DEPUTY COMMISSINER OF INCOME TAX, CIRCLE-2, JALANDHAR V. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD., JALANDHAR

ITA 544/ASR/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 3340 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 20-04-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 17-01-2019
• Assessment Year: 2014-2015
• Appeal Filed On: 17-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARVINDER KAUR
• Keywords: Business expenditure; Bad and doubtful debts; Set aside
• Section: 43D; 145; 37

Judgement Text

P A G E | 1 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. IN THE INCOME TAX APPELLATE TRIBUNAL CAMP BENCH AT JALANDHAR BEFORE SHRI N.K SAINI, VICE PRESIDENT AND SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO. 517/ASR/2017 ASSESSMENT YEAR: 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD., OLD COURT ROAD, NAWANSHAHR DOABA- 144514. VS. DCIT, CENTRAL CIRCLE-2, JALANDHAR. PAN AAAAT4125G ITA NO. 544/ASR/2017 ASSESSMENT YEAR: 2014-15 DCIT, CENTRAL-2, JALANDHAR. VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD., OLD COURT ROAD, NAWANSHAHR DOABA- 144514. PAN AAAAT4125G (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI. RAKESH JOSHI, A.R REVENUE BY: SMT. PARVINDER KAUR, C.I.T.,D.R DATE OF HEARING: 17.01.2019 DATE OF PRONOUNCEMENT: 11.03.2019 O R D E R PER RAVISH SOOD, JM THE PRESENT CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE ORDER PASSED BY THE CIT(AP PEALS)-1, JALANDHAR, DATED 15.06.2017, WHICH IN TURN ARISES F ROM THE ASSESSMENT ORDER PASSED BY THE A.O UNDER SEC. 143(3 ) OF THE INCOME TAX ACT, 1961 (FOR SHORT IT ACT) FOR A.Y. 2014-15 , DATED 20.09.2016. P A G E | 2 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. THE ASSESSEE ASSAILING THE ORDER OF THE CIT(A) HAS RAISED BEFORE US THE FOLLOWING GROUNDS OF APPEAL:- 1 THAT THE LD. COMMISSIONER OF INCOME TAX(APPEALS) -1, JAL, HAS ERRED IN LAW AND FACTS OF THE CASE IN CONFIRMING THE ADDITIO N OF RS. 2,31,94,768/- ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR BAD AND DOUBTFUL ASSETS. 2. THAT THE IMPUGNED ORDER UNDER APPEAL IS ARBITRAR Y AND CONTRARY TO LAW & FACTS OF THE CASE, HENCE DESERVES TO BE CANCELLED . 3. THE APPELLANT CRAVES LEAVE TO AMEND/ALTER OR ADD ANY OF THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF THE APPE AL. ON THE OTHER HAND THE REVENUE HAS ASSAILED THE ORDE R OF THE CIT(A) ON THE FOLLOWING GROUNDS:- 1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS IN DELETING THE AD DITION OF RS. 1,93,31,040/- MADE BY THE A.O. ON ACCOUNT OF DISALL OWANCE OF INTEREST ON NON PERFORMING ASSETS. 1(A). THAT WHILE DELETING THE ABOVE ADDITION OF RS. 1,93,31,040/- LD. CIT(A) HAS ERRED ON FACTS AS WELL AS IN LAW BY IGNORING TH E FACT THAT THE ASSESSEE IS NEITHER FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING NOR CASH SYSTEM OF ACCOUNTING AND IS IN FACT FOLLOWING A MIX ED/HYBRID SYSTEM OF ACCOUNTING, WHICH IS NOT A RECOGNIZED SYSTEM OF ACC OUNTING. 2. THAT, IT IS PRAYED THAT THE ORDER OF THE LD. CIT (A) BE SET-ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 3. THAT THE APPELLANT REQUEST FOR LEAVE TO ADD OR A MEND OR ALTER THE GROUNDS OF APPEAL BEFORE THE APPEAL IS HEARD AND DISPOSED O FF 2. BRIEFLY STATED, THE ASSESSEE WHICH IS A COOPERAT IVE BANK HAD FILED ITS RETURN OF INCOME FOR A.Y 2014-15 ON 29.11.2014, DECLARING AN INCOME OF RS. 8,28,33,100/-. SUBSEQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT UNDER SEC. 143 (2). 3. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY THE AO THAT THE ASSESSEE HAD DEBITED PROVISIONS FOR BAD DOUBTFUL DEBTS AT RS. 3,60,00,000/- AS A RESULT WHEREOF THE TOTAL PROVISION AGAINST BAD AND DOUBTFUL DEBTS IN THE BALANCE SHEET WAS RAISED TO AN AMOUNT OF RS. 25,01,91,450/-. THE A.O OBSERVED THAT AS PER THE PROVISIONS OF SEC. 36(1)(VIIA) OF THE IT ACT, A PRO VISION FOR BAD AND P A G E | 3 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. DOUBTFUL DEBTS WAS ALLOWABLE FOR AN AMOUNT NOT EXCE EDING 7.5% OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE SAID CLAUSE AND CHAPTER VI-A) AND AN AMOUNT NOT EXCEEDING 10% OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCH ES OF THE BANK. AS PER THE COMPUTATION OF THE TOTAL INCOME OF THE A SSESSEE, THE A.O WORKED OUT THE UPPER LIMIT OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS, AS UNDER : GROSS TOTAL INCOME : 8,28,33,098/- PROVISION U/S 36(1)(VIIA) DEBITED TO P & L A/C : 3 ,60,00,000/- TOTAL INCOME BEFORE DEDUCTION U/S 36(1)(VIIA) : 11 ,88,33,098/- 7.5% OF THE ABOVE : 89,12,482/----A AVERAGE AGGREGATE ADVANCES BY RURAL BRANCHES : 218 ,08,42(000) 10% OF THE ABOVE : 21,80,84,200/----B PROVISION U/S 36(1)(VIIA) ALLOWABLE (A+B) : 22,69,96,682/- IN THE BACKDROP OF THE AFORESAID FACTS THE A.O OBSE RVED THAT THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SEC. 36(1)(VII A) BY MAKING TOTAL AGGREGATE PROVISIONS FOR BAD AND DOUBTFUL DEBTS/ASS ETS AT RS. 25,01,91,450/-, WHICH WAS MORE BY AN AMOUNT OF RS. 2,31,94,768/- AS AGAINST THE ALLOWABLE PROVISIONS OF RS. 22,69,96 ,682/- COMPUTED HEREINABOVE. ON THE BASIS OF THE AFORESAID OBSERVAT IONS THE A.O CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY THE EXCESSIV E PROVISION OF RS. 2,31,94,768/- MAY NOT BE DISALLOWED AND ADDED BACK TO ITS TOTAL INCOME. IN REPLY, IT WAS SUBMITTED BY THE ASSESSEE THAT THE ACTUAL OF PROVISION FOR BAD AND DOUBTFUL DEBTS HAS TO BE SEEN IRRESPECTIVE OF WHETHER IT IS RELATING TO RURAL ADVANCES OR NON- RU RAL ADVANCES. AS PER THE ASSESSEE, THE DEDUCTION WAS TO BE ALLOWED SUBJE CT TO THE PERMISSIBLE UPPER LIMITS OF THE PROVISION FOR BAD A ND DOUBTFUL DEBTS AND THERE WAS NO QUESTION OF BIFURCATING THE SAME A S ONE RELATING TO RURAL ADVANCES AND OTHER ADVANCES (I.E. NON-RURAL A DVANCES). IN SUPPORT OF ITS AFORESAID CONTENTION THE ASSESSEE RE LIED ON THE ORDER OF ITAT, BANGALORE IN THE CASE OF DCIT, CIRCLE-11(4) V S. ING VYSYA BANK P A G E | 4 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. LTD. (2014) 149 ITD 611 (BANG). IT WAS SUBMITTED BY THE ASSESSEE THAT AS THE AVERAGE TOTAL OUTSTANDING ADVANCES AMOUNTED TO RS. 37,832 LAKHS, THEREFORE, THE ASSESSEE BANK COULD CREATE TH E PROVISION FOR BAD AND DOUBTFUL DEBTS TO THE MAXIMUM OF RS. 3,783.20 L AKHS (I.E. 10% OF AVERAGE AGGREGATE ADVANCES OF RS. 37,832 LAKHS). HO WEVER, THE A.O DECLINED TO ACCEPT THE AFORESAID CLAIM OF THE ASSES SEE. THE A.O HOLDING A CONVICTION THAT THE ASSESSEE BANK COULD MAKE A PR OVISION FOR BAD AND DOUBTFUL DEBTS EQUAL TO 7.5% OF ITS TOTAL INCOM E (BEFORE MAKING ANY DEDUCTION UNDER THE SAID CLAUSE AND CHAPTER VI- A), AND 10% OF AGGREGATE ADVANCES MADE BY THE RURAL BRANCHES OF SU CH BANK, THUS DISALLOWED THE EXCESS PROVISION FOR BAD AND DOUBTFU L DEBTS OF RS. 2,31,94,768/- MADE BY THE ASSESSEE. 4. THE A.O IN THE COURSE OF THE ASSESSMENT PROCEEDI NGS CALLED UPON THE ASSESSEE TO FURNISH COMPLETE DETAILS OF THE INT EREST ACCRUED ON NON PERFORMING ASSETS (FOR SHORT NPA ACCOUNTS) AND CL ARIFY AS TO WHETHER THE SAME WAS INCLUDED IN ITS INCOME OR NOT. IN REPL Y, IT WAS SUBMITTED BY THE ASSESSEE THAT AS THE INTEREST ON THE NPA ACC OUNTS WERE ACCOUNTED FOR AS PER THE GUIDELINES ISSUED BY RBI F ROM TIME TO TIME, THEREFORE, IN COMPLIANCE TO THE SAID GUIDELINES THE INTEREST ON THESE NPA ACCOUNTS FOR THE TIME BEING WERE ACCOUNTED FOR ON RECEIPT BASIS. THE ASSESSEE TAKING SUPPORT OF THE JUDGMENT OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. DELHI STATE I NDUSTRIAL DEVELOPMENT [(2007) 295 ITR 419 (DEL)], SUBMITTED T HAT THE INCLUSION OF INTEREST ON NPA ACCOUNTS WOULD MILITATE AGAINST THE PRINCIPLES OF REAL INCOME. IT WAS SUBMITTED BY THE ASSESSEE THAT IN CASE THE INTEREST ON THE NPA ACCOUNTS WAS SHOWN AS INCOME ON ACCRUAL BASIS, THEN IN CASE THE AMOUNT OF PRINCIPAL AS WELL AS INTEREST IS NEVER RECEIVED BACK BY THE ASSESSEE, IT WOULD RESULT TO DOUBLE LOSS TO THE LATTER. HOWEVER, THE A.O WAS NOT PERSUADED TO ACCEPT THE AFORESAID C ONTENTION OF THE P A G E | 5 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. ASSESSEE. IT WAS OBSERVED BY THE A.O THAT AS SEC. 4 3D WHICH SPECIFIED THE CATEGORIES OF FINANCIAL INSTITUTIONS IN WHOSE C ASES INTEREST ON BAD AND DOUBTFUL DEBTS WERE TO BE CHARGED TO TAX IN THE YEAR OF RECEIPT DID NOT MAKE ANY MENTION OF COOPERATIVE BANKS AND NBFC S, HENCE IT WAS OBLIGATORY ON THE PART OF THE ASSESSEE WHICH WAS A COOPERATIVE BANK TO ACCOUNT FOR ALL THE RECEIPTS ON ACCRUAL BASIS. APAR T THEREFROM, IT WAS OBSERVED BY THE A.O THAT THE ASSESSEE COULD NOT POS TPONE THE RECOGNITION OF INCOME IN RESPECT OF INTEREST ON STI CKY LOANS BY RELYING ON THE RBI GUIDELINES. ON THE BASIS OF HIS AFORESAI D OBSERVATIONS THE A.O ESTIMATED THE AMOUNT OF INTEREST ON NPAS OF RS . 16,10,92,000/- @ 12% AND MADE AN ADDITION OF RS. 1,93,31,040/- IN THE HANDS OF THE ASSESSEE. 5. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE CIT(A). THE CIT(A) AFTER DELIBERATING ON THE CONTEN TIONS ADVANCED BY THE ASSESSEE IN RESPECT OF ITS CLAIM OF ENTITLEMENT TOWARDS DEDUCTION UNDER SEC. 36(1)(VIIA) WAS HOWEVER NOT PERSUADED TO ACCEPT THE SAME. IT WAS OBSERVED BY THE CIT(A) THAT AS THE DEDUCTION ENVISAGED UNDER SEC. 36(1)(VIIA) WAS ONLY FOR RURAL ADVANCES, THERE FORE, NO INFIRMITY DID ARISE FROM THE ORDER OF THE A.O WHO HAD CORRECTLY D ISALLOWED THE EXCESS DEDUCTION OF RS. 2,31,94,768/- CLAIMED BY TH E ASSESSEE IN RESPECT OF NON-RURAL ADVANCES. IN SO FAR THE CLAIM OF THE ASSESSEE THAT THE INTEREST ON NPAS AS PER THE RBI GUIDELINES WER E NOT TO BE ACCOUNTED FOR ON ACCRUAL BASIS WAS CONCERNED, IT WA S OBSERVED BY THE CIT(A) THAT THE ISSUE WAS SQUARELY COVERED BY THE O RDER OF THE ITAT, CHANDIGARH IN THE CASE OF DCIT VS. THE LUDHIANA CEN TRAL COOPERATIVE BANK LTD. (ITA NO. 526/CHD/2013). ON THE BASIS OF H ER AFORESAID OBSERVATIONS THE CIT(A) CONCLUDED THAT AS PER THE P ROVISIONS OF SEC. 43D THE INTEREST ON NPA ASSETS COULD NOT BE HELD TO THE INCOME OF THE ASSESSEE ON ACCRUAL BASIS. IN THE BACKDROP OF THE A FORESAID P A G E | 6 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. OBSERVATIONS THE CIT(A) DELETED THE ADDITION OF RS. 1,93,31,040/- THAT WAS MADE BY THE A.O TOWARDS INTEREST THAT HAD ACCRU ED ON NPA ACCOUNTS. 6. THE ASSESSEE BEING AGGRIEVED WITH THE ORDER OF T HE CIT(A) TO THE EXTENT THE DISALLOWANCE OF THE ASSESSES CLAIM OF DE DUCTION IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS OF RS. 2,31 ,94,768/- UNDER SEC. 36(1)(VIIA) WAS UPHELD BY HER, HAS CARRIED THE MATTER IN APPEAL BEFORE US. THE LEARNED AUTHORIZED REPRESENTATIVE ( FOR SHORT A.R) FOR THE ASSESSEE AT THE VERY OUTSET OF THE HEARING OF T HE APPEAL SUBMITTED THAT THE ASSESSES CLAIM FOR DEDUCTION ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS HAS TO BE SEEN IRRESPECTIVE OF W HETHER THE SAME WAS RELATING TO RURAL ADVANCES OR NON-RURAL ADVANCE S. IN SUM AND SUBSTANCE, IT WAS THE CONTENTION OF THE LD. A.R THA T THE PERMISSIBLE UPPER LIMITS OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS IS TO BE SEEN AGAINST ALL THE ADVANCES, IRRESPECTIVE OF THE FACT WHETHER THE SAME IS FOR RURAL ADVANCES OR NON-RURAL ADVANCES. THE LD. A .R TAKING SUPPORT OF HIS AFORESAID CONTENTION SUBMITTED THAT AS THE A VERAGE TOTAL ADVANCES OF THE ASSESSEE BANK AMOUNTED TO RS. 37,83 2 LAKHS, HENCE THE AMOUNT ADMISSIBLE TO THE ASSESSEE WAS UPTO TO R S. 37,83,20,000/- , AND THUS NO DISALLOWANCE ON THE SAID COUNT WAS CA LLED FOR IN THE HANDS OF THE ASSESSEE. THE LD. A.R SUBMITTED THAT T HE ISSUE UNDER CONSIDERATION WAS SQUARELY COVERED IN FAVOUR OF ASS ESSEE BY THE ORDERS OF THE TRIBUNAL IN THE CASE OF ASSTT. CIT, CIRCLE-I V, JALANDHAR VS. M/S PUNJAB GRAMIN BANK, JALANDHAR ROAD, KAPURTHALA (ITA NO. 648 & 655(ASR)/2016; DATED 03.01.2018) AND DY. CIT, CIRCL E-IV, JALANDHAR VS. M/S THE KAPURTHALA CENTRAL COOPERATIVE BANK LTD ., KAPURTHALA (ITA NO. 543(ASR)/2017; DATED 16.08.2018). APART TH EREFROM, IT WAS SUBMITTED BY LD. A.R THAT THE ISSUE UNDER CONSIDERA TION AFTER NECESSARY DELIBERATIONS HAD ALSO BEEN DECIDED BY TH E ITAT, BANGALORE P A G E | 7 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. IN FAVOUR OF THE ASSESSEE IN THE CASE OF DCIT, CIRC LE-11(4) VS. ING VYSYA BANK LTD. (2014) 149 ITD 611 (BANG). IN SO FA R THE CHARGEABILITY TO TAX ON THE INTEREST ON NPA ACCOUNTS WAS CONCERNE D, IT WAS SUBMITTED BY THE LD. A.R THAT THE SAID ISSUE HAD BE EN DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE IN THE CASE OF D Y. CIT, CIRCLE-IV, JALANDHAR VS. M/S THE KAPURTHALA CENTRAL COOPERATIV E BANK LTD., KAPURTHALA (ITA NO. 543(ASR)/2017; DATED 16.08.2018 ). APART THEREFROM, IT WAS SUBMITTED BY THE LD. A.R THAT THE SAID ISSUE HAD ALSO BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT, CHANDIGARH BENCH IN THE CASE OF ACIT VS. PUNJAB STATE COOPERATIVE BA NK LTD. [143 ITD 571 (CHD)] AND DCIT VS. THE LUDHIANA CENTRAL COOPER ATIVE BANK LTD. (ITA NO. 526/CHD/2013). THE LD. A.R ALSO TOOK SUPPO RT OF THE ORDER OF THE ITAT, AHEMDABAD BENCH IN THE CASE OF KARNAVATI COOPERATIVE BANK LTD. VS. DCIT [134 ITD 486 (AHD)]. 7. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTAT IVE (FOR SHORT D.R) RELIED ON THE ORDER PASSED BY THE A.O. 8. WE HAVE HEARD THE AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE ORDERS OF THE LOWER AUTHORITIE S AND THE MATERIAL AVAILABLE ON RECORD. WE SHALL FIRST ADVERT TO THE A SPECT AS TO WHETHER THE CIT(A) WAS RIGHT IN LAW AND THE FACTS OF THE CA SE IN CONFIRMING THE ADDITION/DISALLOWANCE OF RS. 2,31,94,768/- MADE BY THE A.O ON ACCOUNT OF EXCESS PROVISION FOR BAD AND DOUBTFUL DE BTS MADE BY THE ASSESSEE. ON A PERUSAL OF THE ORDER PASSED BY THE A .O, IT STANDS REVEALED THAT AS PER HIM THE PROVISION FOR BAD AND DOUBTFUL DEBTS WAS ALLOWABLE FOR AN AMOUNT NOT EXCEEDING 7.5% OF THE T OTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE SAI D CLAUSE AND CHAPTER VI-A), AND AN AMOUNT NOT EXCEEDING 10% OF T HE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF THE BANK. ON THE OTHER HAND, IT WAS THE CLAIM OF THE ASSESSEE THAT T HE SAME WAS TO BE P A G E | 8 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. ALLOWED SUBJECT TO THE PERMISSIBLE