The Solapur District Central Co.op. Bank Ltd., Solapur V. Income-tax Officer,

ITA 1732/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1871 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 16-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KUMAR

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , ! , # $ BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1732/PN/2014 #& & / ASSESSMENT YEAR : 2010-11 THE SOLAPUR DISTRICT CENTRAL CO-OPERATIVE BANK LTD., 207 TO 209 GOLD FINCH PETH, SOLAPUR PAN NO. AAATT9561B . / APPELLANT V/S ITO, WARD-2(4), SOLAPUR . / RESPONDENT / ASSESSEE BY : SHRI S.N. PURANIK / REVENUE BY : SHRI NARENDRA KUMAR / ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 06-06-2014 OF THE CIT(A)-III, PUNE RELATING TO ASSESSMENT YEAR 2010-11. 2. IN GROUNDS OF APPEAL NO.1 AND 2 THE ASSESSEE HAS CHALLENGED THE ORDER OF THE CIT(A) IN CONFIRMING THE ADDITION OF RS.8,26,20,529/- MADE BY THE AO ON ACCOUNT OF INTEREST OV ERDUE ON NPA. / DATE OF HEARING :05.05.2016 / DATE OF PRONOUNCEMENT:06.05.2016 2 ITA NO.1732/PN/2014 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COOPERATIVE SOCIETY INCORPORATED UNDER THE PROVISIONS OF MAHARASHTRA COOPERATIVE SOCIETIES ACT, 1960 AND IS CARR YING ON BANKING BUSINESS UNDER LICENSE FROM RBI AS A COOPERATIVE BANK. THE ASSESSEE FILED ITS RETURN OF INCOME ON 24-09-2010 DEC LARING TOTAL INCOME OF RS.20,17,46,710/-. THE AO WHILE COMPLETING TH E ASSESSMENT MADE ADDITION OF RS.8,26,20,592/- BY DISALLOWING TH E OVERDUE INTEREST ON NPA. 4. IN APPEAL THE LD.CIT(A) CONFIRMED THE ADDITION MADE BY T HE AO FOR WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBM ITTED THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSE SSEE BY THE TRIBUNAL IN ITA NO.495/PN/2012 ORDER DATED 29-09-20 14 FOR A.Y. 2008-09. FOLLOWING THE ABOVE DECISION THE TRIBUNAL VIDE ITA NO.1295/PN/2013 ORDER DATED 30-12-2014 FOR A.Y. 2009-10 HAS DELETED SUCH DISALLOWANCE. THUS THE ISSUE IS COVERED IN FAV OUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL FOR A.YRS. 20 08-09 AND 2009-10. 6. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND FAIRLY CONCEDED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL FOR A.YRS. 2008-09 AND 2009-10. 7. AFTER HEARING BOTH THE SIDES, WE FIND THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 2009-10 VIDE ITA NO.1295/PN /2013 ORDER DATED 30-12-2014 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND DELETED THE DISALLOWANCE ON ACCOUNT OF INTER EST ON NPA BY OBSERVING AS UNDER : 3 ITA NO.1732/PN/2014 4. INSOFAR AS THE FIRST GROUND OF APPEAL IS CONCER NED, IT RELATES TO AN ADDITION OF RS.7,68,22,858, ON ACCOUNT OF INTEREST ON NON-PERFORMING ASSETS (IN SHORT NPAS). AT THE TIME OF HEARING, I T WAS A COMMON GROUND BETWEEN THE PARTIES THAT THE FACTS AND CIRCUMSTANCE S WITH RESPECT TO THE SAID DISPUTE ARE SIMILAR TO THOSE CONSIDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09 , VIDE ITA NO.495/PN/2012, ORDER DATED 29TH SEPTEMBER 2014. IT WAS ALSO A COMMON POINT THAT THE RIVAL CONTENTIONS IN THE INST ANT YEAR REMAIN THE SAME AS WERE CONSIDERED BY THE