DCIT, New Delhi V. M/s. Janta Co- Operative Bank Ltd., New Delhi

ITA 2074/DEL/2012

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 4151 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 26-10-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 03-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: UMESH CHAND DUBEY
• Assessee Lawyers: DEEPAK OSTWAL
• Keywords: Business income; Bad and doubtful debts; Notional interest

Judgement Text

1 ITA NO. 2074/DEL/2012 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SMT SUCHITRA KAMBLE , JUDICIAL MEMBER I.T.A .NO. 2074/DEL/2012 (ASSESSM ENT YEAR-2008-09) DCIT CIRCLE-30 (1) NEW DELHI (APPELLANT) VS JANTA CO - OPERATIVE BANK LTD. 32, NETAJI SUBHASH MARG DARYA GANJ NEW DELHI AAAAT8729N (RESPONDENT) APPELLANT BY SH. UMESH CHAND DUBEY, SR. DR RESPONDENT BY SH. DEEPAK OSTWAL, CA ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED AGAINST THE ORDER DATED 27/2/2 012 PASSED BY THE CIT(A)-XXV, NEW DELHI FOR ASSESSMENT YEAR 2008-09. 2. THE GROUNDS OF APPEAL ARE AS FOLLOWS:- 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE, LD.CIT(A) XXV, NEW DELHI HAS ERRED IN DELETING THE ADDITION OF RS.42,1 2,605/- FOLLOWING THE JUDGMENT OF CIT VS. SHOORJI VALLABHDAS & CO. 46 ITR 144 (SC) DATE OF HEARING 26.10.2016 DATE OF PRONOUNCEMENT 06.12.2016 2 ITA NO. 2074/DEL/2012 (1962) WHICH STANDS DISTINGUISHED BY THE JUDGMENT I N THE CASE OF MORVI INDUSTRIES LTD. VS. CIT (1971) 82 ITR 835 OF SUPREME COURT.. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE, LD .CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.42,12,605/- MADE BY A. ON ACCOUNT OF INTEREST ON NPAS IGNORING THE RATIO OF THE CASE OF STATE BANK OF TRAVANCORE VS. CIT REPORTED IN (1986) 158 ITR 102(S C). (II) ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE, LD.CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.91, 45,294/- FOLLOWI NG THE JUDGMENT OF CIT VS. TOSHA INTERNATIONAL LTD. 331 ITR 440 (DELHI ) 2011 AND GOODRICKE GROUP LTD. VS. CIT 338 ITR 116(CAL) 2011 WHEREAS BOTH THE JUDGMENTS ARE NOT APPLICABLE TO THE FACTS BROUG HT OUT IN THE PRESENT CASE BY A.O THAT THE IMPUGNED LIABILITY HAD BECOME TIME BARRED. 3. THE ASSESSEE IS A CO-OPERATIVE BANK AND IS ENGAG ED IN BANKING BUSINESS. THE ASSESSEE CLAIMED THE INTEREST INCOME AMOUNT OF RS.42,12,605/- AS INTEREST INCOME FROM THE MPA (NON-PERFORMING ASSETS) BUT SIN CE THE LOANS HAVE BECOME BAD THE ASSESSEE HAS NEITHER RECEIVED THE LOAN AMOU NT NOR THE INTEREST INCOME. THE ASSESSEE TREATED THE INTEREST AMOUNT AS INTERE ST RECEIVABLE IN THE DEBIT SIDE OF THE BALANCE SHEET AND AS A LIABILITY UNDER THE HEAD OVERDUE INTEREST RESERVE ACCOUNT IN THE CREDIT SIDE OF THE BALANCE SHEET. THE A.O TREATED THE INTEREST INCOME AS A NORMAL BUSINESS INCOME ON THE GROUND THAT IN THE MERCANTILE SYSTEM OF ACCOUNTING THE ACCRUED INCOME IS TO BE TREATED AS INCOME OF THE ASSESSEE AND ACCORDINGLY MADE THE ADDITION O F RS.42,12,605/-. 4. BEING AGGRIEVED BY THE ORDER OF THE ASSESSING OF FICER, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A). THE ASSESSEE SUBMITTED BE FORE THE CIT(A) THAT THE A.O WAS NOT JUSTIFIED TO MAKE THE ADDITION AS THE LOAN BECAME BAD (NPA) AND THE ASSESSEE DID NOT RECEIVE THE INTEREST INCOME AND AS SUCH NO REAL INCOME ACCRUED TO THE ASSESSEE. INTEREST ON NPAS WAS DEBI TED TO THE PARTY ACCOUNT 3 ITA NO. 2074/DEL/2012 AND THE INTEREST ACCOUNT WAS CREDITED IN THE P &L A CCOUNT. THE INTEREST WAS ACTUALLY NOT RECEIVED A REVERSE ENTRY WAS PASSED AT THE YEAR-END BY WHICH THE P & L ACCOUNT WAS DEBITED AND THE OVERDUE INTEREST AC COUNT WAS CREDITED. THE ASSESSEE MAINTAINED THE BOOKS OF ACCOUNTS ON THE NP A AND ITS INTEREST ON THE BASIS OF THE RBI GUIDELINES AND SINCE THE INCOME WA S NOT RECEIVED BY THE ASSESSEE, THE A.O WAS NOT JUSTIFIED TO TREAT THE SA ME AS INCOME OF THE ASSESSEE. WHEN THE INTEREST INCOME FINALLY RECOVERED IN FUTUR E THE SAME WAS ACCOUNTED FOR AND OFFERED AS INCOME OF THE ASSESSEE. ONLY TH E REAL INCOME OF THE ASSESSEE HAS TO BE TAXED AND NOT THE NOTIONAL INCOME. THE A SSESSEE ALSO SUBMITTED THAT NO INTEREST WOULD BE SET TO HAVE ACCRUED ON THE LOA NS OF DOUBTFUL RECOVERY AND RELIED ON VARIOUS CASE LAWS. 5. THE CIT(A) HELD THAT SINCE THE ASSESSEE DID NOT RECEIVE THE INCOME AS THE LOAN AMOUNT ITSELF BECAME BAD AND AS SUCH THE A.O W AS NOT JUSTIFIED TO TREAT THE NOTIONAL INTEREST AS INCOME OF THE ASSESSEE. O NLY THE REAL INCOME WAS TAXABLE AND NOT THE HYPOTHETICAL INCOME IN VIEW OF THE REAL INCOME THEORY AS NO REAL INCOME WAS RECEIVED BY THE ASSESSEE. THE CIT(A ) FURTHER OBSERVED THAT THE ASSESSEE IS A CO-OPERATIVE BANK AND MANY OF THE CUS TOMERS COME TO THE BANK TO BUY PAY ORDERS AND DEMAND DRAFTS WHICH ARE ISSUE D TO THE CUSTOMERS. THE PAYMENTS FOR THE PAY ORDER AND THE DEMAND DRAFTS AR E MADE WHEN THE SAME ARE PRESENTED TO THE BANK FOR PAYMENTS BY THE CUSTO MERS. IN SOME OF THE CASES SOME OF THE CUSTOMERS DO NOT PRESENT THEIR PAY ORDE RS OR DEMAND DRAFTS AND AS SUCH THE AMOUNT REMAINS WITH THE BANK TILL THE PAYM ENT IS MADE AND AS SUCH THE SAME AMOUNTS ARE SHOWN AS A LIABILITY IN THE BA LANCE SHEET. THE A.O MADE THE ADDITION FOR THIS AMOUNT OF PAYABLE ORDERS U/S 41(1) ON THE GROUND THAT SINCE SUCH PAYMENTS WAS NOT MADE FOR A LONG TIME AN D SUCH AMOUNTS WERE STANDING IN THE BALANCE SHEET FOR A LONG TIME AND A S SUCH THERE WAS A CESSATION OF LIABILITY U/S 41(1) VIDE THE ORDER OF THE A.O. T HUS, ALLOWED THE APPEAL OF THE ASSESSEE. 6. BEING AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US. 4 ITA NO. 2074/DEL/2012 7. THE LD. DR SUBMITS THAT THE ASSESSING OFFICER WA S RIGHT IN MAKING AN ADDITION ON INTEREST ACCRUED ON NPAS AMOUNTING TO R S. 42,12,605/-. THE REVENUE/ INTEREST ON NPA MUST BE RECOGNIZE ON ACCRU AL BASIS AS PER ACCOUNTING STANDARD 9. A DEDUCTION FOR THE PROVISIONS MADE BY THE CO-OPERATIVE BANKS ON BAD AND DOUBTFUL DEBTS, IS NOW AVAILABLE U/S. 36(1) (VIIA) OF THE ACT. THUS ANY LOAN GIVEN BY THE BANK DOES NOT BECOME NPA AT THE T IME OF GIVING THE LOAN. UNCERTAINTY, IN RELATION TO COLLECTABILITY OF INTER EST ON NPA, ARISES SUBSEQUENT TO THE TIME OF SALE (DISBURSEMENT OF LOAN, IN THE I NSTANT CASE). INTEREST MUST BE ORIGINALLY RECORDED AS PRESCRIBED IN PARAGRAPH 8.2 OF THE AS 9. PARAGRAPH 8.2 OF AS 9 PROVIDES FOR RECOGNITION OF INTEREST ON ACCRUA L BASIS. THE LD. DR RELIED UPON THE VARIOUS JUDGMENTS. A) SOUTHERN TECHNOLOGIES LTD. VS. JCIT (2010) 187 T AXMAN 346 (SC) B) CIT VS. SHIV PRAKASH JANAK RAJ & CO. PVT. LTD. ( 1996) 222 ITR 583 (SC) C) SARASWATI INSURANCE CO. LTD. VS. CIT (2001) 252 ITR 430 (DEL) D) BENARES STATE BANK LTD. VS. CIT (1989) 180 ITR 2 31 (ALL) E) GRINDLAYS BANK P.L.C. VS. CIT (1993) 201 ITR 148 (CAL) F) CIT VS. ALLAHABAD BANK (1991) 192 ITR 182 (CAL) 8. THE LD. AR RELIED UPON THE ORDER OF THE CIT(A) A ND VARIOUS CASE LAWS. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ECORDS. THE ASSESSEE WAS HOLDING THE MONEY OF PAYABLE ORDERS AS TRUSTEE OF THE CUSTOMERS AND THE SAME AMOUNT HAS TO BE PAID TO THE CUSTOMERS WHENEVE R THE CLAIM IS MADE WITH THE ASSESSEE. THE ASSESSEE CANNOT APPROPRIATE THE A MOUNT OF PAYABLE ORDERS OR DEMAND DRAFTS AS THE SAME BELONGS TO THE CUSTOMERS. THE ASSESSEE DID NOT CLAIMED ANY DEDUCTION FOR THESE AMOUNTS AND AT THE SAME TIME THERE WAS NO CESSATION OF LIABILITY AND AS SUCH THE A.O WAS NOT JUSTIFIED TO INVOKE THE PROVISIONS OF SECTION 41(1) OF THE ACT AS THIS SECT ION IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE AND THE ASSESSEE ALSO RELIED O N THE VARIOUS CASE LAWS ON 5 ITA NO. 2074/DEL/2012 THE ISSUE OF REMISSION OF LIABILITY U/S 41(1) OF TH E ACT THAT OF CIT VS. TOSHA INTERNATIONAL LTD., 331 ITR 440 (DELHI) 2011 AND GO ODRICKE GROUP LTD., VS. CIT 338 ITR 116 (CAL) 2011, WHERE IN IT WAS HELD THAT T HE REMISSION OF THE PRINCIPAL AMOUNT OF LOAN DID NOT AMOUNT TO INCOME UNDER SECTI ON 41(1) NOR UNDER SECTION 28(IV) NOR UKNDER SECTION 2(24) OF THE INCO ME TAX ACT, 1961. THERE IS NO CESSATION OF LIABILITY U/S 41(1) OF THE ACT AS T HE LIABILITY OF THE ASSESSEE IS NOT A TRADING LIABILITY AND THE LIABILITY OF THE AS SESSEE STILL REMAINS AND THE ASSESSEE HAS ALSO NOT CLAIMED ANY DEDUCTION TO ATTR ACT THE PROVISIONS U/S 41(1) OF THE ACT. THE RELIANCE OF THE APEX COURT JUDGMEN T AND THE JURISDICTIONAL HIGH COURT BY THE LD. DR ARE DIFFERENT IN FACTUAL ASPECT OF THE PRESENT CASE. THESE CASE LAWS THOUGH DISCUSSING ABOUT THE INTEREST PART ARE NOT IDENTICAL WITH THE PRESENT CASE. THUS, THE CIT(A) WAS RIGHT IN HOLDING THAT IT IS NOT POSSIBLE TO SUSTAIN THIS ADDITION AS THERE IS NO CESSATION OF L IABILITY AND AT THE SAME TIME FACTS OF THE CASE DO NOT JUSTIFY THE APPLICATION OF PROVISION OF SECTION 41(1) OF THE ACT. THE CIT(A) RIGHTLY DELETED THE ADDITION MA DE BY THE A.O. 10. IN RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH DECEMBER, 2016. SD/- SD/- (R. S. SYAL) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMB ER DATED: 06/12/2016 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT 6 ITA NO. 2074/DEL/2012 ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 26/10/2016 PS 2. DRAFT PLACED BEFORE AUTHOR 26/10/2016 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2016 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS .12.2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK .12.2016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 7 ITA NO. 2074/DEL/2012