ), CERTAIN CLAUSES WERE ALSO INSERTED . 2.8 CLAUSE 5 (CCI) PROVIDED THE DEFINITION OF THE C OOPERATIVE BANK AND ACCORDING TO WHICH THE COOPERATIVE BANK MEANS A STATE COOPERATIV E BANK AND CENTRAL COOPERATIVE BANK. THUS COOPERATIVE BANK STANDS DEFINED IN SECTI ON 5 (CCI) AND NOT IN 5 ( C) OF THE BAKING REGULATION ACT. SECTION 5 (C ) OF THE BANKIN G REGULATION ACT REFERS TO BANKING COMPANY. THE COMPANY IS ALSO DEFINED IN SECTION 5 ( D) OF THE BANKING REGULATION ACT AND AS PER THIS DEFINITION, BANKING COMPANY MEANS A NY COMPANY AS DEFINED IN SECTION 3 OF THE COMPANIES ACT, 1956 AND INCLUDES A FOREIGN C OMPANY WITHIN THE MEANING OF SECTION 591 OF THAT ACT. THERE IS NO MENTION IN THE INCOME TAX ACT THAT NON-SCHEDULED BANK SHOULD ALSO INCLUDE THE COOPERATIVE BANK IN VI EW OF SECTION 56 OF THE BANKING REGULATION ACT. FOR UNDERSTANDING MEANING AND CONCE PT OF THE WORD USED IN THE 7 BORROWING DEFINITION, WE HAVE TO CONFINE THE DEFIN ITION OF THE WORD USED IN RELEVANT SECTION OF THE DEFINITION IN THE BORROWED ACT. FOLL OWING REFERENCE IS MADE TO THE DECISION OF LUCKNOW BENCH IN THE CASE OF JITENDRA MANGHNANI VS. ASSTT. CIT , 10 DTR (LUCKNOW) (TRIBUNAL) 113 IN WHICH FOLLOWING PARAGRA PH FROM THE DECISION OF HON'BLE APEX COURT IN THE CASE OF K RAMULLAN VS. CIT, 245 ITR 417 HAS BEEN REPRODUCED AS UNDER:- 10. IT IS CLEAR FROM THE ABOVE THAT HON'BLE SUPRE ME COURT HAD APPLIED A PROVISIONS OF SECTION 2(P) OF FERA FOR DE TERMINING WHETHER A PERSON IS RESIDENT IN INDIA OR NOT. THEREFORE, RE SPECTFULLY FOLLOWING ABOVE DECISION, WE ALSO HOLD THAT ONE HAS TO LOOK A T THE DEFINITION OF RESIDENT ONLY IN THE FERA AND NEED NOT COME BACK TO THE IT ACT UNLESS IT IS SO SPECIFICALLY PROVIDED. THERE IS ANOTHER LO GIC IN THIS CONCLUSION. IT IS CLEAR SECTION 5(IIB) AND EXP THERETO OF GOVT. AS CO MPARED TO SAYS THAT WE HAD TO FOLLOW THE DEFINITION OF SECTION 2(Q) FOR DE TERMINING WHETHER PERSON IS RESIDENT OUTSIDE INDIA OR NOT. THIS IS NOT DISPUTED. ONCE THIS IS SO THEN FOR FINDING OUT THE MEANING OR CONCEPT OF T HE WORDS USED IN THAT DEFINITION, ONE HAS TO LOOK THAT ACT ONLY AND NEED NOT TRAVEL OUTSIDE UNLESS IT IS SPECIFICALLY PROVIDED IN THE MAIN STATUTE I.E . GT ACT OR IN THE REFERRED ACT I.E. FERA. THE MAIN QUESTION WILL ARISE AS TO W HY ONE IS REQUIRED TO COME BACK ONLY TO INCOME TAX ACT AND WHY NOT ELSEWH ERE IN ANY OTHER STATUTE WHICH MAY ALSO PROVIDE THE DEFINITION OF R ESIDENT. IN OUR CONSIDERED VIEW SEARCH IN OTHER STATUTE CAN BE DONE ONLY WHEN THE REFERRED ACT I.E. FERA DOES NOT PROVIDE THE MEANING OR CONCE PT OF THE WORDS USED IN SECTION 2(Q). ONCE THE MEANING AND CONCEPT OF TH E WORDS USED IN SECTION 2(Q) ARE CLEARLY AVAILABLE IN SECTION 2(O) OF FERA THEN WE DO NOT SEEN ANY REASON TO COME BACK TO INCOME TAX ACT OR A NY OTHER ACT FOR SEARCHING THE MEANING OF THE WORDS USED IN THE DEFI NITION REFERRED TO IN SECTION 2(Q) OF FERRA. 8 2.9 IT IS FURTHER NOTICED THAT DEFINITION OF THE SC HEDULED BANK GIVEN IN EXPLANATION (II) IN SECTION 36(1)(VIIA) HAS BEEN AMENDED BY THE FINA NCE ACT 2007. BEFORE AMENDMENT, THE SCHEDULED BANK INCLUDED THE CO-OPERATIVE BANK. HOWEVER, THE CO-OPERATIVE BANK WAS OMITTED FROM THE DEFINITION OF THE SCHEDULED BA NK GIVEN IN EXPLANATION (II) TO SECTION 36(1)(VIIA). THE ACT ITSELF HAS PROVIDED TH E DEFINITION OF NON- SCHEDULED BANK AND SCHEDULED BANK. THE LEGISLATURE WAS FULLY AWARE THAT WORD CO-OPERATIVE BANK IS DIFFERENT FROM THE MEANING OF SCHEDULED BANK AS GIV EN IN BANKING COMPANIES ACT. THE WORD CO-OPERATIVE BANK HAS NOT BEEN INCLUDED IN THE PROVISO. THE LANGUAGE IS VERY MUCH CLEAR AND WE FEEL THAT LD. CIT(A) WAS NOT JUSTIFIED IN ALLOWING DEDUCTION OF RS. 277.93 LACS AS PER PROVISO TO SECTION 36(1)(VIIA) OF THE A CT. IT WILL BE USEFUL TO MENTION THAT ENTIRE INCOME OF THE CO-OPERATIVE BANK IS EXEMPT U/ S 80P OF THE ACT AND THEREFORE, IT WAS NOT NECESSARY BY THE LEGISLATURE TO PROVIDE DEDUCTI ON AS PER PROVISO TO SECTION 36(1)(VIIA) OF THE ACT. HENCE, THE FIRST GROUND OF APPEAL OF TH E REVENUE IS ALLOWED. 3.1 THE SECOND GROUND OF APPEAL OF THE ASSESSEE IS THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 750.37 LACS MADE BY TH E AO ON ACCOUNT OF DEPRECIATION ON ASSETS (SECURITIES) AS THE ASSESSEE NEVER HELD THE SE SECURITIES AS STOCK IN TRADE. 3.2 THE A O DISALLOWED THE LOSS OF CLAIM OF RS. 750 .37 LACS AFTER OBSERVING AS UNDER:- 3.2 ANALYSIS OF THE REPLY OF THE ASSESSEE ON THE ISSUE MAKES IN ITSELF CLEAR THAT IT IS A NOTIONAL LOSS ARRIVED AT BY TAKING DIFFERENCE BETWEEN THE BOOK VALUE AND THE MARKET VALUE OF THE INVESTME NTS ON A PARTICULAR DATE I.E. ON 31-03-2007, THE DATE OF INSPECTION BY THE RBI AND I.O. WITHOUT PUTTING THESE TO SALE IN THE MARKET. THE ASSESSEE I N ITS REPLY DATED 6-8-2009 IN GUEST HOUSE EXPENSES GARB OF DIFFERENCE OF OPINI ON WITH THE RBI AUDITOR 9 REITERATED ABOVE HAS INDIRECTLY AGREED FOR THE DISA LLOWANCE OF THE LOSS BY STATING THAT THE LOSS INCURRED SHOULD HAVE BEEN SHO WN IN THE EVENT OF SECURITIES SOLD NO NOTIONAL LOSS SHOULD HAVE BEEN S HOWN. THE LOSS HAS BEEN BOOKED WITHOUT SELLING THE SECURI TIES OR ACTUALLY REALIZATION / INCURRING THE LOSS ON THE BASIS OF TH E RBI INSPECTION REPORT ON ACCOUNT OF DEVALUATION OF THE INVESTMENTS/ SECURITI ES IN MARKET. THE I.O. OF THE RBI IN HIS REPORT AT ANN. II A HAS CLEARLY TERM ED IT AS DEPRECIATION ON INVESTMENT. THE OBSERVATION OF THE RBI AUDITOR AT P AGE 8 OF HIS REPORT AT PARA4.5 IS REITERATED HERE:- AS ON MARCH 31,2007, A DEPRECIATION OF RS. 750.71 LAKH IN IDFC BOND WAS ASSESSED BY IO TAKING INTO CONSIDERATION VALUATION OF THE SCRIP PR OVIDED BY HDFC BANK LTD IT IS SIMPLY A METHOD OF PRESENTATION TO DIFFERENTI ATE THE NPAS WITH THOSE OF OTHER ASSTS AS PER SPECIFIED STANDARDS DRA WN OUT AS A CENTRAL BANKER OF THE COUNTRY UNDER THE BANKING REGULATION ACT AND RBI ACT WHICH HAS GOT NO SANCTION FROM THE INCOME-TAX STATU TE. THEREFORE, WITH THE ABOVE DISCUSSION, IT MAY BE FIRMLY CONCLUDED TH AT THE ASSESSEE'S CLAIM OF DEPRECIATION IS ONLY A NOTIONAL LOSS ARRIVED AT WITH THE DIFFERENCE OF VALUATION OF INVESTMENTS BETWEEN THEIR MARKET VALUE AND THE BOOK VALUE WHICH IS NOT MAINTAINABLE UNDER ANY OF THE PROVISI ONS OF INCOME TAX ACT, 1961, HENCE DISALLOWED AND ADDED TO THE INCOME OF T HE ASSESSEE 3.3 BEFORE THE LD. CIT(A) THE ASSESSEE HAS SUBMITTE D AS UNDER: THE NEXT ITEM OF LOSS IS ON SECURITIES DUE TO DIFF ERENCE IN VALUATION OF SECURITIES AT LOWER MARKET PRICE AS AG AINST BOOK VALUE. THE ASSESSEES CLARIFICATION AS FILED ON VARIOUS DA TES ON THE ISSUE IS AS UNDER- (I)REPLY DATED 06.08.2009 10 HOWEVER WE ALSO DIFFER FROM STATUTORY AUDITORS AS W ELL AS RBI INSPECTOR WITH REGARDS TO LOSS SHOWN ON ACCOUNTS OF SECURITIES DEPRECIATION, AS THESE IS NO SALE OF SUCH SECURITIE S & THERE IS NO PROVISION TO ASCERTAIN DEPRECIATION ON SECURITIES B ECAUSE OF NO FIXED ASSETS & THERE IS NO DEPRECIATION ON SUCH SEC URITIES LYING AS AN INVESTMENT. NO DOUBT IF THE SAME WOULD HAVE BEEN SOLD LOWER THAN BOOK VALUE, THE LOSS INCURRED THEREON WOULD BE FULLY SHOWN AS & WHEN THE SALE TOOK PLACE & LOSS OCCURRED THEREON. NO NOTIONAL LOSS SHOULD HAVE BEEN SHOWN TILL EFFECT OF SALE OF SECURITIES. THE MARKET PRICE SHOWN IN INSIDE COLUMNS TO KNOW THE AC TUAL REALIZATION VALUE AS ON DATE OF BALANCE SHEET & IT MIGHT BE HIGHER OR LOWER FOR ANY SECURITIES BUT THE AUDITOR SHOULD HAVE REFLECT IN BALANCE SHEET BUT NO LOSS CAN BE CLAIMED TILL ACTUA L LOSS SUFFERED BY BANK. HOWEVER WE ARE BOUND TO ACCEPT AUDITOR REPORT AS WELL AS INSPECTORS REPORT OF RBI WHATEVER THE SAME MAY BE. IT IS NOW, ON YOUR HONOUR TO EITHER ALLOW OR DISALLOWED THE SAID LOSSES OF DEPRECIATION ON INVESTMENT. (EMPHASIS SUPPLIED) 3.2 ANALYSIS OF THE REPLY OF THE ASSESSEE ON THE ISSUE MAKES IN ITSELF CLEAR THAT IT IS A NOTIONAL LOSS AR RIVED AT BY TAKING DIFFERENCE BETWEEN THE BOOK VALUE AND THE MARKET VA LUE OF THE INVESTMENTS ON A PARTICULAR DATE I.E. ON 31-03-2007 , THE DATE OF INSPECTION BY THE RBI AND I.O. WITHOUT PUTTING THES E TO SALE IN THE MARKET. THE ASSESSEE IN ITS REPLY DATED 6-8-2009 IN GUEST HOUSE EXPENSES GARB OF DIFFERENCE OF OPINION WITH THE RBI AUDITOR REITERATED ABOVE HAS INDIRECTLY AGREED FOR THE DISA LLOWANCE OF THE LOSS BY STATING THAT THE LOSS INCURRED SHOULD HAVE BEEN SHOWN IN THE EVENT OF SECURITIES SOLD NO NOTIONAL LOSS SHOULD HA VE BEEN SHOWN. THE LOSS HAS BEEN BOOKED WITHOUT SELLING THE SECURI TIES OR ACTUALLY REALIZATION / INCURRING THE LOSS ON THE BA SIS OF THE RBI INSPECTION REPORT ON ACCOUNT OF DEVALUATION OF THE INVESTMENTS/ SECURITIES IN MARKET. THE I.O. OF THE RBI IN HIS RE PORT AT ANN. II A HAS CLEARLY TERMED IT AS DEPRECIATION ON INVESTMENT . THE OBSERVATION OF THE RBI AUDITOR AT PAGE 8 OF HIS REP ORT AT PARA4.5 IS REITERATED HERE:- 11 AS ON MARCH 31,2007, A DEPRECIATION OF RS. 750.71 LAKH IN IDFC BOND WAS ASSESSED BY IO TAKING INTO CONSIDERATION VALUATION OF THE SCRIP PR OVIDED BY HDFC BANK LTD IT IS SIMPLY A METHOD OF PRESENTATION TO DIFFERENTI ATE THE NPAS WITH THOSE OF OTHER ASSTS AS PER SPECIFIED STA NDARDS DRAWN OUT AS A CENTRAL BANKER OF THE COUNTRY UNDER THE BA NKING REGULATION ACT AND RBI ACT WHICH HAS GOT NO SANCTIO N FROM THE INCOME-TAX STATUTE. THEREFORE, WITH THE ABOVE DISCU SSION, IT MAY BE FIRMLY CONCLUDED THAT THE ASSESSEE'S CLAIM OF DE PRECIATION IS ONLY A NOTIONAL LOSS ARRIVED AT WITH THE DIFFERENCE OF VALUATION OF INVESTMENTS BETWEEN THEIR MARKET VALUE AND THE BOOK VALUE WHICH IS NOT MAINTAINABLE UNDER ANY OF THE PROVISIONS OF INCOME TAX ACT, 1961, HENCE DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE 3.4 THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSE E AFTER OBSERVING AS UNDER 5.2 1. SIMILARLY THE DISALLOWANCE OF LOSS ON SECURITIES AND BALANCING OF BOOKS OF ACCOUNTS FOR R S. 750.37 LACS AND 4.11 LACS IS ALSO ILLEGAL AND WRONG AND THE SAM E SHOULD HAVE BEEN ALLOWED AS PER LAW AND AUDIT REPORT. THE DETAI LED REPLIES SUBMITTED BEFORE AO ARE ENCLOSED HEREWITH ALONGWITH COMMENTS OF RBI INSPECTOR ON SUCH LOSSES. AS HELD IN (2003) 130 TAXMAN PAGE 93 (THE HON'BLE KERALA HIGH COURT IN THE CASE OF .) IN THE CASE O F CIT VS. NEDUNGAS BANK LTD. HELD THE GOVT SECURITIES HEL D BY BANK IN COMPLIANCE WITH PROVISIONING OF BANKING REGULATION ACT. FOR THE PURPOSE OF MAINTAINING SLR ARE STOCK IN TRADE OF BU SINESS OF BANKING AND NOTIONAL LOSS SUFFERED ON ACCOUNT OF R EVALUATION OF THE SAID SECURITIES AT CLAUSE OF YEAR IS ALLOWABLE DEDUCTION IN 12 COMPUTATION OF TOTAL INCOME OF THE BANK. IN VIEW OF COVERED DECISIONS, THE LOSS ON ACCOUNT OF REVALUATION MADE BY RBI INSPECTOR AND STATUTORY AUDITORS ARE REPORTED IN TH EIR REPORT MUST HAVE BEEN ALLOWED AS PER THEIR FINANCIAL STATEMENT DULY AUDITED BY THEM. THE AUDIT REPORT IS QUITE CLEAR IN RESPECT OF VALUATION OF SECURITIES AND WE ALSO REPRODUCE HEREWITH THE EXTRA CT OF SUCH REVALUATION AND COMMENTS THEREON RBI INSPECTORS DUL Y ALSO ADOPTED BY STATUTORY AUDITORS. AS PER PAGE 11 OF AO ORDER THE AO HIMSELF AGREED THAT THERE IS A DEVALUATION OF SECUR ITIES WHICH ARE STOCK IN TRADE TO MAINTAIN SLR IS ESSENTIAL REQUIRE MENTS AS PER BANKING ACT AND IT IS QUITE WRONG TO SAY THAT IT AC T HAS NO RELATION WITH RBI ACT AND BANKING REGULATION ACT BECAUSE EVE RY BANK IS GOVERNED BY RBI AND BANKING REGULATION ACT. THE COV ERED JUDGMENT IS QUITE CLEAR ON THIS ISSUE OF NOTIONAL L OSS AS SHOWN BY AO. WE ARE ENCLOSING HEREWITH THE ANNEXURE III & IV SHOWING SECURITIES WISE LOSS AND COMMENTS MADE BY RBI INSPE CTORS FOR SUCH DEVALUATION LOSSES AND LOSS ON ACCOUNT OF NET PROVISIONS REQUIRED TO BE MADE FOR DIFFERENCE IN BALANCING PRI OR TO 01-04-2002 THEY HAVE SHOWN NET PROVISIONS REQUIRED FOR RS. 4.1 1 LACS AS UNDER. DR DIFFERENCES (OVERSTATEMENT OF ASSETS/UNDER STATE MENT OF LIABILITIES RS. 23.49 PRIOR TO 01-04-02 CR. DIFFE RENCE I.E. UNDERSTATEMENT OF ASSETS/ OVERSTATEMENT OF LIABILIT IES PRIOR 01-04- 02 RS. 19.38 I.E. NET 4.11 LACS.;; 5.3 THE APPELLANT PLACED RELIANCE ON THE DECISION O F HON'BLE BOMBAY HIGH COURT IN THE CASE F CIT VS. BANK OF BAR ODA 5.4 IN THE CASE OF CIT VS. BANK OF BARODA REPORTED IN 262 ITR 334 IT WAS OBSERVED BY THE HON'BLE BOMBAY HIGH COU RT THAT THE APPELLANT WAS ENTITLED TO CLAIM LOSS DUE TO DECREAS E IN VALUATION OF SHARES AND SECURITIES. FOLLOWING THIS DECISION, I H OLD THAT THE AO IS NOT JUSTIFIED TO MAKE A DISALLOWANCE OF RS. 750.37 LACS. THE 13 DISALLOWANCE IS DIRECTED TO BE DELETED. GROUND NO. 3 OF THE APPEAL IS THUS ALLOWED. 3.5 WE HAVE HEARD BOTH THE PARTIES. BEFORE US, THE LD. AR HAS FILED HE COPY OF THE INSPECTION REPORT THOUGH PAGE 8 OF SUCH REPORT IS N OT AVAILABLE. PAGE 7 OF THE INSPECTION REPORT SHOWS THAT ASSESSEE PURCHASED IDFC BONDS- 2 006 ON 22-08-2006. DURING THE PREVIOUS YEAR, THE ASSESSEE HAS SOLD BONDS TO THE E XTENT OF RS. 228.22 LACS. DURING THE COURSE OF PROCEEDINGS BEFORE US, WE MADE A QUERY FR OM THE LD. AR TO STATE AS TO HOW PURCHASE AND SALE OF SUCH INVESTMENT IS BEING ACCOU NTED IN THE BOOKS OF ACCOUNTS. WE WANTED TO ASCERTAIN AS TO WHETHER SUCH PROFIT OR LO SS IS SHOWN UNDER THE HEAD BUSINESS OR UNDER THE HEAD CAPITAL GAIN. WE ARE AWARE TO THE FA CT THAT SECTION 6 OF BANKING REGULATION ACT PERMITS THE BANK TO ENGAGE IN BUSINE SS OF PURCHASING AND SELLING OF SECURITIES OR BONDS. THE INVESTMENT CAN BE STOCK IN TRADE BECAUSE BANKING REGULATION ACT PERMITS THE BANKING COMPANIES INCLUDING CO-OPER ATIVE BANK TO ACQUIRE BONDS, SECURITIES ETC. THE BANKING REGULATION ACT ALSO PER MITS TO KEEP THE FIXED SUM IN THE FORM OF INVESTMENT. THE FACTS BEFORE US ARE NOT AVAILABL E TO ASCERTAIN AS TO HOW PURCHASE AND SALE OF SUCH BONDS AND SECURITIES IS BEING CONSIDER ED BY THE ASSESSEE IN ITS ACCOUNTS. WE THEREFORE, FEEL THAT THE ISSUE IS REQUIRED TO BE RE CONSIDERED BY THE AO. IN CASE THE PURCHASE AND SALE OF SECURITIES HAS BEEN SHOWN AS P ART OF THE BUSINESS INCOME THEN THE SECURITIES ARE TO BE CONSIDERED AS STOCK IN TRADE A ND THE VALUE SHOULD BE TAKEN EITHER AT THE COST OR MARKET VALUE WHICHEVER IS LOWER. THE ISSUE OF DEPRECIATION ON FALL OF SECURITIES HAS BEEN CONSIDERED BY ITAT BOMBAY BENCH IN THE CAS E OF JCIT VS. DENA BANK, 201- TIOL218-ITAT BOMBAY. FOR COMING TO THE CONCLUSION, THE BOMBAY BENCH HAS REFERRED TO THE DECISION OF THE ITAT SPECIAL BENCH BOMBAY IN THE CASE OF DCIT VS. 14 BANK OF BAHRIN & KUWAIT, 132 TTJ 505 IN WHICH THE L OSS ON ACCOUNT OF UN-MATURED FORWARD CONTRACT WAS HELD AS ALLOWABLE. HOWEVER, WE ARE MAKING IT CLEAR THAT THE AO WILL TAKE HIS OWN DECISION AFTER PROVIDING OPPORTUNITY T O THE ASSESSEE AND ASCERTAIN AS TO HOW SUCH PURCHASES AND SALES OF SECURITIES IS BEING ACC OUNTED FOR THE PURPOSE OF INCOME TAX. THUS THE SECOND GROUND OF APPEAL OF THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES . 3.6 THE ASSESSEE HAS FILED THE CROSS OBJECTION BELA TEDLY AND HAS FILED AN APPLICATION FOR CONDONATION OF DELAY. IN THE APPLICATION FOR CO NDONATION OF DELAY, IT WAS SUBMITTED THAT THE APPEAL MEMO WAS RECEIVED BY THE GENERAL MA NAGER WHO COULD NOT HAND OVER IT TO HIS SUCCESSOR BECAUSE OF ANTI-CORRUPTION RAID ON HI M. THE GENERAL MANAGER WAS SUSPENDED AND WAS ALSO ARRESTED BY THE COURT ORDER. THE PAPERS WERE AVAILABLE IN HIS ALMIRAH AND THE ALMIRAH WAS LOCKED. THE ALMIRAH WAS GOT OPENED BUT THE PAPERS WERE NOT FOUND IN THE ALMIRAH. THE AFFIDAVIT OF THE MANAGING DIRECTOR HAS BEEN FILED. THE GENERAL MANAGER WAS SUSPENDED WHO HAD NOT HANDED OVER THE A PPEAL MEMO FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND COPY OF THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2008- 09 WAS NOT HANDED OVER. THE COPIES OF THESE WERE CO LLECTED FROM THE DEPARTMENT. IT WAS THEREFORE, SUBMITTED THAT THE DELAY SHOULD BE CONDO NED. 3.7 AFTER HEARING BOTH THE PARTIES, WE FEEL THAT TH ERE WAS A REASONABLE AND SUFFICIENT CAUSE FOR NOT FILING THE CROSS OBJECTION WITHIN THE PRESCRIBED TIME. WE THEREFORE, CONDONE THE DELAY IN FILING THE CROSS OBJECTION. 4.1 THE FIRST GROUND OF THE C.O. OF ASSESSEE IS T HAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 169.95 LACS SHOWN AN D CLAIMED AS UNREALIZABLE INTEREST ON 15 IN N. P. ACCOUNT AS PER RBI DIRECTION AND / OR AUD IT REPORT WITHOUT APPRECIATING THE FULL FACTS. 4.2 BEFORE THE AO, IT WAS SUBMITTED THAT AS PER RBI GUIDELINES, THE INTEREST IS NOT TO BE RECOGNIZED ON NPA LOAN ACCOUNT. THUS THE ENTRY W AS TO BE REVERSED AS PER RBI NORMS. BEFORE THE AO, IT WAS SUBMITTED THAT THE ASSESSEE IS ENTITLED TO ARRANGE ITS AFFAIRS AND FOLLOW THE METHOD OF ACCOUNTING WHICH DEPARTMENT HA S EARLIER ACCEPTED. THE AO HAS REFERRED TO SECTION 43D OF THE ACT. THIS ALLOWS THE PUBLIC FINANCIAL INSTITUTION OR SCHEDULED BANK OR STATE FINANCIAL CORPORATION THAT INTEREST IN RELATION TO BAD AND DOUBTFUL DEBTS AS PER GUIDELINES OF RBI IS CHARGEA BLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT WAS CREDITED BY PUBLIC FINANCIAL INSTITUTION OR THE SCHEDULED BANK IN ITS PROFIT AND LOSS ACCOUNT OR IN THE YEAR IN WHICH IT IS ACTUALLY RE CEIVED. SECTION 43D IS NOT APPLICABLE TO CO-OPERATIVE BANK. IT WAS FURTHER SUBMITTED THAT TH E ASSESSEE FURNISHED A REPLY TO RBI IN WHICH IT WAS STATED THAT RECOVERY OF RS. 25.00 LACS HAS ALREADY BEEN MADE. THE AO ACCORDINGLY DISALLOWED A SUM OF RS. 169.55 LACS 4.3 BEFORE THE LD. CIT(A) ASSESSEE FILED THE FOLLOW ING SUBMISSIONS. 3.2 . APPELLANT IN ITS WRITTEN SUBMISSION A RGUED THAT THAT AS PER RBI NORMS THE INTEREST INCOME CANNOT B E TAKEN ON ACCRUED BASIS IN ALL NON-PERFORMANCE ACCOUNTS & LOS S ASSETS ACCOUNTS AS THE RBI ALLOWED TO CONSIDER INTEREST INCOME ONLY ON ACTUAL RECEIPTS BASIS IN SUCH ADVANCES. IN ALL NPA ACCOUNTS THE INTEREST IF ANY SHOWN ON ACTUAL BASIS THE SAME HAS TO BE RESERVED AND REVERSAL ENTR IES ARE TO BE PASSED AS PER RBI NORMS, WHILE FINALIZING THE AUDIT FOR THE Y EAR ENDED & THE SAME WOULD BE REDUCED FORM TOTAL INTEREST SHOWN ON ACCRU AL BASIS WRONGLY BY BANK AS PER AUDITOR COMMENT & AUDIT PARAS. HE HAS T O MAKE ADJUSTMENT FOR SUCH REVERSAL ENTRIES EVEN IF BANK FINALIZED TH EIR ACCOUNTS ON ACCRUED BASIS. IT IS THEIR DUTIES &/OR RESPONSIBILITIES TO SHOW TRUE AND FAIR RESULTS AND ACCORDINGLY THEY HAVE TO SHOW INTEREST INCOME I N SUCH ADVANCE ONLY ON REALIZATION BASIS I.E. ACTUALLY RECEIVED BY BANK S. NO DOUBT INTEREST HAS BEEN SHOWN ALL STANDARD ACCOUNTS I.E. PERFORMANCE A CCOUNTS ON ACCRUED BASIS EVEN. AS SUCH THE PRACTICE FOLLOWED IS AS PER LAW AND SINCE LAST 16 SEVERAL YEARS CANNOT BE CHANGED BY AO BY MAKING AN ADDITION OF INTEREST ACCRUED INCOME FOR RS. 169.95 LACS. AS DECIDED IN FOLLOWING CASES ALSO, SUCH INCOME OF INTEREST IS TO BE EXCLUDED FROM TOTA L INCOME IF SUCH INTEREST IS NOT ACTUALLY RECEIVED AND THEREAFTER IN TEREST WILL BE ADDED AS INCOME IN THE YEAR WHEN ACTUALLY RECEIVED. IT HAS B EEN HELD BY SUPREME COURT EVEN FOR PRIOR PERIOD WHEN INCOME RECOGNITION NORMS & DECIDED BY RBI WAS NOT THERE IN EXISTENCE BECAUSE OF, TO AVOID SUCH NOTIONAL INCOME WITHOUT ACTUALLY RECEIVED. (1999) 237 ITR PAGE 889 (SUPREME COURT). THIS DECISION IS ALSO FULLY COVERED FROM OUR CASE B UT THE AO HAS NOT EALT WITH & NOT DISCUSSED EVEN IN HIS ORDER (2002) 28 TW PAGE 117 (ITAT, JAIPUR) SIMILARLY AS HELD IN (2009) XL1 TAX WORLD PAGE 156 (ITAT JAIPUR BENCH) IN THE CASE OF ACIT JAIPUR VS . RAJ STATE GANGANAGAR SUGAR MILLS LTD. JAIPUR HELD- NO INTE REST OF LOANS WILL BE TAXABLE ON ACCRUAL BASIS IN A CASE WHERE IN ASSESSEE IS SHOWING IT ON RECEIPT BASIS BECAUSE THERE ARE UNCER TAINTIES TO RECOVER THE SAME ON ACCRUAL BASIS IT HAS BEEN FURTH ER HELD THAT AN AMOUNT CANNOT BE PUT TO TAX UNLESS THE ASSESSEE ACQ UIRES A RIGHT TO RECEIVE THE SAME BECAUSE THE SAID AMOUNT HAS NOT BE CAUSE A DEBT RECEIVABLE BY THE ASSESSEE . ALSO HELD BY RAJ. HIGH COURT AS REPORTED IN (2004) 267 ITR PAGE 398 (RHC)- HELD- NOTIONAL INTEREST NOT TO BE INCLUD ED ON DUES NOT LIKELY TO BE RECOVERED. IN OUR CASE ALSO WE HAVE NOT CHARGED INTEREST ON D EBIT BALANCES NOT LIKELY TO BE RECOVERED AS PER RBI NORM S & DEBITED THE SAME AS WRONGLY CHARGED BY BANK ON THE BASIS OF AUDITOR REPORT GIVEN AFTER CHECKING SUCH A EVERY SUCH ACCOUNTS & ASKED TO MAKE REVERSAL ENTRIES FOR SUCH INTEREST SHOWN ON ACCRUAL BASIS FOR RS. 169.95 AS PER LIST GIVEN BY THEM & SHOWN TO AO BUT HE HAS CONSIDERED THERE INTE REST INCOME OR ACCRUAL BASIS & ADDED IN OUR INCOME AGAINST THE BOO K OF ACCOUNTS ONLY ON THE BASIS OF PREVIOUSLY SHOWN BY BANKS TO SHOW MORE PROFIT AGAINST THE RBI NORMS & INCOME RECOGNITION POLICY AND ALSO AGAI NST THE ACCOUNTING STANDARD TO SHOW INTEREST ACTUALLY RECEIVED ONLY IN THESE NPA ACCOUNTS. WE ARE ENCLOSING HEREWITH THE LIST OF INTEREST REVE RSAL ACCOUNTS IN NPA ADVANCES FOR RS. 169.95 AS PER ANNEXURE I & ACCORDI NGLY ALL INTEREST DEBITED IN NPA ACCOUNTS WHICH ARE NOT REALIZED AND TAKEN ON ACCRUED BASIS IN NPA ADVANCES WHICH WAS WRONG AS PER RBI NO RMS OF INCOME REORGANIZATION FOR WHICH EXPLANATION HAS BEEN GIVEN BANK AUDIT CHAPTER ENCLOSED SEPARATELY. 4.4 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S CONFIRMED THE ADDITION OF RS. 169.95 LACS AFTER OBSERVING AS UNDER:- 17 3.3. ARGUMENTS OF THE APPELLANT HAVE BEEN CAREF ULLY CONSIDERED. IT HAS BEEN RIGHTLY OBSERVED BY AO IN T HE ASSESSMENT ORDER THAT SECTION 43D OF THE I.T ACT IS APPLICABLE TO A PUBLIC FINANCIAL INSTITUTION OR SCHEDULED BANK. THE APPELLANT IS NOT A SCHEDULED BANK AND THEREFORE SECTION 43D IS NOT APPLICABLE IN ITS CASE . MOREOVER THE APPELLANT ITSELF OBJECTED TO TREATMENT OF INTEREST BY RBI TO BE CATEGORIZED AS UNREALIZED. IN ITS REPLY TO THE RBI, THE APPELLANT REPORTED RECOVERY OF RS. 25,00,000/- AND FURTHER CLAIMED THAT THE ENTIRE AMO UNT WILL BE RECOVERED BY THE END OF THE YEAR ITSELF. IN VIEW OF THESE FAC TS AND FOR REASONS DISCUSSED IN DETAIL BY AO IN THE ASSESSMENT ORDER T HE DISALLOWANCE OF RS. 169.95 LACS IS JUSTIFIED AND THE SAME IS CONFIRMED. GROUND NO. 1 OF THE APPEAL IS THUS DISMISSED. 4.5 WE HAVE HEARD BOTH THE PARTIES. SECTION 145 OF THE ACT MAKES IT CLEAR THAT INCOME CHARGEABLE UNDER THE HEAD BUSINESS IS TO BE COMPUTE D IN ACCORDANCE WITH EITHER CASH SYSTEM OR MERCANTILE SYSTEM OF ACCOUNTING . NOW THE ASSESSEE CANNOT HAVE THE HYBRID SYSTEM OF ACCOUNTING. HENCE SPECIFIC PROVISIONS OF SECTION 43D WAS MADE W.E.F. 1-04- 2000 SO THAT THE PUBLIC FINANCIAL INSTITUTION OR S CHEDULED BANKS ARE ALLOWED TO SHOW THE INTEREST ON NPA ON CASH BASIS. THE ITAT SPECIAL BEN CH IN THE CASE OF NEW INDUSTRIES LTD. VS. ACIT, 18 SOT 51 (DEL.) HELD THAT PRUDENTIA L NORMS ISSUED BY RBI FOR TREATING THE DEBT AS BAD WILL NOT BE APPLICABLE FOR ALLOWING DEDUCTION U/S 36(1)(VII) OF THE ACT. IN RESPECT OF SUCH INTEREST, THE ASSESSEE CAN CLAIM T HE DEDUCTION UNDER THE HEAD BAD DEBTS. FOR THIS PURPOSE, THE ASSESSEE WILL HAVE TO CLAIM T HE BAD DEBTS EITHER BY WRITING OFF OF THE ACCOUNT OF THE DEBTORS OR BY REDUCING THE SAME FROM THE AMOUNTS OF DEBTORS SHOWN IN THE BALANCE SHEET. REFERENCE IS MADE TO THE DECISION OF HON'BLE APEX COURT IN THE CASE OF VIJAYA BANK VS. CIT, 323 ITR 366 AND TRF LTD. VS. C IT, 323 ITR 397. SINCE WE ARE NOT HAVING THE BENEFIT OF GOING THROUGH THE PROFIT AND LOSS ACCOUNT, WE THEREFORE, RESTORE THE 18 ISSUE ON THE FILE OF THE AO. IN CASE SUCH INTEREST HAS BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT AND THE ASSESSEE HAS EITHER WRITTEN OFF TH E AMOUNT IN THE ACCOUNT OF THE DEBTORS OR REDUCED THE SAME FROM THE AMOUNT OF THE SUNDRY D EBTORS THEN DEDUCTION CAN BE ALLOWED. THE AO WILL GIVE AN OPPORTUNITY TO THE ASS ESSEE TO PLACE NECESSARY EVIDENCE AND THEREAFTER THE AO WILL RECORD HIS FINDINGS. THEREFO RE, THIS ISSUE IS RESTORED BACK ON THE FILE OF THE AO. 5.1 THE SECOND GROUND OF THE C.O. OF THE ASSESSEE IS THAT THE LD. CIT(A) HAS ERRED IN MAINTAINING THE ADDITION OF GRATUITY PAID AGAINST P ROVISIONS PRIOR TO DUE DATE OF FILING OF RETURN. IT IS MENTIONED IN THE GROUND OF C.O. THAT THE ADDITION MAINTAINED FOR ACTUAL PAYMENT OF GRATUITY IS WRONG AND ILLEGAL. 5.2 WE HAVE HEARD BOTH THE PARTIES. THE PROVISIONS OF GRATUITY IS NOT ALLOWABLE U/S 40A(7) . SECTION 43B(B) IS APPLICABLE IN RESPECT O F ANY SUM CONTRIBUTED TO THE GRATUITY FUND. BEFORE THE LD. CIT(A), IT HAS BEEN MENTIONED THAT THE ASSESSEE HAS MADE PAYMENT OF GRATUITY TO THE EXTENT OF RS. 4,66,593/- UPTO TH E DUE DATE OF FILING OF RETURN U/S 139(1) OF THE ACT. THE PROVISIONS OF SECTION 40A(7) HAVE E FFECT NOTWITHSTANDING ANYTHING TO BE CONTRARY. HENCE, THE PAYMENT OF PROVISIONS TO GRATU ITY FUND IS NOT ALLOWABLE. HOWEVER, IN CASE THE ASSESSEE HAS PAID GRATUITY THEN THE SA ME WILL BE ALLOWABLE. HOWEVER, THE ISSUE BEFORE US IS IN RESPECT OF PROVISIONS FOR PAYMENT TO THE FUND AND NOT TO THE EMPLOYEE. THEREFORE, THE LD. CIT(A) WAS JUSTIFIED IN CONFIRMI NG THE ADDITION OF RS. 5,38,329/-. 6.1 THE THIRD GROUND OF C.O. OF THE ASSESSEE IS T HAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 4.11 LACS. 6.2 WE HAVE HEARD BOTH THE PARTIES. THE ASSESSEE HA S WRITTEN OFF THE SUM OF RS. 4.11 LACS AS THERE WAS DIFFERENCE IN BALANCING OF ACCOUN TS IN GENERAL LEDGER BALANCES AND 19 SUBSIDIARY BALANCES PRIOR TO 01-04-02. SINCE RECONC ILIATION HAS BEEN DONE DURING THE YEAR AS PER REPORT OF THE RBI AND THE AMOUNT HAS BEEN WR ITTEN OFF , THEREFORE, THIS IS ALLOWABLE AS THE DIFFERENCE HAS BEEN NOTICED DURING THE ASSE SSMENT YEAR UNDER CONSIDERATION . 7. IN THE RESULT, THE APPEAL OF THE REVENUE AS WELL AS THE CROSS OBJECTION OF THE ASSESSEE ARE PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 22-12 -2011 SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 22/12/2011 *MISHRA COPY FORWARDED TO :- 1. THE DCIT, CIRCLE-1, AJMER 2. M/S. AJMER COOPERATIVE BANK LTD., AJMER 3. THE LD. CIT BY ORDER 4. THE LD. CIT(A) 5. THE LD.DR 6. THE GUARD FILE (ITA NO.01/JP /11) A.R, ITAT, JAIPUR 20 21