The Karnavati Co.Op. Bank Ltd, Ahmedabad V. The Dy.CIT.,Circle-11, Ahmedabad

ITA 2939/AHD/2010

• Counselvise Citation: 293920514 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 04-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 28-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business expenditure; Bad and doubtful debts

Judgement Text

FIT FOR PUBLICATION SD/- SD/- (AM) (JM) 30.11.11 , , , , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD , .'# '#,$% $ & BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A. NO.2939/AHD/2010 ( # ( # ( # ( # ( / / / / ASSESSMENT YEAR : 2007-08) THE KARNAVATI CO-OP.BANK LTD. 105, RADHA RAMAN COMPLEX NR.KHODIYAR NAGAR BAPUNAGAR, AHMEDABAD # # # # / VS. THE DCIT CIRCLE-11 AHMEDABAD ) $% ./*+ ./ PAN/GIR NO. : AABAT 4588 J ( ), / // / APPELLANT ) .. ( -.), / RESPONDENT ) ), / $ / APPELLANT BY : SHRI S.N. DIVATIA, A.R. -.), 0 / $ / RESPONDENT BY : SHRI B.L. YADAV, D.R. #1 0 % / / / / DATE OF HEARING : 09.11.11 2'( 0 % / DATE OF PRONOUNCEMENT : 30.11.11 $3 / O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE ASSESSEE W HICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-XVI , AHMEDABAD DATED 01/09/2010 PASSED FOR ASSESSMENT YEAR 2007-0 8. 2.. AS PER GROUNDS OF APPEAL, AS MANY AS FIVE MAIN GROUNDS WITH CERTAIN SUB-GROUNDS HAVE BEEN RAISED, HOWEVER, AT THE OUTSE T, LD. LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE MR. S.N.D IVATIA HAS STATED ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 2 - THAT ONLY GROUND NO.2.1 REQUIRES ADJUDICATION AND REST OF THE GROUNDS ARE EITHER GENERAL OR ARGUMENTATIVE IN NATURE. KE EPING THE SAID STATEMENT OF THE LD.AR, WE CONFINE OURSELVES TO GRO UND NO.2.1; REPRODUCED HEREINBELOW:- 2.1 THE LD. CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND OR ON FACTS IN CONFIRMING THE FOLLOWING DISALLOWANCES/ADDITIONS:- (A) CLEARING HOUSE CHARGES : RS. 2,56,309 (B) SERVICES CHARGES OF F&F : RS. 1,46,079 (C) ACCRUED INTEREST ON NPA : RS.18,35,338 2.2. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CAS E AS WELL AS IN LAW, THE LD. CIT(A) OUGHT NOT TO HAVE CONFIRMED THE ABOV E DISALLOWANCES/ADDITIONS. GROUND 2.1(A) CLEARING HOUSE CHARGES RS. 2,56,309/ - 2.1. IN RESPECT OF THE ADDITION OF RS.2,56,309/- UNDER THE HEAD CLEARING HOUSE CHARGES, F ACTS IN BRIEF AS STATED IN THE ORDER PASSED U/S.143(3) DATED 30/12/2009 WERE THAT ASSESSEE IS A CO-OPERATIVE BANK ENGAGED IN BANKING BUSINESS. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE ISSUE OF ALLOWANCE OF EXPENDITURE MADE ON ACCOUNT OF MICR CHEQUE CLEARING CHARGES DEBITED BY CLEARING AG ENT THE BHAGYODAYA CO-OP.BANK LTD. HAD COME UP. THE ASSESSING OFFICER HAS EXAMINED THE DEBIT VOUCHERS ISSUED BY THE BHAGYODAYA CO-OP.BANK LTD. FOR PROVIDING THE SERVICES IN THE CAPACITY OF CLEARING HOUSE AGE NT. THE ASSESSING OFFICER HAS EXAMINED THE PROCESSING CHARGES IN RESP ECT OF CERTAIN BRANCHES OF THE ASSESSEE AND IT WAS NOTED THAT THER E WAS NO DEDUCTION OF TAX AT SOURCE ON PAYMENT TO THE BHAGYODAYA CO-OP.BA NK LTD. AS A CLEARING HOUSE AGENT. THE ASSESSING OFFICER HAS FOUND THAT IN THE ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 3 - PROFIT & LOSS ACCOUNT, A SUM OF RS.2,56,309/- WAS C LAIMED AS MICR CHEQUE PROCESSING CHARGES, BUT WITHOUT DEDUCTION OF TAX AT SOURCE.THIS WAS THE AMOUNT STATED TO BE IN RESPECT OF THE DEBIT VOUCHERS ISSUED BY BHAGYODAYA CO-OP.BANK LTD. 3. IT WAS EXPLAINED TO THE ASSESSING OFFICER THAT T HE ASSESSEE BANK HAPPENED TO BE A SUB-MEMBER OF CLEARING HOUSE. HOWE VER, THE CLEARING AGENT IS BHAGYODAYA CO-OP.BANK LTD. THE MICR CLEAR ING CHARGES OF THE ASSESSEE WERE, THEREFORE, RECOVERED FROM THE SAID C LEARING AGENT BY THE CLEARING HOUSE. THE ASSESSEE HAD OPERATED AS SUB-M EMBER THROUGH THE SAID AGENT. IT WAS ALSO STATED TO THE ASSESSING OF FICER THAT WHILE MAKING THE PAYMENT OF CLEARING HOUSE CHARGES, THE SAID AGE NT HAD ALREADY DEDUCTED TDS IN SUPPORT A LETTER RECEIVED FROM THE SAID AGENT, I.E. THE BHAGYODAYA CO-OP.BANK LTD. DULY PLACED BEFORE THE A SSESSING OFFICER THROUGH WHICH WAS CERTIFIED THAT THE SAID AMOUNT OF CLEARING HOUSE CHARGES WERE RECOVERED FROM THE ASSSESSE AS RE-IMBU RSEMENT CHARGES. THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE SA ID INFORMATION AND HELD THAT THE PAYMENT WAS MADE WITHOUT DEDUCTION OF TDS, THEREFORE, BY INVOKING THE PROVISIONS OF SECTION 40(A) OF THE I. T.ACT DISALLOWED THE SAID CLAIM OF EXPENDITURE. THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 4. THE LEARNED CIT(APPEALS) HAS EXAMINED THE FACTS IN RESPECT OF CLEARING CHARGES AND THEREAFTER HELD AS UNDER:- 2.3.2 FROM THE ABOVE IT IS CLEAR THAT THE MICR CE NTRE MANAGES AND CONTROLS ALL THE STAGE OF PROCESSING OF CHEQUES FROM THE PROCUREMENT OF PAPER TO PRINTING OF THE CODE LINE O N CHEQUE FORMS TILL ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 4 - THE COMPLETION OF CLEARING OF CHEQUES. THE MICR CE NTRE MANAGES ALL THE FUNCTIONS LIKE ACCOUNTING OF THE SETTLEMENT, WA TCH ON THE POSITION OF DEBITS/CREDITS IN THE ACCOUNTS OF VARIOUS MEMBER BA NKS AND ALSO LOOKS AFTER THE OVER-ALL FUNCTIONING OF THE CLEARING HOUS E AND MONITORING ITS OPERATIONS ON BEHALF OF THE MEMBER BANK BRANCHES. THEREFORE IT IS CLEAR THAT THE MICR CENTRE COMPLETELY FALLS WITHIN THE AMBIT OF MANAGERIAL SERVICES AS PER THE PROVISIONS OF SECTIO N 194J OF