The Solapur District Cen.Co-op. Bank Ltd, Solapur V. Asstt.CIT,Cir.2,Solapur, Solapur

ITA 495/PUN/2012

• Counselvise Citation: 49524514 RSA 2012
• Duration Of Justice: 2 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-10-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 12-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Keywords: Business expenditure
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO.495/PN/2012 (ASSESSMENT YEAR : 2008-09) THE SOLAPUR DISTRICT CENTRAL CO-OP. BANK LTD., 207-209, GOLD FINCH PETH, SOLAPUR. PAN : AAATT9561B . APPELLANT VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE- 2, SOLAPUR. . RESPONDENT ASSESSEE BY : MR. SUNIL GANOO & MR. S. N. PURANIK DEPARTMENT BY : MR. A. K. MODI DATE OF HEARING : 30-07-2014 DATE OF PRONOUNCEMENT : 29-09-2014 ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL BY THE ASSESSEE IS DIRECTED AG AINST AN ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-III, PUNE DATED 28.10.2011 WHICH, IN TURN, HAS ARISEN FROM AN ORDER DATED 20.12.2010 PASSED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT), PERTAINING TO THE ASSESSMENT YEAR 2008-09. 2. IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWIN G GROUNDS OF APPEAL :- 1. CIT (A) HAS ERRED IN CONFIRMING THE ADDITION O F RS.47,01,85,366/- IN RESPECT OF INTEREST ON NPA A/CS SAME MAY PLEASE BE DELETED. 2. CIT (A) HAS ERRED IN CONFIRMING REJECTION OF MET HOD OF ACCOUNTING OF NPA INTEREST, IT MAY BE HELD THAT METHOD FOLLOWED B Y ASSESSEE IS MERCANTILE CORRECTLY RECOGNIZING NPA INTEREST INCOM E ON REALIZATION. 3. WITHOUT PREJUDICE TO GROUND NO. 2 ABOVE AND IF A SSESSEE FAILS TO SUCCEED ON GROUND NO. 2, THE AMOUNT ALREADY INCLUDE D IN CREDIT TO PROFIT & LOSS A/C BEING INTEREST ACTUALLY RECEIVED ON NPA A/ CS. SAME MAY PLEASE BE EXCLUDED. 4. CIT (A) HAS ERRED IN CONFIRMING ADDITION OF INTE REST ON AGRICULTURAL STABILIZATION FUND RS.52,24,988/- AND RS.13,97,158/ - INTEREST ON CORPUS ITA NO.495/PN/2012 FUND. THIS BEING OVER RIDING CHARGE OVER PROFIT OF BANK, ADDITION MAY PLEASE BE CANCELLED. 5. ASSESSING OFFICER HAS ERRED IN DISALLOWING EXCESS PROVISION F OR BONUS RS.60,500/- SAME MAY PLEASE BE CANCELLED. AS PER NOTIFIED AS 2 U/S 145 SAME CANNOT BE DISALLOWED. 6. ASSESSING OFFICER HAS ERRED IN CHARGIN G INTEREST U/S 234 B,C AND WITHDRAWING INTEREST U/S 234D. SAME MAY P LEASE BE CANCELLED. 7. ASSESSEE DENIES LIABILITY TO INTEREST U/S 234 A, B AND C. 8. APPELLANT PRAYS FOR JUST AND EQUITABLE RELIEF. 9. APPELLANT PRAYS TO ADD, ALTER, MODIFY, CLARIFY, AMEND AND/OR WITHDRAW THE GROUND/S AS THE OCCASION MAY DEMAND. 3. THE APPELLANT BEFORE US, IS A CO-OPERATIVE SOCIE TY INCORPORATED UNDER THE PROVISIONS OF THE MAHARASHTRA CO-OPERATIVE SOCI ETIES ACT, 1960 AND IS CARRYING ON BANKING BUSINESS AS A CO-OPERATIVE BANK . FOR THE ASSESSMENT YEAR 2008-09, IT FILED A RETURN OF INCOME ON 18.09. 2008 DECLARING A LOSS OF RS.1,30,78,739/- WHICH WAS SUBJECT TO SCRUTINY ASSE SSMENT BY THE ASSESSING OFFICER. IN THE ASSESSMENT ORDER PASSED U/S 143(3) OF THE ACT DATED 20.12.2010 THE ASSESSED INCOME HAS BEEN DETERMINED AT A POSITIVE FIGURE OF RS.46,57,41,910/- AFTER MAKING CERTAIN ADDITIONS/DI SALLOWANCES AS AGAINST THE REPORTED LOSS OF RS.1,30,78,739/-. THE ADDITIONS/D ISALLOWANCES MADE BY THE ASSESSING OFFICER WERE CARRIED IN APPEAL BEFORE THE CIT(A), WHO HAS ALLOWED PARTIAL RELIEF. NOT BEING SATISFIED WITH THE ORDER OF THE CIT(A), ASSESSEE IS IN FURTHER APPEAL BEFORE US ON THE AFORESTATED GROUNDS OF APPEAL. 