ITO, Shimoga V. M/s Shiva Sahakari Bank Niyamitha, Shikaripura

ITA 257/BANG/2012

• Counselvise Citation: 25721114 RSA 2012
• Duration Of Justice: 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 07-11-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 23-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S MANTRI
• Assessee Lawyers: RAMASUBRAMANIAN
• Keywords: Bad and doubtful debts
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH C BEFORE SMT. P MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.257/BAN G/2012 (ASST. YEAR - 2008-09) THE INCOME-TAX OFFICER, WARD-2, SHIVAMOGGA. . APPELLANT VS. M/S SHIVA SAHAKARI BANK NIYAMITHA, SHIKARIPURA. . RESPONDENT APPELLANT BY : SHRI S.S MANTRI, ADDL. CIT RESPONDENT BY : SHRI RAMASUBRAMANIAN, C.A DATE OF HEARING : 07-11-2012 DATE OF PRONOUNCEMENT : 21-12-2012 O R D E R P MADHAVI DEVI, JUDICIAL MEMBER THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2008-09. THE APPEAL IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AT HUBLI DATED 28-11-2011. ITA NO.257/B/12 2 THE APPEAL ARISES OUT OF THE ASSESSMENT COMPLETED U /S 143(3) OF THE INCOME-TAX ACT, 1961. 2. IN THIS APPEAL, THE REVENUE IS AGGRIEVED BY THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS.8,07430/- MAD E ON ACCOUNT OF ACCRUED INTEREST ON LOANS AND ADVANCES WITHOUT APPR ECIATING THE AMENDMENT TO SEC. 145 OF THE INCOME-TAX ACT MADE W. E.F 1.4.97 AND ALSO IGNORING THE MANDATORY REQUIREMENT OF RBI GUI DELINES ACCORDING TO WHICH THE BANKS OUGHT TO COMPLY WITH AND FOLLOW MERCANTILE SYSTEM OF ACCOUNTING. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A CO-OPERATIVE BANK CARRYING ON BANKING BUSINESS AS PER THE PROVIS IONS OF KARNATAKA CO-OPERATIVE SOCIETIES ACT OF 1939 AND BANKING REGU LATION ACT OF 1949. IT FILED ITS RETURN OF INCOME FOR THE ASSESS MENT YEAR 2008-09 DECLARING A TOTAL INCOME OF RS.7,41,705/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME-TAX ACT, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSSE IS FO LLOWING HYBRID SYSTEM OF ACCOUNTING WHICH IS IN CONTRAVENTION OF SEC. 145 OF THE INCOME-TAX ACT. HE OBSERVED THAT THE ASSESSEE IS A CCOUNTING FOR THE INTEREST ON RECEIPT BASIS AND OTHERS ON ACCRUAL BAS IS. THEREFORE, HE ITA NO.257/B/12 3 HELD THAT INTEREST WHICH IS ACCRUED ON LOANS AND AD VANCES IS TO BE TREATED AS INCOME FOR THE RELEVANT ASSESSMENT YEAR AND ACCORDINGLY BROUGHT IT TO TAX. APPLYING THE SAME PRINCIPLE, HE ALSO BROUGHT TO TAX THE INTEREST RECEIVABLE ON GOVT. SECURITIES AND BAN K DEPOSITS. 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A) STATING THAT THE ASSESSEE, BEING BOUND BY THE RBI G UIDELINES, HAS BEEN RECOGNIZING THE INTEREST RECEIVABLE ON LOANS AND AD VANCES WHICH ARE DOUBTFUL (NON PERFORMING ASSETS) ON RECEIPT BASIS. IT WAS SUBMITTED THAT THIS SYSTEM OF ACCOUNTING IS BEING FOLLOWED BY THE ASSESSEE FOR THE SEVERAL YEARS IN THE PAST AND THE SAME HAS BEEN ACCEPTED BY THE REVENUE DEPARTMENT. ACCORDING TO THE ASSESSEE, THE MERCANTILE SYSTEM OF ACCOUNTING DOES NOT CREATE INCOME BUT IT ONLY REQUIRES ACCOUNTING OF INCOME WHICH HAS BECOME DUE BUT NOT R ECEIVED, BUT SUCH INCOME SHOULD BE EXPECTED TO BE RECEIVED IN NO RMAL COURSE OF BUSINESS. ACCORDING TO THE ASSESSEE, AS PER SEC. 1 45 OF THE INCOME-TAX ACT, ONLY THE REAL INCOME AND NOT THE NOTIONAL INCO ME IS TO BE CONSIDERED FOR TAXATION. IN SUPPORT OF THIS CONTEN TION THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF THE HONBLE SU PREME COURT IN THE CASE OF UCO BANK VS. CIT REPORTED IN 237 ITR 82 9. AFTER CONSIDERING THE ASSESSEES CONTENTION AT LENGTH, TH E CIT(A) OBSERVED ITA NO.257/B/12 4 THAT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING IT I S REQUIRED TO ACCOUNT INCOME WHICH HAS BECOME DUE BUT NOT RECEIVE D BUT SUCH INCOME SHOULD BE EXPECTED TO BE RECEIVED IN THE NOR MAL COURSE OF BUSINESS AND AS PER SEC. 145 OF THE INCOME-TAX ACT, WHAT IS TO BE CONSIDERED FOR TAXATION UNDER MERCANTILE SYSTEM OF ACCOUNTING IS ONLY REAL INCOME BUT NOT NOTIONAL INCOME. HE OBSERVED T HAT THE INTEREST WHICH HAS BEEN BROUGHT TO TAX BY THE AO IS ACCRUAL OF INTEREST ON NON PERFORMING ASSETS AND AS PER THE RBI GUIDELINES, SU CH INTEREST IS TO BE ACCOUNTED FOR ONLY WHEN IT IS RECEIVED. THEREFORE, HE DELETED THE ADDITION MADE BY THE AO. HOWEVER WITH REGARD TO TH E INTEREST RECEIVABLE ON INVESTMENTS ON GOVT. SECURITIES ETC., HE UPHELD THE ADDITION HOLDING THAT THERE IS NO UNCERTAINTY IN RE CEIVING THE SAID INTEREST. 5. THE REVENUE IS AGGRIEVED BY THE RELIEF GIVEN BY THE CIT(A) AND IS IN APPEAL BEFORE US. 6. THE LEARNED DR, WHILE SUPPORTING THE ORDER OF TH E AO, SUBMITTED THAT THE ASSESEE HAS TO FOLLOW THE PROVIS IONS OF SEC. 145 FOR THE PURPOSE OF COMPUTATION OF INCOME UNDER THE NORM AL PROVISIONS OF INCOME-TAX ACT. HE SUBMITTED THAT AS PER SYSTEM OF ACCOUNTING U/S. ITA NO.257/B/12 5 145 OF THE INCOME-TAX ACT, THE ASSESSEE HAS TO FOLL OW EITHER ACCRUAL SYSTEM OF ACCOUNTING OR CASH SYSTEM OF ACCOUNTING B UT CANNOT FOLLOW THE MIXED SYSTEM OF ACCOUNTING. HE SUBMITTED THAT THE RESERVE BANK OF INDIA GUIDELINES ARE ONLY FOR THE EFFECTIVE SUPE RVISION, MANAGEMENT AND CONTROL OF MANAGERIAL AND CREDIT SYSTEM OF ACC OUNTING AND NOT FOR RECOGNIZING THE INCOME ACCRUED U/S PER SEC. 5.O F IT ACT. IN SUPPORT OF THIS CONTENTION, THE LEARNED DR PLACED R ELIANCE UPON THE DECISION OF THE TRIBUNAL AT CHENNAI IN THE CASE OF JCIT VS. INDIA EQUIPMENT LEASING LTD. REPORTED IN 111 TTJ 250 (CHE NNAI). HE ALSO PLACED RELIANCE UPON THE DECISION OF THE HONBLE SU PREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JCIT RE PORTED IN 320 ITR 577 (SC) FOR THE PROPOSITION THAT THE RBI DIRECTION S HAVE NOTHING TO DO WITH ACCOUNTING SYSTEM FOR RECOGNIZING TAXABLE INCOME AS THE INCOME-TAX ACT AND RBI DIRECTIONS ARE IN DIFFERENT FIELDS. 7. THE LEARNED COUNSEL FOR THE ASSESEE ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND PLACED RELI ANCE UPON THE FOLLOWING DECISIONS : 1) CIT VS. VASISTH CHAY VYAPAR LTD., REPORTED IN 330 I TR 440 2) KARNAVATI CO-OP. BANK LTD., VS. DCIT REPORTED IN 14 ITR 175 ITA NO.257/B/12 6 3) T.C.I FINANCE LTD., VS. ACIT REPORTED IN 274 ITR 6 9 4) CIT VS. M/S CANFIN HOMES LTD. REPORTED IN (2011) 5 TAXCORP (DT) 49593 8. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THEIR RIVAL CONTENTIONS, WE FIND THAT UNDISPUTEDLY THE ASSESSEE IS IN THE BANKING BUSINESS AND IS ALSO GOVERNED BY THE BANKING REGULA TIONS. WHETHER THE INTERST ACCURED ON NPAS WHICH ARE DOUBTFUL OF BEING RECOVERED, SHOULD BE RECOGNIZED AS ASSESSEES INCOME ON ACCRUA L OR ON RECEIPT BASIS IS THE QUESTION BEFORE US. LET US FIRST CONS IDER THE APPLICABILITY OF THE DECISIONS RELIED UPON BY THE LEARNED DR. TH E HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD WAS CONSIDERING THE ISSUE OF ALLOWABILITY OF PROVISIO NS OF NPA U/S 36(1)(VII) OF THE INCOME-TAX ACT WHILE THE CASE BE FORE US IS WITH REGARD TO THE ACCRUAL OF INTEREST ON NPAS AND REC OGNITION OF THE SAME ON RECEIPT BASIS AND NOT ON ACCRUAL BASIS. FU RTHER, THE HONBLE SUPREME COURT, WHILE HOLDING THAT THE RBI DIRECTION S ARE ONLY NORMS AND ACT IN A DIFFERENT FIELD AS AGAINST THE INCOME- TAX ACT, HAS ALSO OBSERVED THAT COLLECTABILITY OF A RECEIPT IS DIFFER ENT FROM ACCRUAL AND HENCE IN EACH CASE, THE ASSESSEE HAS TO PROVE THAT INTEREST IS NOT RECOGNIZED OR TAKEN INTO ACCOUNT DUE TO UNCERTAINT Y IN CALCULATION OF ITA NO.257/B/12 7 THE INCOME AND IT IS FOR THE AO ACCEPT THE CLAIM OF THE ASSESSEE UNDER THE IT ACT OR NOT TO ACCEPT IT, IN WHICH CASE THERE WILL BE ADDED- BACK EVEN UNDER THE REAL INCOME THEORY. IT WAS ALSO OBS ERVED THAT THE INCOME-TAX ACT IS TAX ON REAL INCOME I.E THE PROFI TS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF ACT BUT A PROVISION FOR DOUBTFUL DEBTS IS ONLY A NOTIONAL EXPENSE WHICH IS A DEBIT TO THE P & L ACCOUNT WHICH IS EXPRESSLY DISALLOWED BY EXPL ANATION TO SEC. 36(1)(VII) WHICH IF CLAIMED HAS GOT TO BE ADDED BAC K TO THE TOTAL INCOME OF THE ASSESSE BECAUSE ACT SEEKS TO TAX THE REAL INCOME AND FOR THIS PURPOSE WRITE OFF IS A CONDITION FOR ALLOW ANCE. IT IS, THEREFORE, CLEAR THAT THE FACTS OF THE CASE BEFORE THE APEX CO URT ARE ENTIRELY ON A DIFFERENT SET OF FACTS AND HENCE ITS FINDING ON NO N-ALLOWABILITY OF THE PROVISIONS OF NPAS CANNOT BE APPLIED TO THE FACTS OF THE CASE BEFORE US BUT ITS OBSERVATION THAT FOR RECOGNIZING THE INT EREST INCOME ON NPAS, AO HAS TO CONSIDER THE FACTS OF EACH CASE HA S RELEVANCE TO THE CASE BEFORE US. IN VIEW OF THE SAME, WE HOLD THAT THE DECISION OF THE HONBLE SUPREME COURT IS ON A DIFFERENT SET OF FACT S. THE SECOND DECISION RELIED UPON BY THE LEARNED DR IS THAT OF C HENNAI BENCH OF THE TRIBUNAL IN THE CASE OF INDIA EQUIPMENT LEASING LTD., WHICH IS ON THE SAME SET OF FACTS AS BEFORE US, AS IT WAS HELD IN FAVOUR OF THE REVENUE. COMING TO THE DECISIONS RELIED UPON THE L EARNED AR, WE ITA NO.257/B/12 8 FIND THAT THE DECISION OF THE JURISDICTIONAL HIGH C OURT IN THE CASE OF CANFIN HOMES LTD., IS ALSO ON THE SAME SET FACTS A S BEFORE US AND IS BINDING ON THIS TRIBUNAL. IN THE SAID DECISION, AT PARA 8 OF THE ORDER, THE HONBLE HIGH COURT HAS HELD AS UNDER : THEREFORE, IT IS CLEAR IF AN ASSESSEE ADOPTS MERC ANTILE SYSTEM OF ACCOUNTING AND IN HIS ACCOUNTS HE SHOWS A PARTICULAR INCOME AS ACCRUING, WHETHER THAT AMOUNT IS REALLY ACCRUED OR NOT IS LIABLE TO BRING THE SAID I NCOME TO TAX. HIS ACCOUNTS SHOULD REFLECT TRUE AND CORRECT STATEMENT OF AFFAIRS. MERELY BECAUSE THE SAID AMOUN T; ACCRUED WAS NOT REALIZED IMMEDIATELY CANNOT BE A GR OUND TO AVOID PAYMENT OF TAX. BUT, IF IN HIS ACCOUNT IT IS CLEARLY STATED THAT THOUGH A PARTICULAR INCOME IS DUE TO HI M BUT IS NOT POSSIBLE TO RECOVER THE SAME, THEN IT CANNOT BE SAID TO HAVE BEEN ACCRUED AND THE SAID AMOUNT CANNOT BE BROUGHT TO TAX. IN THE INSTANT CASE WE ARE CONCERN ED WITH A NON PERFORMING ASSET. AS THE DEFINITION OF NON PERFORMING ASSET SHOWS AN ASSET BECOMES NON PERFORM ING WHEN IT CEASES TO YIELD INCOME. NON PERFORMING ASS ET IS AN ASSET IN RESPECT OF WHICH INTEREST HAS REMAINED UNPAID AND HAS BECOME PAST DUE. ONCE A PARTICULAR ASSET I S SHOWN TO BE A NON PERFORMING ASSET THEN THE ASSUMPT ION IS IT IS NOT YIELDING ANY REVENUE. WHEN IT IS NOT Y IELDING ANY REVENUE, THE QUESTION OF SHOWING THAT REVENUE A ND PAYING TAX WOULD NOT ARISE. AS IS CLEAR FROM THE P OLICY ITA NO.257/B/12 9 GUIDELINES ISSUED BY THE NATIONAL HOUSING BANK, THE INCOME FROM NON PERFORMING ASSET SHOULD BE RECOGNIZ ED ONLY WHEN IT IS ACTUALLY RECEIVED. THAT IS WHAT TH E TRIBUNAL HELD IN THE INSTANT CASE. THEREFORE, THE CONTENTION OF THE REVENUE THAT IN RESPECT OF NON PERFORMING ASSETS EVEN THOUGH IT DOES NOT YIELD ANY INCOME AS THE ASSESSEE HAS ADOPTED A MERCANTILE SYS TEM OF ACCOUNTING, HE HAS TO PAY TAX ON THE REVENUE WHI CH HAS ACCRUED NOTIONALLY IS WITHOUT ANY BASIS. IN THAT V IEW OF THE MATTER, THE SECOND SUBSTANTIAL QUESTION FRAMED IS ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 9. IN VIEW OF THE SAME, RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT (CITED SUPRA), TH E REVENUES APPEAL IS DISMISSED. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DEC, 2012. SD/ SD/- (JASON P BOAZ) (MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER VMS. BANGALORE DATED : 21/12/2012 ITA NO.257/B/12 10 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER SR. PRIVATE SECRETA RY, ITAT, BANGALORE.