UPPER LIMITS OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS AND THERE WAS NO QUESTION OF BIF URCATING THE SAME AS ONE RELATING TO RURAL ADVANCES AND OTHER ADVANCE S (I.E. NON-RURAL ADVANCES). AS OBSERVED BY US HEREINABOVE, THE ASSES SEE HAD IN SUPPORT OF ITS AFORESAID CONTENTION RELIED ON THE O RDER OF ITAT, BANGALORE IN THE CASE OF DCIT, CIRCLE-11(4) VS. ING VYSYA BANK LTD. (2014) 149 ITD 611 (BANG). IN THE BACKDROP OF ITS A FORESAID CONTENTION, IT WAS SUBMITTED BY THE ASSESSEE THAT AS THE AVERAG E TOTAL OUTSTANDING ADVANCES AMOUNTED TO RS. 37,832 LAKHS, THEREFORE, T HE ASSESSEE BANK COULD CREATE THE PROVISION FOR BAD AND DOUBTFUL DEB TS TO THE MAXIMUM OF RS. 3,783.20 LAKHS (I.E. 10% OF AVERAGE AGGREGAT E ADVANCES OF RS. 37,832 LAKHS). HOWEVER, THE A.O HAD DECLINED TO ACC EPT THE AFORESAID CLAIM AND HAD CONCLUDED THAT AS THE ASSESSEE BANK C OULD MAKE A PROVISION FOR BAD AND DOUBTFUL DEBTS EQUAL TO 7.5% OF THE TOTAL INCOME (BEFORE MAKING ANY DEDUCTION UNDER THE SAID CLAUSE AND CHAPTER VI-A) AND 10% OF AGGREGATE ADVANCES MADE BY THE RURAL BRA NCHES OF SUCH BANK, THUS THE CLAIM OF DEDUCTION OF THE ASSESSEE W AS TO BE SCALED DOWN BY THE AMOUNT OF EXCESS PROVISION FOR BAD AND DOUBTFUL DEBTS OF RS. 2,31,94,768/-. 9. WE HAVE DELIBERATED AT LENGTH ON THE ISSUE UNDER CONSIDERATION AND FIND THAT THE SAME IS SQUARELY COVERED BY THE O RDER OF THE TRIBUNAL IN THE CASE OF ACIT, CIRCLE-IV, JALANDHAR VS. M/S P UNJAB GRAMIN BANK, KAPURTHALA (ITA NO. 648/ASR/2016; DATED 03.01 .2018). IN THE AFOREMENTIONED CASE THE TRIBUNAL HAD OBSERVED THAT THE DEDUCTION OF THE PROVISIONS IS NEITHER LIMITED TO THE QUANTUM OF BAD DEBTS IN THE BOOKS NOR IS COMPUTED WITH REFERENCE TO THE QUANTUM OF STANDARD ASSETS. RATHER, THE DEDUCTION ENVISAGED IN SEC. 36( 1)(VIIA) REFERS TO THE ALLOWABLE PROVISIONS OF ANTICIPATED DEFAULT ON THE LOANS AND ADVANCES MADE IN RESPECT OF TOTAL ASSETS INCLUDING STANDARD ASSETS, AND THE P A G E | 9 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. CLAIM OF THE ASSESSEE DOES NOT FALL INTO THE PROVIS O TO SEC. 36(1)(VIIA) AS THE SAME DEALS WITH FURTHER DEDUCTION FOR PROVISION S ON BAD AND DOUBTFUL DEBTS. IT WAS THUS OBSERVED BY THE TRIBUNA L THAT THE CLAIM OF THE ASSESSEE WAS COVERED BY THE MAIN PROVISIONS OF SEC. 36(1)(VIIA). THE TRIBUNAL IN ITS AFORESAID ORDER HAD OBSERVED AS UNDER :- NOW COMING TO THE APPEAL FILED BY THE REVENUE, WE FIND THAT THE ONLY ISSUE RAISED BY REVENUE IS THE ACTION OF LD. CIT(A) BY WH ICH HE HAS ALLOWED RELIEF OF RS. 80,85,000/- ON ACCOUNT OF THE PROVISIONS FOR BAD & DOUBTFUL DEBTS ON STANDARD ASSETS. THIS ISSUE IS ALSO COVERED IN F AVOUR OF ASSESSEE BY THE ORDER DATED 22.06.2016. THE FINDINGS OF THE HONBLE TRIBUNAL ARE CONTAINED IN PARA 8 ONWARDS, FOR SAKE OF COMPLETENE SS, THE FINDINGS OF THE HONBLE TRIBUNAL ARE REPRODUCED BELOW: 8. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE THROUGH THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE H AD CREATED A PROVISION OF RS. 50,00,000/- WHICH INCLUDED A SUM O F RS. 13,25,000/-AS PROVISIONS FOR BAD AND DOUBTFUL DEBTS AND THE BALANCE AMOUNT OF RS. 36,75,000/- WAS PROVISION AGA INST STANDARD ASSETS AND THE ENTIRE AMOUNT WAS CLAIMED A S DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE ACT. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE PROVISIONS MADE BY THE ASSESSEE AGAINST STANDARD ASSETS WAS CONTINGENT LIA BILITY AND WHICH WAS NOT ALLOWABLE AS BUSINESS EXPENDITURE. TH E LD. CIT(A), HOWEVER, ALLOWED RELIEF TO THE ASSESSEE BY HOLDING THAT THE CLAIM OF THE ASSESSEE FALL INTO THE MAIN PROVIS IONS OF SECTION 36(1)(VIIA). TO RESOLVE THE DISPUTE IT IS IMPORTANT TO VISIT THE PROVISIONS OF SECTION 36(1)(VIIA) OF THE ACT AND WH ICH FOR THE SAKE OF CONVENIENCE ARE REPRODUCED BELOW: 36(1)(VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY (A) A SCHEDULED BANK [NOT BE ING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNT RY OUTSIDE INDIA] OR A PRIMARY CO-OPERATIVE AGRICULTUR AL AND RURAL DEVELOPMENT BANK, AN AMOUNT NOT EXCEEDING SEVEN AND ONE-HALF PERCENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A) AND AN AMOUNT NOT EXCEEDIN G TEN PERCENT OF THE AGGREGATE AVERAGED ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER. PROVIDED THAT A SCHEDULED BANK OR A NON- SCHEDULED BANK REFERRED TO IN THIS SUB-CLAUSE SHALL , AT ITS OPINION, BE ALLOWED IN ANY OF THE RELEVANT ASSESSMENT YEARS DEDUCTION IN RESPECT OF ANY PROVIS ION MADE BY IT FOR ANY ASSET CLASSIFIED BY THE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS ASSETS IN ACCOR DANCE WITH THE GUIDELINES ISSUE BY IT IS THIS BEHALF, FOR AN P A G E | 10 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. AMOUNT NOT EXCEEDING FIVE PERCENT OF THE AMOUNT OF SUCH ASSETS SHOWN IN THE BOOKS OF ACCOUNT OF THE BANK ON THE LAST DAY OF THE PREVIOUS YEAR: PROVIDED FURTHER THAT FOR THE RELEVANT ASSESSMENT Y EARS COMMENCING ON OR AFTER THE 1 ST DAY OF APRIL, 2003 AND ENDING BEFORE THE 1 ST DAY OF APRIL, 2005, THE PROVISIONS OF THE FIRST PROVISO SHALL HAVE EFFECT AS IF FOR TH E WORDS FIVE PERCENT, THE WORDS TEN PERCENT HAD BEEN SUBSTITUTED: PROVIDED ALSO THAT A SCHEDULED BANK OR A NON-SCHEDU LED BANK REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS O PINION, BE ALLOWED A FURTHER DEDUCTION IN EXCESS OF THE LIM ITS SPECIFIED IN THE FOREGOING PROVISIONS, FOR AN AMOUN T NOT EXCEEDING THE INCOME DERIVED FROM REDEMPTION OF SECURITIES IN ACCORDANCE WITH A SCHEME FRAMED BY TH E CENTRAL GOVERNMENT: PROVIDED ALSO THAT NO DEDUCTION SHALL BE ALLOWED UN DER THE THIRD PROVISO UNLESS SUCH INCOME HAD BEEN DISCLOSED IN THE RETURN OF INCOME UNDER THE HEAD P ROFITS AND GAINS BUSINESS OR PROFESSION. FROM THE ABOVE PROVISIONS IT CAN BE SEEN THAT DEDUC TION U/S 36(1)(VIIA) OF THE ACT IS ALLOWED IN RESPECT OF PRO VISIONS FOR BAD AND DOUBTFUL DEBTS THIS SECTION DOES NOT DIFFERENTI ATE BETWEEN PROVISION ON BAD ASSETS AND PROVISION ON STANDARD A SSETS. THIS DEDUCTION EXCLUSIVELY ALLOWS DEDUCTION IN RESPECT O F PROVISION FOR BAD AND DOUBTFUL DEBTS TO THE EXTENT MENTIONED IN T HE VARIOUS CLAUSES OF SUB-SECTION (1) OF SECTION 36 OF THE ACT . THE DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE ACT IS ALLOWED ONL Y IN RESPECT OF CERTAIN SPECIFIC CATEGORIES OF ASSESSEE MENTIONED I N THE CLAUSE LIKE BANKS, FINANCIAL INSTITUTIONS, ETC. WHO ARE IN BUSINESS OF LENDING MONEY. IT IS NOT ALLOWED EVEN TO NON-BANKIN G FINANCIAL INSTITUTIONS SINCE THEY ARE NOT INCLUDED IN THIS CL AUSE. IT IS SEEN THAT THOUGH SECTION 36(1)(VIIA) STATES THAT DEDUCTI ON FOR PROVISIONS IS ALLOWABLE IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS, THE COMPUTATION OF SUCH DEDUCTION I S MADE WITH REFERENCE TO TOTAL INCOME OF THE SPECIFIED BANKS BA SED UPON QUANTUM OF AVERAGE ADVANCES. THE DEDUCTION OF THE P ROVISIONS IS NEITHER LIMITED TO THE QUANTUM OF BAD DEBTS IN T HE BOOKS NOR IS COMPUTED WITH REFERENCE TO THE QUANTUM OF PROVISION S OF ANTICIPATED DEFAULT ON THE LOANS AND ADVANCES MADE IN RESPECT OF TOTAL ASSETS INCLUDING STANDARD ASSETS AND THE C LAIM OF THE ASSESSEE DOES NOT FALL INTO THE PROVISO TO SECTION 36(1)(VIIA) AS THE PROVISO DEALS WITH FURTHER DEDUCTION FOR PROVIS IONS ON BAD AND DOUBTFUL DEBTS. THE CLAIM OF THE ASSESSEE IS CO VERED IN THE MAIN PROVISIONS OF SECTION 36(1)(VIIA) OF THE ACT. THE LEARNED CIT(A) HAS PASSED A VERY EXHAUSTIVE AND SPEAKING OR DER ANY WE DO NOT FIND ANY INFIRMITY IN THE SAME. P A G E | 11 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. APART THEREFROM, WE FIND THAT THE AFORESAID VIEW TA KEN BY THE TRIBUNAL WAS THEREAFTER FOLLOWED BY IT WHILE DISPOSING OFF T HE APPEALS IN THE CASE OF DY. CIT, CIRCLE-IV, JALANDHAR VS. M/S THE KAPURT HALA CENTRAL COOPERATIVE BANK LTD. (ITA NO. 543(ASR)/2017; DATED 16.08.2018) AND DCIT VS. PUNJAB GRAMIN BANK, KAPURTHALA (ITA NO. 13 4(ASR)/2015; DATED 22.06.2016). FURTHER, A SIMILAR VIEW HAD ALSO BEEN TAKEN BY THE ITAT BANGALORE, BENCH C IN THE CASE OF DCIT, CIRC LE-11(4) VS. ING VYSYA BANK LTD. (2014) 149 ITD 611 (BANG). WE THUS FINDING OURSELVES AS BEING IN AGREEMENT WITH THE AFORESAID VIEW TAKEN BY THE TRIBUNAL, RESPECTFULLY FOLLOW THE SAME. IN THE BACKDROP OF OU R AFORESAID OBSERVATIONS, WE DELETE THE ADDITION TOWARDS EXCESS PROVISION FOR BAD AND DOUBTFUL DEBTS OF RS. 2,31,94,768/- MADE BY THE A.O. THE ORDER OF THE CIT(A) IS SET ASIDE IN TERMS OF OUR AFORESAID O BSERVATIONS. 10. WE SHALL NOW ADVERT TO THE ASPECT AS TO WHETHER CIT(A) IS RIGHT IN LAW AND THE FACTS OF THE CASE IN VACATING THE ADDIT ION OF RS. 1,93,31,040/- MADE BY THE A.O ON ACCOUNT OF ACCRUED INTEREST @ 12% ON THE NPAS SHOWN IN THE ACCOUNTS OF THE ASSESSEE. WE FIND THAT IT WAS THE CLAIM OF THE ASSESSEE THAT AS THE INTEREST ON THE NPA ACCOUNTS WAS ACCOUNTED FOR AS PER THE GUIDELINES ISSUED BY R BI FROM TIME TO TIME, THEREFORE, IN COMPLIANCE TO THE SAID GUIDELIN ES THE INTEREST ON THESE NPA ACCOUNTS FOR THE YEAR UNDER CONSIDERATION WAS ACCOUNTED FOR ON RECEIPT BASIS AND NOT OFFERED AS INCOME ON A CCRUAL BASIS. HOWEVER, THE A.O WAS NOT PERSUADED TO ACCEPT THE AF ORESAID CONTENTION OF THE ASSESSEE. IT WAS OBSERVED BY THE A.O THAT AS SEC. 43D WHICH SPECIFIED THE CATEGORIES OF FINANCIAL INS TITUTIONS WHERE THE INTEREST ON BAD AND DOUBTFUL DEBTS WAS TO BE CHARGE D TO TAX IN THE YEAR OF RECEIPT DID NOT MAKE ANY MENTION OF COOPERA TIVE BANKS AND NBFCS, HENCE IT WAS OBLIGATORY ON THE PART OF THE ASSESSEE WHICH WAS A COOPERATIVE BANK TO ACCOUNT FOR ALL THE RECEIPTS ON ACCRUAL BASIS. P A G E | 12 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. APART THEREFROM, IT WAS OBSERVED BY THE A.O THAT TH E ASSESSEE COULD NOT POSTPONE THE RECOGNITION OF ITS INCOME IN RESPE CT OF INTEREST ON STICKY LOANS BY RELYING ON THE RBI GUIDELINES. ON T HE BASIS OF HIS AFORESAID OBSERVATIONS THE A.O DECLINED TO ACCEPT T HE AFORESAID CLAIM OF THE ASSESSEE AND ESTIMATED THE AMOUNT OF INTERES T ON NPAS OF RS. 16,10,92,000/- @ 12% AND MADE AN ADDITION OF RS. 1, 93,31,040/- IN THE HANDS OF THE ASSESSEE. 11. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION AND FI ND THAT THE ISSUE HEREIN INVOLVED IS SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL IN THE ASSESSES OWN CASE FOR A.Y. 2013-14 VIZ. THE DY. CIT , CIRCLE-II, JALANDHAR VS. THE NAWANSHEHAR CENTRAL COOPERATIVE B ANK LTD., NAWANSHEHAR (ITA NO. 61/ASR/2017; DATED 03.01.2018) . THE TRIBUNAL IN ITS AFORESAID ORDER HAD AFTER EXHAUSTIVE DELIBER ATIONS UPHELD THE ORDER OF THE CIT(A) WHO HAD OBSERVED THAT THE INTER EST ON NPAS WAS TAXABLE IN THE YEAR OF RECEIPT. THE TRIBUNAL IN ITS AFORESAID ORDER HAD OBSERVED AS UNDER :- 6. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE T HOUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT THE ASSESSING OFFICE R HAS DISALLOWED THE PROVISIONS WHICH THE ASSESSEE HAS MADE ON STANDARD ASSETS AND HAS ALSO MADE ADDITION ON ACCOUNT OF INTEREST ON NON PERFORM ING ASSETS WHICH THE ASSESSEE HAD NOT TAKEN INTO ACCOUNT. WE FIND THAT T HESE ISSUES ARE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE O RDERS OF THE TRIBUNAL IN THE CASE OF M/S PUNJAB GRAMIN BANK AND ALSO IN THE CASE OF MOGA CENTRAL COOPERATIVE BANK. THE FINDINGS OF THE HON'BLE TRIBU NAL IN THE CASE OF MOGA CENTRAL COOPERATIVE BANK ARE REPRODUCED BELOW: 6. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE T HOUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT THE ISSUE I NVOLVED IN THESE APPEALS, IS REGARDING NON DECLARATION OF INTEREST I NCOME ON NON PERFORMING ASSETS BY THE ASSESSEE. THE HON'BLE AMRI TSAR BENCH IN THE CASE OF JALANDHAR CENTRAL CO-OPERATIVE BANK LTD . VIDE ITS ORDER DATED 20.01.2017 HAS DISMISSED THE APPEALS FILED BY REVENUE AND SIMILARLY IN THE CASE OF KAPURTHALA CENTRAL CO-OPER ATIVE BANK LTD., THE AMRITSAR BENCH HAS AGAIN DISMISSED THE APPEALS FILED BY REVENUE ON SIMILAR ISSUE. THE HON'BLE CHANDIGARH BE NCH VIDE ITS ORDER DATED 03.01.2017 IN ITA NO. 526/CHD/2013 HAS ALSO DISMISSED THE APPEAL FILED BY REVENUE UNDER SAME FA CTS AND CIRCUMSTANCES. WHILE DISMISSING THE APPEAL, THE HON 'BLE TRIBUNAL P A G E | 13 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. HAS DISCUSSED THE CASE LAW OF HON'BLE SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCORE AND HAS HELD THAT IT HAS B EEN OVERRULED BY THE APEX COURT ITSELF IN THE CASE OF UCO BANK LT D. (SUPRA) AND THEREFORE THE GRIEVANCE OF THE REVENUE IS NOT JUSTI FIED. FOR THE SAKE OF COMPLETENESS THE DECISION OF THE HON'BLE CHANDIG ARH BENCH OF TRIBUNAL IN THE CASE OF LUDHIANA CENTRAL CO-OPERATI VE BANK LTD. THE FINDINGS OF HON'BLE TRIBUNAL AS CONTAINED FROM PARA 13 ARE REPRODUCED BELOW: 13. WE FIND THAT THE ISSUE OF ACCOUNTING FOR INTER EST ON STICKY LOANS/NPAS, HAS BEEN DEALT WITH IN A NUMBER OF DEC ISIONS BOTH BY THE APEX COURT AND VARIOUS HIGH COURTS AND TRIBUNAL S ALSO, WHEREIN AFTER APPLYING THE REAL INCOME THEORY, TH E PRESCRIBED ACCOUNTING STANDARD ISSUED BY ICAI ON REVENUE RECOG NITION, AS-9, THE ACCOUNTING PRACTICE OF THE ASSESSEE RELATING TO INTEREST ON STICKY LOANS AND THE RBI GUIDELINES RELATING TO ACCOUNTING FOR INTEREST ON NPAS, IT WAS HELD THAT SUCH INCOME WAS TAXABLE IN THE YEAR OF RECEIPT ONLY, WHEN ITS REALIZATION BECOMES REASONAB LY CERTAIN. 14. THE APEX COURT IN THE CASE OF UCO BANK, CALCUTT A VS. CIT, WEST BENGAL (1999) 4 SUPREME COURT CASES 599 APPROVED TH E RECEIPT BASIS OF ACCOUNTING FOR INTEREST ON LOANS WHOSE REC OVERY WAS DOUBTFUL, HOLDING 10 THE SAME TO BE IN ACCORDANCE W ITH ACCOUNTING PRACTICE AND IN CONFORMITY WITH THE METHOD PRESCRIB ED UNDER SECTION 145 OF THE ACT. THE RELEVANT FINDINGS OF THE APEX C OURT ARE AS FOLLOWS: WE HAVE TO CONSIDER WHETHER INTEREST ON A LOAN WHO SE RECOVERY IS DOUBTFUL AND WHICH HAS NOT BEEN RECOVER ED BY THE ASSESSEE-BANK FOR THE LAST THREE YEARS BUT HAS BEEN KEPT IN A SUSPENSE ACCOUNT AND HAS NOT BEEN BROUGHT TO T HE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, CAN BE INCLUDED I N THE ITA NO. 61(ASR)/2017 ASSESSMENT YEAR: 2013-14 4 INCOME OF THE ASSESSEE FOR THE ASSESSMENT YEAR 1981-82. IT IS THE CASE OF THE ASSESSEE THAT IN RESPECT OF LOANS WHICH ARE ADV ANCED BY IT TO VARIOUS CUSTOMERS, RECOVERY OF SOME LOANS IS VERY DOUBTFUL. IT IS DOUBTFUL WHETHER EVEN THE INTEREST ON THE LOANS ADVANCED WILL BE RECOVERED FROM THE CUSTOMER. IN SU CH CASES, THE INTEREST CALCULATED ON THE LOAN AMOUNT IS CREDI TED IN A SUSPENSE ACCOUNT. THIS AMOUNT IS NOT BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE-BANK BECAUSE THESE ARE AMOUNTS WHICH ARE NOT LIKELY TO BE REALIZED BY THE BANK. HENCE THEY DO NOT FORM A PART OF THE REAL INCOME OF THE BANK. IF AND WHEN ANY SUCH AMOUNT OR A PART OF IT IS RECO VERED, IT IS INCLUDED IN THAT ASSESSMENT YEAR IN THE TOTAL INCOM E OF THE ASSESSEE FOR THE PURPOSE OF PAYMENT OF INCOMETAX. T HE METHOD OF ACCOUNTING WHICH IS FOLLOWED BY THE ASSES SEE- BANK IS MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, T HE ASSESSEE CONSIDERS INCOME BY WAY OF INTEREST PERTAI NING TO DOUBTFUL LOANS AS NOT REAL INCOME IN THE YEAR IN WH ICH IT ACCRUES, BUT ONLY WHEN IT IS REALIZED. A MIXED METH OD OF ACCOUNTING IS THUS FOLLOWED BY THE ASSESSEE-BANK. T HIS METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS IN P A G E | 14 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. ACCORDANCE WITH ACCOUNTING PRACTICE. IN SPICER AND PEGLER'S PRACTICAL AUDITING THE RELEVANT PASSAGE OCCURRING A T PAGE 186-187 HAS BEEN REPRODUCED IN THE MINORITY JUDGMEN T OF THIS COURT IN STATE BANK OF TRAVANCORE V. COMMISSIO NER OF INCOME-TAX, KERALA [(1986) 158 ITR 102 AT P.I2O]. I T IS AS FOLLOWS: 'WHERE INTEREST HAS NOT BEEN PAID, IT IS S OMETIMES LEFT OUT OF ACCOUNT ALTOGETHER. THIS PREVENTS THE P OSSIBILITY OF IRRECOVERABLE INTEREST BEING CREDITED TO REVENUE, A ND DISTRIBUTED AS PROFIT. ON THE OTHER HAND, THIS TREA TMENT DOES NOT RECORD THE ACTUAL STATE OF THE LOAN ACCOUNT, AN D IN THE CASE OF BANKS AND OTHER CONCERNS WHOSE BUSINESS IT IS TO ADVANCE MONEY, IT IS USUAL TO FIND THE INTEREST IS REGULARLY CHARGED UP, BUT WHEN ITS RECOVERY IS DOUBTFUL, THE AMOUNT THEREOF IS EITHER FULLY PROVIDED AGAINST OR TAKEN T O THE CREDIT OF AN INTEREST SUSPENSE ACCOUNT AND CARRIED FORWARD AND NOT TREATED AS PROFIT UNTIL ACTUALLY RECEIVED.' SIMILAR LY, REFERRING TO INTEREST ON DOUBTFUL DEBTS, SHUKLA AND GREWAL ON ADVANCED ACCOUNTS, NINTH EDITION AT PAGE 1089 STATE AS FOLLOWS: 'INTEREST ON DOUBTFUL DEBTS SHOULD BE DEBI TED TO THE LOAN ACCOUNT CONCERNED BUT SHOULD NOT BE CREDITED T O INTEREST ACCOUNT. INSTEAD, IT SHOULD BE CREDITED TO INTEREST SUSPENSE ACCOUNT. TO THE EXTENT THE INTEREST IS RECEIVED IN CASH, THE INTEREST SUSPENSE ACCOUNT SHOULD BE TRANSFERRED TO INTEREST ACCOUNT; THE REMAINING AMOUNT SHOULD BE CLOSED BY T RANSFER TO THE LOAN ACCOUNT. THIS TREATMENT ACCORDS WITH TH E 11 PRINCIPLE THAT NO ITEM SHOULD BE TREATED AS INCOME UNLESS IT HAS BEEN RECEIVED OR THERE IS A REASONABLE CERTAINT Y THAT IT WILL BE REALIZED. (VIDE STATE BANK OF TRANVACORE V. CIT [SUPRA]) THE ASSESSEE'S METHOD OF ACCOUNTING, THEREFORE, TRANSFERRING THE D OUBTFUL DEBT TO AN INTEREST SUSPENSE ACCOUNT AND NOT TREATI NG IT AS PROFIT UNTIL ACTUALLY RECEIVED, IS IN ACCORDANCE WI TH ACCOUNTING PRACTICE. UNDER SECTION 145 OF THE INCOME-TAX ACT, 1961, INCO ME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION OR INCOME FROM OTHER SOURCES' SHALL BE C OMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULAR LY EMPLOYED BY THE ASSESSEE; PROVIDED THAT IN A CASE W HERE THE ACCOUNTS ARE CORRECT AND COMPLETE BUT THE METHOD EM PLOYED IS SUCH THAT IN THE OPINION OF THE INCOME- TAX OFFI CER, THE INCOME CANNOT PROPERLY BE DEDUCED THEREFROM, THE COMPUTATION SHALL BE MADE IN SUCH MANNER AND ON SUC H BASIS AS THE INCOME-TAX OFFICER MAY DETERMINE. IN T HE PRESENT CASE THE METHOD EMPLOYED IS ENTIRELY FOR A PROPER DETERMINATION OF INCOME. (EMPHASIS SUPPLIED BY US) 15. FURTHER THE APEX COURT ALSO REFERRED TO THE CBD T CIRCULAR DATED 9T H OCTOBER 1984 STATING THAT INTEREST ON LOANS ON WHICH THERE HAS BEEN NO RECOVERY FOR 3 YEARS WILL BE SUBJECTED TO T AX ON RECEIPT BASIS, AND HELD AS FOLLOWS: P A G E | 15 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. THE QUESTION WHETHER INTEREST EARNED, ON WHAT HAVE COME TO BE KNOWN AS 'STICKY' LOANS, CAN BE CONSIDERED AS IN COME OR NOT UNTIL ACTUAL REALIZATION, IS A QUESTION WHICH M AY ARISE BEFORE SEVERAL INCOME TAX OFFICERS EXERCISING JURIS DICTION IN DIFFERENT PARTS OF THE COUNTRY. UNDER THE ACCOUNTIN G PRACTICE, INTEREST WHICH IS TRANSFERRED TO THE SUSPENSE ACCOU NT AND NOT BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE COMPA NY IS NOT TREATED AS INCOME. THE QUESTION WHETHER IN A GIVEN CASE SUCH 'ACCRUAL' OF INTEREST IS DOUBTFUL OR NOT, MAY ALSO BE PROBLEMATIC. IF, THEREFORE, THE BOARD HAS CONSIDERE D IT NECESSARY TO LAY DOWN A GENERAL TEST FOR DECIDING W HAT IS A DOUBTFUL DEBT, AND DIRECTED THAT ALL INCOME TAX OFF ICERS SHOULD TREAT SUCH AMOUNTS AS NOT FORMING PART OF TH E INCOME OF THE ASSESSEE UNTIL REALIZED, THIS DIRECTION BY W AY OF A CIRCULAR CANNOT BE CONSIDERED AS TRAVELLING BEYOND THE POWERS OF THE BOARD UNDER SECTION 119 OF THE INCOME TAX ACT. SUCH A CIRCULAR IS BINDING UNDER SECTION 119. THE CIRCULAR OF 9TH OF OCTOBER, 1984, THEREFORE, PROVID ES A TEST FOR RECOGNIZING WHETHER A CLAIM FOR INTEREST CAN BE TRE ATED AS A DOUBTFUL CLAIM UNLIKELY TO BE RECOVERED OR NOT. THE TEST PROVIDED BY THE SAID CIRCULAR IS TO SEE WHETHER, AT THE END OF THREE YEARS, THE AMOUNT OF INTEREST HAS, IN FACT, B EEN RECOVERED BY THE BANK OR NOT. IF IT IS NOT RECOVERE D FOR A PERIOD OF THREE YEARS, THEN IN THE FOURTH YEAR AND ONWARDS THE CLAIM FOR INTEREST HAS TO BE TREATED AS A DOUBT FUL CLAIM WHICH NEED NOT BE INCLUDED IN THE INCOME OF THE ASS ESSEE UNTIL IT IS ACTUALLY RECOVERED. 16. THIS VIEW WAS REAFFIRMED IN A LATER JUDGMENT BY THE APEX COURT IN MERCANTILE BANK LTD., VS. CIT, BOMBAY CITY-III ( 2006) 5 SSC 221. 17. FURTHER THE ISSUE OF TAXABILITY OF INTEREST ON NPA ACCOUNTS ON RECEIPT BASIS BY COOPERATIVE BANKS HAS BEEN DEALT W ITH BY VARIOUS HIGH COURTS, WHEREIN IT WAS HELD THAT THE ASSESSEE WAS BOUND BY RBI GUIDELINES TO ACCOUNT FOR SUCH INTEREST ON RECE IPT BASIS AND BY VIRTUE OF THE PROVISIONS OF SECTION 45Q OF THE RBI ACT, THE RBI GUIDELINES HAD AN OVERRIDING EFFECT OVER OTHER ACTS INCLUDING THE INCOME TAX ACT, 1961. 18. THE GUJARAT HIGH COURT IN THE CASE OF PR.CIT-5 VS. SHRI MAHILA SEWA SAHAKARI BANK LTD. (TAX APPEAL NO.531 OF 2015 DATED 5.8.2016 ,RELYING UPON THE DECISION OF THE APEX COU RT IN SOUTHERN TECHNOLOGIES LIMITED VS JCIT, COIMBATORE,(2010) 320 ITR 577,HELD THAT SO FAR AS INCOME RECOGNITION WAS CONCERNED EVE N THE AO HAD TO FOLLOW THE RBI DIRECTIONS,1998 IN VIEW OF SECTIO N 45Q OF THE RBI ACT AND SECTION 145 OF THE INCOME TAX ACT HAD NO RO LE TO PLAY IN THE SAME. THE HONBLE COURT HELD AT PARA 20 TO 23 OF IT S ORDER AS FOLLOWS: 20. SECTION 45Q FINDS PLACE IN CHAPTER IIIB OF THE RBI ACT. THUS, THE PROVISIONS OF CHAPTER IIIB OF THE RBI ACT HAVE AN OVERRIDING EFFECT QUA OTHER ENACTMENTS TO THE EXTEN T THE SAME ARE INCONSISTENT WITH THE PROVISIONS CONTAINED THER EIN. IN P A G E | 16 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. ORDER TO REFLECT A BANK'S ACTUAL FINANCIAL HEALTH I N ITS BALANCE SHEET, THE RESERVE BANK HAS INTRODUCED PRUDENTIAL 1 3 NORMS FOR INCOME RECOGNITION, ASSET CLASSIFICATION AND PR OVISIONING FOR ADVANCES PORTFOLIO OF THE CO-OPERATIVE BANKS. T HE GUIDELINES PROVIDED THEREUNDER ARE MANDATORY AND IT IS INCUMBENT UPON ALL CO-OPERATIVE BANKS TO FOLLOW THE SAME. INSOFAR AS INCOME RECOGNITION IS CONCERNED, CLAUSE 4.1.1 OF THE CIRCULAR PROVIDES THAT THE POLICY OF INCOME REC OGNITION HAS TO BE OBJECTIVE AND BASED ON THE RECORD OF RECOVERY . INCOME FROM NON-PERFORMING ASSETS (NPA) IS NOT RECOGNISED ON ACCRUAL BASIS BUT IS BOOKED AS INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. THEREFORE, BANKS SHOULD NOT TAKE TO INCOME ACCOUNT INTEREST ON NON-PERFORMING ASSETS ON ACCRUA L BASIS. THUS, IN VIEW OF THE MANDATE OF THE RBI GUIDELINES THE ASSESSEE CANNOT RECOGNISE INCOME FROM NON-PERFORMIN G ASSETS ON ACCRUAL BASIS BUT CAN BOOK SUCH INCOME ON LY WHEN IT IS ACTUALLY RECEIVED. THUS, THIS IS A CASE WHERE AT THE THRESHOLD, THE ASSESSEE, IN VIEW OF THE RBI GUIDELI NES, CANNOT RECOGNIZE INCOME FROM NPA ON ACCRUAL BASIS. THIS IS, THEREFORE, A CASE PERTAINING TO RECOGNITION OF INCO ME AND NOT COMPUTATION OF THE INCOME OF THE ASSESSEE. 21. THE SUPREME COURT IN SOUTHERN TECHNOLOGIES LIMI TED (SUPRA) HAS HELD THAT THE 1998 DIRECTIONS ARE ONLY DISCLOSURE NORMS AND HAVE NOTHING TO DO WITH COMPUTATION OF TO TAL INCOME UNDER THE IT ACT OR WITH THE ACCOUNTING TREA TMENT. THE 1998 DIRECTIONS ONLY LAY DOWN THE MANNER OF PRESENTATION OF NPA PROVISION IN THE BALANCE SHEET OF AN NBFC. THE COURT HAS REFERRED TO THE DEVIATIONS BETW EEN THE RBI DIRECTIONS AND THE COMPANIES ACT AS FOLLOWS: '42. BROADLY, THERE ARE THREE DEVIATIONS: (I) IN THE MATTER O F PRESENTATION O F FINANCIAL STATEM ENTS UNDER SCHEDULE VI TO THE COMPANIES ACT; (II) (II) IN NOT RECOGNIZING THE 'INCOME' UNDER THE MERC ANTILE SYSTEM O F ACCOUNTING AND ITS INSISTENCE TO FOLLOW CASH SYSTEM WITH RESPECT TO ASSETS CLASSIFIED AS 14 NPA AS PER ITS NORMS; (III) (III) IN CREATING A PROVISION FOR ALL NPAS SUMMARIL Y AS AGAINST CREATING A PROVISION ONLY WHEN THE DEBT IS DOUBTFUL O F RECOVERY UNDER THE NORMS OF THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA. THESE DEVIATIONS PREVAIL OVER CERTAIN PROVISIONS OF THE COMPANIES AC T, 1956 TO PROTECT THE DEPOSITORS IN THE CONTEXT O F I NCOME RECOGNITION AND PRESENTATION O F THE ASSETS AND PROVISIONS CREATED AGAINST THEM. THUS, THE P&L ACCOUNT PREPARED BY NBFC IN TERMS O F THE RBI DIRECTIONS, 1998 DOES NOT RECOGNIZE 'INCOME FROM NP A' AND, THEREFORE, DIRECTS A PROVISION TO BE MADE IN T HAT REGARD AND HENCE AN 'ADD BACK'. IT IS IMPORTANT TO P A G E | 17 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. NOTE THAT 'ADD BACK' IS THERE ONLY IN THE CASE O F PROVISIONS. [EMPHASIS SUPPLIED]' 22. THEREFORE, IN TERMS OF THE ABOVE DECISION, WHER E AN ASSESSEE MAKES PROVISION FOR NPA AND SEEKS DEDUCTION OF SUCH AMOUNT UNDER SECTION 36(1)(VII) O R SECTION 37 OF THE ACT, THEN IN THE COMPUTATION OF INCOME, THE RBI GUIDELINES WOULD HAVE NO ROLE TO PL AY, AND HENCE, AN ADD BACK. INSOFAR AS INCOME RECOGNITION IS CONCERNED, THE SUPREME COURT HAS HEL D THUS: 'APPLICABILITY OF SECTION 145 57. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE THE RBI DIRECTIONS, 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER CHAPTER III-B O F THE RBI ACT, 1934. THESE NORMS DEAL ESSENTIALLY WITH INCOME RECOGNITION. THEY FORCE THE NBFCS TO DISCLOSE THE AMOUNT O F NPA IN THEIR FINANCIAL ACCOUNTS. THEY FO RCE THE NBFCS TO REFLECT 'TRUE AND CORRECT' PROFITS. BY VIRTUE O F SECTION 45-Q, AN OVERRIDING EFFECT IS GI VEN TO THE RBI DIRECTIONS, 1998 VIS-A-VIS 'INCOME RECOGNIT ION' PRINCIPLES IN THE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, TH ESE RBI DIRECTIONS, 15 1998 AND THE IT ACT OPERATE IN DIFFERENT AREAS. THESE RBI DIRECTIONS, 1998 HAVE NOTHING TO DO WITH COMPUTATION O F TAXABLE INCOME. THESE DIRECTIONS CANNOT OVERRULE THE 'PERMISSIBLE DEDUCTIONS' OR 'THEIR EXCLUSION' UNDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND THE COMPANIES ACT IS ONLY IN THE MATTER OF INCOME RECOGNITION AND PRESENTATION O F FINANCIAL STATEMEN TS. THE ACCOUNTING POLICIES ADOPTED BY AN NBFC CANNOT DETERMINE THE TAXABLE INCOME. IT IS WELL SETTLED TH AT THE ACCOUNTING POLICIES FOLLOWED BY A COMPANY CAN B E CHANGED UNLESS THE AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD RESULT IN UNDERSTATEMENT OF PROFI TS. HOWEVER, HERE IS THE CASE WHERE THE AO HAS TO FOLLO W THE RBI DIRECTIONS, 1998 IN VIEW O F SECTION 45-Q O F THE RBI ACT. HENCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE IT ACT HAS NO ROLE TO PLAY IN THE PRESENT DISPUTE.' THUS, INSOFAR AS INCOME RECOGNITION IS CONCERNED, T HE COURT HAS HELD THAT EVEN THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF SECTION 45Q OF THE RBI ACT AND THAT AS FAR AS INCOME RECOGNITIO N IS CONCERNED, SECTION 145 OF THE INCOME TAX ACT, HAS N OT ROLE TO PLAY. 23. IN THE LIGHT OF THE ABOVE DISCUSSION WHAT EMERG ES IS THAT WHILE DETERMINING THE TAX LIABILITY OF AN P A G E | 18 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. ASSESSEE, TWO FACTORS WOULD COME INTO PLAY. FIRSTLY , THE RECOGNITION OF INCOME IN TERMS OF THE RECOGNIZE D ACCOUNTING PRINCIPLES AND AFTER SUCH INCOME IS RECOGNIZED, THE COMPUTATION THEREOF, IN TERMS OF TH E PROVISIONS OF THE INCOME TAX ACT, 1961. INSOFAR AS THE COMPUTATION OF TAXABILITY IS CONCERNED, THE SAME IS SOLELY GOVERNED BY THE PROVISIONS OF THE INCOME TAX ACT AND THE ACCOUNTING PRINCIPLES HAVE NO ROLE TO P LAY. HOWEVER, RECOGNITION OF INCOME STANDS ON A DIFFEREN T FOOTING. INSOFAR AS INCOME RECOGNITION IS CONCERNED , IT WOULD BE THE RBI DIRECTIONS WHICH WOULD PREVAIL IN VIEW OF THE PROVISIONS OF SECTION 45Q OF THE RBI AC T AND SECTION 145 WOULD HAVE NO ROLE TO PLAY. HENCE, THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS. 19. FURTHER RELYING UPON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD. (20 11) 330 ITR 440, THE COURT HELD THAT THE AO HAS TO FOLLOW R BI DIRECTIONS ON REVENUE RECOGNITION, AND HELD AS FOLL OWS: 25. THE DISTINCTION DRAWN BY THE DELHI HIGH COURT IS THAT WHILE THE ACCOUNTING POLICIES OF ADOPTED BY TH E NBFC CANNOT DETERMINE THE TAXABLE INCOME. HOWEVER, INSOFAR AS INCOME RECOGNITION IS CONCERNED, THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF SECTION 45Q OF THE RBI ACT. THAT INSOFAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE INCOME TAX ACT, 1961 HAS NO ROLE TO PLAY . 20. THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. DE OGIRI NAGARI SAHAKARII BANK LTD. & OTHERS, 379 ITR 241 RE ITERATED THE ABOVE PROPOSITION BY HOLDING AT PARA 9 OF ITS O RDER AS FOLLOWS : 9. THE INCOME TAX APPELLATE TRIBUNAL HAS REFERRED THE CASE OF M/S. VASISTH CHAY VYAPAR LIMITED 330 ITR 440 (DELHI). IN THIS CASE, THE REVENUE RELIED U PON THE DECISION OF THE HON'BLE SUPREME IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. SUPRA. THE LEARNED INCOM E TAX APPELLATE TRIBUNAL HAS REPRODUCED THE OBSERVATIONS MADE BY THE DELHI HIGH COURT WHILE REFERRING THE SAID CASE OF M/S SOUTHERN TECHNOLOGIE S LIMITED SUPRA. THE ASSESSEE HEREIN BEING A COOPERATIVE BANK ALSO GOVERNED BY THE RESERVE BANK OF INDIA AND THUS THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDI A ARE EQUALLY APPLICABLE TO THE CO-OPERATIVE BANKS. T HE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LIMITED SUPRA HELD THAT, PROVISIONS OF SECTION 45Q OF RESERVE BANK OF 17 INDIA ACT HAS AN OVERRIDING EFFECT VIS-A-VIS INCOME RECOGNITION PRIN CIPLE P A G E | 19 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. UNDER THE COMPANIES ACT. HENCE, SECTION 45Q OF THE RBI ACT SHALL HAVE OVERRIDING EFFECT OVER THE INCOM E RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIVE BANKS . HENCE, THE ASSESSING OFFICER HAS TO FOLLOW THE RESE RVE BANK OF INDIA DIRECTIONS 1998, AS HELD BY THE HON'B LE SUPREME COURT. 21. FURTHER RELYING UPON THE DECISION OF THE APEX C OURT IN THE CASE OF UCO BANK, CALCUTTA AND MERCANTILE BANK LTD. (SUPRA) IT ALLOWED THE ASSESSEES APPEAL. 22. IT IS EVIDENT FROM THE ABOVE THAT THE ISSUE REG ARDING TAXABILITY OF INTEREST ON NPAS IS SETTLED IN FAVOU R OF THE ASSESSEE AS BEING TAXABLE IN THE YEAR OF RECEIPT. 23. THE GRIEVANCE OF THE REVENUE THAT THE HON'BLE S UPREME COURTS DECISION IN THE CASE OF STATE BANK OF TRAVA NCORE (SUPRA) APPLIES TO THE PRESENT CASE, WE FIND IS MIS PLACED, SINCE AS POINTED OUT ABOVE BY THE LD. COUNSEL OF TH E ASSESSEE, IT HAS BEEN OVERRULED BY THE APEX COURT I TSELF IN THE CASE OF UCO BANK LIMITED (SUPRA) WHEREIN IT WAS POINTED OUT BY THE APEX COURT THAT WHILE RENDER ING THE JUD GMENT IN THE CASE OF STATE BANK OF TRAVANCORE (SUPRA), THE C IRCULAR DATED 9.10.1984 HAD NOT BEEN BROUGHT TO THE NOTICE OF THE COURT, NOR THE SUBSEQUENT DECISION OF THE APEX COUR T IN THE ITA NO. 61(ASR)/2017 ASSESSMENT YEAR: 2013-14 10 CA SE OF K.P.VARGHESE VS. ITO (1981) 131 ITR 597 (SC). THE R ELEVANT EXTRACTS OF THE DECISION IN UCO BANK LIMITED ARE RE PRODUCED HEREUNDER: 'THERE ARE, HOWEVER, TWO DECISIONS OF THIS COURT WH ICH HAVE BEEN STRONGLY RELIED UPON BY THE RESPONDENTS I N THE PRESENT CASE. THE FIRST DECISION IS THE MAJORIT Y JUDGMENT IN THE STATE BANK OF TRAVANCORE V. COMMISSIONER OF INCOME- TAX, KERALA (1986 (158) ITR 102) DECIDED BY A BENCH OF THREE JUDGES OF THIS COU RT BY A MAJORITY OF TWO TO ONE. THIS JUDGMENT DIRECTLY DEALS WITH INTEREST ON 'STICKY ADVANCES' WHICH HAVE BEEN DEBITED TO THE CUSTOMER BUT TAKEN TO THE INTER EST SUSPENSE ACCOUNT BY A BANKING COMPANY. THE MAJORITY JUDGMENT HAS REFERRED TO THE CIRCULAR OF 6 TH OF OCTOBER, 1952 AND ITS WITHDRAWAL BY THE SECOND CIRCULAR OF 20TH OF JUNE, 1978. THE MAJORITY APPEAR S TO HAVE PROCEEDED ON THE BASIS THAT BY THE SECOND CIRCULAR OF 20TH OF JUNE, 1978 THE CENTRAL BOARD HA D DIRECTED THAT INTEREST IN THE SUSPENSE ACCOUNT ON 'STICKY' ADVANCES SHOULD BE INCLUDIBLE IN THE TAXAB LE INCOME OF THE ASSESSEE AND ALL PENDING CASES SHOULD BE DISPOSED OF KEEPING THESE INSTRUCTIONS IN VIEW. THE SUBSEQUENT CIRCULAR OF 9TH OF OCTOBER, 1984 BY WHIC H, FROM THE ASSESSMENT YEAR 1979-80 THE BANKING COMPANIES WERE GIVEN THE BENEFIT OF THE CIRCULAR OF 9TH OF OCTOBER, 1984, DOES NOT APPEAR TO HAVE BEEN P A G E | 20 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. POINTED OUT TO THE COURT. WHAT WAS SUBMITTED BEFORE THE COURT WAS, THAT SINCE SUCH INTEREST HAD BEEN ALLOWED TO BE EXEMPTED FOR MORE THAN HALF A CENTURY , THE PRACTICE HAD TRANSFORMED ITSELF INTO LAW AND TH IS POSITION SHOULD NOT HAVE BEEN DEVIATED FROM. NEGATIVING THIS CONTENTION, THE COURT SAID THAT THE QUESTION OF HOW FAR THE CONCEPT OF REAL INCOME ENTE RS INTO THE QUESTION OF TAXABILITY IN THE FACTS AND CIRCUMSTANCES OF THE CASE, AND HOW FAR AND TO WHAT EXTENT THE CONCEPT OF REAL INCOME SHOULD INTERMINGL E WITH THE ACCRUAL OF INCOME, WILL HAVE TO BE JUDGED 'IN THE LIGHT OF THE PROVISIONS OF THE ACT, THE PRINCIP LES OF ACCOUNTANCY RECOGNISED AND FOLLOWED, AND FEASIBILIT Y'. THE COURT SAID THAT THE EARLIER CIRCULARS BEING EXECUTIVE IN CHARACTER CANNOT ALTER THE PROVISIONS OF THE ACT. THESE WERE IN THE NATURE OF CONCESSIONS WHICH COULD ALWAYS BE PROSPECTIVELY WITHDRAWN. THE COURT ALSO OBSERVED THAT THE CIRCULARS CANNOT DETRA CT FROM THE ACT. THE DECISION OF THE CONSTITUTION BENC H OF THIS COURT IN NAVNITLAL C. JAVERI V. K.K. SEN (SUPR A), OR THE SUBSEQUENT DECISION IN K.P. VARGHESE V. 19 INCO ME TAX OFFICER (SUPRA) ALSO DO NOT APPEAR TO HAVE BEEN POINTED OUT TO THE COURT. SINCE THE LATER CIRCULAR OF 9.10.1984 WAS NOT POINTED OUT TO THE COURT, THE COU RT NATURALLY PROCEEDED ON THE ASSUMPTION THAT THE BENEFIT GRANTED UNDER THE EARLIER CIRCULAR WAS NO LONGER AVAILABLE TO THE ASSESSEE AND THOSE CIRCULAR S COULD NOT BE RESORTED TO FOR THE PURPOSE OF OVERCOM ING THE PROVISIONS OF THE ACT. INTERESTINGLY, THE CONCU RRING JUDGMENT OF THE SECOND JUDGE HAS NOT DEALT WITH THI S QUESTION AT ALL BUT HAS DECIDED THE MATTER ON THE B ASIS OF OTHER PROVISIONS OF LAW.' 24. THEREFORE, THE CONTENTION OF THE REVENUE THAT T HE DECISION IN THE CASE OF STATE BANK OF TRAVANCORE (SUPRA) APP LIES TO THE ASSESSEES CASE IS DISMISSED. 25. THE ARGUMENT OF THE LEARNED D.R. THAT THE DECIS ION OF THE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD. (SUPRA) WOULD NOT APPLY TO THE ASSESSEES CASE SINC E THE ASSESSEE IS A COOPERATIVE SOCIETY WHILE IN THE CASE OF VASISTH CHAY VYAPAR LTD. (SUPRA), THE ASSESSEE WAS A NBFC, IS ALSO DISMISSED SINCE THE PR INCIPLE ENUNCIATED BY THE DE LHI HIGH COURT IN VASISTH CHAY VYAPAR LTD. (SUPRA) HAS BEEN FOLLOWED IN THE CASE OF SHRI MAHILA SEWA SAHAKARI BANK LTD. (SUPRA) BY THE HON'BLE GUJARAT HIGH COURT AND VARIOUS OTHER DECISIONS CITED BY THE ASSESSEE BEFORE US ,AND THE ASSESSEE IN ALL THOSE CASES BEING A COOPERATIVE BANK, THE DE CISION RENDERED THEREIN SQUARELY APPLIES TO THE CASE OF TH E ASSESSEE. 26. THE ARGUMENT OF THE LEARNED D.R. THAT THE ASSES SEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IS AL SO P A G E | 21 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. DISMISSED SINCE THIS ASPECT HAS BEEN DEALT WITH BY 20 VARIOUS HIGH COURTS REFERRED TO ABOVE WHEREIN THEY HAVE CATEGORICALLY HELD THAT EVEN FOLLOWING THE MERCANTI LE SYSTEM OF ACCOUNTING THE INTEREST ON NPA ACCOUNT CANNOT BE SAID TO HAVE ACCRUED IN THE IMPUGNED YEAR SINCE THE RECOVER Y OF THE SAME WAS IMPOSSIBLE AND EVEN OTHERWISE FOR THE PURP OSE OF INCOME RECOGNITION THE RBI DIRECTIONS, 1998, HAD TO BE FOLLOWED IN VIEW OF SECTION 45Q OF THE RBI ACT. 27. IN THE LIGHT OF THE ABOVE DISCUSSION WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A),HOLDING THE INTEREST ON NPA S AS TAXABLE IN THE YEAR OF RECEIPT , SO AS TO WARRANT I NTERFERENCE. 28. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. THEREFORE FOLLOWING THE ABOVE JUDICIAL PRECEDENTS, WE DO NOT FIND ANY MERIT IN THE GROUNDS TAKEN BY REVENUE. 7. IN VIEW OF THE ABOVE, THE APPEALS FILED BY REVEN UE ARE DISMISSED. IN VIEW OF THE ABOVE JUDICIAL PRECEDENTS, GROUND NO . 1 OF REVENUES APPEAL IS DISMISSED. ITA NO. 61(ASR)/2017 ASSESSMEN T YEAR: 2013- 14 12 NOW COMING TO GROUND NO. 2 REGARDING PROVISIO NS AGAINST THE STANDARD ASSETS, WE FIND THAT THE SAME IS ALSO COVE RED IN FAVOUR OF ASSESSEE BY THE ORDER OF THE HON'BLE TRIBUNAL IN TH E CASE OF PUNJAB GRAMIN COOPERATIVE BANK. FOR THE SAKE OF COMPLETENE SS, THE FINDINGS OF THE HON'BLE TRIBUNAL ARE REPRODUCED BEL OW: 12. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE THROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT THE ISS UE OF PROVISION FOR DOUBTFUL DEBTS ON STANDARD ASSETS IS COVERED IN FAVOUR OF ASSESSEE BY THE ORDER OF THE TRIBUNAL DAT ED 22.06.2016 FOR ASSESSMENT YEAR: 2008-09, WHEREIN TH E APPEAL OF THE REVENUE WAS DISMISSED WHICH WAS FILED BY REVENUE ON SIMILAR GROUNDS. THE RELEVANT FINDINGS O F THE TRIBUNAL AS CONTAINED IN PARA 8 ONWARDS ARE REPRODU CED BELOW. 8. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE THROUGH THE MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAD CREATED A PROVISION OF RS. 50,00,000/- WHICH INCLUDED A SUM OF RS. 13,25,000/- AS PROVISIONS FOR BAD AND DOUBTFUL DEBTS AND THE BALAN CE AMOUNT OF RS. 36,75,000/- WAS PROVISION AGAINST STANDARD ASSETS AND THE ENTIRE AMOUNT WAS CLAIMED AS DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE ACT. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE PROVISIONS MADE BY THE ASSESSEE AGAINST STANDARD ASSETS WAS A CONTINGENT LIABILITY AND WHICH WAS NOT ALLOWABLE AS BUSINESS EXPENDITURE. THE LD. CIT(A), HOWEVER, ALLOWED RELIEF TO THE ASSESSEE BY HOLDING THAT THE CLAIM OF THE ASSESSEE FALL INTO THE MAIN PROVISIONS OF SECTION 36(1)(VIIA). TO RESOLVE THE D ISPUTE P A G E | 22 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. IT IS IMPORTANT TO VISIT THE PROVISIONS OF SECTION 36(1)(VIIA) OF THE ACT AND WHICH FOR THE SAKE OF CONVENIENCE ARE REPRODUCED BELOW. 36(1)(VIIA) IN RESPECT OF ANY PROVISION FOR BAD AN D DOUBTFUL DEBTS MADE BY (A) A SCHEDULED BANK [NOT BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A NON-SCHEDULED BANK OR A CO-OPERATIVE BANK OUTSIDE INDIA] OR A PRIMARY CO- OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK, AN AMOUNT NOT EXCEEDING SEVEN AND ONEHALF PERCENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A) AND A N AMOUNT NOT EXCEEDING TEN PERCENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER. PROVIDED THAT A SCHEDULE BANK OR A NON- SCHEDULED BANK REFERRED TO IN THIS SUB-CLAUSE SHALL , AT ITS OPTION, BE ALLOWED IN ANY OF THE RELEVANT ASSESSMENT YEARS DEDUCTION IN RESPECT OF ANY PROVISION MADE BY IT FOR ANY ASSETS CLASSIFIED BY T HE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS ASSETS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY IT IN THIS BEHALF, FOR AN AMOUNT NOT EXCEEDING FIVE PERCENT OF THE AMOUNT OF SUCH ASSETS SHOWN IN THE BOOKS OF ACCOUNT OF THE BANK ON THE LAST DAY OF THE PREVIOUS YEAR. PROVIDED FURTHER THAT FOR THE RELEVANT ASSESSMENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2003 AND ENDING BEFORE THE 1ST DAY OF APR IL, 2005, THE PROVISIONS OF THE FIRST PROVISO SHALL HAV E EFFECT AS IF FOR THE WORDS FIVE PERCENT, THE WORD S TEN PERCENT HAD BEEN SUBSTITUTED. PROVIDED ALSO THAT A SCHEDULED BANK OR A NON- SCHEDULED BANK REFERRED TO IN THIS SUB-CLAUSE SHALL , AT ITS OPTION, BE ALLOWED A FURTHER DEDUCTION IN EXCES S OF THE LIMITS SPECIFIED IN THE FOREGOING PROVISIONS, F OR AN AMOUNT NOT EXCEEDING THE INCOME DERIVED FROM REDEMPTION OF SECURITIES IN ACCORDANCE WITH A SCHEM E FRAMED BY THE CENTRAL GOVERNMENT. PROVIDED ALSO THAT NO DEDUCTION SHALL BE ALLOWED UNDER THE THIRD PROVISO UNLESS SUCH INCOME HAS BEEN DISCLOSED IN THE RETURN OF INCOME UNDER TH E HEAD PROFITS AND GAINS BUSINESS OR PROFESSION. FROM THE ABOVE PROVISIONS IT CAN BE SEEN THAT DEDUCTION U/S 36(1) (VIIA) OF THE ACT IS ALLOWED IN RESPECT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS. T HIS SECTION DOES NOT DIFFERENTIATE BETWEEN PROVISION ON P A G E | 23 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. BAD ASSETS AND PROVISION ON STANDARD ASSETS. THIS DEDUCTION EXCLUSIVELY ALLOWS DEDUCTION IN RESPECT O F PROVISION FOR BAD AND DOUBTFUL DEBTS TO THE EXTENT MENTIONED IN THE VARIOUS CLAUSES OF SUB-SECTION (1) OF SECTION 36 OF THE ACT. THE DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE ACT IS ALLOWED ONLY IN RESPECT O F CERTAIN SPECIFIC CATEGORIES OF ASSESSEE MENTIONED I N THE CLAUSE LIKE BANKS, FINANCIAL INSTITUTIONS, ETC. WHO ARE IN BUSINESS OF LENDING MONEY. IT IS NOT ALLOWED EVEN TO NON-BANKING FINANCIAL INSTITUTIONS SINCE TH EY ARE NOT INCLUDED IN THIS CLAUSE. IT IS SEEN THAT TH OUGH SECTION 36(1) (VII) STATES THAT DEDUCTION FOR PROVI SION IS ALLOWABLE IN RESPECT OF PROVISION FOR BAD AND DOUBT FUL DEBTS, THE COMPUTATION OF SUCH DEDUCTION IS MADE WI TH REFERENCE TO TOTAL INCOME OF THE SPECIFIED BANKS BA SED UPON QUANTUM OF AVERAGE ADVANCES. THE DEDUCTION OF THE PROVISIONS IS NEITHER LIMITED TO THE QUANTUM OF BAD DEBTS IN THE BOOKS NOR IS COMPUTED WITH REFERENCE T O THE QUANTUM OF STANDARD ASSETS. THE DEDUCTION IN TH IS CLAUSE REFERS TO ALLOWABLE PROVISIONS OF ANTICIPATE D DEFAULT ON THE LOANS AND ADVANCES MADE IN RESPECT O F TOTAL ASSETS INCLUDING STANDARD ASSETS AND THE CLAI M OF THE ASSESSEE DOES NOT FALL INTO THE PROVISO TO S ECTION 36(1) (VIIA) AS THE PROVISO DEALS WITH FURTHER DEDU CTION FOR PROVISIONS ON BAD AND DOUBTFUL DEBTS. THE CLAIM OF THE ASSESSEE IS COVERED IN THE MAIN PROVISIONS OF SECTION 36(1)(VIIA) OF THE ACT. THE LD. CIT(A) HAS PASSED A VERY EXHAUSTIVE AND SPEAKING ORDER AND WE DO NOT FIND ANY INFIRMITY IN THE SAME. THEREFORE FOLLOWING THE ABOVE TRIBUNAL ORDER, WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF LD. CIT(A). 13. IN VIEW OF THE ABOVE FACT AND CIRCUMSTANCES TH E GROUNDS OF APPEAL RAISED BY REVENUE IN ITA NO. 580 & 569 AR E DISMISSED. IN VIEW OF THE ABOVE PRECEDENTS THE GROUND NO. 2 IS ALSO DISMISSED. WE THUS FINDING OURSELVES TO BE IN AGREEMENT WITH T HE AFORESAID VIEW TAKEN BY THE TRIBUNAL, RESPECTFULLY FOLLOW THE SAME . IN TERMS OF OUR AFORESAID OBSERVATIONS, WE ARE OF THE CONSIDERED VI EW THAT THE CIT(A) OBSERVING THAT THE INTEREST ON NPA ASSETS COULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE ON ACCRUAL BASIS, HAD THUS R IGHTLY DELETED THE ADDITION OF RS. 1,93,31,040/- MADE BY THE A.O ON AC COUNT OF INTEREST ACCRUED ON NPAS, UPHOLD HER ORDER TO THE SAID EXTE NT. P A G E | 24 ITA NO. 517 & 544/ASR/2017, A.Y. 2014-15 THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. VS. DCIT & DCIT VS. THE NAWANSHEHAR CENTRAL CO OPERATIVE BANK LTD. 12. IN TERMS OF OUR AFORESAID OBSERVATIONS THE APPE AL OF THE ASSESSEE I.E. ITA NO. 517/ASR/2017 IS ALLOWED AND THAT OF TH E REVENUE I.E. ITA NO. 544/ASR/2017 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 11/03/2019 SD/- SD/- ( N.K. SAINI) (RAVISH SOOD) VICE PRESIDENT JUDICIAL ME MBER PLACE : CHANDIGARH; DATED 11.03.2019 PS. ROHIT / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A)- 4. / CIT 5. DR, ITAT, CAMP BENCH, JALANDHAR 6. / GUARD FILE. //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) /ITAT, CAMP. BENCH, JALANDHAR