4. THE FIRST DISPUTE IS IN TERMS OF GROUNDS OF APPE AL NO.1 TO 3 WHICH RELATE TO AN ADDITION OF RS.47,01,85,366/- ON ACCOUNT OF I NTEREST ON NON PERFORMING ASSETS (IN SHORT NPAS). AS NOTED EARLIER, ASSESS EE IS A CO-OPERATIVE BANK CARRYING ON BANKING BUSINESS IN TERMS OF A LICENSE ISSUED BY RESERVE BANK OF INDIA (RBI). THEREFORE, ASSESSEE IS GOVERNED BY TH E CIRCULARS AND GUIDELINES ISSUED BY THE RBI, IN PARTICULAR RELATING TO PRUDEN TIAL NORMS, INCOME RECOGNITION, ASSET CLASSIFICATION, PROVISIONING AND OTHER RELATED MATTERS. IN TERMS OF SUCH PRUDENTIAL NORMS OF RBI, ASSESSEE ASS ERTS THAT IT DID NOT RECOGNIZE INTEREST INCOME ON ACCOUNT OF NPAS I.E. T HE LOANS/ADVANCES TO ITA NO.495/PN/2012 CUSTOMERS WHICH HAVE BEEN CLASSIFIED AS NPAS FOLLOW ING THE PRUDENTIAL NORMS OF RBI. THE PERTINENT DISPUTE IN THE GROUNDS OF AP PEAL NO.1 TO 3 RELATES TO NON-RECOGNITION OF INCOME OF RS.47,01,85,366/- IN R ESPECT OF ADVANCES/LOANS TO CUSTOMERS, WHICH HAVE BEEN CLASSIFIED AS NPAS. 5. THE CONTROVERSY WITH RESPECT TO NON-RECOGNITION OF INCOME ON ACCRUAL BASIS RELATABLE TO THE NPAS IS NO LONGER RES INTEGRA BUT THE SAME HAS ALREADY BEEN ADJUDICATED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. THE OMERGA JANTA SAHAKARI BANK LTD. VIDE ORDER DATED 31.10.2013 AND ALSO OTHER SUBSEQUE NT DECISIONS OF THE PUNE BENCH OF THE TRIBUNAL. APART THEREFROM, THE HONBL E BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S KEC HOLDINGS LIMITED VIDE INCOM E TAX APPEAL NO.221 OF 2012 DATED 11.06.2014 HAS ALSO APPROVED THE PROPOSI TION THAT THE INTEREST INCOME ON NPAS IS NOT RECOGNIZABLE ON ACCRUAL BASIS . THE AFORESAID MATRIX IS NOT CHALLENGED BY THE REVENUE ALSO. SO HOWEVER, IN THE PRESENT CASE, THE CASE SETUP BY THE REVENUE IS THAT ASSESSEE HAD INDE ED CREDITED SUCH INCOME IN ITS PROFIT & LOSS ACCOUNT AND THERE IS AN EQUIVA LENT AMOUNT OF PROVISION MADE BY THE ASSESSEE BY WAY OF DEBIT IN THE PROFIT & LOSS ACCOUNT. IN ESSENCE, THE STAND OF THE REVENUE IS THAT THE IMPUG NED INCOME, THOUGH RELATABLE TO NPAS, IS DEEMED TO HAVE ACCRUED SINCE ASSESSEE HAS CREDITED IT IN ITS PROFIT & LOSS ACCOUNT, AND THE CORRESPONDING DEBIT IN THE PROFIT & LOSS ACCOUNT IS ONLY A PROVISION FOR OVERDUE INTEREST AN D IT IS NOT AN ALLOWABLE DEDUCTION. 6. IN THE ABOVE BACKGROUND, WE HAVE CONSIDERED THE RIVAL STANDS. THE ASSESSEE HAS ALSO FURNISHED AN AFFIDAVIT ON OATH DA TED 05.10.2013 ENUMERATING THE VARIOUS FACTUAL ASPECTS AND IN RESP ONSE THE REVENUE HAS ALSO FURNISHED ITS SAY IN TERMS OF WRITTEN COMMENTS DATED 18.11.2013 BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, SOL APUR, THE ASSESSING OFFICER IN THIS CASE. BEFORE DWELLING ON THE RIVAL ARGUMENTS ON THE OBJECTIONS ITA NO.495/PN/2012 RAISED BY THE REVENUE WE CONSIDER IT APPROPRIATE TO BRIEFLY CULL OUT THE NECESSARY FACTS HAVING REGARD TO THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE MATERIAL ON RECORD. 7. THE ASSESSEE IS REGISTERED AS A CO-OPERATIVE SOC IETY AND IS CARRYING ON THE BANKING BUSINESS. FOR THE FINANCIAL YEAR 2007- 08 CORRESPONDING TO THE ASSESSMENT YEAR UNDER CONSIDERATION IT FILED A RETU RN OF INCOME WHICH WAS ACCOMPANIED BY, INTER-ALIA, AUDITED BALANCE-SHEET A ND PROFIT & LOSS ACCOUNT. IN THE CONSOLIDATED PROFIT & LOSS ACCOUNT FOR THE F INANCIAL YEAR UNDER CONSIDERATION, A COPY OF WHICH IS AT PAGE 51 OF THE PAPER BOOK, ON THE CREDIT SIDE UNDER THE HEADING INTEREST RECEIVED, INTERES T FROM SOCIETY LOAN AND FROM INDIVIDUAL LOANS HAVE BEEN REFLECTED AT RS.167 ,02,91,981/- AND RS.13,66,79,692/- RESPECTIVELY. IT HAS BEEN EXPLAI NED THAT THE AFORESAID INTEREST INCOME CREDITED IN THE PROFIT & LOSS ACCOU NT INCLUDE RS.46,30,12,177/- AND RS.71,73,189/- ON ACCOUNT OF SOCIETY LOANS AND INDIVIDUAL LOANS RESPECTIVELY WHICH ARE RELATABLE T O LOANS/ADVANCES TO CUSTOMERS CLASSIFIED AS NPAS AS PER RBI NORMS. SIM ILARLY, ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT UNDER THE HEADING INT EREST PAID, SUMS OF RS.46,30,12,177/- AND RS.71,73,189/- ARE PUT UNDER SUB-HEADINGS OVERDUE INTEREST FROM SOCIETY LOANS AND OVERDUE INTEREST FROM INDIVIDUAL LOANS RESPECTIVELY. SIMILARLY, ON THE LIABILITIES SIDE O F THE BALANCE-SHEET AN ENTRY OF RS.82,81,68,339/- STYLED AS OVERDUE INTEREST RESER VE APPEARS. IT HAS BEEN EXPLAINED THAT THE TERM RESERVE HAS BEEN MISTAKENLY USED AND IN-FACT THE SAID AMOUNT REFLECTS A CONTRA ENTRY FOR INTEREST RECEIVA BLE ON NPAS, WHICH IS APPEARING ON THE ASSETS SIDE ON THE BALANCE-SHEET UNDER THE HEADING INTEREST RECEIVABLE, WITH SUB-HEADINGS ON SOCIET Y LOANS AND ON INDIVIDUAL LOANS. 8. DUE TO THE AFORESAID DEPICTION IN FINANCIAL STAT EMENTS, THE CASE OF THE REVENUE IS THAT THE INTEREST ON NPAS HAVE BEEN CRED ITED IN THE PROFIT & LOSS ITA NO.495/PN/2012 ACCOUNT AND THUS ITS ACCRUAL HAS BEEN ACCEPTED BY T HE ASSESSEE; AND THAT THE CONTRA ENTRY BY WAY OF DEBIT IN THE PROFIT & LOSS A CCOUNT IS TO BE UNDERSTOOD AS A MERE PROVISION AND, SINCE A PROVISION IS NOT A N ALLOWABLE DEDUCTION, THE AMOUNT OF RS.47,01,85,366/- HAS BEEN ADDED TO THE T OTAL INCOME. 9. THE CLAIM OF THE ASSESSEE IS THAT IT IS INCORREC T TO SAY THAT IT HAS CREATED A RESERVE/PROVISION IN RESPECT OF THE OVERDUE INTER EST ON NPAS. IT IS EXPLAINED THAT INSTEAD OF NETTING OF THE INTEREST O N LOANS, THE BANK HAS SHOWN THE GROSS INTEREST ON CREDIT SIDE OF THE PROFIT & L OSS ACCOUNT AND ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT THE AMOUNT OF INT EREST ON NPAS HAS BEEN SEPARATELY SHOWN. IT IS FURTHER POINTED OUT THAT A MOUNT ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT IS NOT APPEARING AS A PROVISI ON. FURTHER, EVEN IN THE BALANCE-SHEET, IT IS POINTED OUT THAT AMOUNT OF RS. 82,81,68,339/- ON THE LIABILITIES SIDE OF THE BALANCE-SHEET DOES NOT AP PEAR UNDER THE HEAD RESERVE AND OTHER FUNDS BUT IS SEPARATELY DISCLOS ED AS OVERDUE INTEREST RESERVE. IT IS ALSO POINTED OUT THAT THE TREATMEN T IN THE FINANCIAL STATEMENT OF THE ASSESSEE WOULD SHOW THAT IT HAS NEVER CREATED I N A PROVISION OR A RESERVE IN RESPECT OF OVERDUE INTEREST ON NPAS AS SOUGHT TO BE MADE OUT BY THE INCOME-TAX AUTHORITIES. IN THIS CONTEXT, THE FOLLO WING AVERMENTS IN THE AFFIDAVIT ARE RELEVANT :- 3. IT IS RESPECTFULLY SUBMITTED THAT IN THE BALANC E SHEET AS ON 31/03/2008 [IN ENGLISH COPY] ON THE LIABILITY SIDE THERE APPEARS AN ENTRY FOR RS.82,81,68,339.10 STYLED AS OVERDUE I NTEREST RESERVE. THE BANK SUBMITS THAT THE TERM RESERVE IS MISTAKENLY USED AND IS ERRONEOUS AND IN FACT IT IS A CONTRA EN TRY FOR INTEREST RECEIVABLE ON N.P.A. WHICH IS APPEARING ON ASSET SI DE OF THE BALANCE SHEET UNDER THE HEADING INTEREST RECEIVABLE AND SUB HEADING ON SOCIETY LOANS AND ON INDIVIDUAL LOAN. TH E BANK SUBMITS THAT THE SAID AMOUNT OF RS.82,81,68,339.10 IS NOT APPEAR ING ON LIABILITY SIDE OF THE BALANCE SHEET UNDER THE HEADING RESERVES AND OT HER FUNDS BUT IS SEPARATELY DISCLOSED AS OVERDUE INTEREST. SIMILARLY IN THE PROFIT AND LOSS ACCOUNT THE AMOUNT OF RS.47,01,85,366.04 [BEING THE INTEREST ON N.P.A. DURING THE YEAR] IS NOT APPEARING UNDER THE HEADING PROVISIONS BUT IS DEBITED UNDER THE HEADING INTEREST PAID AS OVERDUE INTEREST ON LOANS OF SOCIETIES AND INDIVIDUALS AS A CONTRA ENTRY. 