TRIBUNAL VIDE ITS OR DER DATED 29TH SEPTEMBER 2014 (SUPRA). IN THE ABOVE BACKGROUND, IN ORDER TO IMPART COMPLETENESS TO THIS ORDER, THE FOLLOWING PORTION O F THE ORDER OF THE TRIBUNAL DATED 29TH SEPTEMBER 2014 (SUPRA) WITH RES PECT TO THE AFORESAID ISSUE IS REPRODUCED HEREINAFTER:- 4. THE FIRST DISPUTE IS IN TERMS OF GROUNDS OF APP EAL NO.1 TO 3 WHICH RELATE TO AN ADDITION OF RS.47,01,85,366/- ON ACCOUNT OF INTEREST ON NON PERFORMING ASSETS (IN SHORT NPAS) . AS NOTED EARLIER, ASSESSEE IS A CO-OPERATIVE BANK CARRYING O N BANKING BUSINESS IN TERMS OF A LICENSE ISSUED BY RESERVE BA NK OF INDIA (RBI). THEREFORE, ASSESSEE IS GOVERNED BY THE CIRCU LARS AND GUIDELINES ISSUED BY THE RBI, IN PARTICULAR RELATIN G TO PRUDENTIAL NORMS, INCOME RECOGNITION, ASSET CLASSIFICATION, PR OVISIONING AND OTHER RELATED MATTERS. IN TERMS OF SUCH PRUDENT IAL NORMS OF RBI, ASSESSEE ASSERTS THAT IT DID NOT RECOGNIZE INT EREST INCOME ON ACCOUNT OF NPAS I.E. THE LOANS/ADVANCES TO CUSTOMER S WHICH HAVE BEEN CLASSIFIED AS NPAS FOLLOWING THE PRUDENTIAL NO RMS OF RBI. THE PERTINENT DISPUTE IN THE GROUNDS OF APPEAL NO.1 TO 3 RELATES TO NON-RECOGNITION OF INCOME OF RS.47,01,85,366/- I N RESPECT OF ADVANCES/LOANS TO CUSTOMERS, WHICH HAVE BEEN CLASSI FIED AS NPAS. 5. THE CONTROVERSY WITH RESPECT TO NON-RECOGNITION OF INCOME ON ACCRUAL BASIS RELATABLE TO THE NPAS IS NO LONGER RE S INTEGRA BUT THE SAME HAS ALREADY BEEN ADJUDICATED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF ACIT VS. THE OMERGA JANTA SAHAKARI BANK LTD. VIDE ORDER DATED 31.10.2013 AND ALSO OTHER SUBSEQUENT DECISIONS OF T HE PUNE BENCH OF THE TRIBUNAL. APART THEREFROM, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S KEC HOLDINGS LIMITED VIDE INCOME TAX APPEAL NO.221 OF 2012 DATED 11.06.2 014 HAS ALSO APPROVED THE PROPOSITION THAT THE INTEREST INC OME ON NPAS IS NOT RECOGNIZABLE ON ACCRUAL BASIS. THE AFORESAID MA TRIX IS NOT CHALLENGED BY THE REVENUE ALSO. SO HOWEVER, IN THE PRESENT CASE, THE CASE SETUP BY THE REVENUE IS THAT ASSESSEE HAD INDEED CREDITED SUCH INCOME IN ITS PROFIT & LOSS ACCOUNT AND THERE IS AN EQUIVALENT AMOUNT OF PROVISION MADE BY THE ASSESSEE BY WAY OF DEBIT IN THE PROFIT & LOSS ACCOUNT. IN ESSENCE, THE STAND OF THE REVENUE IS THAT THE IMPUGNED INCOME, THOUGH RELATAB LE TO NPAS, IS DEEMED TO HAVE ACCRUED SINCE ASSESSEE HAS CREDIT ED IT IN ITS PROFIT & LOSS ACCOUNT, AND THE CORRESPONDING DEBIT IN THE PROFIT & LOSS ACCOUNT IS ONLY A PROVISION FOR OVERDUE INTE REST AND IT IS NOT AN ALLOWABLE DEDUCTION. 6. IN THE ABOVE BACKGROUND, WE HAVE CONSIDERED THE RIVAL STANDS. THE ASSESSEE HAS ALSO FURNISHED AN AFFIDAVIT ON OAT H DATED 05.10.2013 ENUMERATING THE VARIOUS FACTUAL ASPECTS AND IN RESPONSE THE REVENUE HAS ALSO FURNISHED ITS SAY IN TERMS OF WRITTEN COMMENTS DATED 18.11.2013 BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, SOLAPUR, THE ASSESSING 4 ITA NO.1732/PN/2014 OFFICER IN THIS CASE. BEFORE DWELLING ON THE RIVAL ARGUMENTS ON THE OBJECTIONS RAISED BY THE REVENUE WE CONSIDER IT APP ROPRIATE TO BRIEFLY CULL OUT THE NECESSARY FACTS HAVING REGARD TO THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE MATERIAL ON RE CORD. 7. THE ASSESSEE IS REGISTERED AS A CO-OPERATIVE SOC IETY AND IS CARRYING ON THE BANKING BUSINESS. FOR THE FINANCIAL YEAR 2007-08 CORRESPONDING TO THE ASSESSMENT YEAR UNDER CONSIDER ATION IT FILED A RETURN OF INCOME WHICH WAS ACCOMPANIED BY, INTER- ALIA, AUDITED BALANCE-SHEET AND PROFIT & LOSS ACCOUNT. IN THE CON SOLIDATED PROFIT & LOSS ACCOUNT FOR THE FINANCIAL YEAR UNDER CONSIDERATION, A COPY OF WHICH IS AT PAGE 51 OF THE PAPER BOOK, ON THE CREDIT SIDE UNDER THE HEADING INTEREST RECEIVED, INTEREST FRO M SOCIETY LOAN AND FROM INDIVIDUAL LOANS HAVE BEEN REFLECTED AT RS.167,02,91,981/- AND RS.13,66,79,692/- RESPECTIVE LY. IT HAS BEEN EXPLAINED THAT THE AFORESAID INTEREST INCOME C REDITED IN THE PROFIT & LOSS ACCOUNT INCLUDE RS.46,30,12,177/- AND RS.71,73,189/- ON ACCOUNT OF SOCIETY LOANS AND INDI VIDUAL LOANS RESPECTIVELY WHICH ARE RELATABLE TO LOANS/ADVANCES TO CUSTOMERS CLASSIFIED AS NPAS AS PER RBI NORMS. SIMILARLY, ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT UNDER THE HEADING INT EREST PAID, SUMS OF RS.46,30,12,177/- AND RS.71,73,189/- ARE PU T UNDER SUB- HEADINGS OVERDUE INTEREST FROM SOCIETY LOANS AND OVERDUE INTEREST FROM INDIVIDUAL LOANS RESPECTIVELY. SIMIL ARLY, ON THE LIABILITIES SIDE OF THE BALANCE-SHEET AN ENTRY OF R S.82,81,68,339/- STYLED AS OVERDUE INTEREST RESERVE APPEARS. IT HA S BEEN EXPLAINED THAT THE TERM RESERVE HAS BEEN MISTAKENLY USED AND IN- FACT THE SAID AMOUNT REFLECTS A CONTRA ENTRY FOR IN TEREST RECEIVABLE ON NPAS, WHICH IS APPEARING ON THE ASSETS SIDE ON THE BALANCE- SHEET UNDER THE HEADING INTEREST RECEIVABLE, WITH SUB-HEADINGS ON SOCIETY LOANS AND ON INDIVIDUAL LOANS. 8. DUE TO THE AFORESAID DEPICTION IN FINANCIAL STAT EMENTS, THE CASE OF THE REVENUE IS THAT THE INTEREST ON NPAS HAVE BE EN CREDITED IN THE PROFIT & LOSS ACCOUNT AND THUS ITS ACCRUAL HAS BEEN ACCEPTED BY THE ASSESSEE; AND THAT THE CONTRA ENTRY BY WAY O F DEBIT IN THE PROFIT & LOSS ACCOUNT IS TO BE UNDERSTOOD AS A MERE PROVISION AND, SINCE A PROVISION IS NOT AN ALLOWABLE DEDUCTIO N, THE AMOUNT OF RS.47,01,85,366/- HAS BEEN ADDED TO THE TOTAL IN COME. 9. THE CLAIM OF THE ASSESSEE IS THAT IT IS INCORREC T TO SAY THAT IT HAS CREATED A RESERVE/PROVISION IN RESPECT OF THE OVERD UE INTEREST ON NPAS. IT IS EXPLAINED THAT INSTEAD OF NETTING OF TH E INTEREST ON LOANS, THE BANK HAS SHOWN THE GROSS INTEREST ON CRE DIT SIDE OF THE PROFIT & LOSS ACCOUNT AND ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT THE AMOUNT OF INTEREST ON NPAS HAS BEEN SEP ARATELY SHOWN. IT IS FURTHER POINTED OUT THAT AMOUNT ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT IS NOT APPEARING AS A PRO VISION. FURTHER, EVEN IN THE BALANCE-SHEET, IT IS POINTED O UT THAT AMOUNT OF RS.82,81,68,339/- ON THE LIABILITIES SIDE OF T HE BALANCE-SHEET DOES NOT APPEAR UNDER THE HEAD RESERVE AND OTHER F UNDS BUT IS SEPARATELY DISCLOSED AS OVERDUE INTEREST RESERVE. IT IS ALSO POINTED OUT THAT THE TREATMENT IN THE FINANCIAL STA TEMENT OF THE ASSESSEE WOULD SHOW THAT IT HAS NEVER CREATED IN A PROVISION OR A RESERVE IN RESPECT OF OVERDUE INTEREST ON NPAS AS S OUGHT TO BE MADE OUT BY THE INCOME-TAX AUTHORITIES. IN THIS CON TEXT, THE FOLLOWING AVERMENTS IN THE AFFIDAVIT ARE RELEVANT : - 5 ITA NO.1732/PN/2014 3. IT IS RESPECTFULLY SUBMITTED THAT IN THE BALANC E SHEET AS ON 31/03/2008 [IN ENGLISH COPY] ON THE LIABILITY SI DE THERE APPEARS AN ENTRY FOR RS.82,81,68,339.10 STYLED AS O VERDUE INTEREST RESERVE. THE BANK SUBMITS THAT THE TERM RE SERVE IS MISTAKENLY USED AND IS ERRONEOUS AND IN FACT IT IS A CONTRA ENTRY FOR INTEREST RECEIVABLE ON N.P.A. WHIC H IS APPEARING ON ASSET SIDE OF THE BALANCE SHEET UNDER THE HEADING INTEREST RECEIVABLE AND SUB HEADING ON SOCI ETY LOANS AND ON INDIVIDUAL LOAN. THE BANK SUBMITS THAT THE SAID AMOUNT OF RS.82,81,68,339.10 IS NOT APPEARING ON LIABILITY SI DE OF THE BALANCE SHEET UNDER THE HEADING RESERVES AND OT HER FUNDS BUT IS SEPARATELY DISCLOSED AS OVERDUE INTERE ST. SIMILARLY IN THE PROFIT AND LOSS ACCOUNT THE AMOUNT OF RS.47,01,85,366.04 [BEING THE INTEREST ON N.P.A. DU RING THE YEAR] IS NOT APPEARING UNDER THE HEADING PROVIS IONS BUT IS DEBITED UNDER THE HEADING INTEREST PAID AS OVERD UE INTEREST ON LOANS OF SOCIETIES AND INDIVIDUALS AS A CONTRA ENTRY. 4. THE BANK MOST RESPECTFULLY SUBMITS THAT A CAREFU L AND DISPASSIONATE STUDY OF THE FINAL ACCOUNTS OF THE BA NK WOULD REVEAL THAT IT HAS NEVER CREATED ANY PROVISIO N OR RESERVE IN RESPECT OF OVERDUE INTEREST ON N.P.A. AS ALLEGED BY THE TAX AUTHORITIES. THE ENTRIES AS APPEARING IN THE PROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET FOR T HE F.Y. 2007-08 APPEAR TO HAVE CREATED SOME CONFUSION IN THE MINDS OF THE LEARNED ASSESSING OFFICER. IT IS F ALSE AND INCORRECT TO SAY THAT THE BANK HAS CREATED A RESERV E/ PROVISION IN RESPECT OF THE OVERDUE INTEREST ON N.P .A. WHICH HAS BEEN TREATED AS INTEREST ACCRUED IN THE B OOKS OF ACCOUNT OF THE BANK FOR THE RELEVANT YEAR. 5. THE BANK MOST RESPECTFULLY SUBMITS THAT INSTEAD OF NETTING OF THE INTEREST ON LOANS, THE BANK HAS SHOW N THE GROSS INTEREST ON CREDIT SIDE OF THE PROFIT AND LOS S ACCOUNT AND SIMULTANEOUSLY SHOWN ON DEBIT SIDE OF THE PROFI T AND LOSS ACCOUNT THE AMOUNT OF INTEREST ON N.P.A. WHICH IS IN ACCORDANCE WITH THE ACCOUNTING STANDARD [AS] 9 ISSU ED BY THE I.C.A.I. 6. THE BANK MOST RESPECTFULLY SUBMITS THAT AS ON 31/03/2008 IT HAD 214 BRANCHES. AT THE TIME OF PREP ARATION OF CONSOLIDATED PROFIT AND LOSS ACCOUNT AND BALANCE SHEET AS ON 31/03/2008 [THE COPIES OF WHICH ARE FIL ED BEFORE THE VARIOUS TAX AUTHORITIES] SOLELY WITH A V IEW TO MAKE A DISCLOSURE OF GROSS INTEREST THAT WOULD HAVE BEEN RECEIVED BY THE BANK, THE INTEREST ON N.P.A. IS DIS CLOSED ON CREDIT SIDE OF THE PROFIT AND LOSS ACCOUNT AND A CO NTRA ENTRY IS MADE ON DEBIT SIDE UNDER THE HEAD INTEREST PAID. THIS ACCOUNTING TREATMENT DOES NOT BY ANY LOGIC CON VERT THE INTEREST ON N.P.A. IN TO INTEREST ACCRUED WITHI N THE MEANING OF THE PROVISIONS OF THE I.T. ACT 1961 OR C ANNOT BE CALLED AS RECOGNITION OF INCOME BY THE BANK. 6 ITA NO.1732/PN/2014 7. THE INTEREST ON N.P.A. ADVANCES CAN NEVER BE RECOGNIZED AS INCOME ACCRUED TO THE BANK MERELY BY PLACING RELIANCE IN ISOLATION ON THE PRESENTATION O F PROFIT AND LOSS ACCOUNT AND DEHORS OF ENTRIES IN THE BALAN CE SHEET WHICH SHOW THAT THE SAME IS SIMULTANEOUSLY DE BITED TO INTEREST RECEIVABLE ON N.P.A. ACCOUNT [ON ASSET SIDE] AND A CONTRA CREDIT ENTRY IS MADE IN OVERDUE INTERE ST ACCOUNT [ON LIABILITY SIDE] 8. THE BANK MOST RESPECTFULLY SUBMITS THAT THE AFOR ESAID FACTUAL POSITION WAS EXPLAINED BY IT TO THE LEARNED ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS AS WELL AS TO THE LEARNED C.I.T.[A] DURING THE APPELLA TE PROCEEDINGS. HOWEVER BOTH THE AUTHORITIES HAVE FAIL ED TO APPRECIATE THE FACTS IN THE PROPER PERSPECTIVE. 9. THE BANK MOST RESPECTFULLY SUBMITS THAT ENTRIES MADE WHILE PRESENTATION OF FINAL ACCOUNTS TO THE SHAREHO LDERS FOR BETTER UNDERSTANDING OF THE VARIOUS ISSUES SHALL NO T CONVERT THE TRUE CHARACTER AND NATURE OF INCOME. 10. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT T HAT THE GROSS INTEREST REFLECTED ON THE CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT AND THE OVERDUE INTEREST ON NPAS SHOWN ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT IS A S PER THE REQUIREMENTS OF SECTION 65 OF THE MAHARASHTRA CO- OPERATIVE SOCIETIES ACT, 1960 WHICH PRESCRIBES THE MANNER IN WHICH THE NET PROFIT OR LOSS IS REQUIRED TO BE C OMPUTED IN THE FINANCIAL STATEMENT. IT WAS THEREFORE CONTEN DED THAT PRESENTATION IN THE ANNUAL FINANCIAL STATEMENTS WOU LD NOT JUSTIFY THE INCOME-TAX AUTHORITIES TO TREAT THE CLA IM OF THE ASSESSEE DIFFERENTLY THAN AN ASSESSEE WHO WOULD HAV E NETTED THE INTEREST ON LOANS. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. AS NOTED EARLIER, THE CRUX OF THE CONTROVERSY IS WI TH REGARD TO ASSESSEES CLAIM THAT INCOME WITH RESPECT TO THE INTEREST ON NPAS CLASSIFIED AS PER RBI NORMS IS NOT ASSESSAB LE ON ACCRUAL BASIS BUT IS LIABLE TO BE TAXED AS AND WHEN RECEIVED. AS PER THE REVENUE, IN THE PRESENT CASE, ASSESSEE HAS CREDITED GROSS INTEREST IN ITS PROFIT & LOSS AC COUNT WHICH IS INCLUSIVE OF THE INTEREST RELATABLE TO THE NPAS, AND CREDITING OF SUCH INTEREST IN THE PROFIT & LOSS ACCOUNT SHOWS THAT ASSESSEE HAS PERCEIVED SUCH INCOME TO HA VE BEEN ACCRUED, BECAUSE ASSESSEE IS FOLLOWING THE MER CANTILE SYSTEM OF ACCOUNTING. 12. UNDISPUTEDLY, THE ASSESSEE BANK IS FOLLOWING TH E MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, WITH REGA RD TO THE RECOGNITION OF INCOME ON NPAS, IT HAS APPLIED T HE RBI GUIDELINES WHICH SAY THAT SUCH INCOME IS NOT TO BE RECOGNIZED ON ACCRUAL BASIS BUT IS TO BE RECOGNIZED AS INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. THE RBI GUIDELINES ALSO PRESCRIBE THE MANNER IN WHICH THE I NTEREST IN RELATION TO NPAS IS TO BE SHOWN IN THE ANNUAL FI NANCIAL STATEMENTS. IN TERMS OF THE MASTER CIRCULAR ON INCO ME RECOGNITION, ASSET CLASSIFICATION, PROVISIONING & O THER RELATED MATTERS ISSUED BY THE RBI ON 4TH JULY, 2004 IN 7 ITA NO.1732/PN/2014 CHAPTER 4 OF INCOME RECOGNITION IN PARA 4.5.1 IT IS ADVISED THAT THE ACCRUED INTEREST IN RELATION TO NP AS SHOULD BE COMPUTED AND SHOWN SEPARATELY, THOUGH NOT ACCOUNTED AS INCOME OF THE BANK FOR THE RELEVANT PE RIOD. FURTHER, IN PARA 4.5.3, WITH A VIEW TO ENSURING UNI FORMITY IN ACCOUNTING THE ACCRUED INTEREST IN RESPECT OF BO TH THE PERFORMING AND NON-PERFORMING ASSETS, THE RBI GUIDE LINES INTER-ALIA, PRESCRIBE THAT INTEREST ACCRUED IN RESP ECT OF NPAS SHOULD NOT BE DEBITED TO BORROWAL ACCOUNTS BUT SHOWN SEPARATELY UNDER INTEREST RECEIVABLE ACCOUNT ON THE PROPERTY AND ASSETS SIDE OF THE BALANCE-SHEET AND CORRESPONDING AMOUNT SHOWN UNDER THE OVERDUE INTER EST RESERVE ACCOUNT ON THE CAPITAL AND LIABILITIES S IDE OF THE BALANCE-SHEET. IN-FACT, AS A PREFACE IN PARA 4. 5.3 THE RBI HAS LAID DOWN THAT THE AFORESAID GUIDELINE BE A DOPTED NOTWITHSTANDING THE EXISTING PROVISIONS IN THE RESP ECTIVE STATE CO-OPERATIVE SOCIETIES ACT. NOTABLY, THE BALA NCE- SHEET FORMAT PRESCRIBED UNDER THE THIRD SCHEDULE TO THE BANKING REGULATION ACT, 1949 (AS APPLICABLE TO CO- OPERATIVE SOCIETIES) SPECIFICALLY REQUIRES THE BANK S TO SHOW OVERDUE INTEREST RESERVE AS A DISTINCT ITEM ON THE CAPITAL AND LIABILITIES SIDE OF THE BALANCE-SHEET . THUS, IT IS EVIDENT THAT OVERDUE INTEREST RESERVE ACCOUNT CANNOT BE REGARDED AS A RESERVE OR A PART OF THE OWNED F UNDS OF THE BANK, AS IT IS NOT CREATED OUT OF THE REAL INCO ME RECEIVED BY THE BANK. 13. AS A COMPLIANCE TO THE AFORESAID RBI GUIDELINES , WE FIND THAT THE ASSESSEE HAS NOT DEBITED THE INTEREST ON NPAS TO THE ACCOUNTS OF THE RESPECTIVE BORROWALS BUT IT HAS BEEN SHOWN SEPARATELY UNDER INTEREST RECEIVABLE ACCOUNT ON THE PROPERTY AND ASSETS SIDE OF THE BALANCE-SHEET . AND CORRESPONDING AMOUNT HAS BEEN SHOWN UNDER OVERDUE INTEREST RESERVE ACCOUNT ON THE CAPITAL AND LIABI LITIES SIDE OF THE BALANCE-SHEET. THUS, THE DEPICTION IN T HE BALANCE-SHEET IS IN ADHERENCE TO THE PRESCRIPTION CONTAINED IN THE BANKING REGULATION ACT, 1949 (AS APPLICABLE TO CO-OPERATIVE SOCIETIES), A STATUTE UN DER WHICH ASSESSEE IS BOUND TO CARRY OUT ITS BANKING BU SINESS. 14. NOW, WE MAY COME TO THE PLEA OF THE REVENUE WIT H REFERENCE TO THE DEPICTION OF IMPUGNED INTEREST ON NPAS IN THE PROFIT & LOSS ACCOUNT PREPARED BY THE ASSESS EE. AS HAS BEEN SUCCINCTLY NOTED BY US IN THE EARLIER PARA S, ASSESSEE HAS CREDITED ITS PROFIT & LOSS ACCOUNT WIT H GROSS INTEREST WHICH, INTER-ALIA, INCLUDES THE IMPUGNED I NTEREST ON NPAS. ON THE DEBIT SIDE, ASSESSEE HAS SHOWN THE IMPUGNED INTEREST ON NPAS UNDER THE HEADING INTERE ST PAID AND SUBHEADINGS OVERDUE INTEREST FROM SOCIET Y LOANS AND OVERDUE INTEREST FROM INDIVIDUAL LOANS . THE ASSESSEE IS A SOCIETY REGISTERED UNDER THE MAHARASH TRA CO- OPERATIVE SOCIETIES ACT, 1960 AND IT IS ALSO GOVERN ED BY THE MAHARASHTRA COOPERATIVE SOCIETIES RULES, 1961. SECTION 65 OF THE MAHARASHTRA SOCIETIES ACT, 1960 D EALS WITH ASCERTAINMENT AND APPROPRIATION OF PROFITS BY A SOCIETY. SUBSECTION (1) OF SECTION 65 OF THE MAHARA SHTRA CO-OPERATE SOCIETIES ACT, 1960 LAYS DOWN THAT A SOC IETY SHALL CONSTRUCT ITS RELEVANT ANNUAL FINANCIAL STATE MENTS TO 8 ITA NO.1732/PN/2014 ARRIVE AT ITS CONSEQUENT NET PROFIT OR LOSS IN THE MANNER PRESCRIBED. SUCH MANNER IN RELATION TO THE CALCULAT ION OF NET PROFITS HAS BEEN PRESCRIBED IN RULE 49-A OF THE MAHARASHTRA CO-OPERATIVE SOCIETIES RULES, 1961. RUL E 49- A PRESCRIBES THAT A SOCIETY SHALL CALCULATE THE NE T PROFITS BY DEDUCTING FROM THE GROSS PROFITS FOR THE YEAR T HE ITEMS (I) TO (XVI) PRESCRIBED THEREIN. FOR OUR PURPOSE, I T WOULD SUFFICE TO EXAMINE ITEM (I) OF THE AMOUNTS DEDUCTIB LE, WHICH READS AS UNDER :- (I) ALL INTEREST ACCRUED AND ACCRUING ON AMOUNTS O F OVERDUE LOANS (EXCEPT IN OVERDUE AMOUNTS OF LOANS A GAINST FIXED DEPOSIT, GOLD, ETC. 15. THE AFORESAID WOULD SHOW THAT WHILE CONSTRUCTIN G ITS PROFIT & LOSS ACCOUNT TO ARRIVE AT ITS NET PROFIT O R LOSS, A CO-OPERATIVE SOCIETY IS REQUIRED TO SHOW INTEREST ACCRUED/ACCRUING ON AMOUNTS OF OVERDUE LOANS SEPARATELY. THIS IS PRECISELY WHAT HAS BEEN DONE BY THE ASSESSEE IN THE PRESENT CASE. THE AFORESAID REQUIRE MENT OF THE MANNER OF CONSTRUCTION OF PROFIT & LOSS ACCOUNT , PRESCRIBED UNDER THE RULES OF THE MAHARASHTRA CO- OPERATIVE SOCIETIES ACT, 1960, HAS PROMPTED THE ASS ESSEE TO DRAW UP ITS PROFIT & LOSS ACCOUNT IN THE MANNER WE HAVE NOTED ABOVE QUA THE INTEREST ON NPAS. THEREFOR E, IT CANNOT BE ACCEPTED THAT THE MANNER OR PRESENTATION OF ACCOUNT WHICH OSTENSIBLY IS IN COMPLIANCE WITH THE STATUTORY PROVISIONS GOVERNING THE ASSESSEE, CAN BE A FACTOR TO EVALUATE ASSESSABILITY OR OTHERWISE OF AN INCOME. IN OUR CONSIDERED OPINION, IT WOULD INAPPROPRIATE T O BE MERELY GUIDED BY A PRESENTATION IN THE ANNUAL FINAN CIAL STATEMENTS TO INFER ASSESSEES PERCEPTION THAT AN I NCOME HAD ACCRUED, WITHOUT CONSIDERING THE ENTRIES MADE I N THE FINANCIAL STATEMENTS IN TOTO. IN THE PRESENT CASE, IT IS QUITE CLEAR THAT ASSESSEE HAS DRAWN UP ITS ANNUAL FINANCI AL STATEMENT IN COMPLIANCE WITH THE REQUIREMENTS OF TH E STATUTES UNDER WHICH IT FUNCTIONS AND/OR IS INCORPO RATED. THEREFORE, THE ISSUE WITH REGARD TO NON-RECOGNITION OF INCOME ON NPAS IS REQUIRED TO BE ADJUDICATED HAVING REGARD TO THE RELEVANT LEGAL POSITION AND NOT ON TH E BASIS OF THE PRESENTATION IN THE ANNUAL FINANCIAL STATEMENTS . AT THIS STAGE, WE MAY ALSO REFER TO THE JUDGEMENT OF THE HO NBLE SUPREME COURT IN THE CASE OF CIT VS. SHOORJI VALLAB HDAS & CO., (1962) 46 ITR 144 (SC) FOR THE PROPOSITION T HAT A MERE BOOK KEEPING ENTRY CANNOT BE ASSESSED AS INCOM E UNLESS IT CAN BE SHOWN THAT INCOME HAS ACTUALLY RES ULTED. IN THE PRESENT CASE, THE CREDITING OF GROSS INTERES T IN THE PROFIT & LOSS ACCOUNT, WHICH INCLUDES INTEREST ON N PAS CANNOT BE TAKEN AS A PROOF THAT SUCH INCOME HAS ACC RUED TO THE ASSESSEE UNLESS THE STATUTORY GUIDELINES APPLIC ABLE ON THE SAID SUBJECT ARE IGNORED. OBVIOUSLY, WHEN THE B ANKING INSTITUTIONS FOLLOWING MERCANTILE SYSTEM ACCOUNTING ARE PERMITTED TO TREAT THE INCOME ON NPAS AS ASSESSABLE ON RECEIPT BASIS, SUCH A POSITION CANNOT BE IGNORED IN THE CASE OF PRESENT ASSESSEE MERELY BECAUSE OF A PRESENTATIO N IN THE ANNUAL FINANCIAL STATEMENTS. EVEN OTHERWISE, WE NOT ICE THAT THE RBI GUIDELINES PERMIT THAT INTEREST INCOME ON NPAS BE PARKED IN A SUSPENSE ACCOUNT AND IT IS NOT 9 ITA NO.1732/PN/2014 NECESSARY THAT IT HAS TO BE BROUGHT TO THE PROFIT & LOSS ACCOUNT BY THE ASSESSEE. HOWEVER, IN THE PRESENT CA SE, AS SEEN EARLIER, ASSESSEE HAS CREDITED THE GROSS AMOUN T OF INTEREST ON CREDIT SIDE OF THE PROFIT & LOSS ACCOUN T AND SIMULTANEOUSLY SHOWN ON THE DEBIT SIDE OF THE PROFI T & LOSS ACCOUNT, THE AMOUNT OF INTEREST ON NPAS. IN OT HER WORDS, INSTEAD OF NETTING OF THE INTEREST THE TWO A MOUNTS HAVE BEEN SHOWN SEPARATELY ONE ON THE CREDIT SIDE A ND OTHER ON THE DEBIT SIDE. THE NET EFFECT OF THE SAID PRESENTATION IS THE SAME. THEREFORE, IN OUR VIEW, T HE LOWER AUTHORITIES HAVE MISGUIDED THEMSELVES IN REJECTING THE CLAIM OF THE ASSESSEE FOR NON-RECOGNITION OF INTERE ST INCOME ON NPAS. 16. IN VIEW OF THE AFORESAID, WE SE T- ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESS ING OFFICER TO DELETE THE ADDITION OF RS.47,01,85,366/- . THUS, ON GROUNDS OF APPEAL NO.1 AND 2 ASSESSEE SUCCEEDS. THE GROUND OF APPEAL NO.3 IS ONLY AN ALTERNATIVE GROUND RAISED, IN CASE ASSESSEE DOES NOT SUCCEED ON GROUND S OF APPEAL NO.1 AND 2. SINCE ASSESSEE HAS SUCCEEDED ON GROUNDS OF APPEAL NO.1 AND 2, GROUND OF APPEAL NO.3 IS DISMISSED AS INFRUCTUOUS. 5. FOLLOWING THE AFORESAID PRECEDENT IN THE ASSESSE ES OWN CASE FOR THE ASSESSMENT YEAR 2008-09, WE SET ASIDE THE I MPUGNED ORDER OF THE COMMISSIONER (APPEALS) AND DIRECT THE ASSESS ING OFFICER TO DELETE THE ADDITION OF RS.7,88,22,858/-. THUS, W ITH RESPECT TO GROUND OF APPEAL NO.1, THE ASSESSEE SUCCEEDS. 8. SINCE THE TRIBUNAL HAS ALREADY DECIDED THE ISSUE IN FAVO UR THE ASSESSEE BY DELETING THE DISALLOWANCE OF OVERDUE INTE REST ON NPA IN A.YRS. 2008-09 AND 2009-10, THEREFORE, FOLLOWING THE O RDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN THE PRECEDING 2 YEARS AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OU R NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE AGAINST THE ORDER O F THE TRIBUNAL, THE ORDER OF THE CIT(A) ON THIS ISSUE IS SET ASIDE AND THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 9. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS UNDER : 3. APPELLANT PRAYS FOR DELETION OF INTEREST ON AGRIC ULTURAL CREDIT STABILISATION FUND RS.58,41,228/- ADDED AS INCOME OF T HE BANK 10. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUB MITTED THAT THE ABOVE GROUND HAS BEEN DECIDED AGAINST THE AS SESSEE BY THE ORDER OF THE TRIBUNAL FOR A.YRS. 2008-09 AND 2009-1 0. IN 10 ITA NO.1732/PN/2014 VIEW OF THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASS ESSEE THE GROUND OF APPEAL NO.3 BY THE ASSESSEE IS DISMISSED. 11. GROUND OF APPEAL NO.4 RELATES TO LEVY OF INTEREST CHAR GED U/S.234B. 12. AFTER HEARING BOTH THE SIDES, WE ARE OF THE CONSIDERE D OPINION THAT CHARGING OF INTEREST U/S.234B IS MANDATORY AND CONSEQUENTIAL IN NATURE. THEREFORE, THIS GROUND BY THE AS SESSEE IS DISMISSED. 13. GROUND OF APPEAL NO.5 BEING GENERAL IN NATURE IS DISMISSED. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 06-05-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE ; DATED : 06 TH MAY, 2016. ) *#,! -! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A) - I II, PUNE 4. 5. 6. THE CIT-III, PUNE $ ''(, (, / DR, ITAT, B PUNE; - / GUARD FILE. / BY ORDER , // TRUE COPY // /0 ' ( / SR. PRIVATE SECRETARY (, / ITAT, PUNE