Asst. Commissioner of Income tax Cir. 2, Belgaum V. The Khanapur Co-Op. Bank Ltd., Belgaum

ITA 420/PAN/2013

• Counselvise Citation: 42024114 RSA 2013
• Duration Of Justice: 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 19-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B BARTHAKUR
• Assessee Lawyers: P DINESH
• Section: 143(3)

Judgement Text

- 1 - ITA 420/PNJ/2013 IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 420 /PNJ/20 13 (ASST. YEAR 2010 - 11 ) THE ASSTT. COMMISSIONER OF INCOME TAX , APPELLANT CIRCLE 2, BELGAUM. VS THE KHANAPUR CO - OP BANK LTD., RESPONDENT P. B NO. 3, AT POST: KHANAPUR , BELGAUM. PAN : AAAAT2660A APPELLANT BY : SHRI B. BARTHAKUR (DR) RESPONDE NT BY : SHRI P. DINESH (ADV ) DATE OF HEARING: 12/03/2014 DATE OF ORDER : 14 /03 /201 4 O R D E R PER D. T. GARASIA JM THIS APPEAL IS FILED BY THE DEPARTMENT AGAINST THE ORDER PASSED BY CIT (APPEALS) - BELGAUM DATED 14.10.2013. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS UNDER: - (1) THE CIT(A) ERRED IN LAW AND ON FACTS, IN DELETING THE ADDITION OF RS.21,52,339 ON ACCOUNT OF ACCRUED INTEREST ON LOANS WHICH ARE CLASSIFIED AS 'NON - PERFORMING ASSE TS' RELYING ON THE KARNATAKA HIGH COURT DECISION IN CANFIN HOMES LTD (2011) 5 TAXCORP (DT) 49593, IGNORING THE PROVISIONS OF SECTION 43D OF THE I.T. ACT, 1961? (2) ON THE FACTS AND IN LAW THE CIT(A) ERRED IN HOLDING THAT INCOME ACCRUED TO THE ASSESSEE CANNOT BE TAKEN AS INCOME IN THE YEAR IGNORING THE AMENDED PROVISIONS OF SECTION 43D OF THE I.T. ACT, 1961, WHICH PROVIDES - 2 - ITA 420/PNJ/2013 CERTAIN BENEFIT TO THE CERTAIN CLASS OF A SSESSEE'S BUT DO NOT PROVIDE SUCH BENEFIT TO THE ASSESSEE BANK AND AS SUCH, THE PROVISIONS OF SECTION 43D AMENDED W.E.F. 1.4.2000 OVERRULED THE COURT DECISIONS /CIRCULARS? 2. THE SHORT FACTS OF THE CASE ARE AS UNDER: - THE ASSESSEE IS A CO - OP BANK ENGAGED IN CARRYING ON BUSINESS OF BANKING. THE ASSESSEE HAS OBTAINED NECESSARY LICENCE FROM RESERVE BANK OF INDIA FOR CARRYING ON BANKING OPERATION AS CO - OP BANK. THE ASSESSEE HAS FILED THE RETURN OF INCOME FOR A.Y. 2010 - 11 ON 28/09/2010 DECLARING A TOTAL INCOME OF RS. 5926260/ - . THE ASSESSMENT WAS COMPLETED U/S 143(3) DETERMINING THE TAXABLE INCOME AT RS. 8078600/ - . WHILE COMPLETING THE ASSESSMENT THE AO HAS DISALLOWED INTEREST ACCRUED ON NON PERFORMING ASSETS (NPAS) RS. 2152339/ - . THE ASSESSING OFFICER OBSERVED THAT INTEREST RECEIVABLE ON NPAS ON ACCRUAL BASIS TO THE TUNE OF RS 2152339/ - NOT CREDITED TO PROFIT AND LOSS ACCOUNT HAS TO BE TAXED ON ACCRUAL BASIS AND ACCORDINGLY THE SAME HAS BEEN ADDED TO THE RETURN INCOME OF THE ASSESSEE. 