4. THE BANK MOST RESPECTFULLY SUBMITS THAT A CAREFU L AND DISPASSIONATE STUDY OF THE FINAL ACCOUNTS OF THE BANK WOULD REVEA L THAT IT HAS NEVER ITA NO.495/PN/2012 CREATED ANY PROVISION OR RESERVE IN RESPECT OF OVER DUE INTEREST ON N.P.A. AS ALLEGED BY THE TAX AUTHORITIES. THE ENTRIES AS A PPEARING IN THE PROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET FOR THE F.Y. 200 7-08 APPEAR TO HAVE CREATED SOME CONFUSION IN THE MINDS OF THE LEARNED ASSESSING OFFICER. IT IS FALSE AND INCORRECT TO SAY THAT THE BANK HAS CREATE D A RESERVE/ PROVISION IN RESPECT OF THE OVERDUE INTEREST ON N.P.A. WHICH HAS BEEN TREATED AS INTEREST ACCRUED IN THE BOOKS OF ACCOUNT OF THE BAN K FOR THE RELEVANT YEAR. 5. THE BANK MOST RESPECTFULLY SUBMITS THAT INSTEAD OF NETTING OF THE INTEREST ON LOANS, THE BANK HAS SHOWN THE GROSS INT EREST ON CREDIT SIDE OF THE PROFIT AND LOSS ACCOUNT AND SIMULTANEOUSLY SHOW N ON DEBIT SIDE OF THE PROFIT AND LOSS ACCOUNT THE AMOUNT OF INTEREST ON N .P.A. WHICH IS IN ACCORDANCE WITH THE ACCOUNTING STANDARD [AS] 9 ISSU ED BY THE I.C.A.I. 6. THE BANK MOST RESPECTFULLY SUBMITS THAT AS ON 31 /03/2008 IT HAD 214 BRANCHES. AT THE TIME OF PREPARATION OF CONSOLI DATED PROFIT AND LOSS ACCOUNT AND BALANCE SHEET AS ON 31/03/2008 [THE COP IES OF WHICH ARE FILED BEFORE THE VARIOUS TAX AUTHORITIES] SOLELY WITH A V IEW TO MAKE A DISCLOSURE OF GROSS INTEREST THAT WOULD HAVE BEEN RECEIVED BY THE BANK, THE INTEREST ON N.P.A. IS DISCLOSED ON CREDIT SIDE OF THE PROFIT AND LOSS ACCOUNT AND A CONTRA ENTRY IS MADE ON DEBIT SIDE UNDER THE HEAD I NTEREST PAID. THIS ACCOUNTING TREATMENT DOES NOT BY ANY LOGIC CONVERT THE INTEREST ON N.P.A. IN TO INTEREST ACCRUED WITHIN THE MEANING OF THE PR OVISIONS OF THE I.T. ACT 1961 OR CANNOT BE CALLED AS RECOGNITION OF INCOME B Y THE BANK. 7. THE INTEREST ON N.P.A. ADVANCES CAN NEVER BE REC OGNIZED AS INCOME ACCRUED TO THE BANK MERELY BY PLACING RELIAN CE IN ISOLATION ON THE PRESENTATION OF PROFIT AND LOSS ACCOUNT AND DEHORS OF ENTRIES IN THE BALANCE SHEET WHICH SHOW THAT THE SAME IS SIMULTANE OUSLY DEBITED TO INTEREST RECEIVABLE ON N.P.A. ACCOUNT [ON ASSET SID E] AND A CONTRA CREDIT ENTRY IS MADE IN OVERDUE INTEREST ACCOUNT [ON LIABI LITY SIDE] 8. THE BANK MOST RESPECTFULLY SUBMITS THAT THE AFOR ESAID FACTUAL POSITION WAS EXPLAINED BY IT TO THE LEARNED ASSESSI NG OFFICER DURING THE ASSESSMENT PROCEEDINGS AS WELL AS TO THE LEARNED C. I.T.[A] DURING THE APPELLATE PROCEEDINGS. HOWEVER BOTH THE AUTHORITIES HAVE FAILED TO APPRECIATE THE FACTS IN THE PROPER PERSPECTIVE. 9. THE BANK MOST RESPECTFULLY SUBMITS THAT ENTRIES MADE WHILE PRESENTATION OF FINAL ACCOUNTS TO THE SHAREHOLDERS FOR BETTER UN DERSTANDING OF THE VARIOUS ISSUES SHALL NOT CONVERT THE TRUE CHARACTER AND NAT URE OF INCOME. 10. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT T HAT THE GROSS INTEREST REFLECTED ON THE CREDIT SIDE OF THE PROFIT & LOSS A CCOUNT AND THE OVERDUE INTEREST ON NPAS SHOWN ON THE DEBIT SIDE OF THE PRO FIT & LOSS ACCOUNT IS AS PER THE REQUIREMENTS OF SECTION 65 OF THE MAHARASHT RA CO-OPERATIVE SOCIETIES ACT, 1960 WHICH PRESCRIBES THE MANNER IN WHICH THE NET PROFIT OR LOSS IS REQUIRED TO BE COMPUTED IN THE FINANCIAL STATEMENT. IT WAS THEREFORE CONTENDED THAT PRESENTATION IN THE ANNUAL FINANCIAL STATEMENTS WOULD NOT JUSTIFY THE INCOME-TAX AUTHORITIES TO TREAT THE CLA IM OF THE ASSESSEE DIFFERENTLY THAN AN ASSESSEE WHO WOULD HAVE NETTED THE INTEREST ON LOANS. ITA NO.495/PN/2012 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. AS NOTED EARLIER, THE CRUX OF THE CONTROVERSY IS WITH REGARD TO ASSES SEES CLAIM THAT INCOME WITH RESPECT TO THE INTEREST ON NPAS CLASSIFIED AS PER R BI NORMS IS NOT ASSESSABLE ON ACCRUAL BASIS BUT IS LIABLE TO BE TAXED AS AND W HEN RECEIVED. AS PER THE REVENUE, IN THE PRESENT CASE, ASSESSEE HAS CREDITED GROSS INTEREST IN ITS PROFIT & LOSS ACCOUNT WHICH IS INCLUSIVE OF THE INTEREST R ELATABLE TO THE NPAS, AND CREDITING OF SUCH INTEREST IN THE PROFIT & LOSS ACC OUNT SHOWS THAT ASSESSEE HAS PERCEIVED SUCH INCOME TO HAVE BEEN ACCRUED, BEC AUSE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. 