THE INCOME-TAX ACT. THE AO HAS THEREFORE RIGHTLY HELD THAT THE ASSESS EE SHOULD HAVE DEDUCTED TDS U/S.194J. 2.3.3 HAVING SAID THAT THE ASSESSEE WAS LIABLE TO D EDUCT TDS U/S.194J ON ITS PAYMENTS MADE FOR CLEARING CHARGES, ANOTHER ARGUMENT OF THE APPELLANT IS CONSIDERED THAT SINCE THE BHAGYODAYA C OOPERATIVE BANK LTD. HAS PAID TAX ON THE RECEIPTS THE AO SHOULD NOT HAVE AGAIN ASKED FOR TAX. THIS ARGUMENT OF THE APPELLANT IS NOT APPLICA BLE BECAUSE IN THE CASE OF HINDUSTAN COCA-COLA BEVERAGES PRIVATE LTD. [SUPRA], THE HONORABLE SUPREME COURT WAS GIVING DECISION AS TO W HETHER IF THE DEDUCTEE HAD PAID THE TAX, THEN WHETHER THE TDS CAN BE AGAIN COLLECTED FROM THE DEDUCTOR. IN THE PRESENT CASE, THE ISSUE IS OF DISALLOWANCE UNDER SECTION 40[A] [IA]. THE APPELLANT WAS REQUI RED TO DEDUCT TDS, AND SINCE IT HAS FAILED TO DO SO, THE DISALLOWANCE MADE BY THE AO IS CORRECT. THIS GROUND OF APPEAL IS THEREFORE, DISMI SSED. 4.1. FROM THE SIDE OF THE ASSESSEE, LD.AR MR. S.N.D IVATIA APPEARED AND STATED THAT NO BANK CHARGES WERE DIRECTLY PAID BY THE ASSESSEE TO BANK OF BARODA. THE BANK CHARGES WERE PAID BY THE BHAGYODAYA CO- OP.BANK LTD. AND THEREFORE TDS WAS DEDUCTED BY THE SAID BANK ON PAYMENT OF MICR CHARGES TO BANK OF BARODA. THE ASSESSEE WAS ONLY REQUIRED TO REIMBURSE THE BANK CHARGES TO THE BHAGY ODAYA CO-OP.BANK LTD. FOR THIS PROPOSITION, HE HAS PLACED RELIANCE ON THE FOLLOWING CASE LAWS:- SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. KLM ROYAL DUTCH AIRLINES VS. ASST.CIT (1998) 62 TTJ (DEL)268 2. EXPEDITORS INTERNATIONAL (INDIA) (P) LTD. VS. ADDL.CIT (2008) 118 TTJ (DEL) 652 ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 5 - 5. FROM THE SIDE OF THE REVENUE, LD.DR MR.B.L.YADAV APPEARED AND PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BE LOW. 6. ON HEARING, THE RIVAL SUBMISSIONS, WE HAVE NOTIC ED THAT THE ADMITTED FACTUAL POSITION WAS THAT THE ASSESSEE WAS ONLY A SUB-MEMBER OF THE CLEARING HOUSE. THE ASSESSEE HAS AVAILED THE S ERVICES OF MICR CLEARING FROM A MEMBER OF THE CLEARING HOUSE; NAMEL Y, THE BHAGYODAYA CO-OP.BANK LTD. AS FAR AS THE LEGAL POSITION OF DE DUCTION OF TDS IS CONCERNED, THERE IS NO DISPUTE THAT TDS IS REQUIRED TO BE DEDUCTED FROM MICR CHARGES. DUE TO THIS REASON, SINCE THE BHAGYO DAYA CO-OP.BANK LTD. WAS DIRECTLY DEALING WITH THE BANK OF BARODA, A CLEARING AGENT, THEREFORE ON PAYMENT OF MICR CHARGES TO BANK OF BAR ODA; TDS WAS DEDUCTED BY THE BHAGYODAYA BANK CO-OP.LTD. CONSEQU ENT THEREUPON, THE ASSESSEE WAS REQUIRED TO REIMBURSE THE BANK MIC R CHARGES TO BHAGYODAYA BANK. THE SAID REIMBURSEMENT CHARGES WE RE INCLUSIVE OF TDS AS WELL. IN CONFIRMATION THERETO, A LETTER HAS BEEN PLACED ON RECORD ISSUED BY THE BHAYODAYA CO-OP.BANK LTD THEREIN IT W AS AFFIRMED THAT THE SAID REIMBURSEMENT CHARGES WERE INCLUSIVE OF TDS, S ALIENT FEATURES AS FOLLOWS:- THE BHAGYODAYA CO-OP. BANK LTD. DATE : 13/08/2010 TO THE GENERAL MANAGER THE KARNAVATI CO-OP.BANK LTD. ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 6 - AHMEDABAD 382 350 DEAR SIR, CLEARING CHARGES DURING THE YEAR 2006-2007 WE HAVE TO INFORM YOU THAT YOU WERE SUB-MEMBER OF O UR BANK FOR THE CLEARING PURPOSES DURING THE ABOVE PERIOD. WE PRESENTED YOUR OUTWARD AND INWARD CLEARING WITH OUR CLEARING CHEQU ES TO THE CHEQUE PROCESSING CENTRE OF BANK OF BARODA, AHMEDAB AD. AS PER THE AGREEMENT, YOU WERE MAINTAINING FIXED DEPOSIT A S SECURITY FOR THE ABOVE SERVICE RENDERED BY US. FURTHER, THE OVE RDRAFT FACILITY WAS ALLOWED BY US TO YOUR BANK AGAINST THE SAID FIX ED DEPOSIT. FURTHER, BANK OF BARODA WAS CHARGING FIXED PROCESSI NG CHARGES FOR INWARD AND OUTWARD CLEARING TO OUR BANK. ACCOR DINGLY, WE HAD DEBITED RS.256309/- IN YOUR OVERDRAFT ACCOUNT D URING THE YEAR 2006-2007 BEING THE CLEARING PROCESSING, HANDLING, CHEQUE RETURNING, ECS AND OTHER MISCELLANEOUS CLEARING CHA RGES. 6.1. FROM THE ABOVE CERTIFICATE, IT IS THUS CLEAR T HAT AS FAR AS THE PAYMENT BY THE ASSESSEE WAS CONCERNED, IT WAS NOTHI NG BUT IN THE NATURE OF REIMBURSEMENT OF BANK CHARGES. IN THIS REGARD , THE LEGAL PROPOSITION AS SETTLED BY THE CO-ORDINATE BENCH E DELHI IN TH E CASE OF KLM ROYAL DUTCH AIRLINES VS. ASSTT.CIT (1998) 62 TTJ 268 (D EL) WERE THAT IN A SITUATION WHERE THE ASSESSEE IS REIMBURSING ITS EMP LOYEES CONVEYANCE EXPENDITURE, THEN NON-INCLUSION OF THE SAID REIMBUR SEMENT IN SALARY FOR THE PURPOSE OF TDS U/S.192 WAS HELD AS A BONA FIDE BELIEF THAT ON THE SAID REIMBURSEMENT AMOUNT NO TDS WAS REQUIRED TO BE DEDU CTED. THE RESPECTED BENCH HAS HELD THAT THERE WAS NO MATERIAL TO INDICATE THAT THE CONDUCT OF THE ASSESSEE WAS NOT BONA FIDE. OUR AT TENTION HAS ALSO BEEN DRAWN ON AN ANOTHER DECISION OF ITAT DELHI F BENC H IN THE CASE OF EXPEDITORS INTERNATIONAL (INDIA) (P) LTD. REPORTED IN 118 TTJ 652 (DEL), ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 7 - WHEREIN CERTAIN CHARGES WERE REIMBURSED BY THE ASSE SSEE-COMPANY TO ITS PARENT COMPANY. AFTER CONSIDERING THE FACTS, IT W AS HELD THAT THOSE CHARGES WERE NOT IN THE NATURE OF FEE FOR TECHNICAL SERVICES AND BEING REIMBURSED THEREFORE NOT LIABLE FOR DEDUCTION AT SO URCE, HENCE, THE INVOCATION OF THE PROVISIONS OF SECTION 40(A)(I) WE RE HELD AS NOT SUSTAINABLE. WE, THEREFORE, CONCLUDE THAT SINCE TH E MICR CHARGES WERE MERELY REIMBURSED BY THE ASSESSEE AND THAT THERE WA S NO PAYMENT BY MEMBER OF THE BANK TO CLEARING AGENT AS FAR AS THE ASSESSEE IS CONCERNED, THEREFORE THE ASSESSEE WAS NOT REQUIRED TO DEDUCT T HE TDS ON PAYMENT OF REIMBURSEMENT. OTHERWISE ALSO, IT WOULD TANTAMOUNT TO DOUBLE DEDUCTION OF TDS ON THE SAME PAYMENT OF MICR BANK CHARGES. I N THE RESULT, WE HEREBY REVERSE THE FINDINGS OF THE AUTHORITIES BELO W AND DIRECT NOT TO DISALLOW THE CLAIM OF REIMBURSEMENT OF CHARGES MERE LY FOR NON-DEDUCTION OF TDS. THIS PART OF THE GROUND IS, THEREFORE, ALLOWED. 7. GROUND NO.2.1 (B) SERVICES CHARGES OF F&F - RS.1, 46,079/- 7.1. IN RESPECT OF THE IMPUGNED ADDITION UNDER THE HEAD SERVICES CHARGES, THE ASSESSEE HAS CLAIMED AN EXPENDITURE OF RS.1,46,079/- WHICH WAS STATED TO BE IN THE NATURE OF BUILDING MA INTENANCE AND FURNITURE AND FIXTURE CHARGES. BY THE VERY DESCRIP TION OF THE EXPENDITURE, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSE SSEE WAS REQUIRED TO DEDUCT THE TAX. THE ASSESSING OFFICER HAS DISALLOWE D THE CLAIM AND THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHO RITY. ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 8 - 8. BEFORE THE LD.CIT(A), IT WAS CONTENDED THAT THE APPELLANT HAD PAID SERVICE CHARGES AND MAINTENANCE CHARGES OF ONE OF T HE ITS BRANCH AND THE PAYMENT WAS BELOW RS.1,20,000/- TO EACH PERSON, THE REFORE, THE PROVISIONS OF SECTION 194-I WAS NOT ATTRACTED AND C ONSEQUENTIALLY THE DISALLOWANCE U/S.40(A)(IA) WAS ALSO INCORRECT. HOW EVER, LD.CIT(A) WAS NOT CONVINCED AND HELD THAT IN TERMS OF THE CONTRAC T FOR CLEANING, ETC; THE SAID AMOUNT WAS PAID AND THE AMOUNT PAID BY EACH OF THE BRANCH WAS MORE THAN RS.50,000/-, THEREFORE TDS WAS REQUIRED T O BE DEDUCTED. 9. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE ARE OF THE VIEW THAT SINCE THE PAYMENT WAS IN RESPECT OF SERVICE CH ARGES MAY BE UTILIZED BY THE BRANCHES OF THE BANK BUT BEING CONNECTED TO THE PART OF THE FIXTURES OF THE RENTED PROPERTY, THEREFORE, THE ASSESSEE WAS REQUIRED TO DEDUCT THE TAX ON PAYMENT OF SERVICE CHARGES AS IT WAS HELD BY THE REVENUE AUTHORITIES AS RENT. UNDER THESE CIRCUMSTANCES, WE ARE NOT CONVINCED WITH THE ARGUMENT THAT THE PAYMENT BEING FOR AVAILI NG THE SERVICES OF FURNITURE AND FIXTURE, ETC. WAS NOT PART OF THE REN T, HENCE ACCORDING TO US, THE DISALLOWANCE WAS RIGHTLY MADE. THIS PART OF TH E GROUND IS THEREFORE DISMISSED. 10. GROUND NO.2.1 (C) ACCRUED INTEREST ON NPA - RS.18, 35,338/- 10.1. THE OBSERVATION OF THE ASSESSING OFFICER WAS THAT ON ONE HAND, THE ASSESSEE HAD FOLLOWED MERCANTILE SYSTEM OF ACCOUNTI NG BUT ON THE OTHER HAND, NO INTEREST ON ACCRUAL BASIS WAS OFFERED ON NON- PERFORMING ASSETS (IN SHORT NPA). THE EXPLANATION OF THE ASSESSEE ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 9 - WAS THAT THERE WAS NO CHARGEABILITY OF ACCRUED INTE REST ON NPA OF RS.12,16,703/-. IT WAS CLARIFIED THAT THE SAID AMO UNT OF INTEREST WAS NEITHER DEBITED TO BORROWERS ACCOUNT NOR CREDITED TO THE INTEREST INCOME. IT HAS FURTHER BEEN CLARIFIED THAT EVEN THE INTEREST WAS NOT SHOWN UNDER SUSPENSE-ACCOUNT. ON ONE HAND, THE REVENUE HAS STATED THAT THE DECISION OF STATE BANK OF TRAVANCORE VS. CIT REPORTED IN (1986)158 ITR 102(SC) IS TO BE APPLIED WHERE IT WAS HELD THAT INTEREST ACCRUED IS CHARGEABLE TO TAX. ON THE OTHER HAND, T HE ASSESSEE HAS PLACED RELIANCE ON A SUBSEQUENT DECISION OF HON'BLE SUPREM E COURT IN THE CASE OF UCO BANK VS. CIT (1999) 237 ITR 889 (SC), WHEREIN A CIRCULAR ISSUED BY THE BOARD WAS CONSIDERED AND HELD THAT IN RESPECT OF DOUBTFUL DEBTS EVEN IN THE CASE OF BANKS IT IS NOT REQUIRED TO CREDIT THE INTEREST THOUGH MAINTAINING MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSING OFFICER WAS NOT CONVINCED AND HELD THAT IN TERMS OF SECTION 5 OF IT ACT THE SCOPE OF TOTAL INCOME IS DEFINED THAT ALL INCOME FROM WHATEVER SOURCE WHICH IS RECEIVED OR DEEMED TO BE RECEIVED O R ACCRUES OR ARISES, OR DEEMED TO ACCRUE OR TO ARISE TO AN ASSESSEE. THE ASSESSING OFFICER HAS ALSO REFERRED SECTION 43D OF THE I.T.ACT FOR THE PROPOSITION THAT IN SPITE OF ANYTHING CONTAINED IN ANY OTHER PROVISIONS OF TH E ACT, IN THE CASE OF A BANK, THE INCOME BY WAY OF INTEREST IN RELATION TO BAD OR DOUBTFUL DEBTS HAVING REGARD TO THE GUIDELINES ISSUED BY THE RESER VE BANK OF INDIA IN RELATION TO SUCH DEBTS, SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED BY THE BANK TO ITS PROFIT & LO SS ACCOUNT. AS PER ASSESSING OFFICER, THE ASSESSEE WAS REQUIRED TO CRE DIT THE ACCRUED INTEREST TO ITS PROFIT & LOSS ACCOUNT, HOWEVER FAILED TO DO SO,THEREFORE, THE ASSESSEE HAS INFRINGED THE SAID SECTION. THE ASSE SSING OFFICER HAS ALSO ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 10 - DISCUSSED A DECISION OF SPECIAL BENCH DELHI IN THE CASE OF NEW INDIA INDUSTRIES LTD. 18 SOT PAGE 51 (1 DTR 247) FOR THE PROPOSITION THAT WHETHER A BAD DEBT CLAIMED AS BUSINESS EXPENDITURE BY MAKING A PROVISION FOR NON-PERFORMING ASSETS OF NBFC WHICH W ERE IN ACCORDANCE WITH THE PRUDENTIAL NORMS ISSUED BY RESERVE BANK OF INDIA IS ALLOWABLE. IN THAT CASE, IT WAS HELD THAT THE PROVISION MADE I N THE ACCOUNTS OF THE ASSESSEE IN RESPECT OF NPA SHOULD NOT BE TREATED AS SUFFICIENT COMPLIANCE WITH THE PROVISIONS OF SECTION 36(1)(VII) OF THE I. T.ACT SO AS TO ALLOW THE PROVISION FOR BAD OR DOUBTFUL DEBTS AS A PERMISSIBL E DEDUCTION. A CONCLUSION WAS DRAWN BY THE ASSESSING OFFICER WHICH IS REPRODUCED VERBATIM :- IN VIEW OF THE ABOVE LEGAL POSITION THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTED AND THE INTEREST OF RS.12, 16,703/- ACCRUED ON THE NPA WHICH IS NOT CREDITED BY THE ASSESSEE IN THE PR OFIT & LOSS ACCOUNT AND NOT OFFERED FOR TAXATION IS ADDED TO ASSESSEES TOTAL INCOME. THE AMOUNT OF RS.12,16,703/- IS THE OPENING BALANCE OF ACCRUED INTEREST ON NPA ACCOUNT AS ON 01.04.2006. RS.6,18,635/- IS ACC RUED INTEREST ON NPA ACCOUNTS OF RS.104.80 LACS FOR THE FY 2006-07 H AS ALSO NOT BEEN OFFERED TO TAX AND HENCE, TOTAL MOUNT OF RS.18,35,3 38/- (RS.12,16,703 + RS.6,18,635) IS ADDED TO INCOME AS PER PROVISIONS O F SECTION 5 R.W.S. OF THE I.T. ACT, 1961. PENALTY PROCEEDINGS FOR FURNIS HING INACCURATE PARTICULARS OF INCOME ARE HEREBY INITIATED. 11. BEING AGGRIEVED THE MATTER WAS CARRIED BEFORE T HE FIRST APPELLATE AUTHORITY. IT WAS NOTED BY THE LEARNED CIT(APPEALS ) THAT THE DECISION OF UCO BANK VS. CIT (1999) 237 ITR 889 (SC) [SUPRA] WAS WRONGLY RELIED UPON BY THE ASSESSEE BECAUSE THE SAID DECISI ON WAS PRIOR TO THE AMENDMENT IN THE STATUTE THROUGH WHICH THE PROVISIO NS OF SECTION 43D WERE INTRODUCED ON 01/04/1991. IT HAS ALSO BEEN HE LD BY THE LEARNED CIT(APPEALS) THAT THE RBI ACT AND INCOME TAX ACT OP ERATE IN DIFFERENT ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 11 - FIELDS. THE LEARNED CIT(APPEALS) HAS ALSO MADE AN OBSERVATION THAT IT CANNOT BE HELD THAT THE PROVISIONS MADE IN THE ACCO UNTS OF THE ASSESSEE IN RESPECT OF NPA SHOULD BE TREATED AS SUFFICIENT COM PLIANCE WITH THE PROVISIONS OF SECTION 36(1)(VII) OF THE I.T.ACT SO AS TO ALLOW THE PROVISION FOR BAD OR DOUBTFUL DEBTS AS A PERMISSIBLE DEDUCTIO N. THE LEARNED CIT(APPEALS) HAS CONCLUDED THAT THE ASSESSEE-BANK H AD CONSIDERED CERTAIN LOANS AS NPA MERELY WHEN SECOND OR THIRD IN STALLMENT COULD NOT BE RECOVERED. IN HIS OPINION THOSE LOANS SHOULD NOT BE CLAIMED AS STICKY OR BAD LOANS. HE HAS ALSO HELD THAT THE ASSESSEE-COMPANY A CO- OPERATIVE THEREFORE NOT COVERED BY THE PROVISIONS O F IT ACT APPLICABLE ON SCHEDULED BANKS. THE ACTION OF THE ASSESSING OFFIC ER WAS CONFIRMED. 12. FROM THE SIDE OF THE ASSESSEE, LD.AR MR.S.N.DIV ATIA APPEARED AND HIS FIRST PLANK OF ARGUMENT WAS THAT THE PROVISIONS OF SECTION 43D OF THE I.T.ACT DO APPLY ON THE ASSESSEE BECAUSE AS PER TH E LANGUAGE ONLY THAT INTEREST INCOME IS CHARGEABLE TO TAX WHICH IS EITHE R CREDITED TO THE PROFIT & LOSS ACCOUNT OF A BANK OR ACTUALLY RECEIVED , WHICH EVER IS EARLIER. THE LD.AR HAS, THEREFORE, PLEADED THAT NEITHER THE INTEREST WAS RECEIVED NOR IT WAS CREDITED TO PROFIT & LOSS ACCOUNT, THEREFORE IN TERMS OF THE PROVISIONS OF 43D NOT SUBJECT TO TAX IN THE HANDS O F THE ASSESSEE. LD.AR HAS STATED THAT THE ISSUE IN THIS APPEAL RELATES TO ACCRUAL OF INTEREST ON NPA ACCOUNTS AND NOT IN RESPECT OF THE DEDUCTIBILIT Y OF PROVISIONS OF NPA AMOUNT AS DEBT U/S.36 I.T.ACT. RELIANCE WAS P LACED ON THE FOLLOWING DECISIONS:- SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. VASISTH CHAY VYAPAR 330 ITR 440 (DELHI) ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 12 - 2. CIT VS. EICHER LTD. 320 ITR 410 (DEL.) 3. SOUTHERN TECHNOLOGIES LTD.VS. JCIT 320 ITR 577 (SC) 13. FROM THE SIDE OF THE REVENUE, LD. DR MR. B.L.YA DAV APPEARED AND STATED THAT IN THE CASE OF NEW INDIA INDUSTRIES LTD . (18 SOT 51) [SUPRA], EVEN THE NPA WAS NOT CONSIDERED AS A SUFFICIENT COM PLIANCE OF THE PROVISIONS OF SECTION 36(1)(VII) OF THE I.T.ACT TO ALLOW AS A BAD OR DOUBTFUL DEBT THEREFORE IN CONSEQUENCE THEREOF, THE LOANS AND ADVANCES WERE THE ASSETS ON WHICH THE ASSESSEE HAD TO SHOW I NTEREST ON ACCRUAL BASIS. THE LD.DR HAS ALSO PLACED HEAVY RELIANCE ON THE DECISION OF STATE BANK OF TRAVANCORE (1986) 158 ITR 102(SC) [SUPRA] F OR THE LEGAL PROPOSITION THAT THE ASSESSEE-COMPANY, A BANK-COMPA NY, FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, SHOULD HAVE DEBITE D INTEREST ON NPA AND SHOULD HAVE BROUGHT SUCH ACCRUED INTEREST TO I TS PROFIT & LOSS ACCOUNT. HE HAS THEREFORE CONCLUDED THAT THE ACTIO N OF THE REVENUE AUTHORITIES SHOULD BE AFFIRMED. 14. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. IT WAS NOTICED BY THE ASSESSING OFFICER THAT ON NPA THE ASSESSEE HAS NOT DISCLOSED THE INTEREST ON ACCRUAL BASIS. AS PER ASSESSING OFFICE R, THE ASSESSEE BANK HAS MAINTAINED ITS BOOKS OF ACCOUNT ON MERCANTILE BASIS . AS FAR AS QUANTUM IN QUESTION IS CONCERNED, IT WAS NOTICED BY THE ASS ESSING OFFICER THAT ACCRUED INTEREST OF RS.12,16,703/- WAS THE OPENING BALANCE AS ON 1/4/2006 ON NON-PERFORMING ACCOUNTS AND FURTHER A SUM OF RS.6,18,635/- WAS THE ACCRUED INTEREST ON THE NPA ACCOUNT OF RS.1 04.80 LACS FOR THE ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 13 - FINANCIAL YEAR 2006-07 (ASSESSMENT YEAR UNDER CONSI DERATION 2007-08). THE ASSESSING OFFICER HAS HELD THAT IN TERMS OF THE PROVISIONS OF SECTION 5 OF IT ACT, SINCE THE INTEREST INCOME HAD ACCRUED TO THE ASSESS EE THEREFORE ASSESSABLE TO TAX IN ITS HANDS. RELIANCE WAS PLACED ON STATE BANK OF TRAVANCORE REPORTED IN 158 ITR 102(SC). THE ASSESSING OFFICER HAS ALSO MENTIONED THAT BY THE SUBSTITUTION IN THE PROVISIONS OF SECTION 43D OF THE I.T.ACT SINCE THE ASSESSEE BEING NEITHER A PUBLIC FINANCIAL INSTITUTION NOR A SCHEDULED BANK OR STATE FINANCIAL CORPORATION, THEREFORE ACCRUED INTEREST SHOULD HAVE BEEN OFFERED TO TAX. THE ASSESSING OFFICER HAS PLACED RELIANCE ON NEW INDIA INDUSTRIES LTD. REPORTED IN 18 SOT 01 (1DTR 247)(SB), WHEREIN THE ISSUE WAS ABOUT THE CLAIM OF BAD DEBT AND IT WAS HELD THAT THE NON- BANKING FINANCIAL CORPORATIONS (IN SHORT NBFC) ARE NOT ENTITLED FOR ALLOWANCE OF BAD DEBT SO LONG AS THE AMOUNT OF CLAIM IS NOT DEBITED TO PROFIT & LOSS ACCOUNT, BUT ONLY A PROVISION IN RESPECT OF NPA IS MADE. THE ASSESSING OFFICER HAS THEREFORE HELD THAT THE ASSESSEE HAS ME RELY MADE THE PROVISION OF BAD DEBT AS PER THE ADVISORY GUIDELINE S ISSUED BY THE RBI AND SINCE IT WAS HELD THAT THE CLAIM OF BAD DEBT I S NOT ADMISSIBLE, THEREFORE THERE WAS AN ELEMENT OF ACCRUAL OF INTERE ST ON THOSE DEBTS WHICH SHOULD BE TAXED IN THE HANDS OF THE ASSESSEE. AT THIS JUNCTURE IT IS WORTH TO MENT ION THAT A PERTINENT ARGUMENT WAS RAISED BY LD. DR MR. YADAV THAT IF A PROVISION OF DOUBTFUL- DEBT, ON ACCOUNT OF PRUDENTIAL NORMS OF RBI, THOUGH MADE AND THAT PROVISION IS NOT ALLOWABLE, AS HELD BY THE COURTS, THEN MEANING THEREBY, THAT THE DEBTS ARE TREATED AS RECOVERABLE SO IN CONSEQUENCE INTERE ST OUGHT BE SHOWN ON ACCRUAL BASIS. EVEN THE FIRST APPELLATE AUTHORITY H AS HELD THAT THOSE LOANS ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 14 - COULD NOT BE CALLED AS STICKY OR BAD BECAUSE CERTAI N INSTALLMENTS OF INTEREST WERE RECEIVED, HENCE FOR THE YEAR UNDER CO NSIDERATION ACCRUED INTEREST SHOULD HAVE BEEN CREDITED IN THE BOOKS OF ACCOUNT. THE LEARNED CIT(APPEALS) WAS ALSO OF THE VIEW THAT THE ASSESSEE IS BEING NOT A SCHEDULE BANK THEREFORE THE PROVISIONS OF SECTION 4 3D OF THE I.T.ACT WERE NOT APPLICABLE. 15. WITH THIS FACTUAL AND LEGAL BACKGROUND, AS ALSO ON DUE CONSIDERATION OF THE ARGUMENTS RAISED BY BOTH THE SIDES CERTAIN QUESTIONS ARE REQUIRED TO BE ADDRESSED BY US AND POINT-WISE T HE SAME ARE ADJUDICATED UPON HEREINBELOW:- (I) APPLICABILITY OF THE PROVISIONS OF SECTION 43-D OF THE I.T.ACT. THIS SECTION READS AS FOLLOWS:- 43D. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS ACT, ( A ) IN THE CASE OF A PUBLIC FINANCIAL INSTITUTION OR A SCHEDULED BANK OR A STATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL I NVESTMENT CORPORATION, THE INCOME BY WAY OF INTEREST IN RELATION TO SUCH CATEG ORIES OF BAD OR DOUBTFUL DEBTS AS MAY BE PRESCRIBED HAVING REGARD TO THE GUI DELINES ISSUED BY THE RESERVE BANK OF INDIA IN RELATION TO SUCH DEBTS; ( B ) IN THE CASE OF A PUBLIC COMPANY, THE INCOME BY WA Y OF INTEREST IN RELATION TO SUCH CATEGORIES OF BAD OR DOUBTFUL DEBT S AS MAY BE PRESCRIBED HAVING REGARD TO THE GUIDELINES ISSUED BY THE NATIO NAL HOUSING BANK IN RELATION TO SUCH DEBTS, SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED BY THE PUBLIC FINANCIAL INSTITUTION OR THE SCHEDULED BANK OR THE STATE FINANCIAL CORPORATION OR THE STATE INDUSTRIAL INVESTMENT CORP ORATION OR THE PUBLIC ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 15 - COMPANY TO ITS PROFIT AND LOSS ACCOUNT FOR THAT YEA R OR, AS THE CASE MAY BE, IN WHICH IT IS ACTUALLY RECEIVED BY THAT INSTITUTION OR BANK OR CORPORATION OR COMPANY, WHICHEVER IS EARLIER.( WORDS EMPHASIZED ) 15.1. ON CAREFUL ANALYSIS OF THIS SECTION OUR FIRST OBSERVATION IS THAT SECTION 43D IS IN CONTRAST WITH THE FUNDAMENTAL PRI NCIPLE OF ACCOUNTANCY. THE CARDINAL PRINCIPLE OF MERCANTILE SYSTEM OF ACCOUNTANCY IS THAT AN INCOME IS TO BE SHOWN IN THE BOOKS OF ACCOUNT ON ACCRUAL BASIS. THE PRINCIPLE IS THAT IT IS IMMATERIAL WHETHER IT WAS ACTUALLY RECEIVED OR NOT, BUT IF AN INCOME IS EXPEC TED TO BE RECEIVED, THEN IT SHOULD BE BROUGHT TO BOOKS OF ACCOUNT AS AN INCO ME ACCRUED TO THE ASSESSEE. CONTRARY TO THIS RECOGNIZED PRINCIPLE, THIS SECTION HAS PRESCRIBED THAT AN INCOME BY WAY OF INTEREST SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED . THE WORDS CREDITED AND ACTUALLY RECEIVED HAS BEEN HIGHLIGHTED HEREINABOV E WHILE REPRODUCING THE SECTION IN QUESTION. THE OTHER DEVIATION FROM THE SAID ACCEPTED PRINCIPLE OF ACCOUNTANCY IS THAT AN INCOME BY WAY O F INTEREST SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS ACTUALLY RECEIVED. THE ACT SAYS THAT THE INCIDENCE OF CREDIT OR ACT UALLY RECEIVED, WHICHEVER IS EARLIER IS TO BE TAKEN INTO ACCOUNT FO R THE PURPOSE OF CHARGEABILITY OF INCOME BY WAY OF INTEREST. SIMULT ANEOUSLY, IT IS NOTEWORTHY THAT THIS SECTION IS AN OVERRIDING SECTION BECAUSE THE OPENING WORD IS NOTWITHSTANDING ANYTHING TO THE CONTRARY C ONTAINED IN ANY OTHER PROVISIONS OF THIS ACT. THEREFORE, IN SPITE OF AN YTHING CONTAINED IN THE ACT, THE PROVISIONS OF THIS SECTION SHALL OVERRIDE THOSE PROVISIONS. ONCE THE STATUTE HAS CATEGORICALLY MADE A LAW IN RESPECT OF PUBLIC FINANCIAL INSTITUTIONS THAT INTEREST IS CHARGEABLE TO TAX EIT HER IN THE YEAR IN WHICH ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 16 - CREDITED OR ACTUALLY RECEIVED, WHICHEVER IS EARLIER , THEN IT IS COMPULSORY TO ABIDE BY THE SAID RULE. ACCORDING TO US, NO SCOPE IS LEFT WITH THE REVENUE AUTHORITIES TO IGNORE THESE PROVISIONS DUE TO UNAMBIGUOUS USE OF LANGUAGE IN THE SECTION. (II) STATUS OF ASSESSEE FOR THE PURPOSE OF APPLIC ATION SECTION 43-D. AS FAR AS THE STATUS OF THE ASSESSEE IS CONCERNED, THE ASSESSING OFFICER HAS STATED THAT THE ASSESSEE-BANK IS A CO-O PERATIVE BANK. UNDISPUTEDLY, THE ASSESSEE IS ALSO GOVERNED BY THE RBI GUIDELINES. VIDE AN EXPLANATION (D) R.W.S. 36(1)(VIIA) ANNEXED TO SE CTION 43-D THE DEFINITION OF THE ENTITIES INCORPORATED BY THE SEC TION HAVE BEEN DEFINED AND IN THE ABSENCE OF ANY CONTRARY MATERIAL, WE HER EBY HOLD THAT THE ASSESSEE IS COVERED BY ONE OF THE ENTITIES, HENCE T HE PROVISIONS OF SECTION 43-D ARE TO BE APPLIED. (III) APPLICABILITY OF CBDT CIRCULAR. NEXT ISSUE IS THAT WHETHER A CIRCULAR HAVING EFFEC T OF RELAXING RIGOUR OF LAW CAN BE TREATED AS INCONSISTENT WITH THE PROVISI ONS OF A STATUTE. IN ORDER TO AID PROPER DETERMINATION OF THE INCOME OF MONEY LENDERS AND BANKS, THE CENTRAL BOARD OF DIRECT TAXES HAS ISSUED A CIRCULAR DATED OCTOBER 6, 1952, PROVIDING THAT WHERE INTEREST ACCRUING ON DOUBTFUL DEBTS IS CREDITED TO A SUSPENSE ACCOUNT, IT NEED NO T BE INCLUDED IN ASSESSEES TAXABLE INCOME, PROVIDED THE INCOME TAX OFFICER IS SATISFIED THAT RECOVERY IS PRACTICALLY IMPROBABLE. THE CBDT U/S.119 OF THE I.T.ACT HAS POWER TO ISSUE CIRCULARS IN EXERCISE OF ITS STA TUTORY POWERS. IF THE BOARD CONSIDER IT NECESSARY TO LAY DOWN CERTAIN RUL ES AND THEN DIRECT THE SUB-ORDINATE AUTHORITIES, SUCH DIRECTIONS ARE REQUI RED TO BE FOLLOWED AND ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 17 - SUCH CIRCULAR WOULD BE BINDING ON THE DEPARTMENT UN LESS AND UNTIL HELD AS ULTRA VIRES BY A COURT OF LAW.THE BOARD HAS POWERS TO RELAX TH E SEVERITY OR THE STRICTNESS OF LAW AND THE AUTHORITI ES ARE REQUIRED TO FOLLOW THOSE INSTRUCTIONS AS HELD IN THE CASE OF C.B. GAUTAM VS. UNION OF INDIA 108 CTR 304 (SC) & 110 CTR 179 (SC); NAVNITLAL C.ZAVERI 56 ITR 198(SC) AND K.P.VARGHESE 131 ITR 597 (SC). IN THE LAND-MARK DECISION, THE HON'BLE S UPREME COURT IN THE CASE OF UCO BANK VS. CIT (1999) 237 ITR 889 (SC) HAS THEREFORE HELD, FIRST, THAT A BENEFICIAL CIRCULAR IS NOT TO BE TREATED A S INCONSISTENT WITH THE PROVISIONS OF STATUTE AND BINDING ON THE AUTHORITIE S. SECOND , THAT IN RESPECT OF INTEREST ON STICKY ADVANCES INTEREST I NCOME IS TO BE TAXED ONLY WHEN ACTUALLY RECEIVED AS PRESCRIBED BY CBDT C IRCULAR. HOWEVER, IN THE PAST AN INTERESTING TURN HAD TAKEN PLACE BY AN ORDER OF THE HONBLE KERALA HIGH COURT IN THE CASE OF STA TE BANK OF TRAVANCORE REPORTED IN 110 ITR 336 (KER.), WHEREIN IT WAS HELD THAT THE ASSESSEE, A BANKING COMPANY, DID NOT CREDIT IN ITS ACCOUNT THE INTEREST THAT HAD ACCRUED ON STICKY ADVANCES BECAUSE THE ASSESS EE FELT THAT THE INTEREST COULD NOT TO BE REALISED. IT CREDITED TH E INTEREST TO A SEPARATE ACCOUNT KNOWN AS INTEREST SUSPENSE ACCOUNT. ON R EFERENCE, THE HON'BLE COURT HAS HELD THAT THERE WAS AN ACCRUAL OF INCOME LIABLE TO INCOME-TAX AND THE ASSESSEE WAS NOT JUSTIFIED IN NOT CREDITING THE INTEREST INCOME ON SUCH STICK ADVANCES IT ITS ACCOUNTS . HOWEVER, LATER ON AT THE HON'BLE APEX COURT WHILE PRONOUNCING THE JUDGMENT OF THE SAID STATE BANK OF TRAVANCORE VS. CIT REPORTED IN (1986)158 ITR 102(S C), THERE WERE HON'BLE THREE JUDGES PRESIDING THE COURT, OUT OF W HICH HONBLE TWO ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 18 - JUDGES WERE IN THE OPINION THAT THE INTEREST ON ST ICKY ADVANCES WAS RIGHTLY TREATED AS INCOME WHICH HAD ACCRUED TO THE APPELLANT. THERE WAS A DESCENDING NOTE BY ONE OF THE HON'BLE JUDGE AND COMMENTED THAT WHETHER AN INCOME ON RECEIPT BASIS OR ON ACCRUAL BA SIS, IT IS THE REAL INCOME AND NOT ANY HYPOTHETICAL INCOME WHICH MAY HA VE THEORETICALLY ACCRUED, I.E. SUBJECT TO TAX UNDER THE ACT. NEVERT HELESS, THAT DECISION WAS NOT FOLLOWED WHILE DECIDING THE APPEAL OF UCO BANK (SUPRA) BY THE HON'BLE THREE JUDGES OF THE SUPREME COURT, ALREADY DISCUSSED BY US SUPRA. WE, THEREFORE SUMMARIZE THAT AS OF NOW THE LAW AS L AID DOWN IN UCO BANK IS THAT IN TERMS OF CBDT CIRCULAR THE INTEREST IS TO BE ADDED AS INCOME ONLY WHEN ACTUALLY RECEIVED OR CRED ITED IN RESPECT OF THE STICKY ADVANCES WHILE MAKING ASSESSMENT FOR A FINANCIAL INSTITUTION. ( IV) INTERPRETATION OF THE LANGUAGE OF THE STATUT E : WE HAVE REPRODUCED VERBATIM THE PROVISIONS OF SECTI ON 43-D OF THE I.T.ACT AND EXPRESSED AN OPINION THAT IF THE STATUT E HAS USED THE TERMINOLOGY FOR THE CHARGEABILITY OF INTEREST ON TH E BASIS WHEN CREDITED OR ACTUALLY RECEIVED, THEN IN OUR OPINION NO AMB IGUITY HAS BEEN LEFT BY THE STATUTE. IF THE STATUTE IS SO CLEAR THAT AN I NTERPRETATION CAN EASILY BE MADE, THEN THAT EXACT MEANING SHOULD BE GIVEN TO TH E LANGUAGE OF THE SECTION. FOR THIS LEGAL PROPOSITION WE PLACE RELIA NCE ON KESHAVJI RAVJI AND COMPANY VS. CIT 183 ITR 01 (SC), WHEREIN IT WAS HELD AS UNDER: AS LONG AS THERE IS NO AMBIGUITY IN THE STATUTORY LANGUAGE, RESORT TO ANY INTERPRETATIVE PROCESS TO UNFOLD THE LEGISLATIVE INTENT BECOMES IMPERMISSIBLE. THE SUPPOSED INTENTI ON OF THE LEGISLATURE CANNOT THEN BE APPEALED TO WHITTLE DOW N THE ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 19 - STATUTORY LANGUAGE WHICH IS OTHER-WISE UNAMBIGUOUS. IF THE INTENDMENT IS NOT IN THE WORDS, IT IS NOWHERE ELSE. THE NEED FOR INTERPRETATION ARISES WHEN THE WORDS USED IN TH E STATUTE ARE, ON THEIR OWN TERMS, AMBIVALENT AND DO NOT MANI FEST THE INTENTION OF THE LEGISLATURE. WHEN WORDS ACQUIRE A PARTICULAR MEANING OR SENSE BE CAUSE OF THEIR AUTHORITATIVE CONSTRUCTION BY SUPERIOR COU RTS, THEY ARE PRESUMED TO HAVE BEEN USED IN THE SAME SENSE WH EN USED IN SUBSEQUENT LEGISLATION IN THE SAME OR SIMI LAR CONTEXT. TO SAY THAT THE COURT COULD NOT RESORT TO THE SO-CA LLED EQUITABLE CONSTRUCTION OF A TAXING STATUTE IS NOT TO SAY THAT, WHERE A STRICT LITERAL CONSTRUCTION LEADS TO A RESULT NOT INTENDED TO SUBSERVE THE OBJECT OF THE LEGISLATION, ANOTHER CONSTRUCTION, PERMISSIBLE IN THE CONTEXT, SHOULD NO T BE ADOPTED. IN THIS RESPECT, TAXING STATUTES ARE NOT DIFFERENT FROM OTHER STATUTES. WE CAN THEREFORE SAFELY DRAW A CONCLUSION THAT BY T HE INSERTION OF A SPECIAL PROVISION TO TAX INTEREST INCOME IN THE CAS E OF PUBLIC FINANCIAL INSTITUTION, ETC. SECTION 43-D HAS TO BE APPLIED IN ITS LETTER AND SPIRIT. IT IS PERTINENT TO MENTION THAT LATER ON, IN THE C ASE OF CIT VS. BANK OF AMERICA S.A. 262 ITR 504 (BOM) THE QUESTION OF INTEREST ON STICKY LOANS WAS DECIDED IN FAVOUR OF THE ASSESSEE AND HE LD THAT THE QUESTION IS TO BE ANSWERED IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION OF UCO BANK REPORTED AT 237 ITR 889(SC) :: 240 ITR 355 (SC ). LIKEWISE, IN AN ANOTHER CASE OF CIT VS. STATE BANK OF INDIA 262 ITR 662 (BOM.) AGAIN IT WAS HELD THAT THE AMOUNT CREDITED TO THE INTERES T SUSPENSE ACCOUNT WAS ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 20 - NOT TAXABLE FOLLOWING THE DECISION PRONOUNCED IN TH E CASE OF UCO BANK (SUPRA). (V) JUDGEMENT IN FAVOUR OF REVENUE : FROM THE SIDE OF THE REVENUE AN ORDER OF THE TRIBUN AL HAS BEEN VEHEMENTLY RELIED UPON AND THIS IS THE BASIC REASON OF THE ELABORATE DISCUSSION MADE HEREINABOVE SO AS TO UNFOLD THE CON TROVERSY. IN THE SAID DECISION OF THE TRIBUNAL, VIZ. JT.CIT V/S. INDIA EQUIPMENT LEASING LTD. (2008)111 ITD 37 (CHENNAI), THE RESPECTED CO-ORDINATE BENCH HAS EXPRESSED THAT QUOTE PRIOR TO INSERTION OF SECTION 43D WITH EFFECT FROM 1-4-1991, RECOGNITION OF INCOME WAS ON THE BASIS OF CIRCULAR OF 9-10- 1984. IT SAID THAT FOR FIRST THREE YEARS THE INCOM E MAY BE TAKEN ON ACCRUAL BASIS AND FROM 4TH YEAR ONWARDS, THE INCOME IN RESPECT OF DOUBTFUL DEBTS WAS TO BE RECOGNIZED ON RECEIPT BA SIS. SINCE THE INCOME WAS TO BE ASSESSED FOR FIRST THREE YEARS ON ACCRUAL BASIS, PROVISIONS OF SECTION 43D WERE INSERTED IN THE ACT. CIRCULAR NO. 621, DATED 19-12- 1991 GIVES THE LEGISLATIVE INTENTION STATING THAT SECTION 43D WAS INSERTED WITH A VIEW TO IMPROVING THE VIABILITY OF BANKS, PUBLIC FINANCIAL INSTITUTIONS ETC., SO AS TO PROVIDE THAT INTEREST ON STICKY LOANS SHALL BE CHARGED TO TAX ONLY IN THE YEAR IN WHICH T HE INTEREST IS ACTUALLY RECEIVED OR CREDITED TO THE PROFIT AND LOSS ACCOUNT . THIS BENEFIT WAS EXTENDED WITH EFFECT FROM 1-4-2000 IN THE CASE OF P UBLIC COMPANIES ENGAGED IN LONG-TERM FINANCING OF HOUSING PROJECTS APPROVED BY NATIONAL HOUSING BANKS. THE LEGISLATURE IN THEIR WI SDOM DID NOT EXTEND -THE SAME BENEFIT TO NBFCS WHICH HAS BEEN GI VEN TO SCHEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS, ETC. THE PROV ISIONS OF SECTION 43D AS STOOD AT RELEVANT TIME CONTAINED AN EXPRESSION ' THE INCOME BY WAY ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 21 - OF INTEREST IN RELATION TO SUCH CATEGORIES OF BAD O R DOUBTFUL DEBTS AS MAY BE PRESCRIBED HAVING REGARD TO THE GUIDELINES I SSUED BY THE RBI IN RELATION TO SUCH DEBTS'. THIS EXPRESSION CONTINU ES TO EXIST IN THE NEWLY SUBSTITUTED SECTION 43D APPLICABLE WITH EFFEC T FROM 1-4-2000. THIS SHOWS THAT THE RBI GUIDELINES IN RESPECT OF SC HEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS ETC., WERE NOT SUFFIC IENT FOR RECOGNITION OF INCOME ON CASH BASIS FOR THE PURPOSES OF INCOME-TAX . THE INCOME OF SUCH ASSESSEES WAS DETERMINED AS PER CIRCULAR DATED 9-10-1984. BECAUSE OF THIS REASON, SECTION 43DWAS INSERTED IN THE STATUTE. RBI GUIDELINES IN CASE OF NBFC ARE FOR THE PURPOSE OF C ONTROL AND SUPERVISION WITH RESPECT TO PUBLIC INTEREST AND VIA BILITY OF THE NBFC. THE GUIDELINES NEVER INTENDED FOR TAKING THE INTERE ST INCOME ACCRUED AS PER SECTION 5 OUT OF THE SCOPE OF THE ACT. IF TH E CONTENTION OF ASSESSEE WAS ACCEPTED, IT WOULD AMOUNT TO INSERTION OF 'NBFC' IN SECTION 43D, THAT TOO BY A GUIDELINE ISSUED FOR DIF FERENT PURPOSES BY AN AUTHORITY OTHER THAN THE PARLIAMENT IN OTHER WOR DS, THE DOCTRINE OF ' CASUS OMISSUS ' WILL DEEM TO HAVE BEEN APPLIED WHICH IS CONTRARY TO LAW OF LAND. UNQUOTE. THE BASIC REASON FOR DIRECTING TO ASSESS THE ACCRUED INTEREST ON NPA WAS THE RBI GUIDELINES ISS UED ONLY FOR SCHEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS AND NOT FOR NBFC. THE OBSERVATION OF THE RESPECTED TRIBUNAL WAS THAT IF T HE CONTENTION OF THE ASSESSEE WAS TO BE ACCEPTED, THEN IT WOULD AMOUNT T O INSERTION OF NBFC IN SECTION 43-D OF THE I.T.ACT. AS AGAINST THAT, AS FAR AS THE ASSESSEE IS CONCERNED, IT IS AN ACCEPTED FACT THAT THE ASSESSEE IS A CO- OPERATIVE BANK AND NOT A NON-BANKING FINANCIAL COMP ANY AND THIS ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 22 - NOTEWORTHY DISTINCTION HAS ALREADY BEEN APPRECIATED BY US IN ONE OF THE PARAGRAPHS ABOVE. THERE IS ONE MORE DECISION OF THE HONBLE APEX COU RT WHICH IS YET TO BE MENTIONED WHILE DISCUSSING THE ARGUMENTS RAIS ED FROM THE SIDE OF THE REVENUE. A DECISION IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JT. CIT 320 ITR 577 (SC) HAS BEEN CITED BUT THE FUNDAMENTAL DIFFERENCE IS THAT THE ISSUE BEFORE THE HONBLE COURT WAS IN R ESPECT OF PROVISION FOR NPA AND DEBITED TO P&L ACCOUNT BY A NBFC. THE SA ID PROVISION WAS UNDISPUTEDLY MADE BY THE SAID NBFC AS PER THE PRUDE NTIAL NORMS MADE BY THE RESERVE BANK. THEREFORE WE WANT TO MAKE IT CLEAR THAT THE QUESTION FOR CONSIDERATION BEFORE THE HONBLE COURT WAS THAT IF A PROVISION FOR DOUBTFUL DEBT IS MADE THEN WHAT WILL BE THE LEGAL POSITION OF THE APPLICABILITY OF EXPLANATION TO SECTION 36(1)(V II) OF THE I.T. ACT. FOR THE SAKE OF READY REFERENCE, RELEVANT PARAGRAPH FRO M THE HELD PORTION IS REPRODUCED BELOW:- THE INCOME-TAX IS A TAX ON REAL INCOME, I.E., THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE ACT. THEREFORE, IF BY THE EXPLANATION TO SECTION 3 6(1)(VII) A PROVISION FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMBI T OF BAD DEBT WHICH IS WRITTEN OFF, THEN ONE HAS TO TAKE INTO ACC OUNT THE EXPLANATION IN COMPUTING THE TOTAL INCOME UNDER THE INCOME-TAX ACT FAILING WHICH ONE CANNOT ASCERTAIN THE REAL PRO FITS. THE PROVISION FOR NON-PERFORMING ASSETS DEBITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE RESERVE BANK DIRECTIONS OF 1998 I S ONLY A NOTIONAL EXPENSE AND, THEREFORE, THERE WOULD BE ADD BACK TO THAT EXTENT IN THE COMPUTATION OF TOTAL INCOME UNDER THE INCOME-TAX ACT. THEREFORE THE DISTINCTION CAN EASILY BE DRAWN THAT IN THE APPEAL BEFORE US THE QUESTION IS ACCRUAL OF INTEREST INCOME ON STICK Y LOAN BUT IN THIS CITED ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 23 - DECISION THE QUESTION BEFORE HE APEX COURT WAS ABOU T THE ADMISSIBILITY OF PROVISION MADE IN RESPECT OF DOUBTFUL DEBTS. ( VI ) CONCEPT OF REAL INCOME APPROVED IN THE CASE OF BANKING BUSINESS: BEFORE US, THE THEORY OF REAL INCOME HAS ALSO BEEN ARGUED AND IN SUPPORT A DECISION OF HON'BLE COURT PRONOUNCED IN T HE CASE OF CIT VS. GODHRA ELECTRICITY CO. 225 ITR 746 (SC). IN SHORT , THE VIEW EXPRESSED WAS THAT IF INCOME DOES NOT RESULT AT ALL, THERE CA NNOT BE ANY TAX AND THAT IF AN INCOME HAS NOT MATERIALIZED, THEN MERELY AN E NTRY MADE ABOUT A HYPOTHETICAL INCOME BY FOLLOWING BOOK KEEPING METHO DS, THE LIABILITY TO TAX CANNOT BE ATTRACTED. NOW AT PRESENT THE SITUATION IS THAT THE HON'B LE MADRAS HIGH COURT IN THE CASE OF CIT VS. ELGI FINANCE LTD. 293 ITR 357 (MAD.) HAS TAKEN A VIEW THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF LEASE, FINANCE AND HIRE PURCHASE AND THAT THE PRINCIPLE O F ACCRUAL COMES INTO PLAY WITHOUT INCOME WAS RECOGNIZED AND THAT THE ASS ESSEE HAD CLASSIFIED ITS ASSETS ON THE BASIS OF NOTIFICATION ISSUED BY R .B.I. AND FOUND THAT CERTAIN ASSETS CAME UNDER THE CATEGORY OF NPA AND T HAT FROM SUCH NPA THE ASSESSEE HAD NOT RECOGNIZED ANY INCOME IN CONSO NANCE WITH THE NOTIFICATION ISSUED BY RBI AND AS-9 ISSUED BY ICAI AND THAT THE ASSESSEE WAS JUSTIFIED IN NOT RECOGNIZING SUCH INCOME. THE COURT HAD FURTHER EXPRESSED THAT THERE WAS NO OCCASION TO CONSIDER WH ETHER THE PRINCIPLE OF ACCRUAL WOULD ARISE OR NOT, NEVERTHELESS, THE INTER EST FROM SUCH NPA WOULD BE TAXED IN THE APPROPRIATE ASSESSMENT YEAR O N THE BASIS OF ACTUAL RECEIPT. IT IS WORTH TO MENTION THAT FOR THIS DECI SION, THE HON'BLE MADRAS HIGH COURT HAS RELIED UPON AN ANOTHER DECISION OF T HE SAME HIGH COURT ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 24 - PRONOUNCED IN THE CASE OF JT.CIT VS. INDIA EQUIPMENT LEASING LTD. 293 ITR 350. TO CONCLUDE THE ISSUE, WE DEEM IT IMPORTANT TO DISCUSS THE DECISION OF INDIA EQUIPMENT LEASING LTD. (293 ITR 350) FOR THE SAKE OF COMPLETENESS OF OUR JUDGEMENT. IN THAT APPEAL, THE ASSESSEE WAS DOING THE BUSINESS OF HIRE PURCHASE TRANSACTION AND LEASI NG OF PLANT & MACHINERY. THE INTEREST ON STICKY LOANS NOT BEIN G BROUGHT INTO THE PROFIT & LOSS ACCOUNT BUT BEING TAKEN TO THE SUSPE NSE ACCOUNT WAS HELD BY THE COURT AS AN ACCEPTED MODE OF TREATMENT OF NO TIONAL INCOME IN ACCOUNTING PRACTICE. THE COURT HAS SAID THAT THE C IRCULAR-9 OF OCTOBER- 1984 SERVE A PRACTICAL PURPOSE OF LAYING DOWN A UNI FORM TEST FOR THE ASSESSING AUTHORITY TO DECIDE WHETHER THE INTEREST INCOME WHICH IS TRANSFERRED TO SUSPENSE ACCOUNT IS, IN FACT, ARISIN G IN RESPECT OF A DOUBTFUL OR STICKY LOAN. THIS WAS DONE BY PROVIDING THAT NON-RECEIPT OF INTEREST FOR THE FIRST THREE YEARS WILL NOT BE TREATED AS IN TEREST ON A DOUBTFUL LOAN, BUT IF AFTER THREE YEARS THE PAYMENT OF INTEREST IS NOT RECEIVED, FROM THE 4 TH YEAR ONWARDS IT WILL BE TREATED AS INTEREST ON A DO UBTFUL LOAN AND WILL BE ADDED TO THE INCOME ONLY WHEN IT IS ACTUALLY RECEIV ED. FOLLOWING THE UCO BANK (237 ITR 889)[SUPREME COURT], THE SAID APP EAL OF THE REVENUE WAS DISMISSED. THIS PART OF THE GROUND THUS GOES IN FAVOUR OF THE ASSESSEE. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED . SD/- SD/- (A. MOHAN ALANKAMONY) (MUKUL KR. SHRAWAT) ACCOUNTANT MEMBER JUDICIAL ME MBER AHMEDABAD; DATED 30/ 11 /2011 4..#, .#../ T.C. NAIR, SR. PS ITA NO.2939/AHD /2010 THE KARNAVATI CO-OP.BANK LTD. VS. DCIT ASST.YEAR - 2007-08 - 25 - $3 0 -5 6$5( $3 0 -5 6$5( $3 0 -5 6$5( $3 0 -5 6$5(/ COPY OF THE ORDER FORWARDED TO : 1. ), / THE APPELLANT 2. -.), / THE RESPONDENT. 3. 7 / CONCERNED CIT 4. 7() / THE CIT(A)-XVI, AHMEDABAD 5. 5:; -# , , / DR, ITAT, AHMEDABAD 6. ; <1 / GUARD FILE. $3# $3# $3# $3# / BY ORDER, .5 - //TRUE COPY// = == =/ // / * * * * ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD 1. DATE OF DICTATION..15.11.2011 & 17.11.11 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 16.11.2011 & 18.11.11 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S 30.11.11 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 30.11.11 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER