Vidyanand Co-Op. Bank Ltd., Solapur V. ACIT, Cir-1, Solapur

ITA 385/PUN/2012

• Counselvise Citation: 38524514 RSA 2012
• Duration Of Justice: 1 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 27-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUNITA RAI
• Keywords: Bad and doubtful debts; Revenue expenditure
• Section: 43B; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER , AND SHRI R.K. PANDA, ACCOUNTANT MEMBER. ITA.NOS.385/PN/2012 (ASSESSMENT YEAR 2007-08) VIDYANAND CO-OP. BANK LTD., 13, BUDHWAR PETH, JAIN BOARDING COMPLEX, BALIVES, SOLAPUR 413002 PAN NO.AAATV 0943R .. APPELLANT VS. ACIT, CIRCLE-1, SOLAPUR .. RESPONDENT ASSESSEE BY : SRI SUNIL GANOO REVENUE BY : SMT. SUNITA RAI DATE OF HEARING : 01-05-2013 DATE OF PRONOUNCEMENT : 28-06-2013 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 28-11-2012 OF THE CIT(A)-III, PUNE RELATING TO ASS ESSMENT YEARS 2007-08. 2. GROUNDS OF APPEAL NO. 1 AND 2 BY THE ASSESSEE RE AD AS UNDER : 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED C.I.T.[A] HAS GROSSLY ERRED IN CONFIRMING THE ADDIT ION OF RS.57,92,156.00 MADE BY THE LEARNED ASSESSING OFFICER ON THE GROUND OF INTEREST ACCRUED ON NON PERFORMING ASSET/ LOANS [NPA], WITHOUT APPRE CIATING THE WELL SETTLED LEGAL POSITION THAT THE INTEREST ON NON PER FORMING ASSETS / LOANS [NPA] DOES NOT ACCRUE EVEN UNDER MERCANTILE SYSTEM OF ACCOUNTING UNLESS IT IS ACTUALLY RECEIVED. THE IMPUGNED ADDITION BEING P ATENTLY ILLEGAL, BAD IN LAW, ARBITRARY, PERVERSE AND DEVOID OF MERITS THE S AME MAY PLEASE BE DELETED. 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED C.I.T.[A] HAS FAILED TO APPRECIATE THAT INCOME TAX IS A TAX ON REAL INCOME AND THEREFORE ON THE THEORY OF REAL INCOME, THE INT EREST ON NON PERFORMING ASSETS/LOANS [NPA], DOES NOT ACCRUE UNTI L IT IS RECEIVED. IN THE CIRCUMSTANCES THE ADDITION OF RS.7,92,156.00 SUSTAI NED BY THE LEARNED C.I.T.[A] ON ACCOUNT OF INTEREST ACCRUED ON NON PER FORMING ASSETS / LOANS [NPA] BE DELETED. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A CO-OPERATIVE SOCIETY CARRYING ON THE BUSINESS OF BANKING. IT WAS OBSERVED BY THE ASSESSING OFFICER FROM THE BALANCE SHEET FOR THE YE AR UNDER APPEAL THAT AN 2 AMOUNT OF RS.1,42,34,528/- WAS SHOWN AS INTEREST RE CEIVABLE ON NPA ACCOUNT ON THE ASSET SIDE AND A CONTRA ENTRY NPA I NTEREST RESERVE ACCOUNT IS SHOWN IN THE LIABILITY SIDE. ON BEING ASKED, IT WAS CONTENDED THAT SUCH INTEREST RECEIVABLE ON NPA IS DIRECTLY TAKEN TO THE BALANCE SHEET AND NOT ROUTED THROUGH THE PROFIT & LOSS ACCOUNT. THE DETAILS OF SUCH INTEREST ACCRUED ON NPAS AND CREDITED TO THE P & L A/C ARE AS UNDER : TOTAL INTEREST ACCRUED ON NPA DURING THE YEAR : R S.87,15,696/- LESS: INTEREST RECOVERED OUT OF ABOVE AND CREDITED TO P & L A/C : RS.29,23,540/- BALANCE AMOUNT DIRECTLY TAKEN TO B/S : RS.57,92,1 56/- 3.1 JUSTIFYING ITS ACTION, IT WAS CONTENDED BY THE ASSESSEE THAT WHILE THEY ARE CONSISTENTLY FOLLOWING MERCANTILE SYSTEM OF ACC OUNTING, IN RESPECT OF INTEREST ON NPA, CASH SYSTEM WAS BEING FOLLOWED. IN SUPPORT, A CIRCULAR BEARING NO.491 WAS ALSO CITED. ON PERUSAL, THE A SSESSING OFFICER FOUND THAT THE SAID CIRCULAR WAS ISSUED IN THE CONTEXT OF STATE FINANCIAL CORPORATIONS WHICH STATES THAT STATE FINANCIAL CORP ORATIONS ARE GOVERNED BY THE DIRECTIONS OF RBI AND IDBI WHICH MIGHT APPROVE THE CHANGE IN THE METHOD OF ACCOUNTING OF THE STATE FINANCIAL CORPORA TIONS, IF SUCH CHANGE IS FOUND TO BE LEGAL, BONAFIDE AND VALID. ACCORDING TO THE ASSESSING OFFICER, THESE DIRECTIVES WERE NOT APPLICABLE IN CASE OF THE ASSESSEE SINCE IT IS NOT A FINANCIAL CORPORATION BUT A COOPERA TIVE SOCIETY. ACCORDING TO THE ASSESSING OFFICER, EVEN IF SUCH DIRECTIVES ARE PRESUMED TO BE APPLICABLE IN CASE OF THE ASSESSEE, THE ASSESSEE HA S NOT CHANGED ITS METHOD OF ACCOUNTING FROM MERCANTILE TO CASH SYSTEM IN OFF ERING THE ENTIRE INTEREST INCOME. ACCORDING TO THE ASSESSING OFFICER, THE ASS ESSEE WAS ATTEMPTING TO OFFER PART OF ITS INTEREST INCOME ON MERCANTILE BASIS AND PART ON CASH 3 BASIS. THE ASSESSING OFFICER WAS OF THE VIEW THAT S INCE THE ASSESSEE HAS BEEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, THEREFORE, IT WAS OBLIGED TO OFFER THE INCOME ON ACCRUAL BASIS. AS REGARDS THE RBI DIRECTIVES WHICH WAS CITED BY THE ASSESSEE IN SUPPO RT OF THE ACCOUNTING TREATMENT IN RESPECT OF THE INTEREST RECEIVABLE ON NPAS, THE ASSESSING OFFICER WAS OF THE OPINION THAT SUCH DIRECTIVES OR GUIDELINES ARE FOR THE PURPOSE OF SUPERVISION, MANAGEMENT AND CONTROL OF M ONETARY AND CREDIT SYSTEM AND IT CAN IN NO WAY STOP THE ACCRUAL OF INC OME UNDER SEC.5 OF THE INCOME TAX ACT. THE ASSESSING OFFICER HELD THAT R BI RULES CANNOT OVERRIDE THE PROVISIONS OF INCOME TAX. REFERRING TO THE PROVISIONS OF SEC.145 OF THE I.T. ACT, 1961 THE ASSESSING OFFICER OPINED THAT THE INCOME OF AN ASSESSEE IS TAXABLE EITHER ON MERCANTILE BASI S OR ON RECEIPT BASIS DEPENDING UPON THE METHOD OF ACCOUNTING THAT HAS BEEN FOLLOWED BY THE ASSESSEE REGULARLY AND ONCE THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNT, ALL INCOME THAT IS ACCRUED TO IT DURING A PARTICULAR YEAR HAS TO BE INCLUDED IN THE INCOME IN THAT YEAR ONLY. HIGHLIGHTING THAT IN CASE OF OTHER INTEREST, THE ASSESSEE HAS BEEN OFFE RING THE SAME ON ACCRUAL BASIS WHILE FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING, IT IS ONLY IN CASE OF OVERDUE INTEREST ON ADVANCES, THE ASSESSEE HAS CHOSEN TO BOOK THE INCOME ON ACTUAL RECEIPTS AND NOT ON ACCRUAL BASIS, THE ASSESSING OFFICER EMPHASIZES THAT ASSESSEE IS NOT ALLOWED TO FOLLOW SUCH A HYBRID SYS TEM OF ACCOUNTING. THE AO FURTHER HIGHLIGHTED THAT THE ASS ESSEE IS NOT AN INSTITUTION SPECIFIED IN SEC.45D WHEREBY SUCH INSTI TUTIONS ARE ALLOWED TO OFFER THE INCOME ON RECEIPT BASIS IN RESPECT OF NPA. 4. RELYING ON VARIOUS DECISIONS THE AO CAME TO THE CONCLUSION THAT THE INTEREST ACCRUED ON STICKY ADVANCES HAS TO BE TREAT ED AS INCOME OF THE ASSESSEE 4 AND SUCH INCOME/ADVANCE CAN BE CLAIMED AS BAD DEBTS IF IT IS ESTABLISHED THAT SUCH ADVANCE HAS BECOME IRRECOVERABLE. DISTINGUISH ING THE VARIOUS DECISIONS RELIED ON BY THE ASSESSEE THE AO TREATED THE INTERE ST ACCRUED DURING THE YEAR AMOUNTING TO RS.57,92,156/- AS TAXABLE IN THE CURRE NT YEAR AND ACCORDINGLY MADE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE. 5. IN APPEAL THE LD. CIT(A) UPHELD THE ACTION OF TH E AO. WHILE DOING SO, HE HELD THAT THE RBI GUIDELINES ISSUED CANNOT OVERR IDE THE PROVISIONS OF THE INCOME TAX ACT WHICH IS A SPECIAL ACT. FOR THIS PUR POSE, HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SO UTHERN TECHNOLOGIES LTD. REPORTED IN 320 ITR 577. HE ALSO REJECTED CONTENTI ON OF THE ASSESSEE THAT THE PROVISIONS OF SECTION 43D WHICH PROVIDE FOR RECOGNI TION OF INCOME BY WAY OF INTEREST IN RELATION TO PRESCRIBED CATEGORIES OF BA D OR DOUBTFUL DEBTS ON ACTUAL RECEIPTS ON THE GROUND THAT THE SAME IS AVAILABLE O NLY TO SCHEDULE BANKS, FINANCIAL INSTITUTIONS, PUBLIC COMPANIES. THERE IS NO SUCH PROVISION U/S.43D IN CASE OF COOPERATIVE BANKS. IN ABSENCE OF SUCH PROVISION FOR COOPERATIVE BANKS AND SINCE THE ASSESSEE HAD BEEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING HE HELD THAT INTEREST INCOME ON NPA ACCR UED TO THE ASSESSEE AND IT IS LIABLE TO BE ASSESSED ON ACCRUAL BASIS U/S.5 R.W .S. 145 OF THE INCOME TAX ACT. THE SUBMISSION OF THE ASSESSEE THAT IT IS FOL LOWING THE CONSERVATIVE POLICY FOR ASSET CLASSIFICATION AS PER ACCOUNTING S TANDARD-9 WAS ALSO REJECTED BY HIM ON THE GROUND THAT THE SAME WOULD NOT OVERRI DE MANDATORY PROVISIONS OF SECTION 145 AND ACCRUAL OF INCOME U/S.5. FOR TH IS PURPOSE, HE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F TUTICORIN ALKALIES & CHEMICALS LTD. REPORTED IN 227 ITR 172. 5 5.1 THE ARGUMENT OF THE ASSESSEE THAT IT HAD NOT RE COGNIZED INCOME FROM NPA AS THERE WAS NO CERTAINTY OF RECOVERY OF INTERE ST WHEN PRINCIPAL AMOUNT WAS DOUBTFUL OF RECOVERY WAS REJECTED BY HIM ON THE GROUND THAT THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE TO SHOW THAT RECOVER Y OF PRINCIPAL ITSELF WAS DOUBTFUL IN THESE CASES. ACCORDING TO HIM, WHEN TH E PRINCIPAL AMOUNT HAS BECOME BAD AND DOUBTFUL THE PROPER COURSE OF ACTION FOR THE ASSESSEE WAS TO WRITE OFF SUCH AMOUNT AS BAD DEBTS IN THE BOOKS OF ACCOUNTS AND CLAIM DEDUCTION U/S.36(1)(VII). FOR CLAIMING SUCH DEDUCT ION, THE ASSESSEE HAS TO ACTUALLY WRITE OFF BAD DEBT IN THE BOOKS OF ACCOUNT . SINCE THE ASSESSEE HAS NEITHER WRITTEN OFF PRINCIPAL AMOUNT NOR THE INTERE ST ON THE DEBTS IN THE BOOKS OF ACCOUNT DURING THE YEAR, THEREFORE, HE HELD THAT THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED EVEN U/S.36(1)(VII). 5.2 HE ALSO REJECTED THE CONTENTION OF THE ASSESSE E THAT WHEN THERE WAS UNCERTAINTY OF RECOVERY OF PRINCIPAL AMOUNT ITSELF THE CONCEPT OF REAL INCOME WAS TO BE APPLIED AND THEREFORE NO INTEREST INCOME HAD ACCRUED ON SUCH ASSETS. DISTINGUISHING THE VARIOUS DECISIONS RELIED ON BY T HE ASSESSEE AND NOTING THAT CBDT CIRCULAR DATED 06-10-1984 FOR THE PROPOSITION THAT INTEREST ON STICKY LOANS OR NPA IS TO BE RECOGNIZED AS INCOME FOR THE YEAR IN WHICH ACTUAL INTEREST IS REALIZED OR COLLECTED WAS ISSUED PRIOR TO INSERTION OF CLAUSE (A) AND (B) IN SECTION 43B HE HELD THAT THE AO WAS JUSTIFIE D IN CHARGING THE INTEREST INCOME OF RS.57,92,156/- ON ADVANCES CLAIMED TO BE NPA ACCOUNTS AS CHARGEABLE TO TAX. 5.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 6 6. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET S UBMITTED THAT THE ABOVE GROUNDS ARE DECIDED IN FAVOUR OF THE ASSESSEE BY TH E DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. OSMAN ABAD JANTA SAHAKARI BANK LTD. VIDE ITA NO. 795/PN/2011 ORDER DATED 31-0 8-2012 FOR A.Y 2007- 08. 6.1 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTH ER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 7. AFTER HEARING BOTH THE SIDES WE FIND IDENTICAL I SSUE HAD COME UP BEFORE THE TRIBUNAL IN THE CASE OF ACIT VS. OSMANABAD JANT A SAHAKARI BANK LTD. FOR A.Y 2007-08. WE FIND THE TRIBUNAL VIDE ORDER D ATED 31-08-2012 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND THE APPEAL FILED BY THE REVENUE HAS BEEN DISMISSED. THE RELEVANT OBSERVATION OF TH E TRIBUNAL FROM PARA 5 TO 7 OF THE ORDER READ AS UNDER : 5. WE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AN D PERUSED THE RECORD. WE FIND THAT THE IDENTICAL ISSUE HAS BEE N CONSIDERED BY THE ITAT, VISAKHAPATNAM BENCH, IN THE CASE OF DCIT, V IJAYAWADA VS. THE DURGA COOPERATIVE URBAN BANK LTD., VIJAYAWADA, IN ITA.NO.511/VIZAG/2010 DATED 10.03.2011. IN THE SAID CASE ALSO , IT WAS NOTICED BY THE ASSESSING OFFICER THAT ASSESSEE DID NOT INCLUDE THE INTEREST OF RS.18,26,306/- ON THE NPA ADVANCES. AGA IN THE ISSUE OF APPLICABILITY OF SECTION 43D WAS CONSIDERED TO THE NON- SCHEDULED BANKS. THE TRIBUNAL PLACED ITS HEAVY RELIANC E ON THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CA SE OF VASHIST CHAY VYAPAR LTD. [330 ITR 440 (DEL.)], IN WHICH THE HON BLE DELHI HIGH COURT HAS CONSIDERED THE DECISION IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. [320 ITR 577 (SC)]. THE TRIBUNAL FINA LLY HELD THAT THE INTEREST INCOME RELATABLE TO NPA ADVANCES DID NO T ACCRUE TO THE ASSESSEE. 6. AN IDENTICAL VIEW HAS BEEN TAKEN BY THE ITAT, AHME DABAD BENCH IN THE CASE OF KARNAVATI COOPERATIVE BANK LTD . VS. DY.CIT [134 ITD 486 (AHMEDABAD)]. IN THE CASE OF KARNAVATI COOPERATIVE BANK LTD. (SUPRA), THE TRIBUNAL HAS CONSIDERED THE PR OVISIONS OF SECTION 43D AND ITS APPLICATION TO THE NON-SCHEDULED B ANKS. THE REASONS GIVEN BY THE TRIBUNAL IN THE CASE OF KARNAVA TI COOPERATIVE BANK LTD. (SUPRA) FOR HOLDING THAT INTEREST ON THE STI CKY ADVANCES/NPA ADVANCES CANNOT BE BROUGHT TO TAX BY F OLLOWING THE DECISION IN THE CASE OF UCO BANK (SUPRA), WHICH IS AS UND ER: 7 15.1. ON CAREFUL ANALYSIS OF THIS SECTION OUR FIRST O BSERVATION IS THAT SECTION 43D IS IN CONTRAST WITH THE FUNDAMEN TAL PRINCIPLE OF ACCOUNTANCY. THE CARDINAL PRINCIPLE OF MERC ANTILE SYSTEM OF ACCOUNTANCY IS THAT AN INCOME IS TO BE SH OWN IN THE BOOKS OF ACCOUNT ON ACCRUAL BASIS. THE PRINCIPLE I S THAT IT IS IMMATERIAL WHETHER IT WAS ACTUALLY RECEIVED OR NOT, B UT IF AN INCOME IS EXPECTED TO BE RECEIVED, THEN IT SHOULD BE BROUGHT TO BOOKS OF ACCOUNT AS AN INCOME ACCRUED TO THE ASSESSEE. CONTRARY TO THIS RECOGNIZED PRINCIPLE, THIS SECTION HAS PRESCRIBED THAT AN INCOME BY WAY OF INTEREST SH ALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED. THE WORDS CREDITED AND ACTUALLY RECEIVED HAS BEE N HIGHLIGHTED HEREINABOVE WHILE REPRODUCING THE SECTIO N IN QUESTION. THE OTHER DEVIATION FROM THE SAID ACCEPTED PRINCIPLE OF ACCOUNTANCY IS THAT AN INCOME BY WAY OF INTEREST SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS ACTUALLY RECEIVED. THE ACT SAYS THAT THE INCIDENCE OF CREDIT O R ACTUALLY RECEIVED, WHICHEVER IS EARLIER IS TO BE T AKEN INTO ACCOUNT FOR THE PURPOSE OF CHARGEABILITY OF INCOME B Y WAY OF INTEREST. SIMULTANEOUSLY, IT IS NOTEWORTHY THAT THIS S ECTION IS AN OVERRIDING SECTION BECAUSE THE OPENING WORD IS NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT. THEREFORE, IN SPITE OF ANYTHING CONTAINED IN THE ACT, THE PROVISIONS OF THIS SECTION SHALL OVERRIDE THOSE PROVISIONS. ONCE THE STATUTE HAS CATE GORICALLY MADE A LAW IN RESPECT OF PUBLIC FINANCIAL INSTITUTION S THAT INTEREST IS CHARGEABLE TO TAX EITHER IN THE YEAR IN W HICH CREDITED OR ACTUALLY RECEIVED, WHICHEVER IS EARLIER, T HEN IT IS COMPULSORY TO ABIDE BY THE SAID RULE. ACCORDING TO US, NO SCOPE IS LEFT WITH THE REVENUE AUTHORITIES TO IGNORE T HESE PROVISIONS DUE TO UNAMBIGUOUS USE OF LANGUAGE IN THE SECTION. (II) STATUS OF ASSESSEE FOR THE PURPOSE OF APPLICAT ION 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- OPERATIVE BANK. UNDISPUTEDLY, THE ASSESSEE IS ALSO GOV ERNED BY THE RBI GUIDELINES. VIDE AN EXPLANATION (D) R.W.S. 36(1)(VIIA) ANNEXED TO SECTION 43-D THE DEFINITION OF T HE ENTITIES INCORPORATED BY THE SECTION HAVE BEEN DEFIN ED AND IN THE ABSENCE OF ANY CONTRARY MATERIAL, WE HEREBY HOLD TH AT THE ASSESSEE IS COVERED BY ONE OF THE ENTITIES, HENCE THE PROVISIONS OF SECTION 43-D ARE TO BE APPLIED. (III) APPLICABILITY OF CBDT CIRCULAR. NEXT ISSUE IS THAT WHETHER A CIRCULAR HAVING EFFECT OF RELAXING RIGOUR OF LAW CAN BE TREATED AS INCONSISTENT WITH THE PROVISIONS OF A STATUTE. IN ORDER TO AID PROPER DETE RMINATION OF THE INCOME OF MONEY LENDERS AND BANKS, THE CENTRAL BOA RD OF 8 DIRECT TAXES HAS ISSUED A CIRCULAR DATED OCTOBER 6, 1952, PROVIDING THAT WHERE INTEREST ACCRUING ON DOUBTFUL D EBTS IS CREDITED TO A SUSPENSE ACCOUNT, IT NEED NOT BE INCLUD ED IN ASSESSEES TAXABLE INCOME, PROVIDED THE INCOME TAX OFFI CER 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 STATUTORY POWERS. IF THE BOARD CONSIDER IT NEC ESSARY TO LAY DOWN CERTAIN RULES AND THEN DIRECT THE SUB-ORDINA TE AUTHORITIES, SUCH DIRECTIONS ARE REQUIRED TO BE FOLLOWE D AND 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 THE SEVERITY OR THE STRICTNESS O F LAW AND THE AUTHORITIES ARE REQUIRED TO FOLLOW THOSE INSTRUCTI ONS AS HELD IN THE CASE OF C.B. GAUTAM VS. UNION OF INDIA 108 C TR 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 SUPREME 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 AS INCONSISTENT WITH THE PROVISIONS OF STATUT E AND BINDING ON THE AUTHORITIES. SECOND, THAT IN RESPECT O F INTEREST ON STICKY ADVANCES INTEREST INCOME IS TO BE TAXED ONLY WHEN ACTUALLY RECEIVED AS PRESCRIBED BY CBDT CIRCULAR. HOWEVER, IN THE PAST AN INTERESTING TURN HAD TAKEN P LACE BY AN ORDER OF THE HONBLE KERALA HIGH COURT IN THE CAS E OF STATE BANK OF TRAVANCORE REPORTED IN 110 ITR 336 (KER.), WH EREIN 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 ASSESSEE FELT THAT THE INTERES T COULD NOT TO BE REALISED. IT CREDITED THE INTEREST TO A SE PARATE ACCOUNT KNOWN AS INTEREST SUSPENSE ACCOUNT. ON REFE RENCE, THE HON'BLE COURT HAS HELD THAT THERE WAS AN ACCRUAL O F INCOME LIABLE TO INCOME-TAX AND THE ASSESSEE WAS NOT JUSTIFIED IN NOT CREDITING THE INTEREST INCOME ON SU CH STICK ADVANCES IT ITS ACCOUNTS. HOWEVER, LATER ON AT THE HON'BLE APEX COURT WHILE PRONOUNCING THE JUDGMENT OF THE SAI D STATE BANK OF TRAVANCORE VS. CIT REPORTED IN (1986)158 ITR 102(SC), THERE WERE HON'BLE THREE JUDGES PRESIDING THE COURT, OUT OF WHICH HONBLE TWO JUDGES WERE IN THE OPI NION THAT THE INTEREST ON STICKY 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 COMM ENTED THAT WHETHER AN INCOME ON RECEIPT BASIS OR ON ACCRU AL BASIS, IT IS THE REAL INCOME AND NOT ANY HYPOTHETICAL INCOME WHICH MAY HAVE THEORETICALLY ACCRUED, I.E. SUBJECT TO TAX UND ER THE ACT. NEVERTHELESS, 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 LAID DOWN IN UCO BANK IS THAT IN TERMS OF CBDT CIRC ULAR THE 9 INTEREST IS TO BE ADDED AS INCOME ONLY WHEN ACTUALLY RECEIVED OR CREDITED IN RESPECT OF THE STICKY ADVANCES WHI LE MAKING ASSESSMENT FOR A FINANCIAL INSTITUTION. (IV) INTERPRETATION OF THE LANGUAGE OF THE STATUTE : WE HAVE REPRODUCED VERBATIM THE PROVISIONS OF SECTION 43-D OF THE I.T.ACT AND EXPRESSED AN OPINION THAT IF THE S TATUTE HAS USED THE TERMINOLOGY FOR THE CHARGEABILITY OF INTERES T ON THE BASIS WHEN CREDITED OR ACTUALLY RECEIVED, THEN IN OUR OPINION NO AMBIGUITY HAS BEEN LEFT BY THE STATUTE. IF THE STATUTE IS SO CLEAR THAT AN INTERPRETATION CAN EASIL Y BE MADE, THEN THAT EXACT MEANING SHOULD BE GIVEN TO THE LANGU AGE 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 LA NGUAGE, RESORT TO ANY INTERPRETATIVE PROCESS TO UNFOLD THE LE GISLATIVE INTENT BECOMES IMPERMISSIBLE. THE SUPPOSED INTENTION O F THE LEGISLATURE CANNOT THEN BE APPEALED TO WHITTLE DOWN TH E STATUTORY LANGUAGE WHICH IS OTHER-WISE UNAMBIGUOUS. IF THE INTENDMENT IS NOT IN THE WORDS, IT IS NOWHERE ELSE. TH E NEED FOR INTERPRETATION ARISES WHEN THE WORDS USED IN THE STATUTE ARE, ON THEIR OWN TERMS, AMBIVALENT AND DO NOT MANIFES T THE INTENTION OF THE LEGISLATURE. WHEN WORDS ACQUIRE A PARTICULAR MEANING OR SENSE BE CAUSE OF THEIR AUTHORITATIVE CONSTRUCTION BY SUPERIOR COUR TS, THEY ARE PRESUMED TO HAVE BEEN USED IN THE SAME SENSE WHEN U SED IN SUBSEQUENT LEGISLATION IN THE SAME OR SIMILAR CONTEXT. TO SAY THAT THE COURT COULD NOT RESORT TO THE SO-CALLED EQUITABLE CONSTRUCTION OF A TAXING STATUTE IS NOT T O SAY THAT, WHERE A STRICT LITERAL CONSTRUCTION LEADS TO A RESULT NOT INTENDED TO SUBSERVE THE OBJECT OF THE LEGISLATION, A NOTHER CONSTRUCTION, PERMISSIBLE IN THE CONTEXT, SHOULD NOT BE ADOPTED. IN THIS RESPECT, TAXING STATUTES ARE NOT DIF FERENT FROM OTHER STATUTES. WE CAN THEREFORE SAFELY DRAW A CONCLUSION THAT BY TH E INSERTION OF A SPECIAL PROVISION TO TAX INTEREST INC OME IN THE CASE OF PUBLIC FINANCIAL INSTITUTION, ETC. SECTION 43-D HA S TO BE APPLIED IN ITS LETTER AND SPIRIT. IT IS PERTINENT TO ME NTION THAT LATER ON, IN THE CASE OF CIT VS. BANK OF AMERICA S.A. 2 62 ITR 504 (BOM) THE QUESTION OF INTEREST ON STICKY LOANS WAS DECIDED IN FAVOUR OF THE ASSESSEE AND HELD THAT THE QUESTION IS TO BE ANSWERED IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION OF UCO BANK REPORTED AT 237 ITR 889(SC) :: 24 0 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 INTEREST SUSPENSE ACCOUNT WAS NOT 10 TAXABLE FOLLOWING THE DECISION PRONOUNCED IN THE 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 RE ASON OF THE ELABORATE DISCUSSION MADE HEREINABOVE SO AS TO UNFOLD THE CONTROVERSY. IN THE SAID DECISION OF THE TRIBUN AL, VIZ. JT.CIT V/S. INDIA EQUIPMENT LEASING LTD. (2008)111 ITD 3 7 (CHENNAI), THE RESPECTED CO-ORDINATE BENCH HAS EXPRESS ED THAT QUOTE PRIOR TO INSERTION OF SECTION 43D WITH EFFECT FROM 1-4-1991, RECOGNITION OF INCOME WAS ON THE BASIS OF CI RCULAR OF 9-101984. IT SAID THAT FOR FIRST THREE YEARS THE I NCOME MAY BE TAKEN ON ACCRUAL BASIS AND FROM 4TH YEAR ONWARDS , THE INCOME IN RESPECT OF DOUBTFUL DEBTS WAS TO BE RECOGN IZED ON RECEIPT BASIS. 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 WA S INSERTED WITH A VIEW TO IMPROVING THE VIABILITY OF BANKS, PUBLIC FINANCIAL INSTITUTIONS ETC., SO AS TO PROVIDE THAT INTERE ST ON STICKY LOANS SHALL BE CHARGED TO TAX ONLY IN THE YEAR IN WHICH THE INTEREST IS ACTUALLY RECEIVED OR CREDITED TO THE PROFIT AND LOSS ACCOUNT. THIS BENEFIT WAS EXTENDED WITH EFFECT F ROM 1-4- 2000 IN THE CASE OF PUBLIC COMPANIES ENGAGED IN LONG -TERM FINANCING OF HOUSING PROJECTS APPROVED BY NATIONAL HOUSING BANKS. THE LEGISLATURE IN THEIR WISDOM DID NOT EXTEN D THE SAME BENEFIT TO NBFCS WHICH HAS BEEN GIVEN TO SCHED ULED BANKS, PUBLIC FINANCIAL INSTITUTIONS, ETC. THE PROVISION S OF SECTION 43D AS STOOD AT RELEVANT TIME CONTAINED AN EXPRESSION 'THE INCOME BY WAY OF INTEREST IN RELATI ON TO SUCH CATEGORIES OF BAD OR DOUBTFUL DEBTS AS MAY BE PRESCR IBED HAVING REGARD TO THE GUIDELINES ISSUED BY THE RBI I N RELATION TO SUCH DEBTS'. THIS EXPRESSION CONTINUES TO EXIST I N THE NEWLY SUBSTITUTED SECTION 43D APPLICABLE WITH EFFECT FROM 1-4 -2000. THIS SHOWS THAT THE RBI GUIDELINES IN RESPECT OF SC HEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS ETC., WERE NOT SUFFI CIENT FOR RECOGNITION OF INCOME ON CASH BASIS FOR THE PURPOSE S OF INCOME-TAX. THE INCOME OF SUCH ASSESSEES WAS DETERMI NED AS PER CIRCULAR DATED 9-10-1984. BECAUSE OF THIS REASO N, SECTION 43DWAS INSERTED IN THE STATUTE. RBI GUIDELI NES IN CASE OF NBFC ARE FOR THE PURPOSE OF CONTROL AND SUPE RVISION WITH RESPECT TO PUBLIC INTEREST AND VIABILITY OF THE N BFC. THE GUIDELINES NEVER INTENDED FOR TAKING THE INTEREST I NCOME ACCRUED AS PER SECTION 5 OUT OF THE SCOPE OF THE ACT . IF THE CONTENTION OF ASSESSEE WAS ACCEPTED, IT WOULD AMOUNT T O INSERTION OF 'NBFC' IN SECTION 43D, THAT TOO BY A GU IDELINE ISSUED FOR DIFFERENT PURPOSES BY AN AUTHORITY OTHER THAN THE PARLIAMENT IN OTHER WORDS, THE DOCTRINE OF 'CASUS OMI SSUS' WILL DEEM TO HAVE BEEN APPLIED WHICH IS CONTRARY TO LA W OF LAND.UNQUOTE. THE BASIC REASON FOR DIRECTING TO ASSE SS THE 11 ACCRUED INTEREST ON NPA WAS THE RBI GUIDELINES ISSU ED ONLY FOR SCHEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS AND N OT FOR NBFC. THE OBSERVATION OF THE RESPECTED TRIBUNAL WAS TH AT IF THE CONTENTION OF THE ASSESSEE WAS TO BE ACCEPTED, T HEN IT WOULD AMOUNT TO INSERTION OF NBFC IN SECTION 43-D O F THE I.T.ACT. AS AGAINST THAT, AS FAR AS THE ASSESSEE IS CON CERNED, IT IS AN ACCEPTED FACT THAT THE ASSESSEE IS A COOPER ATIVE BANK AND NOT A NON-BANKING FINANCIAL COMPANY AND THIS NOTEWORTHY DISTINCTION HAS ALREADY BEEN APPRECIATED B Y US IN ONE OF THE PARAGRAPHS ABOVE. THERE IS ONE MORE DECISION OF THE HONBLE APEX COURT WHICH IS YET TO BE MENTIONED WHILE DISCUSSING THE ARGUMENTS R AISED 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 TH E ISSUE BEFORE THE HONBLE COURT WAS IN RESPECT OF PROVISION FOR NPA AND DEBITED TO P&L ACCOUNT BY A NBFC. THE SAID PROVI SION WAS UNDISPUTEDLY MADE BY THE SAID NBFC AS PER THE PRUDENTIAL NORMS MADE BY THE RESERVE BANK. THEREFORE W E WANT TO MAKE IT CLEAR THAT THE QUESTION FOR CONSIDERA TION BEFORE THE HONBLE COURT WAS THAT IF A PROVISION FOR DOUBTFUL DEBT IS MADE THEN WHAT WILL BE THE LEGAL POSITION OF TH E APPLICABILITY OF EXPLANATION TO SECTION 36(1)(VII) OF THE I.T. ACT. FOR THE SAKE OF READY REFERENCE, RELEVANT PARAGRAPH F ROM THE HELD PORTION IS REPRODUCED BELOW: THE INCOME-TAX IS A TAX ON REAL INCOME, I.E., THE PR OFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PR OVISIONS OF THE ACT. THEREFORE, IF BY THE EXPLANATION TO SECT ION 36(1)(VII) A PROVISION FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMB IT OF BAD DEBT WHICH IS WRITTEN OFF, THEN ONE HAS TO TAKE INTO ACCOUNT THE EXPLANATION IN COMPUTING THE TOTAL INCOME UNDER THE INCOME-TAX ACT FAILING WHICH ONE CANNOT ASCERTAIN T HE REAL PROFITS. THE PROVISION FOR NON-PERFORMING ASSETS DEB ITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE RESERVE BANK DIREC TIONS OF 1998 IS ONLY A NOTIONAL EXPENSE AND, THEREFORE, THERE WOULD BE ADD BACK TO THAT EXTENT IN THE COMPUTATION OF TO TAL 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 STICKY LOAN BUT IN THIS CITED DECISION THE QUESTION B EFORE HE APEX COURT WAS ABOUT 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 A RGUED AND IN SUPPORT A DECISION OF HON'BLE COURT PRONOUNCE D IN THE CASE OF CIT VS. GODHRA ELECTRICITY CO. 225 ITR 746 (SC). IN 12 SHORT, THE VIEW EXPRESSED WAS THAT IF INCOME DOES NO T RESULT AT ALL, THERE CANNOT BE ANY TAX AND THAT IF AN INCOME HAS NOT MATERIALIZED, THEN MERELY AN ENTRY MADE ABOUT A HYPOTHE TICAL INCOME BY FOLLOWING BOOK KEEPING METHODS, THE LIABILITY TO TAX CANNOT BE ATTRACTED. NOW AT PRESENT THE SITUATION IS THAT THE HON'BLE MADR AS HIGH COURT IN THE CASE OF CIT VS. ELGI FINANCE LTD. 293 ITR 357 (MAD.) HAS TAKEN A VIEW THAT THE ASSESSEE IS A COMPA NY ENGAGED IN THE BUSINESS OF LEASE, FINANCE AND HIRE PUR CHASE AND THAT THE PRINCIPLE OF ACCRUAL COMES INTO PLAY WITH OUT INCOME WAS RECOGNIZED AND THAT THE ASSESSEE HAD CLA SSIFIED ITS ASSETS ON THE BASIS OF NOTIFICATION ISSUED BY R.B .I. AND FOUND THAT CERTAIN ASSETS CAME UNDER THE CATEGORY O F NPA AND THAT FROM SUCH NPA THE ASSESSEE HAD NOT RECOGNI ZED ANY INCOME IN CONSONANCE WITH THE NOTIFICATION ISSUED BY RBI AND AS-9 ISSUED BY ICAI AND THAT THE ASSESSEE WAS JUSTIFI ED IN NOT RECOGNIZING SUCH INCOME. THE COURT HAD FURTHER EXPRESS ED THAT THERE WAS NO OCCASION TO CONSIDER WHETHER THE PRINCIPLE OF ACCRUAL WOULD ARISE OR NOT, NEVERTHELESS, THE INTERES T FROM SUCH NPA WOULD BE TAXED IN THE APPROPRIATE ASSESSMENT YEAR ON THE BASIS OF ACTUAL RECEIPT. IT IS WORTH TO MENTION THAT FOR THIS DECISION, THE HON'BLE MADRAS HIGH COURT HAS RELI ED UPON AN ANOTHER DECISION OF THE SAME HIGH COURT PRONOUNC ED IN THE CASE OF JT.CIT VS. INDIA EQUIPMENT LEASING LTD. 293 ITR 350. 7. IN THE CASE BEFORE US, ADMITTEDLY, ASSESSEE HAS DIR ECTLY TAKEN THE INTEREST TO THE BALANCE SHEET AND IT IS N OT ROUTED THROUGH THE PROFIT & LOSS ACCOUNT. MOREOVER, THE ISSUE OF T HE TAXABILITY OF THE INTEREST ON THE STICKY LOSSES/ADVANCES, IS COVERE D IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE COORDINATE BENC HES IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD., VIJAYAWADA (SUPRA) AND KARNAVATI COOPERATIVE BANK LTD. (SUPRA). WE FIND NO REASON TO INTERFERE WITH THE REASONED ORDER OF THE LD. CIT(A) AN D ACCORDINGLY THE SAME IS CONFIRMED. IN THE RESULT, THE REVENUES GROUND IS DISMISSED. 8. RESPECTFULLY FOLLOWING THE DECISION OF THE COORD INATE BENCH OF THE TRIBUNAL IN THE CASE OF OSMANABAD JANTA SAHAKARI BA NK LTD. CITED (SUPRA) WE HOLD THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN CONFI RMING THE ADDITION OF RS. 57,92,156/- MADE BE THE AO. WE ACCORDINGLY SET-ASI DE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO DELETE THE ADDITION. 9. GROUND OF APPEAL NO.3 BY THE ASSESSEE READS AS U NDER : 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE DISALLOWANCE OF RS.9,80,539.00 AS SUSTAINED BY THE LEARNED C.I.T .[A] OUT OF LEGAL EXPENSES BEING LEGALLY UNSUSTAINABLE, ARBITRARY, PE RVERSE AND DEVOID OF 13 MERITS AND BEING CONTRARY TO THE WELL SETTLED ACCOU NTING PRINCIPLES THE SAME MAY PLEASE BE DELETED. 10. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSEE HAS DEBITED AN AMOUNT OF RS.10,98,348/- TOWARDS LAW CHARGES IN THE PROFIT AND LOSS ACCOUNTS. FROM THE DETAILS FURNISHED BY THE ASSESS EE THE ASSESSING OFFICER NOTED THAT AN AMOUNT OF RS.9,80,539/- WHICH WAS DEB ITED TO THE PROFIT AND LOSS ACCOUNT PERTAINS TO EARLIER YEARS AND NOT ALLO WABLE DURING THE CURRENT YEAR. ON BEING QUESTIONED BY THE ASSESSING OFFICER TO JUSTIFY THE ALLOWANCE OF THE SAME THE ASSESSEE IN HIS WRITTEN SUBMISSION STATED AS UNDER : CO-OPERATIVE BANKS ARE FURTHER GOVERNED BY CIRCULA RS ISSUED BY RESERVE BANK OF INDIA FROM TIME TO TIME. THE COURT EXPENSES HAVE BEEN ACTUALLY INCURRED BY O UR BANK WHILE FILING THE SUITS FOR RECOVERY UNDER SECTION 91 AND 101 OF MAHERASHTRA CO-OP. SOCIETIES ACT, 1961 FOR PROCESS AND STAMP FEES WHIC H ARE RECOVERABLE FROM THE BORROWERS INCLUDING SHRI SANT DAMAJI SAHAKARI S AKHAR KARKHANA. THESE ARE REAL LEGAL EXPENSES/DUES RECEIVABLE FROM THE BO RROWERS AND HENCE SHOWN SEPARATELY IN BALANCE SHEET ON ASSET SIDE. . HOWEVER, RESERVE BANK OF INDIA HAS ISSUED G UIDELINES IN RESPECT OF ACCOUNTING TREATMENT OF LEGAL EXPENSES INCURRED BY BANKS IN SUIT FILED ACCOUNTS AND ASKED THE BANKS TO ADOPT THE FOLLOWING GUIDE LINES. I. LEGAL EXPENSES INCURRED BY BANKS IN RESPECT OF SUIT-FILED ACCOUNTS SHOULD BY DEBITED TO THE PROFIT AND LOSS ACCOUNT AT THE TIME OF INCURRENCE. FOR THE PURPOSE OF MONITORING THE RECOVERY OF SUCH EXPENSES FROM THE BORROWERS, THE BANKS MAY KEEP A MEMORANDUM CONTROL ACCOUNT. II. AT THE TIME OF RECOVERY OF THE LEGAL EX PENSES FROM THE BORROWER, THE AMOUNT RECOVERED SHOULD BE RECOGNIZED IN THE PR OFIT AND LOSS ACCOUNT OF THE YEAR IN WHICH THE RECOVERY IS MADE. III. THE ACCOUNTING POLICY IN THIS REGARD SH OULD BE CONSISTENTLY FOLLOWED IN THE PREPARATION AND PRESENTATION OF FIN ANCIAL STATEMENT BY BANKS. SIMILARLY DURING THE INSPECTION CONDUCTED BY R.B.I. IN RESPECT OF OUR BANK AS ON 31/03/2006 HAS ALSO OBJECTED FOR SHOWING LEGAL E XPENSES IN THE BALANCE SHEET ON ASSET SIDE. UNDER SUCH CIRCUMSTANCES TO COMPLY WITH RBI GUIDELI NES AND TO THE DIRECTIONS GIVEN IN THE RESERVE BANK OF INDIA INSPE CTION REPORT DATED 28.06.2006 OUR BANK HAS TRANSFERRED THE LEGAL EXPEN SES TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2007. 14 11. FROM THE COPY OF THE CIRCULAR ISSUED BY THE RB I FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER NOTED THAT RBI HAS I SSUED THE GUIDELINES WITH A DIRECTION THAT BANKS MAY ACCEPT THE ABOVE PROCEDU RE IN A UNIFORM MANNER FORM THE YEAR ENDING 31-03-2004, I.E. A.Y. 2004-05. DESPITE THE CIRCULAR THE BANK HAS NOT DEBITED THE EXPENSES ON YEAR TO YE AR BASIS FROM THE A.Y. 2004-05 ONWARDS. AS SUCH THE EXPENSES ON COURT SUI TS INCURRED DURING THE YEAR ALONE WILL BE ALLOWED AS DEDUCTION. THE EXPEN SES PERTAINING TO EARLIER YEARS ARE NOT ALLOWED TO BE CLAIMED DURING THE CURR ENT YEAR. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED AN AMOUNT OF RS.9,80 ,539/- HOLDING THAT THE SAME DOES NOT PERTAIN TO THE YEAR UNDER CONSIDERATI ON. 12. BEFORE THE CIT(A) THE ASSESSEE FURNISHED THE BR EAK-UP OF THE EXPENDITURE DEBITED TO PROFIT AND LOSS ACCOUNT OF RS.10,98,348/- WHICH IS AS UNDER : SR. NO. PARTICULARS 2003-04 2005-06 2006-07 TOTAL 1 2 3 4 5 01. LEGAL EXPENSES OF SANT DAMAJI SUGAR MILL 9,27,217 30,000 9,57,217 02. OTHER DEFAULTERS -- -- 1,41,131 03. TOTAL (01+02): 9,27,217 30,000 10,98,348 04. LESS: EXPENDITURE PERTAINING TO THE ASST. YEAR: 2007-08 -- -- 1,17,809 05. BALANCE OF THE AMOUNT -- -- 9,80,539 12.1 IT WAS SUBMITTED THAT MAJOR PORTION OF THE EX PENDITURE WAS ATTRIBUTABLE TO A SINGLE DEFAULTER'S ACCOUNT VIZ. S ANT DAMAJI SAHAKARI SAKHAR KARKHANA LTD. IT WAS FURTHER STATED THAT THE LEGAL PROCEEDINGS WERE UNDER PROGRESS AND CONSIDERING THE SECURITY AV AILABLE TO BANK, THERE WAS A VIEW OF CERTAINTY OF RECOVERY. THEREFORE ASS ESSEE BANK DID NOT TREAT THE AMOUNT SPENT ON LEGAL PROCEEDING AS REVENUE EXPENSE S IN THE RESPECTIVE ACCOUNTING YEAR, BUT SHOWN AS RECEIVABLE IN THE BALANCE SHEET. 15 IT WAS SUBMITTED THAT IN ACCORDANCE WITH RBI CIRCUL AR, DATED 13 TH SEPTEMBER 2003, SUCH EXPENDITURE WAS REQUIRED TO BE DEBITED TO PROFIT AND LOSS ACCOUNT IN THE RESPECTIVE YEAR, BUT WITH A VIE W TO MAKE THE RECOVERY, THE ASSESSEE BANK INSTEAD OF TREATING AS REVENUE EXPENDITURE SHOWN SUCH EXPENDITURE AS RECEIVABLE. 12.2 EXPLAINING THE REASON FOR DEBITING THE ENTIR E EXPENDITURE DURING THE YEAR UNDER CONSIDERATION, IT WAS SUBMITTED THAT AS PER T HE OBSERVATIONS OF THE RESERVE BANK OF INDIA, IN THEIR INSPECTION REPORT, DATED 28 TH JUNE 2006 UNDER REMARK NO: 5-17, IF THE PRINCIPAL AMOUNT WAS DOUBTFUL, THEN ALL OTHER CHARGES ARE TO BE TAKEN AS NOT RECOVERABLE AND SHOULD BE WRITTEN OFF IN THE YEAR IN WHICH IT WAS INCURRED. IT WAS CLAIMED THAT CONSIDERING THE PROLONGED LITIGATIONS AND OTHE R FACTORS, THE BANK DECIDED THAT SINCE THERE IS NO CERTAINTY IN THE REC OVERY OF THE AMOUNT, THEREFORE, AMOUNT WHICH WAS DISCLOSED AS RECEIVABLE HAS TO BE WRITTEN OFF BY DEBITING TO P & L ACCOUNT AT THE END OF 31 ST MARCH 2007 AND CONSEQUENTLY, THE CHARGES RECEIVABLE FROM SUCH DEFA ULTED ACCOUNT ARE TO BE CONSIDERED AS NOT RECOVERABLE. THEREFORE, THE BANK HAS WRITTEN OFF THE LEGAL CHARGES, WHICH WERE SHOWN AS RECEIVABLE. IT WAS ACCORDINGLY PLEADED THAT THE AMOUNT OF RS.9,80,539/- DISALLOWED BY THE ASSESSING OFFICER SHOULD BE ALLOWED AS AN EXPENDITURE. 13. HOWEVER, THE CIT(A) WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND UPHELD THE ACTION OF THE AO BY HOLDING AS UNDER : 3.3 THE SUBMISSIONS MADE BY THE LD. COUNSEL FOR TH E APPELLANT ARE CAREFULLY EXAMINED WITH REFERENCE TO THE FACT OF TH E CASE AND THE RELEVANT LEGAL POSITION. ADMITTEDLY, THE APPELLANT HAS BEEN FOLLOWING MERCANTILE 16 SYSTEM OF ACCOUNTING. THE CONCEPT OF ACCRUAL IS BAS ED UPON THE MATCHING PRINCIPLE OF COST WITH REVENUE AND VICE VERSA. AS ALREADY MENTIONED, THE PROVISIONS OF SEC.145 WERE ALSO AMENDED W.E.F. ASSE SSMENT YEAR 1997-98 REQUIRING AN ASSESSEE EITHER TO FOLLOW THE CASH SYSTEM OF ACCOUNTING OR MERCANTILE SYSTEM OF ACCOUNTING. THE BASIC PURPOSE OF MERCANTILE SYSTEM OF ACCOUNTING IS TO DERIVE CORRECT AND TRUE FINANCIAL RESULTS. THEREFORE, IT IS UTMOST NECESSARY TO MAKE PROVISIONS FOR ASCERTAINED LIABILITY TOWARDS EXPENSES AT THE END OF THE YEAR. IN THE PRESENT CAS E, IT IS NOT IN DISPUTE THAT THE EXPENSES IN QUESTION RELATED TO ACCOUNTING YEAR S 2003-04 AND 2005-06 AND NOT TO THE YEAR UNDER CONSIDERATION. AS PER THE CIRCULAR DATED 13/09/2003 ISSUED BY THE RBI, THE APPELLANT WAS OBL IGED TO DEBIT SUCH LEGAL EXPENSES TO THE PROFIT & LOSS A/C IN THE YEARS IN W HICH THE EXPENSES WERE INCURRED. BUT, THE SAME WAS NOT DONE BY THE APPELLA NT RESULTING IN ACCUMULATION OF SUCH EXPENSES FROM THE F.Y. 2003-04 TILL THE ASSESSMENT YEAR UNDER CONSIDERATION. THIS IS NO T A CASE WERE THE LIABILITY IN QUESTION HAD ARISEN OR WAS DETERMINED AND CRYSTA LLIZED DURING THE YEAR AND THE ASSESSEE COULD NOT HAVE ANTICIPATED THE LIABILITY IN THE EARLIER YEARS. THE LIABILITY PERTAINED TO EARLIER YEARS AND IT WAS AN ASCERTAINED LIABILITY AND THE APPELLANT OUGHT TO HAVE CLAIMED THE EXPENDI TURE IN THE RESPECTIVE YEARS OF INCURRING THE EXPENSES AS THE APPELLANT WA S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE CLAIM MADE BY THE APPELLA NT IN THIS YEAR FOR SUCH ASCERTAINED EXPENSES OF EARLIER YEARS VIOLATED THE PRINCIPLE OF MATCHING OF COST WITH THE REVENUE. THE APPELLANT IS ALS O NOT ABLE TO SATISFACTORILY PROVE THAT THE EXPENSES COULD NOT BE CLAIMED IN THE RESPECTIVE YEARS OF PECULIAR REASONS AND CIRCUMSTANCES BEYOND ITS CONTR OL. IN SUCH CIRCUMSTANCES AND AS PER THE APPELLANT HAS BEEN FOL LOWING MERCANTILE SYSTEM OF ACCOUNTING, THE EXPENSES RELATING EARLIER YEARS CANNOT BE ALLOWED AS DEDUCTION FOR THE YEAR UNDER CONSIDERATION. THE REFORE, THE ASSESSING OFFICER IS JUSTIFIED IN MAKING DISALLOWANCE OF PRIO R PERIOD EXPENSES AMOUNTING TO RS.9,80,539/- AND ACCORDINGLY THE DIS ALLOWANCE MADE BY ASSESSING OFFICER ON THIS GROUND IS UPHELD. GROUND OF APPEAL NO.3 FAILS. 14. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 15. THE LD. COUNSEL FOR THE ASSESSEE FILED A COPY O F THE ACCOUNTING STANDARD-5 ISSUED BY THE INSTITUTE OF CHARTERED ACC OUNTANTS OF INDIA AND SUBMITTED THAT AS PER THE SAID ACCOUNTING STAND ARD PRIOR PERIOD EXPENSES WHICH ARISE IN THE CURRENT PERIOD AS A RES ULT OF ERRORS OR OMISSIONS IN THE PREPARATION OF FINANCIAL STATEMENT S OF ONE OR MORE PERIOD/PERIODS CAN BE SHOWN IN THE CURRENT PROFIT A ND LOSS ACCOUNT. 15.1 REFERRING TO THE DECISION OF THE HONBLE SUPRE ME COURT IN THE CASE OF OIL AND NATURAL GAS CORPORATION LTD. VS. CI T REPORTED IN 297 ITR 180 HE SUBMITTED THAT THE HONBLE SUPREME COURT IN THE SAID DECISION HAS ALLOWED THE LOSS CLAIMED BY THE ASSESS EE ON ACCOUNT OF 17 FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON T HE DATE OF BALANCE SHEET IN RESPECT OF LOANS TAKEN FOR REVENUE PURPOSE S NOTWITHSTANDING THE FACT THAT THE LIABILITY HAS NOT BEEN ACTUALLY D ISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHAN GE HAS ACCRUED. HE SUBMITTED THAT SINCE THE MISTAKE WAS NOTICED ON ACC OUNT OF INSPECTION BY RBI DURING THE IMPUGNED ASSESSMENT YEAR, THEREFO RE, THE ASSESSEE DEBITED SUCH EXPENDITURE TO THE PROFIT AND LOSS ACC OUNT AND THEREFORE THE SAME SHOULD BE ALLOWED AS A DEDUCTION. 16. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). SHE SUBMITTED T HAT SINCE THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACC OUNTING, THEREFORE, THE EXPENSES RELATING TO EARLIER YEAR WHICH CAN BE ASCERTAINED SHOULD HAVE BEEN CLAIMED IN THAT YEAR AND CANNOT BE ALLOWE D AS A DEDUCTION IN THE CURRENT ASSESSMENT YEAR. SHE SUBMITTED THAT TH E CIT(A) HAS PASSED A DETAILED ORDER AND THEREFORE THE SAME SHOULD BE U PHELD. 17. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAP ER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT R EGARDING THE GENUINENESS OF THE LEGAL EXPENSES OF RS.9,80,539/-. THE DISPUTE IS ONLY RELATING TO THE YEAR OF ITS ALLOWABILITY. ACC ORDING TO THE AO AND CIT(A) SINCE THE ASSESSEE IS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING AND SINCE THE LEGAL CHARGES RELATE TO A. Y.2004-05 TO 2006- 07, THEREFORE, THE SAME CANNOT BE ALLOWED AS AN EXP ENDITURE FOR THE IMPUGNED A.Y., I.E. A.Y. 2007-08. IT IS THE CASE O F THE ASSESSEE THAT 18 THE MAJOR PORTION OF THE EXPENDITURE WAS ATTRIBUTAB LE TO A SINGLE DEFAULTER, I.E., SANT DAMAJI SAHAKARI KARKHANA LTD. FURTHER, DUE TO THE ADEQUATE SECURITY AVAILABLE TO THE BANK THERE WAS A VIEW OF CERTAINTY OF RECOVERY AND THEREFORE THE BANK DID NOT TREAT THE A MOUNT SPENT ON LEGAL PROCEEDINGS AS REVENUE EXPENDITURE IN THE RESPECTIV E ACCOUNTING YEAR BUT SHOWN AS RECEIVABLE IN THE BALANCE SHEET. IT W AS ONLY DUE TO THE INSPECTION REPORT OF THE RBI DATED 28-06-2006 WHERE IN IT HAS BEEN MENTIONED THAT IF THE PRINCIPAL AMOUNT WAS DOUBTFUL THEN ALL OTHER CHARGES ARE TO BE TAKEN AS NOT RECOVERABLE AND SHOU LD BE WRITTEN OFF IN THE YEAR IN WHICH IT WAS INCURRED THAT THE ASSESSEE DEBITED SUCH LEGAL EXPENSES TO THE PROFIT AND LOSS ACCOUNT. FURTHER, ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE IN VIEW OF THE ACCOUNTING STANDARD-5 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA PRIOR PERIOD INCOME OR EXPENSES WHICH ARISE IN THE CURRENT PERIOD AS A RESULT OF ERRORS OR OMISSIONS IN THE PREPARATION OF THE FINANCIAL STATE MENTS CAN BE INCLUDED IN THE DETERMINATION OF NET PROFIT OR LOSS FOR THE CURRENT PERIOD. 18. WE DO NOT FIND FORCE IN THE ARGUMENTS OF THE LD . COUNSEL FOR THE ASSESSEE. WE FIND THE ASSESSEE IN THE INSTANT CASE IS A COOPERATIVE BANK AND WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING. IT IS NOT THE CASE OF THE BANK THAT IT HAD NOT RECEIVED THE CIRCU LAR DATED 13-09-2003 ISSUED BY RBI IN TIME, I.E. IN THE YEAR 2003-04 OR 2004-05. THE VARIOUS CIRCULARS ISSUED BY THE RBI ARE BINDING ON THE BANK WHICH WAS OBLIGED TO FOLLOW AND THEREFORE THE BANK WAS OBLIGE D TO DEBIT SUCH LEGAL EXPENSES TO THE PROFIT AND LOSS ACCOUNT IN TH E YEAR IN WHICH SUCH EXPENSES WERE INCURRED. SINCE THE ASSESSEE BANK WA S FOLLOWING 19 MERCANTILE SYSTEM OF ACCOUNTING, THEREFORE, DEBITIN G THE EXPENSES OF ANOTHER YEAR IN THE PROFIT AND LOSS ACCOUNT OF THE CURRENT YEAR WILL GIVE A DISTORTED RESULT AND THEREFORE, THE SAME CANNOT B E ALLOWED AS AN EXPENDITURE FOR THIS YEAR. 19. SO FAR AS THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN VIEW OF ACCOUNTING STANDARD-5 THE BANK CAN DEBIT PRIOR PERIOD ITEMS WE DO NOT FIND MUCH FORCE IN THE SAME. THE T ERM PRIOR PERIOD ITEMS AS DEFINED IN THE ACCOUNTING STANDARD REFERS ONLY TO INCOME OR EXPENSES WHICH ARISE IN THE CURRENT PERIOD AS A RES ULT OF ERRORS OR OMISSIONS IN THE PREPARATION OF FINANCIAL STATEMENT S OF ONE OR MORE PRIOR PERIODS. AS PER THE SAID ACCOUNTING STANDARD THE NATURE OF AMOUNT OF PRIOR PERIOD ITEMS SHOULD BE SEPARATELY D ISCLOSED IN THE STATEMENT OF PROFIT AND LOSS ACCOUNT IN A MANNER TH AT THEIR IMPACT ON THE CURRENT PROFIT OR LOSS CAN BE PERCEIVED. THE O BJECTIVE OF DEBITING SUCH EXPENSES IS TO INDICATE THE IMPACT OF SUCH ITE M ON THE CURRENT PROFIT OR LOSS. HOWEVER, IT DOES NOT GIVE A BLANKE T PERMISSION THAT ITEMS OF EARLIER YEARS INVARIABLY CAN BE DEBITED TO THE PROFIT AND LOSS ACCOUNT OF CURRENT YEAR. SINCE THE ASSESSEE IS FOL LOWING MERCANTILE SYSTEM OF ACCOUNTING AND SINCE THE RBI GUIDELINES I SSUED IN 2003 IS BINDING ON THE BANK WHICH HAS NOT BEEN FOLLOWED, TH EREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) U PHOLDING THE DISALLOWANCE OF RS.9,80,539/- MADE BY THE AO. WE A CCORDINGLY UPHOLD THE SAME. 20. SO FAR AS THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ONGC VS. CIT REPORTED IN 322 ITR 180 RELIED ON BY T HE LD. COUNSEL 20 FOR THE ASSESSEE WE FIND THE SAME IS DISTINGUISHABL E AND IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN TH AT CASE THE DISPUTE WAS REGARDING THE YEAR OF ALLOWABILITY OF ADDITIONAL LI ABILITY DUE TO EXCHANGE RATE FLUCTUATION WHERE ASSESSEE MAINTAINS MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, IN THE INSTANT CASE, IT IS THE ALLOWABILITY OF AN EXPENDITURE OF AN EARLIER YEAR IN THE PROFIT AND LO SS ACCOUNT OF THE CURRENT YEAR WHEN THE ASSESSEE FOLLOWS MERCANTILE S YSTEM OF ACCOUNTING AND HAS NOT FOLLOWED THE GUIDELINES ISSU ED BY THE RBI WHICH IT WAS OBLIGED TO DO. THE VARIOUS OTHER DECI SIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE ARE ALSO NOT APPLI CABLE TO THE FACTS OF THE PRESENT CASE AND ARE DISTINGUISHABLE. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE LD.C IT(A) WE FIND NO INFIRMITY IN HIS ORDER ON THIS ISSUE. ACCORDINGLY, THE SAME IS UPHELD. GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY DISMIS SED. 21. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY-ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 28 TH DAY OF JUNE 2013. SD/- SD/- (SHAILENDRA KUMAR YADAV ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE, DATED : 28 TH JUNE 2013. COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-III, PUNE 4. THE CIT-III, PUNE 5. THE DR B BENCH, PUNE. 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE T RIBUNAL, PUNE.