12. UNDISPUTEDLY, THE ASSESSEE BANK IS FOLLOWING TH E MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, WITH REGARD TO THE RECOGNITIO N OF INCOME ON NPAS, IT HAS APPLIED THE RBI GUIDELINES WHICH SAY THAT SUCH INCOME IS NOT TO BE RECOGNIZED ON ACCRUAL BASIS BUT IS TO BE RECOGNIZED AS INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. THE RBI GUIDELINES ALSO PRESCRIB E THE MANNER IN WHICH THE INTEREST IN RELATION TO NPAS IS TO BE SHOWN IN THE ANNUAL FINANCIAL STATEMENTS. IN TERMS OF THE MASTER CIRCULAR ON INCOME RECOGNITI ON, ASSET CLASSIFICATION, PROVISIONING & OTHER RELATED MATTERS ISSUED BY THE RBI ON 4 TH JULY, 2004 IN CHAPTER 4 OF INCOME RECOGNITION IN PARA 4.5.1 IT IS ADVISED THAT THE ACCRUED INTEREST IN RELATION TO NPAS SHOULD BE COMPUTED AND SHOWN SEPARATELY, THOUGH NOT ACCOUNTED AS INCOME OF THE BANK FOR THE RELEVAN T PERIOD. FURTHER, IN PARA 4.5.3, WITH A VIEW TO ENSURING UNIFORMITY IN ACCOUN TING THE ACCRUED INTEREST IN RESPECT OF BOTH THE PERFORMING AND NON-PERFORMING A SSETS, THE RBI GUIDELINES INTER-ALIA, PRESCRIBE THAT INTEREST ACCRUED IN RESP ECT OF NPAS SHOULD NOT BE DEBITED TO BORROWAL ACCOUNTS BUT SHOWN SEPARATELY U NDER INTEREST RECEIVABLE ACCOUNT ON THE PROPERTY AND ASSETS SIDE OF THE B ALANCE-SHEET AND CORRESPONDING AMOUNT SHOWN UNDER THE OVERDUE INTER EST RESERVE ACCOUNT ON THE CAPITAL AND LIABILITIES SIDE OF THE BALANC E-SHEET. IN-FACT, AS A PREFACE IN PARA 4.5.3 THE RBI HAS LAID DOWN THAT THE AFORE SAID GUIDELINE BE ADOPTED NOTWITHSTANDING THE EXISTING PROVISIONS IN THE RESP ECTIVE STATE CO-OPERATIVE ITA NO.495/PN/2012 SOCIETIES ACT. NOTABLY, THE BALANCE-SHEET FORMAT P RESCRIBED UNDER THE THIRD SCHEDULE TO THE BANKING REGULATION ACT, 1949 (AS AP PLICABLE TO CO-OPERATIVE SOCIETIES) SPECIFICALLY REQUIRES THE BANKS TO SHOW OVERDUE INTEREST RESERVE AS A DISTINCT ITEM ON THE CAPITAL AND LIABILITIES SIDE OF THE BALANCE-SHEET. THUS, IT IS EVIDENT THAT OVERDUE INTEREST RESERVE ACCOUNT CANNOT BE REGARDED AS A RESERVE OR A PART OF THE OWNED FUNDS OF THE BANK, AS IT IS NOT CREATED OUT OF THE REAL INCOME RECEIVED BY THE BANK. 13. AS A COMPLIANCE TO THE AFORESAID RBI GUIDELIN ES, WE FIND THAT THE ASSESSEE HAS NOT DEBITED THE INTEREST ON NPAS TO TH E ACCOUNTS OF THE RESPECTIVE BORROWALS BUT IT HAS BEEN SHOWN SEPARATE LY UNDER INTEREST RECEIVABLE ACCOUNT ON THE PROPERTY AND ASSETS SI DE OF THE BALANCE-SHEET. AND CORRESPONDING AMOUNT HAS BEEN SHOWN UNDER OVER DUE INTEREST RESERVE ACCOUNT ON THE CAPITAL AND LIABILITIES SIDE OF T HE BALANCE-SHEET. THUS, THE DEPICTION IN THE BALANCE-SHEET IS IN ADHERENCE TO T HE PRESCRIPTION CONTAINED IN THE BANKING REGULATION ACT, 1949 (AS APPLICABLE TO CO-OPERATIVE SOCIETIES), A STATUTE UNDER WHICH ASSESSEE IS BOUND TO CARRY OUT ITS BANKING BUSINESS. 14. NOW, WE MAY COME TO THE PLEA OF THE REVENUE WIT H REFERENCE TO THE DEPICTION OF IMPUGNED INTEREST ON NPAS IN THE PROFI T & LOSS ACCOUNT PREPARED BY THE ASSESSEE. AS HAS BEEN SUCCINCTLY NOTED BY U S IN THE EARLIER PARAS, ASSESSEE HAS CREDITED ITS PROFIT & LOSS ACCOUNT WIT H GROSS INTEREST WHICH, INTER-ALIA, INCLUDES THE IMPUGNED INTEREST ON NPAS. ON THE DEBIT SIDE, ASSESSEE HAS SHOWN THE IMPUGNED INTEREST ON NPAS UN DER THE HEADING INTEREST PAID AND SUB-HEADINGS OVERDUE INTEREST FROM SOCIETY LOANS AND OVERDUE INTEREST FROM INDIVIDUAL LOANS. THE ASSE SSEE IS A SOCIETY REGISTERED UNDER THE MAHARASHTRA CO-OPERATIVE SOCIETIES ACT, 1 960 AND IT IS ALSO GOVERNED BY THE MAHARASHTRA CO-OPERATIVE SOCIETIES RULES, 1961. SECTION 65 OF THE MAHARASHTRA SOCIETIES ACT, 1960 DEALS WITH A SCERTAINMENT AND APPROPRIATION OF PROFITS BY A SOCIETY. SUB-SECTION (1) OF SECTION 65 OF THE MAHARASHTRA CO-OPERATE SOCIETIES ACT, 1960 LAYS DOW N THAT A SOCIETY SHALL ITA NO.495/PN/2012 CONSTRUCT ITS RELEVANT ANNUAL FINANCIAL STATEMENTS TO ARRIVE AT ITS CONSEQUENT NET PROFIT OR LOSS IN THE MANNER PRESCRIBED. SUCH MANNER IN RELATION TO THE CALCULATION OF NET PROFITS HAS BEEN PRESCRIBED IN R ULE 49-A OF THE MAHARASHTRA CO-OPERATIVE SOCIETIES RULES, 1961. RULE 49-A PRES CRIBES THAT A SOCIETY SHALL CALCULATE THE NET PROFITS BY DEDUCTING FROM THE G ROSS PROFITS FOR THE YEAR THE ITEMS (I) TO (XVI) PRESCRIBED THEREIN. FOR OUR PUR POSE, IT WOULD SUFFICE TO EXAMINE ITEM (I) OF THE AMOUNTS DEDUCTIBLE, WHICH R EADS AS UNDER :- (I) ALL INTEREST ACCRUED AND ACCRUING ON AMOUNTS O F OVERDUE LOANS (EXCEPT IN OVERDUE AMOUNTS OF LOANS AGAINST FIXED DEPOSIT, GOLD, ETC. 15. THE AFORESAID WOULD SHOW THAT WHILE CONSTRUCTIN G ITS PROFIT & LOSS ACCOUNT TO ARRIVE AT ITS NET PROFIT OR LOSS, A CO-O PERATIVE SOCIETY IS REQUIRED TO SHOW INTEREST ACCRUED/ACCRUING ON AMOUNTS OF OVERDU E LOANS SEPARATELY. THIS IS PRECISELY WHAT HAS BEEN DONE BY THE ASSESSE E IN THE PRESENT CASE. THE AFORESAID REQUIREMENT OF THE MANNER OF CONSTRUC TION OF PROFIT & LOSS ACCOUNT, PRESCRIBED UNDER THE RULES OF THE MAHARASH TRA CO-OPERATIVE SOCIETIES ACT, 1960, HAS PROMPTED THE ASSESSEE TO D RAW UP ITS PROFIT & LOSS ACCOUNT IN THE MANNER WE HAVE NOTED ABOVE QUA THE I NTEREST ON NPAS. THEREFORE, IT CANNOT BE ACCEPTED THAT THE MANNER OR PRESENTATION OF ACCOUNT WHICH OSTENSIBLY IS IN COMPLIANCE WITH THE STATUTOR Y PROVISIONS GOVERNING THE ASSESSEE, CAN BE A FACTOR TO EVALUATE ASSESSABILITY OR OTHERWISE OF AN INCOME. IN OUR CONSIDERED OPINION, IT WOULD INAPPROPRIATE T O BE MERELY GUIDED BY A PRESENTATION IN THE ANNUAL FINANCIAL STATEMENTS TO INFER ASSESSEES PERCEPTION THAT AN INCOME HAD ACCRUED, WITHOUT CONSIDERING THE ENTRIES MADE IN THE FINANCIAL STATEMENTS IN TOTO . IN THE PRESENT CASE, IT IS QUITE CLEAR THAT ASSE SSEE HAS DRAWN UP ITS ANNUAL FINANCIAL STATEMENT IN COMP LIANCE WITH THE REQUIREMENTS OF THE STATUTES UNDER WHICH IT FUNCTIO NS AND/OR IS INCORPORATED. THEREFORE, THE ISSUE WITH REGARD TO NON-RECOGNITION OF INCOME ON NPAS IS REQUIRED TO BE ADJUDICATED HAVING REGARD TO THE REL EVANT LEGAL POSITION AND NOT ON THE BASIS OF THE PRESENTATION IN THE ANNUAL FINA NCIAL STATEMENTS. AT THIS ITA NO.495/PN/2012 STAGE, WE MAY ALSO REFER TO THE JUDGEMENT OF THE HO NBLE SUPREME COURT IN THE CASE OF CIT VS. SHOORJI VALLABHDAS & CO., (1962 ) 46 ITR 144 (SC) FOR THE PROPOSITION THAT A MERE BOOK KEEPING ENTRY CANNOT B E ASSESSED AS INCOME UNLESS IT CAN BE SHOWN THAT INCOME HAS ACTUALLY RES ULTED. IN THE PRESENT CASE, THE CREDITING OF GROSS INTEREST IN THE PROFIT & LOS S ACCOUNT, WHICH INCLUDES INTEREST ON NPAS CANNOT BE TAKEN AS A PROOF THAT SU CH INCOME HAS ACCRUED TO THE ASSESSEE UNLESS THE STATUTORY GUIDELINES APPLIC ABLE ON THE SAID SUBJECT ARE IGNORED. OBVIOUSLY, WHEN THE BANKING INSTITUTIONS FOLLOWING MERCANTILE SYSTEM ACCOUNTING ARE PERMITTED TO TREAT THE INCOME ON NPA S AS ASSESSABLE ON RECEIPT BASIS, SUCH A POSITION CANNOT BE IGNORED IN THE CASE OF PRESENT ASSESSEE MERELY BECAUSE OF A PRESENTATION IN THE AN NUAL FINANCIAL STATEMENTS. EVEN OTHERWISE, WE NOTICE THAT THE RBI GUIDELINES P ERMIT THAT INTEREST INCOME ON NPAS BE PARKED IN A SUSPENSE ACCOUNT AND IT IS N OT NECESSARY THAT IT HAS TO BE BROUGHT TO THE PROFIT & LOSS ACCOUNT BY THE A SSESSEE. HOWEVER, IN THE PRESENT CASE, AS SEEN EARLIER, ASSESSEE HAS CREDITE D THE GROSS AMOUNT OF INTEREST ON CREDIT SIDE OF THE PROFIT & LOSS ACCOUN T AND SIMULTANEOUSLY SHOWN ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT, THE AMOUNT OF INTEREST ON NPAS. IN OTHER WORDS, INSTEAD OF NETTING OF THE INTEREST THE TWO AMOUNTS HAVE BEEN SHOWN SEPARATELY ONE ON THE CREDIT SIDE AND OTHER O N THE DEBIT SIDE. THE NET EFFECT OF THE SAID PRESENTATION IS THE SAME. THERE FORE, IN OUR VIEW, THE LOWER AUTHORITIES HAVE MISGUIDED THEMSELVES IN REJECTING THE CLAIM OF THE ASSESSEE FOR NON-RECOGNITION OF INTEREST INCOME ON NPAS. 16. IN VIEW OF THE AFORESAID, WE SET-ASIDE THE ORDE R OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS. 47,01,85,366/-. THUS, ON GROUNDS OF APPEAL NO.1 AND 2 ASSESSEE SUCCEEDS. TH E GROUND OF APPEAL NO.3 IS ONLY AN ALTERNATIVE GROUND RAISED, IN CASE ASSESSEE DOES NOT SUCCEED ON GROUNDS OF APPEAL NO.1 AND 2. SINCE ASSESSEE HA S SUCCEEDED ON GROUNDS OF APPEAL NO.1 AND 2, GROUND OF APPEAL NO.3 IS DISMISSED AS INFRUCTUOUS. ITA NO.495/PN/2012 17. IN GROUND OF APPEAL NO.4, ASSESSEE HAS CHALLENG ED THE ADDITION OF RS.52,24,988/- AND RS.13,97,158/- ON ACCOUNT OF INT EREST ON AGRICULTURAL STABILIZATION FUND AND ON CORPUS FUND RESPECTIVELY. AT THE TIME OF HEARING, THE LEARNED COUNSEL HAS SUBMITTED THAT ASSESSEE BAN K DOES NOT WISH TO PRESS THE ADDITION OF RS.13,97,158/- RELATING TO INTEREST ON CORPUS FUND. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED . 18. THE SURVIVING DISPUTE IS OF RS.52,24,988/- WHIC H REPRESENTS INTEREST ON AGRICULTURAL STABILIZATION FUND, THE RELEVANT FACTS THEROF ARE AS FOLLOWS. IT IS EXPLAINED THAT THE FUND HAS BEEN CREATED PURSUANT T O A THE GOVT. RESOLUTION, AGRICULTURE AND CO-OPERATION DEPARTMENT NO.CCR4 186 9/22948-C-1 DATED 27 TH FEBRUARY 1971, UTILIZATION OF WHICH WAS GOVERNED B Y THE RULES LAID DOWN BY THE STATE GOVERNMENT. IT IS STATED THAT THE ASS ESSEE HAS BEEN PAYING INTEREST @ 3% ON THE FUND BALANCE AS PER STIPULATIO N IN THE RULES AND ACCORDINGLY, AN AMOUNT OF RS.52,24,988/- WAS CREDIT ED TO THE BALANCE OF THE FUND AT ON THE END OF THE YEAR. THE AFORESAID AMOUN T WAS CLAIMED AS A DEDUCTION WHILE COMPUTING THE TAXABLE INCOME. THE ASSESSING OFFICER HELD THAT THE AFORESAID AMOUNT COULD NOT BE DEDUCTED BEC AUSE IT WAS NOT AN ACTUAL OUTGO. ACCORDINGLY, THE INTEREST DEBITED IN THE PR OFIT & LOSS ACCOUNT IN THIS REGARD AMOUNTING TO RS.52,24,988/- WAS DISALLOWED A ND ADDED BACK TO THE INCOME OF THE ASSESSEE. THE CIT(A) HAS ALSO AFFIRM ED THE STAND OF THE ASSESSING OFFICER ON THIS ASPECT AND THE OPERATIVE PART OF THE ORDER OF THE CIT(A) IN THIS REGARD READS AS UNDER :- 6.3 THE SUBMISSIONS OF THE APPELLANT ARE CAREFULLY CONSIDERED WITH REFERENCE TO THE INCOME & EXPENDITURE ACCOUNT AND T HE RELEVANT RULES FOR ESTABLISHMENT AND USE OF AGRICULTURAL CREDIT (STABI LIZATION) FUND AS PROVIDED IN THE GOVT. RESOLUTION NO.CCR4 1869/22948-C-1 DATED 2 7 TH FEBRUARY 1971. AS STATED IN PARA 3 OF THE RULES, THE RESOURCES FOR ESTABLISHMENT AND MAINTENANCE OF FUNDS ARE AS FOLLOWS:- (A) ANNUAL APPROPRIATION OF 40% OF ANNUAL PROFITS OF THE DISTRICT CENTRAL COOPERATIVE BANK TO BE DIVIDED BETWEEN THE RESERVE FUND AND THE AGRICULTURAL CREDIT (STABILIZATION) FUND IN SUCH A WAY THAT THE ITA NO.495/PN/2012 CONTRIBUTION TO THE STABILIZATION FUND ALONE IN NO CASE IS REDUCED BELOW 15% OF THE NET PROFIT; (B) TRANSFER OF AMOUNT OF DIVIDEND PAYABLE ON THE SH ARE HOLDING OF THE GOVERNMENT IN DISTRICT CENTRAL COOPERATIVE BANK OVER AND ABOVE 3%; (C) CREDIT OF INTEREST AT 3% PER ANNUM ON THE BALAN CE TO THE CREDIT OF THE FUND AS AT THE COMMENCEMENT OF THE YEAR. 6.3.1 THE OBJECTS OF THE FUND AS STATED IN THE SCHE ME ARE AS UNDER :- 'THE OBJECT OF CONSTITUTION OF AGRICULTURAL CREDIT STABILIZATION FUND AT THE APEX AND DISTRICT CENTRAL COOPERATIVE BANKS' LEVELS IS TO FACILITATE THE CONVERSION OF SHORT TERMS LOANS FOR AGRICULTURAL PU RPOSES INTO MEDIUM TERMS LOANS AND TO PROVIDE CONVERSION FACILITIES TO THE INSTALLMENTS OF MEDIUM TERM LOANS FOR AGRICULTURAL PURPOSES IN CIRC UMSTANCES IN WHICH TOTAL OR PARTIAL FAILURE OF CROPS RESULTING FROM NA TURAL CALAMITY RENDERS THE REPAYMENT OF SUCH SHORT TERM LOANS OR INSTALLME NTS OF MEDIUM TERM LOANS IMPOSSIBLE WITHOUT DISLOCATION OF THE CREDIT STRUCTURE AND WITHOUT HARDSHIP TO INDIVIDUAL AGRICULTURALISTS. THE PRINCI PLES AND PROCEDURES SET OUT BELOW SHALL GOVERN THE ESTABLISHMENT AND UT ILIZATION OF THE STABILIZATION FUND AT VARIOUS LEVELS.' 6.3.2 THE RESOURCES FOR THE ESTABLISHMENT OF THE FU ND CLEARLY INDICATE THAT THE FUND WAS CREATED OUT OF APPROPRIATION OF PR OFITS OF THE APPELLANT BANK AND THEREFORE, EVEN THE CREDIT OF INTEREST @ 3% ON THE BALANCE AT THE BEGINNING OF THE YEAR IS ALSO AN APPROPRIATION OF P ROFIT TO MEET THE EXIGENCIES AS MENTIONED IN THE AIMS AND OBJECTS OF THE FUND AN D THE INTEREST CANNOT BE A CHARGE TO THE PROFIT & LOSS ACCOUNT. THE CLAIM O F THE APPELLANT THAT THE FUND WAS UTILIZED FOR ITS BUSINESS PURPOSES AND THEREFOR E* THE INTEREST IS BUSINESS EXPENDITURE CANNOT BE ACCEPTED. IT IS ONLY AN APP ROPRIATION OF PROFIT TOWARDS A SPECIFIC PURPOSE AND THE SAME DOES NOT CONSTITUTE BUSINESS EXPENDITURE OF THE APPELLANT. THE SAME IS THE POSITION WITH THE INTEREST ON CORPUS FUND, WHICH IS MEANT FOR WEAKER SECTIONS OF THE SOCIETY A ND IT IS ONLY AN APPROPRIATION OF THE PROFIT AND CANNOT BE A CHARGE TO THE INCOME & EXPENDITURE ACCOUNT. ACCORDINGLY, THE ADDITIONS MADE BY THE ASS ESSING OFFICER ON THIS GROUND DO NOT CALL FOR ANY INTERFERENCE AND THE GRO UND RAISED BY THE APPELLANT IN THIS REGARD STANDS REJECTED. 19. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT ASSESSEE WAS REQUIRED TO PAY TO THE FUND INTEREST @ 3% AND THEREFORE THE SAID AMOUNT WAS ALLOWABLE AS AN EXPENSE. 20. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS OPPOSED THE PLEA OF THE ASSESSEE BY POINTING OUT TH AT ASSESSEE WAS IN CONTROL OF THE INVESTMENT OF THE FUND AND ANY INCOME THEREF ROM IS PERMITTED TO BE CREDITED IN ASSESSEES PROFIT & LOSS ACCOUNT. IN T HIS CONTEXT, A REFERENCE HAS BEEN MADE TO THE RULES FOR THE ESTABLISHMENT AND US E OF ITA NO.495/PN/2012 AGRICULTURAL CREDIT (STABILISATION) FUND, A COPY OF WHICH HAS BEEN PLACED AT PAGES 65 TO 79 IN THE PAPER BOOK. 21. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN OUR CONSIDERED OPINION, NO FAULT CAN BE FOUND WITH THE ORDER OF TH E CIT(A) ON THIS COUNT AS IT HAS BEEN JUSTIFIABLY CONCLUDED BY HIM THAT THE IMPU GNED INTEREST IS ONLY AN APPROPRIATION OF PROFITS TOWARDS SPECIFIC PURPOSE A ND IT DOES NOT CONSTITUTE A BUSINESS EXPENDITURE OF THE ASSESSEE. THE CONSTITU TION OF THE AGRICULTURAL CREDIT (STABILIZATION) FUND PER THE RESOLUTION OF T HE GOVERNMENT OF MAHARASHTRA REFLECTS THAT IT IS CREATED BY APPROPRI ATION OF THE PROFITS OF THE ASSESSEE BANK, AND THE YEARLY CREDIT OF INTEREST @3 % ON THE BALANCE TO THE CREDIT OF FUND, IS NOT A CHARGE AGAINST THE PROFIT & LOSS ACCOUNT. THE ORDER OF THE CIT(A) IS HEREBY AFFIRMED AND ASSESSEE FAILS ON THIS GROUND. THUS, GROUND OF APPEAL NO.4 IS DISMISSED. 22. THE GROUND OF APPEAL NO.5 RELATING TO EXCESS PR OVISION FOR BONUS OF RS.60,500/- HAS NOT BEEN PRESSED AND IS ACCORDINGLY , DISMISSED. 23. THE ONLY OTHER GROUND RELATES TO THE CHARGEABIL ITY OF INTEREST U/S 234A, B AND C WHICH IS CONSEQUENTIAL IN NATURE AND DOES N OT REQUIRE ANY SPECIFIC ADJUDICATION. 24. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH SEPTEMBER, 2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G . S. PANNU) JUDICIAL MEMBER ACCOUNT ANT MEMBER PUNE, DATED : 29 TH SEPTEMBER, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-III, PUNE; ITA NO.495/PN/2012 4) THE CIT-III, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE