ACIT, Circle-1, Warangal V. M/s. Andhra Pradesh Grameena Vikas Bank, Warangal

ITA 1459/HYD/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2820 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 17-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M RAVINDER SAI
• Assessee Lawyers: T UMAKANT
• Keywords: Depreciation; Search and seizure; Additional evidence; Bad and doubtful debts; Revised return; Capital expenditure
• Section: 43B; 143(3); 139(5); 145; 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBE R ITA NOS. 502/H/11- ASST. YEAR 2007-08 967/ HYD/11- A.YEAR 2007-08 AND ITA NO. 1387/HYD/11- A.YEAR.2008-09 M/S. ANDHRA PRADESH GRAMEENA VIKAS BANK, WARANGAL. PAN:AAAJA1351N V/S. ACIT, AAYAKAR BHAVAN, STATION ROAD, WARANGAL. (APPELLANT) (RESPONDENT) ITA NOS. 112 1/HYD/11-A.YEAR 2007-08 & 1459/HYD/ 11- A.YEAR 2008- 09 ACIT, AAYAKAR BHAVAN, STATION ROAD, WARANGAL. V/S. M/S. ANDHRA PRADESH GRAMEENA VIKAS BANK, WARANGAL. PAN:AAAJA1351N (APPELLANT) (RESPONDENT) ASSESSEE BY : SRI T. UMAKANT DEPARTMENT BY : SRI M. RAVINDER SAI DATE OF HEARING 2 5 - 3 - 2013 DATE OF PRONOUNCEMENT 29-4-2013 . O R D E R PER SAKTIJIT DEY, JUDICIAL MEMBER: THESE ARE SET OF FIVE APPEALS. WHILE ITA NO. 1121/HY D/11 AND ITA NOS. 967/HYD/11 ARE CROSS APPEALS AGAINST THE ORDER O F THE CIT (A), VIJAYAWADA PERTAINING TO THE ASSESSMENT YEAR 2007- 08, ITA NOS. 1387/HYD/11 AND ITA NO. 1459/HYD/11 ARE CROSS APPEALS AGA INST THE ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 2 ORDER OF THE CIT (A)-VI, HYDERABAD PERTAINING TO THE ASSESSMENT YEAR 2008-09. ITA NOS. 502/HYD/11 IS AGAINST THE ORDER PASSED BY THE CIT U/S 263 OF THE IT ACT FOR THE ASSESSMENT YEAR 2007-08. S INCE THE ASSESSEE IS COMMON AND ISSUES INVOLVED IN ALL THESE APPEALS AR E ALSO IDENTICAL, THESE ARE CLUBBED TOGETHER AND DISPOSED OF BY THIS COMBINED ORDER FOR THE SAKE OF CONVENIENCE. ITA NOS.1121 AND 1459/HYD/11 (DEPARTMENTAL APPEALS) :- 2. SINCE FACTS EXCEPTING THE FIGURES ARE SIMILAR FOR BOTH THE YEARS IN THESE TWO APPEALS, WE DEAL WITH THE FACTS INVOLVED IN THE ASSESSMENT YEAR RELATING TO A.Y. 2007-08. 3 THE FIRST ISSUE AS RAISED IN GROUND NO.2 RELATES TO DE LETION OF ADDITION OF AN AMOUNT OF RS.83 LAKHS BEING BROKEN PER IOD INTEREST. BRIEFLY THE FACTS ARE, THE ASSESSEE IS A REGIONAL RURAL B ANK WHICH CAME INTO EXISTENCE AFTER AMALGAMATION OF FIVE REGIONAL R URAL BANKS. IN COURSE OF ASSESSMENT PROCEEDINGS FOR THE IMPUGNED ASSESSMENT YE AR, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE FOR THE PURP OSE OF MAINTAINING STATUTORY LIQUIDITY RATIO (SLR) WITH THE RESERVE BANK OF INDIA, HAD PURCHASED GOVERNMENT SECURITIES ON WHICH THE RBI PAYS INTEREST ON DUE DATES. IT WAS FURTHER NOTED BY THE ASSE SSING OFFICER THAT THE ASSESSEE HAS INCLUDED BROKEN PERIOD INTEREST FOR THE INTEREST PAYABLE TO THE ASSESSEE. THE ASSESSING OFFICER WAS OF THE VI EW THAT THE BROKEN PERIOD INTEREST PAID AT THE TIME OF PURCHASE OF SECURITIES WAS A PART OF PURCHASE CONSIDERATION AND THEREFORE THE SAME IS IN THE NATURE OF CAPITAL EXPENDITURE. HE THEREFORE ASKED THE ASSESSEE T O EXPLAIN AS TO WHY THE BROKEN PERIOD INTEREST SHALL NOT BE DISALLO WED. IN RESPONSE TO THE QUERY MADE BY THE ASSESSING OFFICER, THE ASSESSEE THO UGH ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 3 SUBMITTED HIS EXPLANATION, THE ASSESSING OFFICER HOWEVER R EJECTED THE SAME AND HELD THAT THE INTEREST ELEMENT INCLUDED IN TH E PURCHASE CONSIDERATION WAS NOT ALLOWABLE AS EXPENDITURE BY FOL LOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK VS. CIT (187 ITR 541). THE ASSESSING OFFICER FURTHER REFERRING TO THE CIRCULAR NO.665 DATED 5-10-1993 OF THE CBDT HELD THAT THE GO VERNMENT SECURITIES SINCE ARE COMING WITHIN THE CATEGORY OF HELD T O MATURITY (HTM), SECURITIES CONSTITUTED INVESTMENT AND NOT STOCK IN T RADE. HENCE, IT IS A CAPITAL EXPENDITURE AND THEREFORE NOT AL LOWABLE. THE ASSESSEE CHALLENGED THE DISALLOWANCE IN APPEAL BEFORE THE CIT (A). 4. IN COURSE OF HEARING BEFORE THE CIT (A) THE ASSESSEE RELYING UPON VARIOUS JUDICIAL PRECEDENTS, SUBMITTED THAT HTM CATE GORY OF SECURITIES ARE NOT INVESTMENTS BUT STOCK IN TRADE OF THE ASSESSEE AND AS SUCH NO DISALLOWANCE OF THE BROKEN PERIOD INTEREST CAN B E MADE. THE CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND RELYING UPON THE DECISION OF HONBLE KERALA HIGH COURT IN CASE O F CIT VS. NEDUNGADI BANK LTD.(264 ITR 545) HELD THAT GOVERNME NT SECURITIES ACQUIRED BY THE ASSESSEE IN PURSUANCE OF PROVISIONS OF BANK ING REGULATION ACT HAVE TO BE TREATED AS STOCK IN TRADE O F BUSINESS OF THE BANK. HENCE, THE BROKEN PERIOD INTEREST IS AN ADMISSIBL E DEDUCTION IN THE COMPUTATION OF TOTAL INCOME OF THE BANK UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. ON THE AFORESAID CONCLUSION, THE CI T (A) DELETED THE ADDITION OF RS.83 LAKHS. 5. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIAL ON RECORD. IT IS EVIDENT FROM THE ASSESSMEN T ORDER THAT THE ASSESSING OFFICER HAS DISALLOWED THE BROKEN PERIOD IN TEREST BY HOLDING THE HTM CATEGORY OF SECURITIES AS INVESTMENT AND NOT STOCK IN ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 4 TRADE OF THE ASSESSEE BY RELYING UPON BOARDS CIRCULAR N O.665 DATED 5- 10-1993. THE ASSESSING OFFICER HAS FURTHER RELIED UPON T HE DECISION OF HONBLE SUPREME COURT IN CASE OF CIT VS. VIJAYA BANK (187 ITR 541). HOWEVER, WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF MUMBAI HIGH COURT IN CASE OF AMERICAN EXP RESS INTERNATIONAL BANKING CORPORATION V/S. CIT (258 ITR 601) AND DECISION OF HONBLE KERALA HIGH COURT IN CASE OF CIT V/S. NED UNGADI BANK LTD.,(264 ITR 545) WHEREIN IT HAS BEEN HELD THAT TH E BROKEN PERIOD INTEREST IS AN ALLOWABLE DEDUCTION. THE CO-ORDINATE BEN CH OF THIS TRIBUNAL FOLLOWING THE AFORESAID DECISIONS HAVE ALSO DE CIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN CASE OF STATE BANK OF HYDERABAD IN ITA NOS.578 AND 779/HYD/10 DATED 7-9-2012. FURTHER, THE CONCLUSION ARRIVED AT BY THE ASSESSING OFFICER THAT THE HTM CATEGORY OF SECURITIES ARE INVESTMENTS AND CANNOT BE CONSIDERED AS STOCK IN TRADE IS ALSO FOUND TO BE NOT THE CORRECT VIEW. THE HONBLE AP HIGH COURT IN CASE OF SBH (151 ITR 703) HAS HELD THAT THE AMOUNT REQUIRED TO BE KEPT IN INDIA AS PER SECTION 24 OF THE BANKING REGULATION ACT, 1949 IN THE FORM OF CASH, GOLD AND ENCUMBERED SECURITIES IS PART OF STOCK IN TRADE OF THE ASSESSEE. HENCE, IT CANNOT BE HELD THAT HTM CATEGORY OF SECUR ITIES IS NOT STOCK IN TRADE OF THE ASSESSEE. IN AFORESAID VIEW OF THE MATTER, WE UPHOLD THE CONCLUSION OF THE CIT (A) TO THE EFFECT THAT BROKEN PERIOD INTEREST IS AN ALLOWABLE DEDUCTION. ACCORDINGLY, WE DI SMISS THE GROUND RAISED BY THE REVENUE ON THIS ISSUE. 6. GROUND NO.3 RELATES TO DISALLOWANCE OF AMORTISATION OF GOVERNMENT SECURITIES AMOUNTING TO RS.19,14,62,383/-. IN COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.19,14,62,000/- TOWARDS AM ORTISATION PROVIDED ON GOVERNMENT SECURITIES UNDER THE HEAD OP ERATING ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 5 EXPENSES. IT WAS EXPLAINED BY THE ASSESSEE THAT ALL TH E SECURITIES FOR THE PURPOSE OF SLR ARE CLASSIFIED AS HELD TO MATURITY ( HTM IN SHORT) AS PER THE ADVICE OF THE RBI. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE BY OBSERVING THAT MERE CONFOR MITY WITH THE ACCOUNTING PRACTICE ADVISED BY THE RBI WOULD NOT QUALIF Y FOR ANY ALLOWANCE UNDER THE PROVISIONS OF IT ACT. HE WAS OF THE VIEW THAT THE CLAIM OF AMORTIZATION OF GOVERNMENT SECURITIES WAS INADM ISSIBLE AS NO SPECIFIC PROVISION WARRANTING THE ALLOWABILITY OF SUCH A CLAIM WAS AVAILABLE IN THE ACT. HE FURTHER OBSERVED THAT THE CO MPUTATION OF AMORTIZATION ITSELF WAS INCORRECTLY DONE BY ADOPTING TH E COUNT OF 365 DAYS PER YEAR AS AGAINST 360 DAYS ALLOWABLE. THE CIT (A) AFTER CONSIDERING THESE SUBMISSIONS OF THE ASSESSEE AND EXAMINING TH E MATERIALS ON RECORD CAME TO HOLD THAT HTM CATEGORY CONSTI TUTES STOCK IN TRADE OF THE ASSESSEE BANK. HE FURTHER HELD THAT THE ME THOD ADOPTED BY THE ASSESSEE FOR AMORTIZING THE PREMIUM IS AS PER THE ESTABLISHED ACCOUNTING STANDARDS. HE FURTHER HELD THAT AS THE SECURITI ES UNDER HTM CATEGORY IS HELD BY THE ASSESSEE AS STOCK IN TRADE, THE CLAIM FOR AMORTIZATION MADE BY THE ASSESSEE IS VALID. THE CIT (A) HOWEVER ACCEPTED THE VIEW OF THE ASSESSING OFFICER SO FAR AS THE COR RECTNESS OF THE COMPUTATION OF THE CLAIM MADE BY THE ASSESSEE IS CON CERNED BY RESTRICTING THE CLAIM TO RS.18,88,58,186/-. 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PARTIES AN D PERUSED THE MATERIAL ON RECORD. AFTER PERUSING THE ORDER OF THE CIT (A), WE DO NOT FIND ANY INFIRMITY IN HIS VIEW. AS HAS BEEN HELD BY US IN THE EARLIER PART OF THIS ORDER (SUPRA), HTM CATEGORY OF SECURITIES BEI NG STOCK IN TRADE, THE ASSESSEE IS ENTITLED TO CLAIM AMORTIZATION. HE NCE, THE ORDER PASSED BY THE CIT (A) IS UPHELD AND THE GROUND RAISED B Y THE REVENUE IS DISMISSED. ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 6 8. GROUND NO.4 RELATES TO DELETION OF AN ADDITION OF RS.46,45,087/- BEING PROVISION FOR STAFF FRAUDS. DURING THE ASSESSMENT P ROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD MADE A PR OVISION OF RS.44,44,087/- TOWARDS STAFF FRAUD. IN RESPONSE TO THE QUERY MADE BY THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED THAT ALL THE ADVANCES WHICH HAVE BECOME BAD ON ACCOUNT OF FRAUD BY THE STAFF A RE TREATED AS LOSS AND ACCORDINGLY PROVISION HAS BEEN MADE. THE ASSESSI NG OFFICER HOWEVER REJECTED THE CONTENTIONS OF THE ASSESSEE BY OBSERVI NG THAT THE PROVISION FOR STAFF FRAUDS COULD NOT BE EQUATED WITH TH E PROVISION OF BAD AND DOUBTFUL DEBTS. HE WAS FURTHER OF THE VIEW THAT FRAUDS BY STAFF ARE NORMALLY NOT EASILY LET OFF AND THE AMOUNTS ARE RECO VERED, BUT APPROPRIATE ACTION IS INITIATED FOR RECOVERY OF SUCH LOSS FROM PAYMENTS DUE TO THEM. THE ASSESSING OFFICER WAS OF THE OPINION THA T SINCE THE ASSESSEE WAS NOT ABLE TO SHOW THAT THE AMOUNT SO RECOVERED WAS DULY ACCOUNTED FOR, THE CLAIM CANNOT BE ALLOWED. HE ASSESSEE CHA LLENGED THE DISALLOWANCE BEFORE THE CIT (A). 9. ON APPEAL, THE CIT (A) AFTER CONSIDERING THE CONTENTIONS MADE ON BEHALF OF THE ASSESSEE WAS OF THE VIEW THAT STAFF FRAUDS ARE SIMILAR TO EMBEZZLEMENT BY AN EMPLOYEE AND THEREFORE QUALIFIES AS AN ALLOWABLE EXPENDITURE U/S 37 OF THE ACT. THE CIT(A) FOLLOWING A DECISION OF INCOME-TAX APPELLATE TRIBUNAL, AMRITSAR BENCH IN CASE OF ITO VS. J & K BANK LTD., (95 ITD 141) ALLOWED THE CLAIM OF THE ASSESSE E. 10. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. FROM THE ASSESSMENT ORDER, IT IS CLEAR THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT THERE I S LOSS TO THE BANK ON ACCOUNT OF STAFF FRAUD BUT HAS ASSUMED THAT THE E NTIRE AMOUNT ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 7 COULD NOT HAVE BEEN LOST AND PART OF THE LOSS MUST H AVE BEEN RECOVERED, THE AMOUNT SO RECOVERED NEEDS TO BE ACCOUNTED FOR AS INCOME IF THE PROVISIONS CREATED FOR SUCH LOSS IS TO BE ALL OWED. HOWEVER, NO DISALLOWANCE CAN BE MADE ON PRESUMPTIONS. T HE INCOME- TAX APPELLATE TRIBUNAL, AMRITSAR BENCH IN CASE OF ITO VS. J & K BANK LTD (SUPRA) AFTER TAKING INTO CONSIDERATION THE DECISION OF HONBLE SUPREME COURT IN CASE OF BADRI DAS DAGA V/S. CIT (34 ITR 10) AND ASSOCIATED BANKING CORPN. OF INDIA LTD. V/S. CIT AIR 1965 (SC) 1188 AND KEEPING IN VIEW THE CBDTS CIRCULAR NO.35 DATED 2 4-11-1965 HELD THAT THE LOSS BY EMBEZZLEMENT BY EMPLOYEES SHOULD BE T REATED AS INCIDENTAL TO BUSINESS AND THE SAME SHOULD BE ALLOWED AS D EDUCTION IN THE YEAR IN WHICH IT IS DISCOVERED. THE INCOME-TAX A PPELLATE TRIBUNAL, AMRITSAR BENCH FOLLOWING A DECISION OF HONBLE GUJARAT HI GH COURT HELD THAT EMBEZZLEMENT LOSS BY AN EMPLOYEE SHOULD BE ALLOWE D IN THE YEAR IN WHICH IT IS DISCOVERED BY THE ASSESSEE. 11. WE FIND FROM THE ORDER PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, AMRITSAR BENCH IN CASE OF ITO VS. J & K BANK L TD (SUPRA) THAT THE ISSUE IS SQUARELY COVERED BY THE AFORESAID DECISION OF THE TRIBUNAL. THAT BESIDES CIRCULAR NO.35 DATED 24-11-1965 OF CBDT A LSO CLARIFIES THAT THE LOSS TO EMBEZZLEMENT BY AN EMPLOYEE IS AN ALL OWABLE EXPENDITURE U/S 37 OF THE ACT. IN AFORESAID VIEW OF T HE MATTER, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT (A) IN ALLOWING THE EXPENDITURE CLAIMED BY THE ASSESSEE ON ACCOUNT OF STAFF FRA UD. HENCE, THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 12. THE ADDITIONAL GROUND RAISED BY THE DEPARTMENT IN ITA NO.1121/HYD/2011 WHICH CORRESPONDS TO GROUND NO.5 OF ITA NO.1459/HYD/11 IS WITH REGARD TO DELETION OF ADDITIO N MADE BY THE ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 8 ASSESSING OFFICER ON ACCOUNT OF ACCRUED INTEREST ON NON PERFO RMING ASSETS (NPAS). 13. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING O FFICER NOTED FROM THE AUDIT REPORT IN FORM NO.3CD, IT WAS REPORTED THAT INCOME AND EXPENDITURE WERE ACCOUNTED ON ACCRUAL BASIS EXCE PT THE INTEREST ON NPAS WHICH WAS STATED TO HAVE BEEN RECOGNISED ON REALISATION BASIS. WHEN THE ASSESSING OFFICER ASKED THE A SSESSEE TO EXPLAIN AS TO WHY THE INTERESTS ON NPAS HAVE NOT BEEN RECOGNISED ON ACCRUAL BASIS, THE ASSESSEE SUBMITTED THAT INTEREST ON ADVANCE S HAVE BEEN RECOGNISED IN ACCORDANCE WITH THE PRUDENTIAL NORM S FOR INCOME RECOGNITION, CLASSIFICATION AND PROVISIONS ISSUED BY THE RB I. IT WAS STATED THAT INTEREST ON NPAS IS RECOGNISED ONLY WHEN IT IS ACTUALLY RECEIVED BY THE BANK. 14. IT WAS FURTHER STATED THAT ONCE AN ADVANCE ACCOUNT I S CLASSIFIED AS SUBSTANDARD ASSET AS AT THE END OF THE YEAR, UNREALIZ ED INTEREST ON SUCH INTEREST WILL BE DEBITED TO INTEREST ACCOUNT IF IT IS PREVIOUSLY CREDITED TO IT. IT WAS STATED THAT AS THE RECOGNITION OF ADVANCES IS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY THE RBI AND ALSO CONSIDERING THE PROVISIONS OF SECTION 43D INTEREST ON NON PERFORM ING ASSETS SHOULD NOT BE TREATED AS INCOME ON ACCRUAL BASIS. THE ASSESSING O FFICER HOWEVER DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE BY OBSERVING THAT SUCH INTEREST WAS TAXABLE ON ACCRUAL BASIS AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. HE FURTHER OBSE RVED THAT THE ASSESSEE ITSELF HAD CREDITED INTEREST ON NPA IN ITS BOOKS OF ACCOUNTS BEFORE DEBITING THE SAME FOR PURPOSE OF COMPUTING TAX ABLE INCOME. HENCE, HE CAME TO A CONCLUSION THAT THE AMOUNT CREDITED A S UNREALIZED ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 9 INTEREST ON NPA WAS TAXABLE AND ADDED IT TO THE TOTAL INCOME. THE ASSESSEE CHALLENGED THE ADDITION BEFORE THE CIT (A). 15. IN COURSE OF HEARING BEFORE THE CIT (A), THE ASSESSEE CONTENDED THAT ALTHOUGH INTEREST NOT RECOVERED OR REALISED WAS TR EATED AS REALISED AND CREDITED TO INTEREST ACCOUNT ON ACCRUAL BASIS , THE A SSESSEE GENERALLY USING MERCANTILE SYSTEM OF ACCOUNTING AS PER T HE DIRECTIONS OF RBI WITH REGARD TO PRUDENTIAL NORMS ON IDENTIFICATION OF ADVANCES AS NPA, THE INTEREST ACCRUED AND CREDITED DURING THE YEAR ON SUCH ADVANCES IS REVERSED AND TRANSFERRED TO INTEREST NOT COLL ECTED ACCOUNT I.E., INTEREST SUSPENSE ACCOUNT. IT WAS SUBMITTED THAT TH E AFORESAID FACTS WERE CLEARLY EXPLAINED IN FORM 3CD. THE ASSESSEE F URTHER RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN CASE OF UNITED COMMERCIAL BANK V/S. CIT (240 ITR 355) WHEREIN IT WA S HELD IN THE FOLLOWING MANNER:- THE VERY FACT THE ASSESSEE, ALTHOUGH GENERALLY U SING A MERCANTILE SYSTEM OF ACCOUNTING, KEEPS SUCH INTEREST AMOUNTS I N A SUSPENSE ACCOUNT AND DOES NOT BRING THESE AMOUNTS TO THE PRO FIT AND LOSS ACCOUNT, GOES TO SHOW THAT THE ASSESSEE IS FOLLOWIN G A MIXED SYSTEM OF ACCOUNTING BY WHICH SUCH INTEREST IS INCLUDED IN ITS INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. LOOKING TO THE METHO D OF ACCOUNTING SO ADOPTED BY THE ASSESSEE IN SUCH CASES, THE CIRCULAR S WHICH HAVE BEEN ISSUED ARE CONSISTENT WITH THE PROVISIONS OF SECTIO N 145 AND ARE MEANT TO ENSURE THAT ASSESSEE OF THE KIND SPECIFIED WHO HAVE O ACCOUNT FOR ALL SUCH AMOUNTS OF INTEREST ON DOUBTFU L LOANS ARE UNIFORMLY GIVEN THE BENEFIT UNDER THE CIRCULAR AND SUCH INTEREST AMOUNTS ARE NOT INCLUDED IN THE INCOME OF THE ASSES SEE UNTIL ACTUALLY RECEIVED IF THE CONDITIONS OF THE CIRCULAR ARE SATI SFIED. 16. THE ASSESSEE RELIED UPON A DECISION OF HYDERABAD BENCH IN CASE OF TCI FINANCE LTD. V/S. ACIT (91 ITD 573) WHEREIN THE TR IBUNAL AFTER GOING THROUGH ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 10 THE GUIDELINES ISSUED BY RBI AND THE ACCOUNTING STA NDARDS NOTIFIED BY THE CENTRAL GOVERNMENT U/S 145 OF THE ACT OBSERVED THAT NON RECOGNITION OF INCOME ON THE GROUND THAT THE INCOME HAD NOT REALLY ACCRUED AS THE REALIZABILITY OF THE PRINCIPLES OUTSTANDING ITSELF WAS DOUBTFUL, IS LEGALLY CORRECT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. THE ASS ESSEE FURTHER RELIED UPON A DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF CIT V/S. ANNAMALAI FINANCE LTD. (275 ITR 451) WHEREIN IT WAS HELD THAT WHEN THE PRINCIPAL AMOUNT IS DOUBTFUL FOR RECOVERY IT CANNOT BE SAID T HAT ANY INTEREST ACCRUED ON SUCH PRINCIPAL AMOUNT. THE CIT (A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN THE LIGHT OF JUDICIAL PRECEDENTS CITED BEFORE HIM HELD THAT AS THE ASSESSEE WAS FOLLOWING AN ESTABLISHED METHOD OF AC COUNTING AND RECOGNIZING THE INTEREST INCOME ON NPAS AT THE TIME OF REALIZAT ION, THE INTEREST INCOME DID NOT ACCRUE TO THE ASSESSEE ON NPAS DURING THE YEAR UNDER DISPUTE. WHILE COMING TO SUCH CONCLUSION, THE CIT (A) ALSO TOOK SU PPORT FROM THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BE NCH IN THE CASE OF DCIT V/S. DURGA CO-OPERATIVE URBAN BANK LTD. IN ITA NO .511/VIZAG/2010 DATED 10-3-2011 AND THE JUDGMENT DATED 29-11-2010 OF HON BLE DELHI HIGH COURT IN CASE OF CIT V/S. VASISTH CHAY VYAPAR LTD. 17. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. WE HAVE ALSO CAREFULLY EXAMI NED THE DECISIONS CITED BEFORE US. IT IS QUITE EVIDENT FROM T HE ASSESSMENT ORDER THAT THE ASSESSING OFFICER TREATED THE INTEREST O N NPAS AS INCOME OF THE ASSESSEE ONLY BECAUSE THE ASSESSEE WA S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. FURTHER THE ASSESSIN G OFFICER HAS OBSERVED THAT AS THE ASSESSEE HAS CREDITED THE UN REALIZED INTEREST ON NPA WHICH WAS THEREAFTER DEDUCTED FROM THE TOTAL INTEREST INCOME FOR THE PURPOSE OF COMPUTATION OF TAX ABLE INCOME, THE INTEREST ON NPA IS TAXABLE INCOME OF THE ASSESSE E. HOWEVER, THE ASSESSING OFFICER HAS NOT DENIED THE FACT THAT T HE AMOUNT ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 11 REPRESENTS UNREALIZED INTEREST ON NPA. ADMITTEDLY, SO F AR AS INTEREST ON NPA IS CONCERNED THE ASSESSEE WAS RECOGNIZ ING IT AS PER THE PRUDENTIAL NORMS FOR INCOME RECOGNITION ISSUED BY THE RBI FOR RECOGNITION AND ASSET CLASSIFICATION AND ACCORDING LY HAS NOT INCLUDED THE INTEREST ON NPA AS ITS INCOME. IN OUR V IEW, SUCH RECOGNITION OF INCOME BY THE ASSESSEE IS IN ACCORDAN CE WITH LAW AND AS PER ACCEPTED ACCOUNTING NORMS. WHEN THE RECOV ERY OF THE PRINCIPAL AMOUNT ITSELF HAS BECOME DOUBTFUL, IT CANN OT BE SAID THAT INTEREST ON SUCH AMOUNT HAS ACCRUED AS INCOME TO THE ASSESSEE. THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SQUARELY SUPPORTS THIS VIEW. THE HONBLE DELHI HIGH COURT IN CASE OF CIT V/S. VASISTH CHAY VYAPAR LTD. (330 ITR 440) W HILE CONSIDERING SIMILAR NATURE OF DISPUTE HELD THAT INTEREST ON NPA CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE EVE N WHEN THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING. THE HONBLE DELHI HIGH COURT OBSERVED THAT WHEN TH E PRINCIPAL AMOUNT HAS ITSELF BECOME DOUBTFUL TO RECO VER, IT WOULD BE LEGITIMATE TO INFER THAT INTEREST INCOME T HEREUPON HAS NOT ACCRUED. THE INCOME-TAX APPELLATE TRIBUNAL , VIZAG BENCH IN CASE OF DCIT V/S. DURGA CO-OPERATIVE URBAN BANK LTD. IN ITA NO.511/VIZAG/2010 DATED 10-3-2011 FOLLOWING THE AFORESAID DECISION OF HONBLE DELHI HIGH COURT DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING THAT INTEREST INCOME RELATA BLE ON NPA ADVANCES DID NOT ACCRUE TO THE ASSESSEE. THE O THER DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASS ESSEE BEFORE US ALSO SUPPORTS THIS VIEW. IN SUCH VIEW OF THE ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 12 MATTER, WE DO NOT FIND ANY INFIRMITY IN THE ORDER O F THE CIT (A) WHICH WE ACCORDINGLY UPHOLD. THE GROUND RAISED BY THE DEPARTMENT IS DISMISSED. ITA NO.967/HYD/2011 (ASSESSEES APPEAL) :- 18. THE ONLY DISPUTE IN THIS APPEAL OF THE ASSESSEE PER TAINING TO THE ASSESSMENT YEAR 2007-08 IS WITH REGARD TO DISALLOWANCE O F PROVISION MADE FOR GRATUITY. 19. BRIEFLY THE FACTS RELATING TO THE ISSUE IN DISPUTE ARE, DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIMED PROVISION FOR GRATUITY OF AN AMOUNT RS.2,74 ,49,761/-. THE ASSESSING OFFICER WHEN ASKED THE ASSESSEE TO EXPLAIN WHY THE SAID AMOUNT SHOULD NOT BE DISALLOWED U/S 40A (7) OF THE A CT, THE ASSESSEE IN ITS REPLY SUBMITTED THAT THE PROVISION HAS BEEN MADE O N THE BASIS OF ACTUARIAL VALUATION. IT WAS FURTHER STATED THAT THE ACTUAL PAYMENT WAS ALSO MADE ON 22-5-2007 I.E., BEFORE THE DUE DATE OF FURNISHING THE RETURN OF INCOME, BY WAY OF CONTRIBUTION TO GROUP GRA TUITY SCHEME OF SBI LIFE INSURANCE CO. LTD. THE ASSESSING OFFICER HOWEVER DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE AND DISALLOWED THE PROVISION MADE FOR GRATUITY BY OBSERVING THAT THE PROVISION IS REQUIRED TO BE DISALLOWED U/S 40A(7) AS THE PAYMENT HAS NOT BEEN MADE TO ANY APPROVED GRATUITY FUND. THE ASSESSEE CHALLENGED THE DIS ALLOWANCE IN THE APPEAL PREFERRED BEFORE THE CIT (A). 20. IN COURSE OF HEARING BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT THE OBSERVATION MADE BY THE ASSESSING OFFICER THAT GROUP GRATUITY OF SBI LIFE INSURANCE CO. LTD IS NOT AN APPROVED GRAT UITY FUND, IS NOT CORRECT. THE ASSESSEE CONTENDED THAT THE GROUP GRATUIT Y SCHEME IS AN ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 13 APPROVED ONE HENCE, THE CONTRIBUTION MADE TO SUCH SCHEME IS ALLOWANCE AS DEDUCTION U/S 43B OF THE ACT AS THE PAYMENT WAS MADE BEFORE THE DUE DATE OF FURNISHING THE RETURN OF INCO ME. IT WAS FURTHER SUBMITTED THAT SBI LIFE INSURANCE IS REGISTERED WITH INSU RANCE REGULATORY DEVELOPMENT AUTHORITY AND IS AUTHORIZED TO MANAGE GROUP GRATUITY SCHEME. IN SUPPORT OF SUCH CONVENTION, THE ASSESSE E SUBMITTED THE CERTIFICATE OF RENEWAL OR REGISTRATION W ITH IRDA. THE CIT (A) THOUGH ACCEPTED THE FACT THAT THE ACTUAL PAYMENT T O THE GROUP GRATUITY FUND WAS MADE ON 22-5-2007 BEFORE THE DUE DATE FOR FURNISHING THE RETURN OF INCOME, HOWEVER BY OBSERVING THAT THE ASSESSEE, FOR THE FIRST TIME CLAIMED THAT THE GRATUITY F UND WAS AN APPROVED FUND AND THE EVIDENCE IN SUPPORT OF SUCH CLAI M WAS NOT PRODUCED BEFORE THE ASSESSING OFFICER, HE REJECTED THE CLA IM OF THE ASSESSEE. THE CIT(A) FURTHER OBSERVED THAT AS THE EVIDE NCE PRODUCED BEFORE HIM CONSTITUTES ADDITIONAL EVIDENCE AND SINCE THE ASSESSEE HAS NOT SUBMITTED ANY PETITION FOR ADMISSION OF AN ADDITIO NAL EVIDENCE AS PER RULE 46A THE EVIDENCE PRODUCED BEFORE HIM CANNOT BE CONSIDERED. THE CIT(A) FURTHER HELD THAT A CLAIM OF DEDUCTION IS A LLOWABLE ONLY IF MADE ALONG WITH THE RETURN OF INCOME OR IN THE REVISE D RETURN, IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GOETZ INDIA LIMITED V/S. CIT (284 ITR 23). THE CIT (A) HELD TH AT THE REVISED PLEA MADE IN THE APPEAL PROCEEDINGS IS NOT ENTERTAINABLE AN D ACCORDINGLY REJECTED THE CLAIM OF THE ASSESSEE. 21. THE LEARNED AR REITERATING HIS STAND TAKEN BE FORE THE FIRST APPELLATE AUTHORITY SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN REJECTING THE EVIDENCE SUBMITTED BEFORE HIM BY OBSERV ING THAT NO COGNIZANCE CAN BE TAKEN OF THE SAME AS NO PETITION IN TERMS OF RULE 46A WAS FILED FOR ADMITTING ADDITIONAL EVIDENCE . THE LEARNED ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 14 AR SUBMITTED THAT GROUP GRATUITY OF SBI LIFE INSURANCE IS AN APPROVED GRATUITY FUND AND HAD IT NOT BEEN AN APPROVE D GRATUITY FUND THE AMOUNT COULD NOT HAVE BEEN COLLECTED FROM THE ASSESSEE. HE FURTHER SUBMITTED A CERTIFICATE OF RENEWAL OF REGISTRATION WITH IRDA AND RECEIPT IN SUPPORT OF PAYME NT MADE TO GRATUITY FUND OF SBI LIFE INSURANCE COMPANY AND SUBM ITTED THAT THE CONTRIBUTION HAVING BEEN MADE BEFORE THE DUE DAT E OF FILING OF RETURN OF INCOME, IT IS AN ALLOWABLE DEDUCTION U/S 4 3B OF THE ACT. THE LEARNED AR FURTHER SUBMITTED THAT FOR THE SUBSEQUE NT ASSESSMENT YEAR I.E., ASSESSMENT YEAR 2008-09 BASING ON THE CERTIFICATE ISSUE BY IRDA STATING THAT THE GROUP INSU RANCE FUND MANAGED BY SBI LIFE INSURANCE COMPANY LIMITED IS APPRO VED GRATUITY FUND THE ASSESSING OFFICER HAS ALLOWED THE PROVISION FOR GRATUITY. IT WAS FURTHER SUBMITTED THAT FOR THE ASSESS MENT YEAR 2009-10 THE CIT(A) ALLOWED THE GROUND RELATING TO D ISALLOWANCE OF PAYMENT TO GROUP GRATUITY FUND MANAGED BY THE SBI LIFE INSURANCE CO. LTD, APPROVED BY IRDA AND AUTHORIZED TO M ANAGE GROUP GRATUITY SCHEME. A COPY OF THE ORDER DATED 31-1- 2013 PASSED BY THE CIT(A) IN APPEAL NO.320/CIT(A)/TR/VJA/10 -11 RELATING TO ASSESSMENT YEAR 2009-10 WAS ALSO SUBMITTE D BEFORE US BY THE LEARNED AR. 22. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED T HE ORDER OF THE CIT (A). 23. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIAL ON RECORD. ON PERUSAL OF THE ORDER OF THE ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 15 REVENUE AUTHORITIES IT IS TO BE SEEN THAT WHILE THE A SSESSING OFFICER HAS DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROU ND THAT THE FUND TO WHICH CONTRIBUTION WAS MADE IS NOT AN APPROV ED GRATUITY FUND, THE CIT(A) HAS REJECTED THE CLAIM OF THE ASSES SEE BY OBSERVING THAT THE EVIDENCE PRODUCED FOR THE FIRST TI ME BEFORE HIM COULD NOT BE TAKEN COGNIZANCE OF AS THERE WAS NO PETITION FOR ADMISSION OF ADDITIONAL EVIDENCE AS PER RULE 46A OF IT RULES. THUS, THE CIT (A) REJECTED THE CLAIM OF THE ASSESSEE AT THE THRESHOLD WITHOUT LOOKING INTO THE EVIDENCE PRODUCED BEFORE HIM. HOWEVER, FACT REMAINS THAT THE ASSESSEE HAS SUBMITTED CERTAIN DOCUMENTS IN SUPPORT OF HIS CLAIM THAT THE GROUP GRATU ITY SCHEME OF THE SBI LIFE INSURANCE COMPANY IS AN APPROVED GRATUI TY FUND AND IT IS ALSO A FACT ON RECORD THAT THE PAYMENT TO T HE SAID FUND WAS MADE BEFORE THE DUE DATE OF SUBMISSION OF RETUR N OF INCOME FOR THE RELEVANT ASSESSMENT YEAR. IN AFORESAID VIEW OF THE MATTER, ASSESSEES CLAIM IS REQUIRED TO BE EXAMINED. THEREFORE , CONSIDERING THE FACT THAT THE EVIDENCE PRODUCED BY THE ASSESSEE WERE NOT CONSIDERED BY THE REVENUE AUTHORITIES WHILE DISALLOWING THE CLAIM OF THE ASSESSEE, WE REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL DECIDE THE ISSUE AFR ESH AFTER TAKING INTO ACCOUNT ALL THE EVIDENCES AVAILABLE ON RECORD AN D FURTHER EVIDENCES THAT MAY BE PRODUCED BY THE ASSESSEE BEFORE HIM. WE DIRECT THE ASSESSING OFFICER TO AFFORD A REASONABLE O PPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THE ISSU E. 24. FOR STATISTICAL PURPOSES, THE APPEAL FILED B Y THE ASSESSEE IS TREATED AS ALLOWED. ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 16 ITA NO.1387/HYD/11 (ASSESSEES APPEAL) : 25 THIS APPEAL OF THE ASSESSEE RELATES TO THE ASSESSMENT Y EAR 2008- 09. 26. THE ISSUE IN DISPUTE IN THIS APPEAL RELATES TO DI SALLOWANCE OF AN AMOUNT OF RS.10,46,19,487/- CLAIMED AS DEDUCTION U/S 36( 1)(VIIA) OF THE ACT. 27. BRIEFLY THE FACTS RELATING TO THE ISSUE ARE, DUR ING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE ON 6-10-2008 SUBMITTED A LETTER BEFORE THE ASSESSING OFFICER REQUESTING TO ALLOW REVISED COMPUTATION E NCLOSED TO THE LETTER. IT WAS SUBMITTED BY THE ASSESSEE THAT IN THE ORIGINAL RETURN OF INCOME FILED FOR THE IMPUGNED ASSESSMENT YEAR, THE ASSE SSEE HAD NOT CLAIMED DEDUCTION OF AN AMOUNT NOT EXCEEDING 7.5% OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THI S CLAUSE AND CHAPTER VI-A) AS LAID DOWN U/S 36(1)(VIIA) OF THE ACT. IT WAS SUBMITTED THAT THE REVISED COMPUTATION FILED AS PER SECTION 139(5) TO BE CONSIDERED. THE ASSESSING OFFICER HOWEVER REJECTED THE CLAI M OF THE ASSESSEE BY OBSERVING THAT THE REVISED COMPUTATION HAS NOT BEEN FILED WITHIN THE TIME PRESCRIBED U/S 139(5) OF THE ACT. TH E ASSESSEE BEING AGGRIEVED OF THE AFORESAID DECISION OF THE ASSESSING OFFICE R PREFERRED AN APPEAL BEFORE THE CIT (A). 28. ON APPEAL, THE CIT (A) ALSO CONFIRMED THE VI EW OF THE ASSESSING OFFICER BY OBSERVING THAT THE ASSESSEES CLAIM CANNOT BE CON SIDERED AS IT WAS NOT MADE WITHIN THE PERIOD PRESCRIBED U/S 139(5 ) OF THE ACT. ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 17 29. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PAR TIES AND PERUSED THE MATERIAL ON RECORD. IT IS CLEAR FROM THE ORDERS OF THE REVENUE AUTHORITIES THAT THE ASSESSEES CLAIM FOR DEDUCTION U/S 36(1 )(VIIA) HAS BEEN REJECTED ON THE GROUND THAT THE ASSESSEE HAS NOT MAD E THE CLAIM WITHIN THE PRESCRIBED TIME AS PROVIDED U/S 139(5) OF TH E ACT. IN OTHER WORDS, THE DEDUCTION CLAIMED BY THE ASSESSEE WAS NOT CONSIDE RED ON MERITS. THE HONBLE SUPREME COURT IN CASE OF GOETZ IND IA LIMITED VS. CIT (284 ITR 323) HAS LAID DOWN THE LAW THAT THE ASSESSI NG OFFICER IS NOT EMPOWERED UNDER THE ACT TO ENTERTAIN THE CLAIM FO R DEDUCTION OTHERWISE THAN BY FILING A REVISED RETURN. HOWEVER I N THE VERY SAME JUDGMENT, THE HONBLE SUPREME COURT MADE IT CLEAR THA T THE RESTRICTION IS LIMITED TO THE POWER OF THE ASSESSING AUTHORITY AND D OES NOT IMPIGNE ON THE POWER OF THE INCOME-TAX APPELLATE TRIBUNAL U/ S 254 OF THE ACT. KEEPING IN VIEW THE RATIO LAID DOWN BY THE HONBLE S UPREME COURT IN CASE OF GOETZ INDIA LTD. (SUPRA) WE DIRECT THE ASSESSING OF FICER TO EXAMINE THE CLAIM OF DEDUCTION MADE BY THE ASSESSEE U/S 3 6(1)(VIIA) OF THE ACT AND DECIDE THE SAME IN ACCORDANCE WITH LAW AFTER CONSIDERING ALL THE MATERIALS AND EVIDENCES THAT MAY BE PRODUCED BY THE ASSESSEE. THE ASSESSING OFFICER SHALL AFFORD A REASONABLE OPPORTUNI TY OF BEING HEARD TO THE ASSESSEE. 30. IN THE RESULT, THE APPEAL IS TREATED AS ALLOWE D FOR STATISTICAL PURPOSES. ITA NO. 502/HYD/2011 (ASSESSEES APPEAL) :- 31. IN THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE OR DER PASSED BY THE CIT U/S 263 OF THE ACT DIRECTING THE ASSESSING OFFICER TO BRING TO TAX ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 18 AN AMOUNT OF RS.15,23,19,692/- BEING THE PROVISION MA DE TOWARDS STANDARD ASSETS. 32.. THE ASSESSMENT FOR THE IMPUGNED ASSESSMENT YEAR W AS COMPLETED U/S 143(3) OF THE ACT ON 31-12-2009 ON A TOT AL INCOME OF RS.43,42,87,044/-. THE CIT WHILE EXAMINING THE ASSESSME NT RECORDS OF THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR WAS OF THE V IEW THAT THE ASSESSMENT ORDER PASSED WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE ON THE FOLLOWING TWO ISSUES:- A) THE ASSESSING OFFICER HAS ALLOWED DEDUCTION TOWARDS PROVI SION MADE ON STANDARD ASSETS FOR AN AMOUNT OF RS.15,23,19,231 /- B) THOUGH THE PROVISION TOWARDS STAFF LEAVE ENCASHMENT OF RS.21,14,35,000/- BY AN AMOUNT OF RS.13,72,08,180/- W AS MADE ON 22-5-2007 WITHIN THE PRESCRIBED TIME LIMIT F OR ASSESSMENT YEAR 2007-08.HOWEVER, THE ASSESSING OFFICER FAILED TO DISALLOW THE DIFFERENTIAL AMOUNT OF RS.7,42,26,82 0/- U/S 43B OF THE ACT. 33. THE CIT ISSUED A NOTICE U/S 263 OF THE ACT DIR ECTING THE ASSESSEE TO SHOW CAUSE. THE ASSESSEE IN ITS REPLY SUBMITTED THA T THE ORDER OF THE INCOME-TAX APPELLATE TRIBUNAL ON THE BA SIS OF WHICH THE CIT FORMED HIS OPINION WAS NOT AVAILABLE TO THE ASSESSI NG OFFICER DURING THE ASSESSMENT PROCEEDINGS. HENCE, THERE IS NO SCOPE U/S 263 OF THE ACT TO REVISE THE ASSESSMENT ORDER ON THE BASIS OF SUBSEQUENT EVENTS. IN SUPPORT OF HIS CONTENTION, THE LEARNED AR RELIED U PON THE DECISION OF CALCUTTA HIGH COURT IN CASE OF JAIKUMAR KANKARIA VS. C IT (251 ITR 707). THE CIT HOWEVER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT SINCE THE ASSESSING OFFICER COMPLETED THE ASSESSMENT ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 19 MUCH AFTER THE DECISION WAS RENDERED BY THE INCOME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF ANDHRA BANK VS. DCI T (ITA NOS. 615 TO 619 AND 711 DATED 22-5-2009. 34. THE LEARNED AR SUBMITTED BEFORE US THAT THERE IS HEAVY RISK INVOLVED WITH REGARD TO ADVANCES MADE BY RURAL BANK AS MORE THAN 80% OF THE TOTAL ADVANCES ARE GIVEN TO RURAL BORROWER S LIKE AGRICULTURE CROP PRODUCTION LOANS, ANIMAL HUSBANDRY LOANS, ARTISANS AN D OTHER RURAL SCHEMES IN THE RURAL AREAS AND POSSIBILITY OF LOANS AND A DVANCES BECOMING DOUBTFUL IS VERY HIGH IN VIEW OF VARIOUS RISK FACTORS SUCH AS MONSOON VAGARIES, POLITICAL DEVELOPMENTS, GOVERNMENT PO LICIES, UNFORESEEN DOMESTIC PROBLEMS LIKE HEALTH, EDUCATION, MAR RIAGES, DEATH OF EARNING PERSONS, MARKETING LOSSES ETC., BADLY EFFECT T HE RECOVERY PROCESS OF REGIONAL RURAL BANKS. IT WAS FURTHER SUBMITTE D THAT IN ADDITION TO THE ABOVE FACTORS, THE DECLARATION OF RELI EF MEASURES FOR AFFECTED FARMERS, MORATORIUM ON LOAN RECOVERY AND I NTEREST WAIVERS, AS ALSO OPERATIONAL AND RISKS, NOT SWITCHING OVER TO NE W TECHNOLOGY AND PROCEDURES STICKING ON TO OLD TECHNIQUES AND PROCEDURES ALSO LEAD TO LANDING OF STANDARD ASSETS INTO LOSS ASSETS OVERNIGHT. IT WAS SUBMITTED THAT KEEPING IN VIEW THE ABOVE RISK FACTORS AND THE R ATIONALE, THE IT ACT INTRODUCED SEC. 36(1)(VIIA) FOR ALLOWING DEDUCTIO N FOR THE PROVISION OF AN AMOUNT NOT EXCEEDING 10% OF THE AGGREGATE AVER AGE ADVANCES MADE BY RURAL BRANCHES AND ALSO DIRECT DEDUCTION NOT EXC EEDING 7.5% OF TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A). IT WAS FURTHER SUBMITTED TH AT THERE IS LOT OF DISTINCTION BETWEEN ADVANCES MADE BY COMMERCIAL BANKS AN D RURAL BANK. IN SUPPORT OF HIS CONTENTION, THE LEARNED AR R ELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF CATHOLIC SYRIAN BANK LTD. VS. CIT (248 CTR 1). ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 20 35. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF INCOME-TAX APPELLAT E TRIBUNAL, HYDERABAD BENCH IN CASE OF ANDHRA BANK VS. DCIT (ITA NOS. 615 TO 619 AND 711 (SUPRA) WHEREIN IT WAS HELD THAT THE PROV ISION ON STANDARD ASSETS CANNOT BE EQUATED WITH THE PROVISION FOR BAD AND DOUBTFUL DEBTS. IT IS FURTHER SUBMITTED THAT THE ASSESSEES ARGUMENT TO THE EFFECT THAT IT BEING A REGULAR RURAL BANK CANNOT BE EQUATED WITH A COMMERCIAL BANK IS NOT A VALID ARGUMENT BECAUSE WHATEVER THE NATURE O F THE BANK, STANDARD AND CLASSIFICATION ETC., ARE WITH REFERENCE TO T HE BANK ITSELF. 36. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO APPLIED OUR MI ND TO THE DECISIONS CITED BEFORE US. SECTION 36 OF THE ACT ALLOWS CE RTAIN DEDUCTIONS WHILE COMPUTING THE INCOME UNDER THE HEAD B USINESS AND PROFESSION. SUB-CLAUSE (VII) OF SECTION 36(1) PROVIDES FOR WRITING OFF BAD DEBTS AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FO R THE PREVIOUS YEAR. SUB-CLAUSE(VIIA) OF SECTION 36 ALLOWS DE DUCTION IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MA DE BY A SCHEDULED BANK OF AN AMOUNT NOT EXCEEDING 7.5% OF TOT AL INCOME AND THE AMOUNT NOT EXCEEDING 10% OF THE AGGREGATE AVERAG E ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANKS COMPUTED IN THE PRESCRIBED MANNER. THEREFORE, A READING SUB-CLAUSE (VIIA) WOULD MAKE IT CLEAR THAT DEDUCTION IS ALLOWABLE IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY THE BANK. AS PER RBI GUIDELIN ES, THE NPAS HAVE BEEN CLASSIFIED TO THE FOLLOWING THREE CATEGORIES. A) SUB-STANDARD ASSETS B) DOUBTFUL ASSETS ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 21 C) LOSS ASSETS. THE SUB-STANDARD ASSET IS ONE WHICH HAS REMAINED NPA FOR A PERIOD OF LEAST 12 MONTHS. IN SUCH CASES, THE CURRENT NET WORTH OF THE BORROWER OR THE CURRENT MARKET VALUE OF THE SECURITY IS NOT ENOU GH TO ENSURE RECOVERY OF DUES IN FULL. A DOUBTFUL ASSET IS ONE WHICH HAS REMAINED IN NPA FOR A PERIOD EXCEEDING 18 MONTHS BUT HAS ALL THE W EAKNESSES INHERENT IN ASSETS THAT WERE CLASSIFIED AS SUBSTANDARD, WITH THE ADDED CHARACTERISTIC THAT THE WEAKNESSES MAKE COLLECTION OR LIQUID ATION IN FULL HIGHLY QUESTIONABLE AND IMPROBABLE. SIMILARLY, A LO SS ASSET IS ONE WHERE LOSS HAS BEEN IDENTIFIED FOR WHOLE OR SUBSTANTIAL PORTION OF THE ASSET ALTHOUGH THE ASSET HAS NOT BEEN WRITTEN OFF FULLY. SUCH AN ASSET IS CONSIDERED AS UNCOLLECTIBLE THE INCOME-TAX APPELLATE T RIBUNAL IN CASE OF ANDHRA BANK VS. DCIT (ITA NOS. 615 TO 619 OF 2007AND 711 OF 2008DATED 22-5-2009 AFTER CONSIDERING THE ENTIRE GA MUT OF NPAS AND STANDARD ASSETS HELD THAT STANDARD ASSETS CANNOT BE EQUATE D WITH BAD AND DOUBTFUL DEBTS WHICH IN OTHER WORDS IS KNOWN AS NP AS. THE CO- ORDINATE BENCH HELD IN THE FOLLOWING MANNER:- 16. COM ING TO THE FACTS OF THE CASE ON HAND, THE MAIN ARGUMENT OF THE LEARNED COUNSEL IS THAT THE ASSESSE E HAS STRICTLY FOLLOWED RBI GUIDELINES AND HENCE THE DEDUCTION IS AVAILABLE. WE ARE AFRAID, WE CANNOT AGREE WITH THE PROPOSITION ADVOCATED BY THE LEARNED COUNSEL. THE ASSESSEE HAS CLAIMED DE DUCTION U/S 36(1)(VIIA) OF THE ACT. THE SAID PROVISION GRANT S DEDUCTION IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. T O PUT IT DIFFERENTLY, IT DOES NOT GRANT DEDUCTION IN RESPECT OF A PROVISION FOR A DEBT WHICH IS NEITHER BAD NOR DOUBTFUL OF REC OVERY. BAD AND DOUBTFUL DEBTS ARE KNOWN AS NON-PERFORMING ASSE TS IN BANKING PARIANCE. AS PER RBIS GUIDELINES, (A) SUB -STANDARD ASSETS, (B) DOUBTFUL ASSETS AND (C) LOSS ASSETS ARE NON ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 22 PERFORMING ASSETS. AGAIN, ACCORDING TO RBI, A SUB- STANDARD ASSET IS ONE WHICH HAS REMAINED NPA FOR A PERIOD OF AT LEAST 18 MONTHS. IN SUCH CASES, THE CURRENT NET WORTH OF TH E BORROWER OR THE CURRENT MARKET VALUE OF THE SECURITY IS NOT ENOUGH TO ENSURE RECOVERY OF THE DUES IN FULL. DOUBTFUL ASSE T IS ONE WHICH HAS REMAINED NPA FOR A PERIOD OF EXCEEDING 18 MONT HS. IT HAS ALL WEAKNESSES INHERENT IN ASSETS THAT WERE CLASSIF IED AS SUB- STANDARD, WITH THE ADDED CHARACTERISTIC THAT THE WE AKNESSES MAKE COLLECTION OR LIQUIDATION IN FULL HIGHLY QUEST IONABLE AND IMPROBABLE. A LOSS ASSET IS ONE WHERE LOSS HAS BEE N IDENTIFIED WHICH HAS NOT BEEN WRITTEN OFF FULLY. SUCH AN ASSE T IS CONSIDERED AS UNCOLLECTIBLE AND OF SUCH LITTLE VALU E THAT ITS CONTINUANCE AS A BANKABLE ASSET IS NOT WARRANTED. AS AGAINST THESE, STANDARD ASSETS ARE PERFORMING ASSETS. IN O THER WORDS, THEY ARE NEITHER BAD NOR DOUBTFUL OF RECOVERY. NON -PERFORMING ASSETS HAVE WELL DEFINED CREDITWORTHINESS THAT JEOP ARDIZE THE LIQUIDATION OF THE DEBT AND THERE IS DISTINCT POSSI BILITY THAT THE BANK WILL SUSTAIN LOSS IF DEFICIENCIES ARE NOT CORR ECTED. ON THE OTHER HAND, PERFORMING ASSETS ARE SUCH WHICH HAVE NOT CEASED TO GENERATE INCOME FOR THE BANK. NONETHELESS, AS A MATTER OF PRUDENCE, THE RBI HAS DIRECTED THE BANKS TO MAKE A GENERAL PROVISION OF A MINIMUM OF 0.25% ON STANDARD ASSETS W.E.F. THE YEAR ENDING 31-3-2000. THIS IS ONLY, IN OUR OPINION , A SAFETY MEASURE OR AN OVER-CAUTIOUS APPROACH TO TAKE CARE O F A STANDARD ASSET BECOMING NON-STANDARD IN FUTURE. BU T CERTAINLY, THE PROVISION FOR STANDARD ASSET CANNOT BE EQUATED WITH A PROVISION FOR A BAD AND DOUBTFUL DEBT. THAT IS WHY , IT IS PRESCRIBED BY THE RBI THAT THE PROVISION FOR STANDA RD ASSETS NEED NOT BE NETTED OUT FROM GROSS ADVANCES BUT SHOU LD BE SHOWN SEPARATELY AS CONTINGENT PROVISIONS AGAINST STANDARD ASSETS. THE HEAD ITSELF IS INDICATIVE OF THE FACT THAT THIS PROVISION IS CONTINGENT IN NATURE WHEREAS THE PROVI SION FOR NON ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 23 PERFORMING ASSETS IS TO GUARD AGAINST A LOSS WHICH IS LOOMING LARGE ON THE BANK OR FOR THE LOSS WHICH HAS ALREADY TAKEN PLACE. THEREFORE, THE RBI FURTHER PRESCRIBES THAT PROVISIO N ON STANDARD ASSETS SHOULD NOT BE RECKONED FOR ARRIVING AT NET N PAS. THE ACT ITSELF HAS GIVEN AN OPTION TO THE ASSESSEE TO MAKE PROVISION FOR ITS DOUBTFUL OR LOSS ASSETS (FIRST PROVISO TO SECTI ON 36(1)(VIIA). WE DO AGREE THAT THE BANK SI BOUND TO FOLLOW THE RB I GUIDELINES. BUT THE DEDUCTION AVAILABLE HAS TO BE AS PER THE PR OVISIONS OF THE ACT ONLY. ACCORDINGLY, WE UPHOLD THE ORDER FO THE CIT(A) DISALLOWING THE DEDUCTION IN RESPECT OF PROVISION M ADE FOR STANDARD ASSETS. ANOTHER PROVISION DISALLOWED BY T HE REVENUE AUTHORITIES IS IN RESPECT OF BORDER LINE PERFORMING ASSETS. NEITHER THE RBI HAS GIVEN SUCH CLASSIFICATION IN IT S GUIDELINES NOR HAS THE ACT PROVIDED FOR ANY DEDUCTION OF PROVI SION IN RESPECT OF SUCH ASSETS. THE VERY NOMENCLATURE USED BY THE BANK SUGGESTS THAT THE ASSETS ARE STILL PERFORMING, THAT IS, STILL GENERATING INCOME FOR THE BANK THOUGH THERE MAY BE SOME SIGNS OF CONCERN. HOWEVER, UNLESS SUCH ASSETS ARE NOT C LASSIFIED AS NONPERFORMING ASSETS AND SUB-CLASSIFIED AS SUB-STAN DARD, DOUBTFUL OR LOSS ASSETS, NO DEDUCTION CAN BE PERMIT TED UNDER THE ACT IN RESPECT OF THE PROVISION FOR SUCH ASSETS. T HUS, THE DISALLOWANCE THEREOF BY THE REVENUE AUTHORITIES IS UPHELD. THIS ISSUE, AS MENTIONED EARLIER IS IN RESPECT OF ASSESS MENT YEARS 2003-04 AND 2004-05 ONLY. IN VIEW OF THE ABOVE DECISION OF CO-ORDINATE BENCH, THE CIT IN OUR OPINION WAS LEGALLY CORRECT IN COMING TO A CONCLUSION THAT THE ASSESSMENT ORDER PASSED U/S 143(3) OF THE ACT IS ERRONEOUS AN D PREJUDICIAL TO THE INTEREST OF REVENUE AS THE ASSESSING O FFICER HAS ALLOWED THE DEDUCTION CLAIMED TOWARDS PROVISION MADE ON STANDARD ASSETS WITHOUT PROPER APPLICATION OF MIND. SO FAR AS T HE DECISION OF ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 24 HONBLE SUPREME COURT IN CASE OF CATHOLIC SYRIAN BANK L TD. VS. CIT (SUPRA) IS CONCERNED THE SAME IS NOT APPLICABLE TO THE FACT S OF THE INSTANT CASE. THE ALLOWANCE OF DEDUCTION ON STANDARD ASSE TS WAS NOT AN ISSUE FOR CONSIDERATION BEFORE THE HONBLE SUPREME CO URT. IN AFORESAID VIEW OF THE MATTER, RESPECTFULLY FOLLOWING T HE DECISION OF THE CO-ORDINATE BENCH IN CASE OF ANDHRA BANK (SUPRA) WE UPHO LD THE ORDER OF THE CIT ON THIS ISSUE AND DISMISS THE APPEAL. 37. TO SUM UP, DEPARTMENTS APPEAL IN ITA NOS. 11 21/HYD/11 AND 1459/HYD/11 ARE DISMISSED. ASSESSEES APPEALS IN ITA NOS. 967/HYD/11 AND 1387/HYD/11 ARE ALLOWED FOR STATISTICAL PURPOSES AND ASSESSEES APPEAL IN ITA NO.502/HYD/11 IS DISMISSED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 29 TH APRIL, 2013. SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 29 TH APRIL, 2013 JMR* COPY FORWARDED TO: 1. 2. ACIT, CIR-1, AAYAKAR BHAVAN, STATION ROAD, WARANGAL . M/S. A.P. GRAMEENA VIKAS BANK, 2-5-8/1, OLD BUS DEPOT ROAD, RAMNAGAR, HANAMKONDA, WARANGAL. 3. 4. COMMISSIONER OF INCOME-TAX (APPEALS)-VI, HYDERABAD. CIT CONCERNED, HYDERABAD. 5. THE DR B BENCH ITAT, HYDERABAD. ITA NOS.502 AND OTHERS A.P. GRAMEENA VIKAS BANK, WARANGAL. 25