3. MATTER CARRIED TO CIT (A ) AND CIT (A) HAS DELETED BY OBSERVING AS UNDER: - 5.1 THE ASSESSING OFFICER NOTICED THAT THE APPELLANT BANK IS FOLLOWING HYBRID SYSTEM OR MIXED SYSTEM OF ACCOUNTING TO COMPUTE ITS NET INCOME FROM THE BANKING BUSINESS. THE APPELLANT BANK IS MAINLY FOLLOWIN G MERCANTILE SYSTEM OF ACCOUNTING BUT INTEREST ON ADVANCES IS RECOGNIZED AS INCOME ON RECEIPT BASIS AS PER SOCIETIES ACT AND AS PER GUIDELINES ISSUED BY THE RBI. THE AUDIT REPORT IN FORM 3CD INDICATES METHOD OF ACCOUNTING AS 'MERCANTILE SYSTEM OF ACCOUNTING'. 5.1.1 FROM THE ABOVE, IT WAS SEEN THAT THE ASSESSEE WAS RELYING ON THE RBI GUIDELINES TO CONTEND THAT IT WAS NOT FOLLOWING THE ACCRUAL SYSTEM OF ACCOUNTING IN RESPECT OF STANDARD ASSETS, BAD AND DOUBTFUL ASSETS. THE A.O IN HIS ORDER HAS MENTI ONED THAT AS HELD BY THE ITAT (JAIPUR) IN THE CASE OF BANK OF RAJASTHAN VS. ACIT (68 ITD 69), THE INCOME TAX ACT IS AN INDEPENDENT CODE BY ITSELF AND FOR COMPUTATION OF TOTAL INCOME UNDER THE INCOME TAX ACT, THE NORMS AND/OR THE PROCEDURE LAID DOWN BY THE RBI CANNOT BE FOLLOWED. FURTHER, THE PROVISIONS OF INCOME TAX ACT ARE VERY CLEAR THAT THE ASSESSEE CANNOT SIMULTANEOUSLY FOLLOW BOTH THE SYSTEMS OF ACCOUNTING. IN VIEW OF THIS, THE AO REJECTED THE CONTENTION OF THE ASSESSEE. - 3 - ITA 420/PNJ/2013 5.1.2 IN SUPPORT OF HIS CONTENTION , THE ASSESSING OFFICER HAS RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF UCO BANK VS. CIT (237 ITR 889), WHEREIN THE SUPREME COURT REFERRED TO THE JUDGMENT OF CALCUTTA HIGH COURT, WHEREIN THE HIGH COURT OBSERVED THAT LERE F ACT THAT THE SYSTEM FOLLOWED BY THE ASSESSEE HAD NOT BEEN QUESTIONED IN THE PAST, IS NO ID TO SAY THAT IT SHOULD BE ACCEPTED ALL ALONG, AS THERE IS NO ESTOPEL IN THESE MATTERS. EVEN IF THE ASSESSEE IS CONSISTENTLY FOLLOWING THE HYBRID METHOD OF ACCOUNTING, THE SAME CAN BE REJECTED AS LONG AS THERE IS JUSTIFIABLE REASON FOR NOT ACCEPTING THE SAME. FURTHER IN SUPPORT OF HIS ARGUMENT , THE ASSESSING OFFICER HAS RELIED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCORE VS. CIT (158 ITR 102) AND THE JUDGEMENT OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF KARNATAKA STATE FINANCE CORPORATION VS. CIT (174 ITR 212). 5.1.3 ACCORDINGLY, INTEREST RECEIVABLE ON LOANS AND INVESTMENTS ON ACCRUAL BASIS TO THE TUNE OF RS.21,52,339/ - BUT NOT CRE DITED TO PROFIT AND LOSS ACCOUNT HAS BEEN ADDED BY THE ASSESSING OFFICER TO THE RETURNED INCOME. 5.1.4 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT IN THIS REGARD AND ALSO PERUSED THE DECISIONS RELIED UPON BY IT. THE ASSESSING OFFICER WHILE BRINGING TO TAX THE INTEREST INCOME OF THE APPELLANT FROM NPAS/STICKY LOANS ON ACCRUAL BASIS HAS RELIED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCORE VS. CIT (158 ITR 102) AND THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF KARNATAKA STATE FINANCE CORPORATION VS. CIT H(174 ITR 212). THE A.O HAS ALSO CONTENDED THAT SECTION 43D OF THE I.T.ACT AS INSERTED W.E.F.01 - 04 - 2000 IS NOT APPLICABLE TO CO - OPERATIVE BANKS. 5.1.5 THE APPELLANT ON THE OTHER HAND CHALLENGING THE ACTION OF THE A.O IN BRINGING TO TAX THE INTEREST INCOME OF THE APPELLANT FROM NPAS/STICKY LOANS ON ACCRUAL BASIS HAD MAINLY RELIED ON THE DECISION OF THE APEX COURT IN THE CASE OF UCO BANK VS.CIT, 237 ITR 889 (1999). OTHER CASE LAWS IN FAVOUR OF THE APPELLANT ARE THE JCIT(ASST) V. CANFIN HOMES LTD IN ITA NO.801 OF 2006 AND THE DECISION OF THE ITAT, BANGALORE BENCH 'C' BANGALORE IN THE CASE OF ITO WARD - 2 SHIVAMOGGA V. SHIVA SAHAKARI BANK NIYAMITHA IN ITA NO.257/BANG/2012 FOR A.Y. 2008 - 09 DATED 21.12.2012 WHEREIN, THE HON'BLE ITAT, RELYING UPON THE DECISION OF HON'BLE HIGH COURT OF KARNATAKA, IN THE CASE OF JCIT(ASST) V. CANFIN HOMES LTD IN ITA NO.801 OF 2006, HAS HELD THAT - 4 - ITA 420/PNJ/2013 INTEREST ON NON - PERFORMING ASSETS CANNOT BE TAKEN AS INCOME ACCRUED TO THE ASSESSEE IN THE RELEVANT YEAR. THE ABOVE MENTIONED CASES OF SUPREME COURT AND HIGH COURT IN FAVOUR OF THE APPELLANT IN THE CASES OF UCO BANK AND CANFIN, SUPRA ARE LATER IN TIME THAN THE CASE LAWS RELIED UPON BY THE AO. THE APEX COURT IN THE CASE OF UCO BANK, SUPRA HAS CONSIDERED AND OVER RULED ITS OWN DECISION IN THE CASE OF STATE BANK OF TRAVANCORE, SUPRA. FURTHER, THE HON'BLE ITAT AHMEDABAD BENCH IN CASE OF KARNAVATI CO - OP. BANK LTD. VS. DEPUTY COMMISSIONER OF INCOME T AX (2012) 14 ITR (TRIB) 175 HAS HELD THAT CO - OPERATIVE BANK IS GOVERNED BY RBI GUIDELINES HENCE PROVISIONS OF SECTION 43D ARE ALSO APPLICABLE TO CO - OPERATIVE BANKS. FURTHER, THERE IS NOTHING IN THE PHRASEOLOGY OF SECTION 43D WHICH MAKES THE INTEREST INCOME OF CO - OPERATIVE BANKS FROM NPA OR STICKY LOANS TAXABLE ON ACCRUAL BASIS. 5.1.6 HON'BLE SUPREME COURT (3 MEMBERS) IN THE CASE OF UCO BANK VS. CIT (1999) 237 ITR 889 HAS HELD THAT INTEREST ACCRUED ON STICKY ADVANCES WHICH WAS NOT BROUGHT IN PROFIT AND LOSS ACCOUNT BUT TAKEN TO SEPARATE SUSPENSE ACCOUNT SHOULD BE ADDED AS INCOME ONLY WHEN ACTUALLY RECEIVED. THIS JUDGMENT OF THE APEX COURT IN ITS ESSENCE LAYS DOWN LAW ON THE ISSUE UNLESS EXPRESSLY OVERRULED EITHER BY ITSELF OR BY A LEGISLATIVE AMENDMENT WHICH HAS NOT COME TILL DATE. 5.1.7 THE HON'BLE HIGH COURT OF KARNATAKA IN THE CANFIN CASE, MENTIONED SUPRA, FOLLOWING THE JUDGMENT OF THE APEX COURT IN THE CASE OF UCO BANK VS.CIT, 237 ITR 889 (1999) HAS HELD AS UNDER: - ' THEREFORE, IT IS CLEAR IF AN ASSESSEE ADOPTS MERCANTILE 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 INCOME TO TAX. HIS ACCOUNTS SHOULD REFLECT TRUE AND CORRECT STATEMENT OF AFFAIRS. MERELY BECAUSE THE SAID AMOUNT; ACCRUED WAS NOT REALIZED IMMEDIATELY CANNOT BE A GROUND TO AVOID PAYMENT OF TAX. BUT, IF IN HIS ACC OUNT IT IS CLEARLY STATED THOUGH A PARTICULAR INCOME IS DUE TO HIM BUT IT IS NOT POSSIBLE TO RECOVER THE SAME, THEN IT CANNOT SAID TO HAVE BEEN ACCRUED AND THE SAID AMOUNT CANNOT BE BROUGHT TO TAX. IN THE INSTANT CASE WE ARE CONCERNED WITH A NON - PERFORMING - 5 - ITA 420/PNJ/2013 ASSET. AS THE DEFINITION OF NON - PERFORMING ASSET SHOWS AN ASSET BECOMES NON - PERFORMING WHEN IT CEASES TO YIELD INCOME. NON - PERFORMING ASSET IS AN ASSET IN RESPECT OF WHICH INTEREST HAS REMAINED UNPAID AND HAS BECOME PAST DUE. ONCE A PARTICULAR ASSET IS SH OWN TO BE A NON - PERFORMING ASST THEN THE ASSUMPTION IS IT IS NOT YIELDING ANY REVENUE. WHEN IT IS NOT YIELDING ANY REVENUE, THE QUESTION OF SHOWING THAT REVENUE AND PAYING TAX WOULD NOT ARISE. AS IS CLEAR FROM THE POLICY GUIDELINES ISSUED BY THE NATIONAL H OUSING BANK, THE INCOME FROM NON - PERFORMING ASSET SHOULD BE RECOGNIZED ONLY WHEN IT IS ACTUALLY RECEIVED . THAT IS WHAT THE TRIBUNAL HELD IN THE INSTANT CASE. THEREFORE, THE CONTENTION OF THE REVENUE THAT IN RESPECT OF NON - PERFORMING ASSETS EVEN THOUGH IT D OES NOT YIELD ANY INCOME AS THE ASSESSEE HAS ADOPTED A MERCANTILE SYSTEM OF ACCOUNTING, HE HAS TO PAY TAX ON THE REVENUE WHICH HAS ACCRUED NATIONALLY IS WITHOUT ANY BASIS. IN THAT VIEW OF THE MATTER, THE SECOND SUBSTANTIAL QUESTION FRAMED IS ANSWERED AGAIN ST THE REVENUE AND IN FAVOUR OF THE ASSESSEE 5.1.8 THUS, IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF JCIT VS. M/S CAN/IN HOMES LTD (2011) 5 TAX CORP (DT) 49593 , IT IS OBSERVED THAT THE FACTS OF THE APPELLANT BANK ARE SIMILAR TO THE FACTS OF THE CASE BEFORE THE HON'BLE HIGH COURT OF KARNATAKA WHEREIN IT HAS BEEN HELD THAT 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 SYST EM OF ACCOUNTING, HE HAS TO PAY TAX ON THE REVENUE WHICH HAS ACCRUED NOTIONALLY IS WITHOUT ANY BASIS. 5.1.9 IN VIEW OF THE ABOVE DISCUSSION AND RESPECTFULLY FOLLOWING THE JUDGMENTS OF THE APEX COURT IN THE UCO BANK VS.CIT, SUPRA, JUDGMENTS OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CANFIN, SUPRA AND THE DECISIONS OF ITAT, BANGALORE BENCH ' C ' BANGALORE IN THE CASE OF ITO WARD - 2 SHIVAMOGGA V. SHIVA SAHAKARI BANK NIYAMITHA, SUPRA AND PANJI BENCH IN THE CASE OF THE KHANAPUR CO - OP. BANK LTD., VS. INCOME TAX OFFICER ITA NO. 141/PNJ/2011, I HOLD THAT THE ADDITION MADE BY THE ASSESSING OFFICER OF RS.21,52,339/ - CANNOT BE - 6 - ITA 420/PNJ/2013 SUSTAINED IN LAW. ACCORDINGLY, THE ADDITION OF RS.21,52,339/ - ON ACCOUNT OF INTEREST RECEIVABLE ON NPA MADE B Y THE ASSESSING OFFICER IS DELETED. 4. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES, THE LD. DR RELIED UPON THE ORDER OF AO. LD. DR SUBMITTED THAT ASSESSEE IS A CO - OPERATIVE BANK FOLLOWING HYBRID SYSTEM OR MIXED SYSTEM OF ACCOUNTING TO COMPUTE ITS NET INCOME FROM BANKING BUSINESS. DURING THE YEAR FOR A.Y 2010 - 11 THE ASSESSEE ACCRUED INTER EST RELATED TO NON PERFORMING ASSETS WHERE THE RECOVERY OF PRINCIPLE AMOUNT ITSELF IS DOUBTFUL. DUE TO RECOVERY OF INTEREST ON NPA IS DOUBTFUL THE ASSESSEE DID NOT ACCOUNT INTEREST IN HIS PROFIT AND LOSS ACCOUNT. THE LD. DR SUBMITTED THAT ASSESSEE IS A CO - OPERATIVE BANK AND IT HAS TO ACCOUNT FOR INTEREST INCOME ON LOAN ON CASE BASIS. THE ASSESSEE IS FOLLOWING HYBRID SYSTEM OF ACCOUNT IN VIOLATION OF PRESCRIBE ACCOUNTING STANDARD WHICH MAY NOT BE TRUE AND CORRECT INCOME OF THE ASSESSEE. THE ASSESSEE CO - OPERA TIVE BANK HAS NOT PRODUCED ANY EVIDENCE BEFORE AO TO SHOW THAT ASSESSEE IS ENTITLED TO FOLLOW MIXED SYSTEM OF ACCOUNTING. THE AO HAS RELIED UPON THE DECISION OF SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCORA, 158 ITR 102. 5. HAVING HEARD LD. DR AND THE COUNSEL FOR THE ASSESSEE WE FIND THAT THE CIT (A) HAS RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF UCO BANK 237 ITR 889. WE FIND THAT THE SUPREME COURT HAS CONSIDERED THE DECISION OF STATE BANK OF TRAVANCORA CASE 158 ITR 102 AND HELD THAT AS PER THE CBDT CIRCULAR WHEREIN IT IS PROVIDED THAT THE INTEREST ACCRUED ON DOUBTFUL DEBT IS CREDITED TO SUSPENSE ACCOUNT IT NEED NOT TO BE INCLUDED IN ASSESSEES TAXABLE INCOME. THE BOARD HAS ALSO DECIDED THAT INTEREST IN R ESPECT OF DOUBTFUL DEBT CREDITED TO SUSPENSE ACCOUNT BY BANKING COMPANY WOULD NOT BE SUBJECT TO TAX BUT THE INTEREST CHARGED IN AN ACCOUNT WHERE THERE HAS BEEN NO RECOVERY FOR THREE CONSECUTIVE ACCOUNTING YEARS WOULD NOT BE SUBJECT TO TAX IN THE FOURTH YEA R ONWARDS. WE FIND THAT THE AO HAS NOT VERIFIED THIS FACT. THE AO HAS DISALLOWED THE INTEREST ON NPS ON THE GROUND THAT SECTION 43D ARE APPLICABLE TO FINANCIAL INSTITUTION BUT IT IS NOT EXCLUDED CO - OPERATIVE BANK. THE AOS OBJECTION THAT SECTION 43D IS NOT APPLICABLE TO THE FACTS OF ASSESSEES CASE. THE AHMEDABAD I.T.A.T. BENCH IN CASE OF KARNAVATI CO - OP BANK 14 - 7 - ITA 420/PNJ/2013 ITR (TRIBUNAL) 175 HAS HELD THAT CO - OPERATIVE BANK IS GOVERN BY RBI GUIDELINES HENCE PROVISIONS OF SECTION 43D ARE APPLICABLE TO CO - OPERATIVE BANK. DURING THE COURSE OF HEARING LD. DR DID NOT BROUGHT ANY CONTRARY DECISION BEFORE US, WE ARE OF THE VIEW THAT CIT (A) IS JUSTIFIED IN HIS ACTION AND OUR INTERFERENCE IS NOT REQUIRED. 6 . IN THE RESULT THE APPEAL OF THE DEPARTMENT IS DISMISSED. JUDGMENT PR ONOUNCED IN OPEN COURT ON 14 /03/2014 SD/ - SD/ - (P. K. BANSAL) (D. T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER PANAJI / GOA DATED: - 14 /03/2014 *NANU * COPY TO : 1 . APPELLANT 2 . RESPONDENT 3 . CIT, BELGAUM 4 . CIT(A), BELGAUM 5 . D.R 6 . GUARD FILE BY ORDER SR. PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI, GOA