ACIT, New Delhi V. M/s. The Delhi State Co-Operative Bank Ltd., New Delhi

ITA 2537/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87160 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 15-01-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 24-05-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: J P CHANDRAKAR
• Assessee Lawyers: SL GUPTA
• Keywords: Gift; Business income; Business expenditure; Cost of acquisition; Bad and doubtful debts; Notional interest; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 139(5)

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER ITA NO. 2537 /DEL/ 2012 (ASSESSMENT YEAR: 2008 - 09 ) ACIT CIRCLE - 30(1), DRUM SHAPE BLDG, NEW DELHI THE DELHI STATE CO - OPERATIVE BANK LTD. DARYA GANG , NEW DELHI - 110002 PAN: AAAAT9998D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI J P CHANDRAKAR, SR.D R RESPONDENT BY : SHRI S L GUPTA, C A DATE OF HEARING 15.01.2015 DATE OF PRONOUNCEMENT 27 .03.2015 O R D E R PER A. T. VARKEY, JUDICIAL MEMBER THE REVENUE HAS FILED THE PRESENT APPEAL AGAINST THE ORDER DATED 29 / 3 /20 1 2 PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - X XV , NEW DELHI FOR A SSESSMENT YEARS 2008 - 09 ON THE FOLLOWING GROUNDS: - 1 . WHETHER THE LD. CIT(A) - XXV, NEW DELHI HAS NOT ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 1,43,13,391/ - MADE BY AO ON ACCOUNT OF DISALLOWANCE OF DEDUCTION OF PREMIUM WRITTEN OFF ON GOVT. SECURITIES WHEN THE ASSESSEE IS NOT IN THE BUSINESS OF TRADING IN GOVT. SECURITIES AND SUCH GOVT. SECURITIES ARE SHOWN BY THE ASSESSEE AS INVESTMENTS AND NOT AS STOCK IN TRADE. 2. WHETHER THE LD. CIT(A) HAS NOT ENTERED IN LAW IN DIRECTING THE AO TO EXAMINE THE ASSESSEES CLAIM U/S. 36(1)(VIIA) OBLITERATING THE VERDICT OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZE INDIA (P) LTD. VS. CIT (2006) 284 ITR 323 (SC) WHICH MANDATES THAT AO CANNOT ENTERTAIN ASSESSEES CLAIM AT THE ASSESSMENT STAGE WHICH IS NOT MADE THROUGH FILING OF REVISED RETURN. 3. WHETHER SUCH DIRECTION BY THE LD. CIT(A) IN THE ORDER DISPOSING OFF APPEAL DOES NOT TANTAMOUNT SETTING ASIDE THE ISSUE WHICH IS NOT ENVISAGED IN SEC. 250(4) AFTER 1.6.2001. ITA NO. 2537/ DEL/ 2012 2 4. WHETHER LD. CIT(A) HAS NOT ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 4,08,38,822/ - MADE BY AO ON ACCOUNT OF ACCRUED INTEREST ON NPAS . 2. GROUND NO.1 IS IN RESPECT OF DELETION OF ADDITION OF RS.1,43,13,391/ - MADE BY AO ON ACCOUNT OF DISALLOWANCE OF DEDUCTION OF PREMIUM WRITTEN OFF ON GOVT. SECURITIES . THE FACTS IN BRIEF ARE THAT T HE ASSESSEE IS A COOPERATIVE BANK ENGAGED IN THE BUSINESS OF BANKING. THE RETURN OF INCOME DECLARING INCOME OF RS. 30,43,17,299/ - WAS FILED IN THIS CASE ON 2 8.9.2008 AND THE SAME WAS PROCESSED U/S. 143(1) OF THE I NCOME TAX ACT, 1961 (HEREIN AFTER THE ACT) ON 31.3.2010. THE CASE WAS SELECTED FOR SCRUTINY THROUGH CASS ON RANDOM BASIS. STATUTORY NOTICE U/S. 143(2) OF THE ACT, DATED 16.9.2009 WAS ISSUED AND DULY SERVED UPON THE ASSESSEE. IN COMPLIANCE THEREOF, VARIOUS DETAILS WERE SUBMITTED FROM TIME TO TIME BEFORE THE AO DURING ASSESSMENT PROCEEDINGS AND BOOKS OF ACCOUNTS WERE EXAMINED ON RANDOM TEST CHECK BASIS BY THE AO. THEREAFTER, THE AO COMPLETED THE ASSESSMENT U/S. 143(3) OF THE ACT ON 31.12.2010 AGAINST WHICH THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A) , WHO WAS PLEASED TO ALLOW IT. 3 . NOW THE REVENUE IS AGGRIEVED AGAINST THE SAID IMPUGNED ORDER OF THE LD CIT(A) AND HAS FILED THE PRESENT APPEAL BEFORE US . 4 . AT THE TIME OF HEARING LD. DR RELIED UPON THE ORDER OF THE AO AND REITERATED THE CONTENTIONS RAISED BY THE REVENUE IN THE GROUNDS OF APPEAL AND PRAYED THAT WE REVERSE THE ORDER OF THE LD CIT(A) AND UPHOLD THE ORDER OF THE AO . 5 . ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE HAS RELIED UPON THE ORDER OF THE LD. CIT(A) AND DOES NOT WANT US TO INTERFERE IN THE IMPUGNED ORDER. 6. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE RELEVANT RECORD AVAILABLE BEFORE US . WE FIND THAT THE FACTS AS STATED BY THE LD CIT(A) IS THAT THE ASSESSEE IS A CO - OPERATIVE SOCIETY AND WAS CLAIMING DEDUCTION U/S 80P(2)(A)(I) OF THE ACT UP TO AY 2006 - 07 @100%. THE ASSESSEE MAKES INVESTMENTS AND BUYS THE GOVERNMENT SECURITIES (IN SHORT, G - SEC) AND BONDS ITA NO. 2537/ DEL/ 2012 3 AT A PREMIUM OR AT A HIGHER PRICE THAN THE FACE VALUE WHEN THE RETURN FROM INVESTMENTS IN INTEREST IS LOWER IN OTHER AVENUES/AREAS. THE BONDS/G - SEC ARE HA VING THE FACE VALUE AND ARE GENERALLY HAVING THE LONG MATURITY PERIOD LIKE 20 YEARS ETC AND THE ASSESSEE REDEEMS THE SAME AFTER A LONG PERIOD. WHEN THE ASSESSEE BUYS THE G - SEC AT A PREMIUM , THE PREMIUM AMOUNT WHICH IS IN ADDITION AND ABOVE THE FACE VALUE I S PROPORTIONATELY CLAIMED BY THE ASSESSEE AS A REVENUE EXPENDITURE OR IS WRITTEN OFF. THE AO HAS DISALLOWED THE PREMIUM EXPENDITURE / WRITE OFF OF RS. 1,43,13,391/ - ON THE GROUND THAT THE SAME IS A CAPITAL EXPENDITURE OR THE SAME IS NOT AN ALLOWABLE EXPEN DITURE UNDER THE ACT VIDE THE ORDER OF THE AO. WE FIND THAT ASSESSEE BEFORE THE LD. CIT(A) HAS SUBMITTED THAT THE AO IS NOT JUSTIFIED TO DISALLOW THE GENUINE PREMIUM EXPENDITURE WHICH IS A BUSINESS EXPENDITURE AND THE SAME IS ALLOWABLE AS THE SAME IS FOR THE PURPOSE OF BUSINESS. IT WAS SUBMITTED BEFORE THE LD. CIT(A) THAT THE AO IS NOT JUSTIFIED TO MENTION IN THE ORDER THAT THE BUY AND SALE OF THE G - SEC IS NOT PART OF THE BUSINESS ACTIVITY OF THE ASSESSEE WHEREAS THE FACT OF THE MATTER IS THAT IT IS PART OF THE BUSINESS ACTIVITY OF THE ASSESSEE AND AS SUCH THE PREMIUM EXPENDITURE/ WRITE OFF SHOULD BE ALLOWED. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS FAILED TO ESTABLISH, HOW THERE IS AN ADVERSE IMPACT ON REVENUE WHEN THE ASSESSEE IS CONSISTENTLY FOLLOWING THE SAME ACCOUNTING POLICY SINCE LONG. THE LD. ASSESSING OFFICER STATED IN HIS ORDER THAT PREMIUM PAID IS AN EXPENSE FOR PURCHASE OF SECURITIES AT PREMIUM, AND SECURITIES ARE NOT BUSINESS ASSETS OF THE ASSESSEE AND SHOWN AS INVESTMENT INSTEAD OF STOCK IN TRADE, WHICH ACCORDING TO THE ASSESSEE IS NOT T RUE. WE FIND THAT ASSESSING OFFICER FURTHER STATED THAT BY FOLLOWING THE CONSISTENT ACCOUNTING POLICIES THE APPELLANT IS CARRYING AN ILLEGAL AND WRONG ACT BUT FAILED TO ESTABLISH HOW THE APPELLANT IS DOING THE ILLEGAL AND WRONG ACT. HE STATED THAT THE FIN ANCIAL ACCOUNTS OF THE APPELLANT ARE PREPARED AS PER THE SET GUIDELINES AND PERFORMA OF RBI. THE ASSESSEE IS A SERVICE PROVIDER AND DEALS IN MONEY OR MONEY EQUIVALENTS AND SECURITIES PURCHASED AND DEALT WITH ARE ITS STOCK IN TRADE. LD. COUNSEL OF THE ASSES SEE FURTHER SUBMITTED THAT AS PER RBI NORMS THE ASSESSEE ON THE BASIS OF ITS TIME & DEMAND LIABILITIES HAS TO INVEST CERTAIN AMOUNT IN GOVT. SECURITIES ITA NO. 2537/ DEL/ 2012 4 AND ALSO INVESTS SURPLUS (FUNDS WHICH ARE NOT IMMEDIATELY REQUIRED) BUSINESS FUNDS IN SECU RITIES/ LOANS/ BONDS/ADVANCES. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE INVESTS IN GOVT. SECURITIES AND OTHER FINANCIAL DOCUMENTS AS OTHER COMMERCIAL/CO - OPERATIVE BANKS AS PER THE GUIDELINES OF THE RBI. IN CASE OF INVESTMENTS/SECURITIES PURCHASED ON PREMI UM, THE TOTAL PREMIUM PAID IS ALLOCATED/ DISTRIBUTED EQUALLY TO THE REMAINING PERIOD OF SECURITY, AS THE HIGHER RATE OF INTEREST IS BEING RECEIVED FOR THOSE YEARS. THE ACCOUNTING POLICY REGARDING PREMIUM WRITTEN OFF, ON PURCHASE OF SECURITIES FROM SECONDAR Y MARKET ON PREMIUM (EXTRA PAYMENT THAN THE FACE VALUE, DUE TO CHANGE IN INTEREST RATES) ADOPTED BY THE APPELLANT SINCE AB - NITIO IS SPECIFICALLY AND CLEARLY MENTIONED, IN THE ANNUAL AUDITED FINANCIAL ACCOUNTS. ACCORDING TO THE LD AR THE PREMIUM PAID AT THE TIME OF PURCHASE OF SECURITY IS NOTHING, BUT DIFFERENCE OF RATE OF HIGHER INTEREST THAN THE PREVAILING MARKET RATE OF INTEREST, FOR WHICH THE PURCHASER/ ASSESSEE WILL TAKE THE BENEFIT IN FUTURE BY RECEIVING EXTRA INTEREST. ACCORDING TO THE LD AR , HIGHER INTEREST RECEIVED BY THE APPELLANT IN A PARTICULAR PERIOD IS COMPENSATED /MA TCHED WITH THE HIGHER INTEREST PREMIUM PAID AT THE TIME OF PURCHASE OF SECURITY, BY WRITING OFF PROPORTIONATE PREMIUM PAID OVER THE REMAINING PERIOD OF SECURITY. SO, ACCORDING TO T HE LD AR, ON MATURITY OF GOVT. SECURITY, IT IS ONLY THE FACE VALUE ON WHICH SECURITY IS REDEEMED AND NOT AT THE PREMIUM/DISCOUNT PREVAILING IN THE MARKET. LD. COUNSEL OF THE ASSESSEE FURTHER SUBMITTED THAT AS PER RBI MASTER CIRCULAR NO.DBOD.BP.BC.13/21.04. 141/2012 - 13 DATED JULY 2,2012, CONTAINING CONSOLIDATED INSTRUCTIONS/GUIDELINES ISSUED TO BANKS TILL JUNE 30, 2012, ON MATTERS RELATING TO PRUDENTIAL NORMS FOR CLASSIFICATION, VALUATION AND OPERATION OF INVESTMENT PORTFOLIO BY BANKS, INVESTMENTS CLASSIFIED UNDER HTM (HELD TO MATURITY) NEED NOT BE MARKED TO MARKET AND WILL BE CARRIED AT ACQUISITION COST, UNLESS IT IS MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTIZED OVER THE PERIOD REMAINING TO MATURITY. THE BOOK VALUE OF THE SECURITY SH OULD CONTINUE TO BE REDUCED TO THE EXTENT OF THE AMOUNT AMORTIZED DURING THE RELEVA NT ACCOUNTING PERIOD. THE LD AR TOOK OUR ATTENTION TO THE OBSERVATION OF THE HON'BLE DELHI HIGH COURT IN ITA NO. 2537/ DEL/ 2012 5 THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD. (ITA NO. 552/2005, 565/ 2005, 1191/2007, 139/2008,466/2008 & 537/2008 , WHEREIN IT WAS OBSERVED AS UNDER: - 'UNDER THE INCOME TAX ACT THE CHARGE IS ON PROFIT & GAINS, NOT ON GROSS RECEIPTS (WHICH, HOWEVER, HAS PROFITS EMBEDDED IN IT). THEREFORE, SUBJECT TO THE REQUIREMENT OF THE IN COME TAX ACT PROFIT TO BE ASSESSED UNDER THE INCOME TAX ACT HAVE GOT TO BE REAL PROFITS WHICH HAVE TO BE COMPUTED ON ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING. IN OTHER WORDS PROFIT HAVE GOT TO BE COMPUTED AFTER DEDUCTING LOSSES/ EXPENSES INCURRED FOR BU SINESS, EVEN THOUGH SUCH LOSSES/EXPENSES MAY NOT BE ADMISSIBLE U/S 30 TO 430 OF THE INCOME TAX ACT UNLESS SUCH LOSSES/ EXPENSES ARE EXPRESSLY OR BY NECESSARY IMPLICATION DISALLOWED BY THE ACT. 6.1 LD. COUNSEL OF THE ASSESSEE FURTHER BROUGHT TO OUR NOT ICE THAT THE ASSESSING OFFICER HAVE ACCEPTED THE SAME ACCOUNTING POLICY IN THE PAST AND NEVER OBJECTED FOR THE SAME. AND GENERALLY INCOME OF THE ASSESSEE WAS ASSESSED U/S 143(3) OF THE ACT BY THE LD. ASSESSING OFFICER WITHOUT ANY REFERENCE TO CHANGE IN ACC OUNTING POLICY. 6.2 WE FIND THAT THE ASSESSEE INVESTS IN GOVT. SECURITIES AND OTHER FINANCIAL DOCUMENTS AS OTHER CO - OPERATIVE BANKS AS PER THE GUIDELINES OF THE RBI AND SO AS PER THE RBI MASTER CIRCULAR NO.DBOD.BP.BC.13/21.04.141/2012 - 13 DATED JULY 2,201 2, CONTAINING CONSOLIDATED INSTRUCTIONS/GUIDELINES ISSUED TO BANKS TILL JUNE 30, 2012, ON MATTERS RELATING TO PRUDENTIAL NORMS FOR CLASSIFICATION, VALUATION AND OPERATION OF INVESTMENT PORTFOLIO BY BANKS, INVESTMENTS CLASSIFIED UNDER HTM (HELD TO MATURITY) NEED NOT BE MARKED TO MARKET AND WILL BE CARRIED AT ACQUISITION COST, UNLESS IT IS MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTIZED OVER THE PERIOD REMAINING TO MATURITY. THE BOOK VALUE OF THE SECURITY SHOULD CONTINUE TO BE REDUCED TO THE EXTENT OF THE AMOUNT AMORTIZED DURING THE RELEVA NT ACCOUNTING PERIOD. AND AS HELD IN THE CASE OF CIT VS. HIMACHAL FINANCE CORPORATION (2010) 186 TAXMANN 2005 (H . P . ) AND INDIAN RAYON AND INDUSTRIES LTD. (2010) 38 DTR 313 (BOMBAY) IT WAS HELD THAT DISCOUNT ON BONDS AND PREMIUMS ON REDEMPTIONS OF DEBENTURES ARE ALLOWABLE AS EXPENSE PROPORTIONATELY SPREAD OVER THE PERIOD OF SECURITY. SO THEREFORE WE ARE OF THE CONSIDERED VIEW THAT THIS ISSUE NEED S TO BE REMANDED BACK TO THE FILE OF THE AO TO VERIFY WH ETHER THE ITA NO. 2537/ DEL/ 2012 6 ASSESSEE HAS CLAIMED THE EXPENSES PROPORTIONATELY I.E. THE PREMIUM AMOUNT WHICH IS IN ADDITION TO THE FACE VALUE PROPORTIONATELY SPREAD OVER THE LIFE OF SECURITY AND IF IT IS SO COMPUTED AND CLAIMED IT BE ALLOWED. THEREFORE THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 7. WITH REGARD TO DELETION OF ADDITION OF RS 2,46,73,078/ - UNDER THE HEAD DEDUCTION U / S 36(1)(VIIA) IS CONCERNED, WE FIND THAT ASSESSEE IS A CO - OPERATIVE SOCIETY AND WAS CLAIMING DEDUCTION U / S 80P(2)(A)(I) OF THE ACT UP TO A Y 2006 - 07 @ 100%. THIS BENEFIT HAS BEEN WITHDRAWN IN THE CASE OF URBAN CO - OPERATIVE SOCIETY AFTER A Y 2006 - 07 AS PROVIDED U / S 80P( 4) AS PER THE FINANCE ACT, 2006. SINCE THE BENEFIT OF DEDUCTION U / S 80P(2)(A)(I) HAS BEEN WITHDRAWN IN THE CASE OF URBAN CO - OP ERATIVE SOCIETIES, SIMILAR BENEFITS OF DEDUCTION OF 'PROVISION FOR BAD & DOUBTFUL DEBTS' HAS BEEN INTRODUCED AND AL LOWED FROM A Y 2007 - 08 U/S 36(1 )(VIIA) AS PER THE FINANCE ACT, 2007. THE CO - OPERATIVE SOCIETIES WERE NOT ALLOWED THIS BENEFIT UP TO A Y 2006 - 07 AS THE DEDUCTION WAS ALLOWED TO THEM U/S 80P(2)(A)(I). THE ASSESSEE HAS BEEN CLAIMING THE BENEFIT OF 100% DEDUCTION OF ITS INCOME U / S 80P(2)(A)(I). AND THEREFORE THE ASSESSEE WAS NOT AWARE OF THE CHANGE IN LAW AND SO DID NOT MAKE THE CLAIM IN RESPECT OF BAD DEBT (N.P.) WHILE FILING THE RETURN. THE ASSESSEE HAD FILED THE RETURN INCOME OF RS 30,43,17,299/ - ON 31/03/2010. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE DETECTED THE MISTAKE AND FILED A REVISED COMPUTATION CL AIMING THE DEDUCTION OF RS 2,46,73,078/ - WHICH IS ALLOWABLE ULS 36(L)(VIIA) @ 7.5% OF THE TOTAL NP. THE AO HAS DISALLOWED THE CLAIM OF THE ASSES SEE ON THE GROUND THAT FILING TIME FOR REVISED RETURN HAS EXPIRED ULS 139(5) AND THE ASSESSEE WAS NOT ENTITLED TO MAKE A FRESH CL AIM OR DEDUCTION AND THE AO RELIED ON THE CASE OF GOETZE INDIA LTD VS CIT, 284 ITR 323 (SC) [2006]. WE FIND THAT THE LD. COUNSEL OF THE ASSESSEE SUBMITTED BEFORE THE LD. CIT(A) THAT AO WAS NOT JUSTIFIED TO DISALLOW THE STATUTORY AND GEN UINE CLAIM OF THE ASSESSEE ON TECHNICAL GROUNDS. HE SUBMITTED THAT SINCE NEW PROVISIONS WERE INTRODUCED FOR BAD AND DOUBTFUL DEBTS INRESPECT OF COOPERATIVE SOCIETIES W.E.F. A Y 2007 - 08 U/S 36(1)(VIIA), THE ASSESSEE WAS NOT ABLE TO KEEP TRACK OF THE AMENDED /NEW PROVISIONS AND THERE WAS A BONA FIDE MISTAKE IN NOT BEING ABLE TO MAKE THE CORRECT CLAIM OF ITA NO. 2537/ DEL/ 2012 7 DEDUCTION IN THE ORIGINAL RETURN. IT WA S SUBMITTED BY THE LD AR THAT THE AO IS ALSO DUTY BOUND TO ALLOW THE GENUINE CLAIM OF THE ASSESSEE AS PER THE BOARD CIRC ULAR NO. 14 (XL - 35) DATED 11104/2005 & F.NO. 81127/65 - IT(B) DATED 18/05 11965 WHICH STATES THAT THE AO SHOULD NOT TAKE ADVANTAGE OF THE IGNORANCE OF THE ASSESSEE AND THE AO SHOULD NOT ACT AGAINST THE ASSESSEE IN SECURING THE GENUINE RELIEF DUE TO THE ASSES SEE. IT WAS ALSO SUBMITTED THAT THE CASE OF THE GOETZE INDIA LTD (SUPRA) HAS BEEN DECIDED IN A DIFFERENT CONTEXT IN WHICH THE ASSESSMENT WAS NOT PENDING WHEREAS IN THE PRESENT CASE THE ASSESSMENT WAS PENDING AND THE ASSESSEE HAD MADE THE GENUINE CLAIM DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS ITSELF TH R OUGH A REVISED COMPUTATION . THE LD AR RELIED ON THE FOLLOWING CASES : - - C IT VS BHARAT ALUMINIUM CO LTD, 303 ITR 256 (DEL) [2008] - CHICAGO PNEUMATIC INDIA LTD VS DCN SPL. RANGE - 45, [2007] 15 SOT 252 (MUM) - EMERSON N ETWORK POWER INDIA P LTD VS ACIT, [2009] 122TTJ 67 (ITAT MUM) 7.2 WE FIND THAT THE ASSESSEE HAS MADE THE PROVISIONS OF RS.3,66,33,543/ - FOR BAD AND DOUBTFUL DEBTS IN ITS PROFIT & LOSS A/C BUT BY MISTAKE WHILE SUBMITTING THE RETURN THE SAME WAS TAKEN AS RS.1,35,28,498/ - INSTEAD OF RS.3,66,33,543/ - . WE FIND THAT SECTION 36(1)(VIIA) WAS AMENDED BY FINANCE ACT, 2007, WITH EFFECT FROM 01.04.2007, BY WHICH THE WORDS OR A COOPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIETY O R A PRIMARY COOPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK WERE INSERTED. THIS AMENDMENT IS APPLICABLE TO ASSESSMENT YEAR 2007 - 08 ONWARDS AND FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, IT APPLIES TO THE CASE OF THE ASSESSEE FOR THIS YEAR. WE FIND THAT THIS ISSUE HAS NOT BEEN ADJUDICATED ON MERITS BY THE AO. THEREFORE, WE THINK IT FIT TO RESTORE THE MATTER BACK TO THE FILE OF THE AO TO ADJUDICATE THE ADMISSIBILITY OF THE AMOUNT U/S 36(1)(VIIA) ON MERITS. THIS GROUND IS TREATED AS ALLOWED FOR STATIS TICAL PURPOSES. 8 . WITH REGARD TO DELETION OF ADDITION OF RS. 4,08,38,822/ - MADE BY AO ON ACCOUNT OF ACCRUED INTEREST ON NPA IS CONCERNED, WE FIND THAT THE ASSESSEE HAS NOT DECLARED THE INTEREST INCOME AMOUNT ING TO RS 4,08,38,822/ - ITA NO. 2537/ DEL/ 2012 8 AS INTEREST INCOME F ROM THE NPA (NON - PERFORMING ASSETS), SINCE THE LOANS HAVE BECOME BAD. ACCORDING TO THE AO , THE ASSESSEE HAS NEITHER RECEIVED THE LOAN AMOUNT NOR THE INTEREST INCOME AND THE ASSESSEE HAS TREATED THE INTEREST AMOUNT AS 'INTEREST 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. HOWEVER, THE AO HAS TREATED THE INTEREST INCOME AS A NORMAL BUSINESS INCOME ON THE GROUND THAT IN THE MERCANTILE SYSTEM OF A CCOUNTING THE ACCRUED INCOME IS TO BE TREATED AS INCOME OF THE ASSESSEE AND ACCORDINGLY, HAS MADE THE ADDITION OF RS 4,08,38,822/ - . THE LD DR RELIED ON THE ORDER OF THE AO AND WANT US TO REVERSE THE ORDER OF THE LD CIT(A). ON THE OTHER HAND THE AR SUBMITT ED THAT THE AO WA S NOT JUSTIFIED TO MAKE THE ADDITION AS THE LOAN HAS BECOME BAD (NPA) ; AND THE ASSESSEE HAS NOT RECEIVED THE INTEREST INCOME AND AS SUCH NO REAL INCOME HAS ACCRUED TO TH E ASSESSEE. ACCORDING TO HIM, IN THE CASE OF INTEREST ON NPAS , THE PARTY ACCOUNT IS DEBITED AND THE INTEREST ACCOUNT IS CREDITED IN THE P&L ACCOUNT AND SINCE THE INTEREST IS ACTUALLY NOT RECEIVED A REVERSE ENTRY IS PASSED AT THE YEAR - END BY WHICH THE P&L ACCOUNT IS DEBITED AND THE OVERDUE INTEREST ACCOUNT IS CREDITED . IT WA S FURTHER SUBMITTED THAT THE AS S ESSEE HAS MAINTAINED THE BOOKS OF ACCOUNTS ON THE N PA AND ITS INTEREST ON THE BASIS OF THE RBI GUIDELINES AND SINCE THE INCOME HAS NOT BEEN RECEIVED BY THE ASSESSEE, THE AO WAS NOT JUSTIFIED TO TREAT THE SAME AS INCOM E OF THE ASSESSEE. IT WAS ALSO SUBMITTED TH AT IN CASE LATER, THE INTEREST INCOME COULD BE RECOVERED IN FUTURE THE SAME WILL BE ACCOUNTED FOR AND OFFERED AS INCOME OF THE ASSESSEE. FURTHER IT WAS SUBMITTED THAT ONLY THE REAL INCOME OF THE ASSESSEE MAY BE TA XED AND NOT THE NOTIONAL INCOME. THE AR FURTHER SUBMITTED THAT NO INTEREST WOULD BE SET TO HAVE ACCRUED ON THE LOANS OF DOUBTFUL RECOVERY AND THE AR RELIED ON VARIOUS CASE LAWS WHICH ARE AS UNDER: - (1) CIT V S HOORJI VALLABHDAS & CO, 46 ITR 144 (SC) [1962 ] (2) CIT VS VASISTH CHAY VYAPAR LTD, 330 ITR 440 (DELHI), 2011 (3) DIT VS BRAHMAPUTRA CAPITAL FINANCIAL SERVICES LTD, 335 ITR 182 (DELHI), 2011 ITA NO. 2537/ DEL/ 2012 9 (4) TR O VS CUSTODIAN, 293 ITR 369 (DEL) (5) BARKHA INVESTMENT & TRADING CO P LTD VS CIT, 281 ITR 31 (GUJ) (6) CIT VS NANITAL BANK LTD, 309 ITR 335 (UTTARAKHAND) (7) CIT VS ELGI FINANCE LTD, 293 ITR 357 (MAD) (8) CIT V S MOTOR CREDIT CO P LTD, 127 ITR 572 (MAD) [1981] (9) CIT VS COIMBATORE LAKSHMI INV. & FINANCE CO LTD, 331 ITR 229 (MAD) [2011] 8.1 WE FIND THAT AS PER RBI PRUDENTIAL NORMS WHERE THE PRINCIPAL AMOUNT IS DOUBTFUL OF RECOVERY AND BORROWER IS NOT PAYING, INCOME FROM INTEREST ON SUCH ACCOUNTS SHOULD NOT BE CREDITED TO ITS PROFIT AND LOSS ACCOUNT. THE ASSESSEE IS ADOPTING THE SAME ACCOUNTIN G POLICIES SINCE LONG, SO INTEREST ACCRUED ON BAD & DOUBTFUL LOANS CANNOT BE CONSIDERED ITS INCOME. WHERE THE CHANCES OF REALIZATION OF PRINCIPAL BY THE APPELLANT FROM ITS CUSTOMERS WERE FAR FROM REMOTE EVEN BEFORE THE EVENT OF ACCRUAL OF INTEREST TAKING P LACE, THE QUESTION OF TREATING THE INTEREST ON SUCH NPA LOANS ON ACCRUAL BASIS AS INCOME DOES NOT ARISE. THERE IS NO LOSS OF REVENUE, AS THE INTEREST INCOME ON BAD LOANS IS ACCOUNTED FOR ON RECEIPT BASIS, IN THE YEAR WHEN THE LOAN IS RECOVERED /SETTLED. TH E ACCOUNTING POLICY ADOPTED BY THE APPELLANT IS SPECIFICALLY AND CLEARLY MENTIONED, IN THE INCOME TAX AUDIT REPORT U/S 44AB AND ANNUAL AUDITED FINANCIAL ACCOUNTS. MORE OVER THE ASSESSING OFFICER HAS ALSO ACCEPTED THE SAME ACCOUNTING POLICY AND NEVER OBJECT ED FOR THE SAME. GENERALLY INCOME OF THE ASSESSEE WAS ASSESSED ULS 143(3) OF THE INCOME TAX ACT 1961 WITHOUT ANY REFERENCE TO CHANGE IN ACCOUNTING POLICY. 8.2 WE FIND THAT THE LD. CIT(A) HAS OBSERVED THAT THE ASSESSEE HAS NOT RECEIVED THE INCOME AS THE LOAN AMOUNT ITSELF HAS BECOME BAD AND AS SUCH THE AO IS NOT JUSTIFIED TO TREAT THE NOTIONAL INTEREST AS INCOME OF THE ASSESSEE. A PERUSAL OF THE CASE LAWS CITED BY THE ASSESSEE ALSO SUPPORTS THE CASE OF THE ASSESSEE THAT ONLY THE REAL INCOME IS TAXABLE AND NOT THE HYPOTHETICAL INCOME IN VIEW OF THE REAL INCOME THEORY AS NO REAL INCOME IS RECEIVED BY THE A S SESSEE AND THE SAME VIEW HAS BEEN HELD BY THE HON BLE SUPREME ITA NO. 2537/ DEL/ 2012 10 COURT IN THE CASE OF CIT VS. SHOORJI VALLABHDAS & CO., 46 ITR 144 (SC) [1962] AND THE HEAD - N OTE OF THE CASE READS AS UNDER: - 'HELD, THAT THE SUBSEQUENT AGREEMENT HAD ALTERED THE RATE OF COMMISSION IN SUCH A WAY AS T O MAKE THE INCOME WHICH REALLY ACCRUED TO THE ASSESSEE DIFFERENT FROM WHAT HAD BEEN ENTERED IN THE BOOKS OF ACCOUNT. THIS WAS NOT A CASE OF A GIFT BY THE ASSESSEE TO THE MANAGED COMPANIES OF A PORTION OF INCOME WHICH HAD ALREADY ACCRUED, BUT AN AGREEMENT TO RECEIVE A LESSER REMUNERATION THAT WHAT HAD BEEN AGREED UPON. THE ASSESSEE HAD IN FACT RECEIVED ONLY THE LESSER AMOUNT IN SPITE OF THE ENTRIES IN THE ACCOUNT BOOKS, AND THIS LESSER AMOUNT ALONE WAS TAXABLE. INCOME TAX IS A LEVY ON INCOME. THOUGH THE INCOME TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT, YET THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOK - KEEPING, AN ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME WHICH DOES NOT MATERIALISE. WHERE INCOME HAS, IN FACT, BEEN RECE IVED AND IS SUBSEQUENTLY GIVEN UP 10 SUCH CIRCUMSTANCES THAT IT REMAIN THE INCOME OF THE RECIPIENT, EVEN THOUGH GIVEN UP, THE TAX MAY BE PAYABLE. WHERE, HOWEVER, THE INCOME CAN BE SAID NOT TO HAVE RESULTED AT A LL , THERE IS OBVIOUSLY NEITHER ACCRUAL NOR REC EIPT OF INCOME, EVEN THOUGH AN ENTRY TO THAT EFFECT MIGHT, IN CERTAIN CIRCUMSTANCES, HAVE BEEN MADE IN THE BOOKS OF ACCOUNT. DECISION OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME - TAX V . SHOORJI VALLABHDAS & CO. [1959] 36 I.T.R. 25 AFFIRMED. COMMIS SIONER OF INCOME - TAX V. CHAMANLAL MANGALDAS & CO. [1960] 39 L.T.R. 8 (S.C.) FOLLOWED.' 8. 3 IN THE CASE OF CIT V MOTOR CREDIT CO P LTD, 127 ITR 572 (MAD) [1981] THAT ONLY THE REAL INCOME IS TO BE TAXED AND THE HEAD - NOTE OF THE CASE READS AS UNDER : - 'THE REGULAR MODE OF ACCOUNTING DETERMINES ONLY THE MODE OF COMPUTING THE TAXABLE INCOME AND THE POINT OF TIME AT WHICH THE TAX LIABILITY IS ATTRACTED. IT CANNOT DETERMINE OR AFFECT THE RANGE OF TAXABLE INCOME OR THE AMBIT OF TAXATION. WHERE NO INCOME HAS RESULTED IT CANNOT BE SAID THAT INCOME HAS ACCRUED MERELY ON THE GROUND THAT THE ASSESSEE HAD BEEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. EVEN IF THE ASSESSEE MAKES A DEBIT ENTRY TO THAT EFFECT, STILL NO INCOME CAN BE SAID TO HAVE ACCRUED TO THE AS SESSEE. IF NO INCOME HAS MATERIALISED, THERE CAN BE NO LIABILITY TO TAX ON A HYPOTHETICAL INCOME. IT IS NOT THE HYPOTHETICAL ACCRUAL OF INCOME BASED ON THE MERCANTILE ITA NO. 2537/ DEL/ 2012 11 SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE THAT HAS TO BE TAKEN INTO ACCOUNT, BUT WHAT SHOULD BE C ONSIDERED IS WHETHER THE INCOME HAS REALLY MATERIALISED OR RESULTED TO THE ASSE S SEE. THE QUESTION WHETHER REAL INCOME HAS MATERIALISED TO THE ASSESSEE HAS TO BE CONSIDERED WITH REFERENCE TO COMMERCIAL AND BUSINESS REALITIES OF THE SITUATION IN WHICH THE ASSESSEE HAS BEEN PLACED AND NOT WITH REFERENCE TO HIS SYSTEM OF ACCOUNTING. 8.4 IN VIEW OF THE ABOVE, WE FIND CONSIDERABLE COGENCY IN THE FINDING OF THE LD. CIT(A) REGARDING THE NOTIONAL INTEREST INCOME THAT THE SAME HAS NOT BEEN RECEIVED BY THE ASSESSEE AND AS SUCH THE AO WAS NOT JUSTIFIED TO MAKE THE ADDITION ON THE BASIS OF NOTIONAL INTEREST BECAUSE OF THE MERCANTILE SYSTEM OF ACCOUNTING ONLY AND ACCORDINGLY, THE ADDITION WAS RIGHTLY DELETED BY THE CIT(A). IN THE BACKGROUND OF THE AFORESAI D DISCUSSIONS AND PRECEDENT RELIED UPON, WE ARE OF THE CONSIDERED VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE WELL REASONED ORDER PASSED BY THE LD. CIT(A), HENCE, WE UPHOLD THE SAME BY REJECTING THIS GROUND OF APPEAL RAISED BY THE REVENUE IN THE AFORE SAID MANNER. 9 . IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 .03.2014. - SD/ - - SD/ - (R.S. SYAL ) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED:27 /03/2014 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI