The Chathamangalam Service Co-operative Bank Ltd, Calicut V. The ITO, Calicut

ITA 6/COCH/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8563 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 20-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 06-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A DHANARAJ
• Assessee Lawyers: PREETHA S NAIR
• Keywords: Opportunity of being heard; Bad and doubtful debts
• Section: 43B

Judgement Text

ITA NO .6/COCH/2015 1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN (SMC) BEFORE SHRI B P JAIN , ACCOUNTANT MEMBER ITA NO 6/COCH/2015 (A SST YEAR 2010 - 11 ) THE CHATHAMANGALAM SERVICE COOP BANK LTD CHATHAMANGALAM KOZHIKODE 673 601 VS THE INCOME TAX OFFICER WARD 2(3 ), KOZHIKODE ( APPELLANT) (RESPONDENT) PAN NO. AAABT2901P ASSESSEE BY SMT PREETHA S NAIR REVENUE BY SH A DHANARAJ, SR DR DATE OF HEARING 20 TH JUNE 2016 DATE OF PRONOUNCEMENT 21 ST JUNE 2016 ORDER PER B P JAIN, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER THE CIT(A), KOZHIKODE DATED 30 TH SEPT 2014 FOR THE ASSESSMENT YEAR 2010 - 11. 2 THE ASSESSEE HAS RAISED BASICALLY TWO GROUNDS OF APPEAL; FIRSTLY , THAT U/S 36(I)(VIIA) SUB CLAUSE (A) OF THE I T ACT FOR RS. 4,81,5 70/ - AND TO GRANT DEDUCTION FROM THE TOTAL INCOME U/S 36(I)(VIIA) IN TWO LIMBS. THE DEDUCTION UNDER FIRST LIM B IS (7.5 % OF THE TOTAL INCOME BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI - A) IS A SEPARATE DEDUCTION AND THIS DEDUCTION DOES NOT HAVE ANY CONNECTION WITH DEDUCTION UNDER SECOND PART OF THIS SECTION (10% OF THE ITA NO .6/COCH/2015 2 AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANK). SECONDLY, AGAINST U/S 43B FOR A SUM OF RS.1,10,868/ - IN RESPECT OF PROVISION FOR LEAVE SALARY WHICH WAS P AID WITHIN THE STATUTORY TIME LIMIT. 3 THE ASSESSEE HAS RAISED ADDITIONAL GROUND WHICH READS AS UNDER: THE AO AS WELL AS THE CIT HAVE GROSSLY ERRED IN REJECTING THE CLAIM OF DEDUCTION MADE BY THE PETITIONER COOPERATIVE BANK FOR A SUM OF RS. 80,57,750/ - FOR THE RESERVE FOR OVERDUE INTEREST. 4 THE LD COUNSEL FOR THE ASSESSEE MRS PREETHA S NAIR PLACED ON RECORD THE AFFIDAVIT EXPLAINING THE PETITION FOR ADMISSION OF ADDITIONAL GROUND STATING THAT THE PETITIONER BANK IS A COOPERATIVE BANK REGISTERED UNDER T HE KERALA COOPERATIVE SOCIETIES ACT, 1969 WHERE THE SOCIETY ADVANCES LOANS AND CREDIT FACILITIES MAINLY TO SMALL AND MARGINAL FARMERS ETC. THE ASSESSEE HAS DECLARED THE GROSS INTEREST RECEIVABLE, WHICH IS THE MAIN SOURCE OF INCOME AT RS. 1,49,64,278/ - WHICH INCLUDES THE OVERDUE INTEREST OF RS 80,57,750/ - . THE AMOUNT OF OVERDUE INTEREST IS UNLIKELY TO BE REALIZED AND AS SUCH NOT FIT FOR RECOGNITION AS INCOME AND ACCORDINGLY THE SAID AMOUNT OF UNREALIZABLE INTEREST HAS BEEN SHO WN AS EXPENDITURE BY DEBITING THE P&L ACCOUNT UNDER THE HEAD RESERVE FOR OVERDUE INTEREST. IT WAS STATED THAT THE AO HAS DISALLOWED THE CLAIM IN THE COMPUTATIONAL PART AND NOT DISCUSSED OR MADE EVEN A WHISPER IN THE BODY OF THE ORDER. ITA NO .6/COCH/2015 3 5 AS REGARDS THE G ROUND FOR RESERVE FOR BAD AND DOUBTFUL DEBTS THE LD CIT(A) FOLLOWING THE JUDGMENT DATED 17 TH FEB 2012 OF THE HONBLE SUPREME COURT IN CIVIL APPEAL NO.1143 OF 2011 IN THE CASE OF CATHOLIC SYRIAN BANK LTD VS CIT DISMISSED THE GROUND OF THE ASSESSEE. THE LD COUNSEL ARGUED THAT THE CIT(A) ALSO DID NOT GIVE ANY FINDINGS HOW THE SAID CASE OF CATHOLIC SYRIAN BANK (SUPRA) IS APPLICABLE IN THE PRESENT CASE. THE LD COUNSEL ALSO RELIED ON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF KANNUR DISTRICT CO - OPERATIVE BANK LTD VS CIT REPORTED IN (2014) 365 ITR 0343 WHEREIN IT HAS BEEN CLEARLY MENTIONED AT PAGE 349 THAT SECTION 36(1)(VIIA) REFERS TO THE DEDUCTION OF AN AMOUNT NOT EXCEEDING 7.5 PER CENT. OF THE TOTAL INCOME WHEREAS THE SECOND ONE RE FERS TO THE DEDUCTION OF AN A MOUNT NOT EXCEEDING 10 PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF SUCH BANK WHILE COMPUTING IN THE PRESCRIBED MANNER. SHE ALSO RELIED ON THE ORDER DATED 14 TH MAY 2015 OF THE COCHIN BENCH OF THE TRIBUNA L IN ITA NO.556/COCH/ 2014 WHEREIN ALSO THE TRIBUNAL REFERS TO THE FIRST LIMB I.E.7.5% OF THE TOTAL INCOME AND ACCORDINGLY IN THE SAID ORDER, THE QUESTION OF CONSIDERATION OF RURAL ADVANCES DOES NOT ARISE FOR THE DEDUCTION CLAIMED UNDER FIRST LIMB OF SECT ION 36(1)(VIIA) OF THE ACT AND ACCORDINGLY, THE ADDITION WAS DELETED. 5.1 THE LD DR, ON THE OTHER HAND RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. ITA NO .6/COCH/2015 4 6 I HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AT THE OUTSET, I FIND THAT TH E AO HAS NOT DISCUSSED AT ALL ANYTHING ABOUT THE CONTENTS OF THE GROUND RAISED BY THE ASSESSEE AND HAD MADE THE ADDITION IN THE COMPUTATION PART . THE LD CIT(A) ALSO HAS NOT GIVEN ANY COGENT REASON IN HIS ORDER AND HAS SIMPLY RELIED ON THE JUDGMENT OF TH E CATHOLIC SYRIAN BANK LTD (SUPRA). 6.1 AS REGARDS THE DECISION IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA), THE ISSUE WAS WHETHER THE CLAIM @ 10% OF RURAL BRANCH ADVANCES MADE WHEREAS THE ISSUE IN THE PRESENT CASE IS WITH REGARD TO THE FIRST LIMB OF SEC TION 36(1)(VIIA) OF THE ACT. THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF KANNUR DISTRICT CO - OPERATIVE BANK LTD (SUPRA), WHICH IS REPRODUCED HEREIN BELOW: PROVIDED UNDER SECTION 36(1) OF THE ACT. WE ARE CO NCERNED WITH SUB - CLAUSE (A) OF CLAUSE (VIIA) OF SECTION 36(1). PRIOR TO THE FINANCE ACT OF 2007, CO - OPERATIVE BANK WAS NOT INCLUDED IN SUB - CLAUSE (A) SO FAR AS THE PROVISIONS FOR BAD AND DOUBTFUL DEBTS. WITH EFFECT FROM APRIL 1, 2007, CO - OPERATIVE BANK WA S INCLUDED UNDER SUB - CLAUSE (A) OF CLAUSE (VIIA) OF SECTION 36(1). IT IS FURTHER CLARIFIED THAT ONLY SUCH CO - OPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURE CREDIT SOCIETY, ETC., IS INCLUDED IN SUB - CLAUSE (A) OF CLAUSE (VIIA). THE PROVISION IS A BENEFICIAL ONE. NO DOUBT, A PLAIN READING OF THE MAIN SECTION 36(1)(VIIA)(A) AND THE EXPLANATION UNDER THE SAID SECTION PRESENT CERTAIN DIFFICULTIES BUT SITUATION IS NOT WITHOUT POSSIBILITIES. THE OBJECT AND THE INTENTION OF THE LEGISLATURE IS TO BE UNDERSTOOD BY HA RMONIOUS CONSTRUCTION OF THE PROVISIONS. THE POLICY WAS TO INCLUDE CO - OPERATIVE BANKS AS WELL, AS THEY COULD NOT TAKE SHELTER UNDER SECTION 80P OF THE INCOME - TAX ACT ANY MORE. BY RESTRICTING THE SCOPE OF THE PROVISIONS, THE VERY PURPOSE OF INCLUSION OF CO - OPERATIVE BANK WOULD BE LOST. SUB - CLAUSE (A) CONSISTS OF TWO TYPES OF DEDUCTIONS. ONE REFERS TO THE DEDUCTION OF AN AMOUNT NOT EXCEEDING 7.5 PER CENT. OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI - A). THE SECOND ONE REFERS TO THE DEDUCTION OF AN AMOUNT NOT EXCEEDING 10 PER CENT. OF THE AGGREGATE AVERAGE ITA NO .6/COCH/2015 5 ADVANCES MADE BY RURAL BRANCHES OF SUCH BANK WHILE COMPUTING IN THE PRESCRIBED MANNER. SO FAR AS THE BENEFIT OF 7.5 PER CENT. OF THE TOTAL INCOME, THERE IS NO CON DITION THAT IT SHOULD BE IN RESPECT OF ANY RURAL BRANCH. ALL TYPES OF BANKS DESCRIBED UNDER SUB - CLAUSE (A) OF CLAUSE (VIIA) ARE ENTITLED TO SEEK DEDUCTION OF AN AMOUNT NOT EXCEEDING 7.5 PER CENT. OF THE TOTAL INCOME. ONLY CONDITION IS, THERE SHOULD BE A PR OVISION FOR BAD AND DOUBTFUL DEBTS. TILL APRIL 1, 2007, THERE WAS NO NEED TO MAKE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS UNDER THIS CLAUSE SO FAR AS CO - OPERATIVE BANK AND THEY WERE CLAIMING BENEFITS APPLICABLE TO THEM UNDER SECTION 80P. DURING THE ASSESS MENT YEAR IN QUESTION THEY CLAIMED DEDUCTIONS UNDER SECTION 36(1)(VIIA)(A) OF THE ACT. ONLY WITH REFERENCE TO THE ASSESSMENT YEAR IN QUESTION THE APPELLANTS - ASSESSEES HAVE CREATED PROVISION FOR BAD AND DOUBTFUL DEBTS IN THE BOOKS OF ACCOUNT. SO FAR AS THIS ISSUE IS CONCERNED, THE OPINION OF THE ASSESSING OFFICER AND THE TWO APPELLATE AUTHORITIES IS JUSTIFIED AND WE NEED NOT INTERFERE WITH THE OPINION OF THE AUTHORITIES IN RESTRICTING THE DEDUCTIONS ONLY TO 7.5 PER CENT. OF THE TOTAL INCOME AS PROVIDED UNDER CLAUSE (VIIA) OF SECTION 36(1). 6.2 IN THE PRESENT CASE ALSO THE ASSESSEES CLAIM IS WITH REGARD TO 7.5% OF THE TOTAL INCOME AND NOT WITH REGARD TO THE SECOND LIMB AND THEREFORE, THE DECISION IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) IS NOT APPLICABLE. 7 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE, GROUND NO.1 OF THE ASSESSEE IS ALLOWED. 8 AS REGARD THE GROUND WITH REGARD TO DEDUCTION U/S 43B, THE AO HAS MADE A DISALLOWANCE OF RS. 3,44,630/ - BUT HAS NOT DISCUSSED ANYTHING IN THE BODY OF THE ORDER WHEREAS THE LD CIT(A) ALSO HAS CONFIRMED THE ACTION OF THE AO WITHOUT STATING ANY REASON THEREOF. ITA NO .6/COCH/2015 6 9 IT WAS ARGUED THAT THE PAYMENT OF RS. 1,10,868/ - HAD BEEN MADE DURING THE YEAR AND THE SAME IS ALLOWABLE ON PAYMENT BASIS U/S 43B OF THE ACT, WHICH ASPECT HAS NOT BEEN EXAMINED BY THE AUTHORITIES BELOW. IN THE INTEREST OF JUSTICE AND EQUITY, I SET ASIDE THE ISSUE TO THE AO TO DECIDE THE SAME DE - NOVO AFTER EXAMINING THE CLAIM OF THE ASSESSEE BY AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, GROUND NO.2 IS ALLOWED FOR STATISTICAL PURPOSE. 10 NOW, WE TAKE UP FOR ADJUDICATION THE ADDITIONAL GROUND RAISED BY THE ASSESSEE. 11 THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 80,57,750/ - FOR RESERVES FOR OVERDUE INTEREST. THE AO HAS SIMPLY DISALLOWED THE SAME IN THE COMPUTATION PART AND HAS NOT DISCUSSED ANYTHING IN THE BODY OF THE ORDER. THE LD CIT(A) HAS CONFIRMED THE ACTION OF THE AO BY FOLLOWING THE DECISION OF THE COCHIN BENCH OF THE TRIBUNAL IN THE CASE OF M/S PAPPI NISSERI COOPERATIVE RURAL BANK LTD VS ITO, KANNUR IN ITA NOS 711 TO 714/COCH/2013 VIDE ORDER DATED 8.8.2014 FOR THE AY 2007 - 08 TO 2010 - 11. 12 IT WAS ARGUED BY THE LD COUNSEL FOR THE ASSESSEE THAT THE DECISION OF THE COCHIN BENCH OF THE TRIBUNAL IN THE CAS E OF M/S PAPPINISSERI COOPERATIVE RURAL BANK LTD (SUPRA ) IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE, SINCE THE SAID ITA NO .6/COCH/2015 7 CASE IS WITH REGARD TO THE SECOND LIMB OF SECTION 36(1)(VIIA) OF THE ACT WITH REGARD TO DEDUCTION OF 10% AND NOT 7.5%. THE LD COUNSEL A LSO RELIED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SOLAPUR DISTRICT CENTRAL COOP BANK LTD IN ITA NO.495/PN/2012 VIDE ORDER DATED 29 TH SEPT 2014 AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK VS CIT REPORTE D IN 237 ITR 889. 12.1 ON THE OTHER HAND, THE LD DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 13 AFTER HEARING BOTH THE PARTIES, L ADMIT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE SINCE THE MATTER GOES DEEP IN TO THE ROUTE OF THE MATTER. AS REGARD S THE ISSUE RAISED IN THE ADDITIONAL GROUND, THE SAME IS COVERED BY THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SOLAPUR DISTRICT CENTRAL COOP BANK LTD (SUPRA) . THE RELEVANT OBSERVATIONS AND THE FINDINGS OF THE TRIBUNAL ARE REPRODUCED HER EIN BELOW: 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 DECISION OF THE PUNE BENCH OF THE TRIBUNAL I N THE CASE OF ACIT VS. THE OMERGA JANTA SAHAKARI BANK LTD. VIDE ORDER DATED 31.10.2013 AND ALSO OTHER SUBSEQUENT DECISIONS OF THE PUNE BENCH OF THE TRIBUNAL. APART THEREFROM, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S KEC HOLDINGS LIMITED VID E INCOME TAX APPEAL NO.221 OF 2012 DATED 11.06.2014 HAS ALSO APPROVED THE PROPOSITION 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 CA SE SETUP BY THE REVENUE IS THAT ASSESSEE HAD INDEED CREDITED SUCH INCOME IN ITS PROFIT & LOSS ACCOUNT AND THERE IS AN EQUIVALENT 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 IMPUGNED INCOME, THOUGH RELATABLE TO NPAS, IS DEEMED TO HAVE ACCRUED SINCE ITA NO .6/COCH/2015 8 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 AND IT IS NOT AN AL LOWABLE DEDUCTION. 6. IN THE ABOVE BACKGROUND, WE HAVE CONSIDERED THE RIVAL STANDS. THE ASSESSEE HAS ALSO FURNISHED AN AFFIDAVIT ON OATH DATED 05.10.2013 ENUMERATING THE VARIOUS FACTUAL ASPECTS AND IN RESPONSE THE REVENUE HAS ALSO FURNISHED ITS SAY IN TER MS OF WRITTEN COMMENTS DATED 18.11.2013 BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 2, SOLAPUR, THE ASSESSING OFFICER IN THIS CASE. BEFORE DWELLING ON THE RIVAL ARGUMENTS ON THE OBJECTIONS RAISED BY THE REVENUE WE CONSIDER IT APPROPRIATE TO BRIEFL Y 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 SOCIETY AND IS CARRYING ON THE BANKING BUSINESS. FOR THE FINANCIAL YEAR 2007 - 08 CORRESP ONDING TO THE ASSESSMENT YEAR UNDER CONSIDERATION IT FILED A RETURN OF INCOME WHICH WAS ACCOMPANIED BY, INTER - ALIA, AUDITED BALANCE - SHEET AND PROFIT & LOSS ACCOUNT. IN THE CONSOLIDATED PROFIT & LOSS ACCOUNT FOR THE FINANCIAL YEAR UNDER CONSIDERATION, A COP Y OF WHICH IS AT PAGE 51 OF THE PAPER BOOK, ON THE CREDIT SIDE UNDER THE HEADING INTEREST RECEIVED, INTEREST 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 EXPLAINED T HAT THE AFORESAID INTEREST INCOME CREDITED IN THE PROFIT & LOSS ACCOUNT INCLUDE RS.46,30,12,177/ - AND RS.71,73,189/ - ON ACCOUNT OF SOCIETY LOANS AND INDIVIDUAL LOANS RESPECTIVELY WHICH ARE RELATABLE TO LOANS/ADVANCES TO CUSTOMERS CLASSIFIED AS NPAS AS PER RBI NORMS. SIMILARLY, ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT UNDER THE HEADING INTEREST 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 LOAN S RESPECTIVELY. SIMILARLY, ON THE LIABILITIES SIDE OF THE BALANCE - SHEET AN ENTRY OF RS.82,81,68,339/ - STYLED AS OVERDUE INTEREST RESERVE 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 RECEIVABLE ON NPAS, WHICH IS APPEARING ON THE ASSETS SIDE ON THE BALANCE - SHEET UNDER THE HEADING INTEREST RECEIVABLE, WITH SUB - HEADINGS ON SOCIETY LOANS AND ON INDIVIDUAL LOANS. 8. DUE TO THE AFORESAID DEPICTION IN FINA NCIAL STATEMENTS, THE CASE OF THE REVENUE IS THAT THE INTEREST ON NPAS HAVE BEEN CREDITED IN THE PROFIT & LOSS ITA NO.495/PN/2012 5 ACCOUNT AND THUS ITS ACCRUAL HAS BEEN ACCEPTED BY THE ASSESSEE; AND THAT THE CONTRA ENTRY BY WAY OF DEBIT IN THE PROFIT & LO SS ACCOUNT IS TO BE UNDERSTOOD AS A MERE PROVISION AND, SINCE A PROVISION IS NOT AN ALLOWABLE DEDUCTION, THE AMOUNT OF RS.47,01,85,366/ - HAS BEEN ADDED TO THE TOTAL INCOME. 9. THE CLAIM OF THE ASSESSEE IS THAT IT IS INCORRECT TO SAY THAT IT HAS CREATED A RESERVE/PROVISION IN RESPECT OF THE OVERDUE INTEREST ON NPAS. IT IS EXPLAINED THAT INSTEAD OF NETTING OF THE INTEREST ON LOANS, THE BANK HAS SHOWN THE GROSS INTEREST ON CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT AND ON THE DEBIT SIDE OF THE PROFIT & LOSS AC COUNT THE AMOUNT OF INTEREST ON NPAS HAS BEEN SEPARATELY SHOWN. IT IS FURTHER POINTED OUT THAT AMOUNT ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT IS ITA NO .6/COCH/2015 9 NOT APPEARING AS A PROVISION. 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 APPEAR UNDER THE HEAD RESERVE AND OTHER FUNDS BUT IS SEPARATELY DISCLOSED AS OVERDUE INTEREST RESERVE. IT IS ALSO POINTED OUT THAT THE TREATMENT IN THE FINANCIAL STATEMENT OF THE ASSE SSEE WOULD SHOW THAT IT HAS NEVER CREATED IN 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 FOLLOWING AVERMENTS IN THE AFFIDAVIT ARE RELEVANT : - 3. IT IS RESPE CTFULLY SUBMITTED THAT IN THE BALANCE 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 INTEREST RESERVE. THE BANK SUBMITS THAT THE TERM RESERVE IS MISTAKENLY USED AND IS ERRONEOU S AND IN FACT IT IS A CONTRA ENTRY FOR INTEREST RECEIVABLE ON N.P.A. WHICH IS APPEARING ON ASSET SIDE OF THE BALANCE SHEET UNDER THE HEADING INTEREST RECEIVABLE AND SUB HEADING ON SOCIETY LOANS AND ON INDIVIDUAL LOAN. THE BANK SUBMITS THAT THE SAID AMOUNT OF RS.82,81,68,339.10 IS NOT APPEARING ON LIABILITY SIDE OF THE BALANCE SHEET UNDER THE HEADING RESERVES AND OTHER 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 I NTEREST 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 CARE FUL AND DISPASSIONATE STUDY OF THE FINAL ACCOUNTS OF THE BANK WOULD REVEAL THAT IT HAS NEVER ITA NO.495/PN/2012 6 CREATED ANY PROVISION OR RESERVE IN RESPECT OF OVERDUE INTEREST ON N.P.A. AS ALLEGED BY THE TAX AUTHORITIES. THE ENTRIES AS APPEARING IN THE P ROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET FOR THE F.Y. 2007 - 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 CREATED 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 BANK 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 INTEREST ON CRE DIT SIDE OF THE PROFIT AND LOSS ACCOUNT AND SIMULTANEOUSLY SHOWN 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 ISSUED 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 CONSOLIDATED PROFIT AND LOSS ACCOUNT AND BALANCE SHEET AS ON 31/03/2008 [THE COPIES OF WHICH ARE FILED BEFORE THE VARIOUS TAX AUTHORITIES] SOLELY WITH A VIEW TO MAKE A DISCLO SURE 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 ITA NO .6/COCH/2015 10 INTEREST 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 PROVISIONS OF THE I.T. ACT 1961 OR CANNOT BE CALLED AS RECOGNITION OF INCOME BY THE BANK. 7. THE INTEREST ON N.P.A. ADVANCES CAN NEVER BE RECOGNIZED AS INCOME ACCR UED TO THE BANK MERELY BY PLACING RELIANCE IN ISOLATION ON THE PRESENTATION OF PROFIT AND LOSS ACCOUNT AND DEHORS OF ENTRIES IN THE BALANCE SHEET WHICH SHOW THAT THE SAME IS SIMULTANEOUSLY DEBITED TO INTEREST RECEIVABLE ON N.P.A. ACCOUNT [ON ASSET SIDE] AN D A CONTRA CREDIT ENTRY IS MADE IN OVERDUE INTEREST ACCOUNT [ON LIABILITY SIDE] 8. THE BANK MOST RESPECTFULLY SUBMITS THAT THE AFORESAID FACTUAL POSITION WAS EXPLAINED BY IT TO THE LEARNED ASSESSING 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 SHARE HOLDERS FOR BETTER UNDERSTANDING OF THE VARIOUS ISSUES SHALL NOT CONVERT THE TRUE CHARACTER AND NATURE OF INCOME. 10. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT THAT THE GROSS INTEREST REFLECTED ON THE CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT AND THE OVERDUE INTEREST ON NPAS SHOWN ON THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT IS AS PER THE REQUIREMENTS OF SECTION 65 OF THE MAHARASHTRA CO - OPERATIVE SOCIETIES ACT, 1960 WHICH PRESCRIBES THE MANNER IN WHICH THE NET PROFIT OR LOSS IS REQUIRED TO BE COMPUT ED 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 CLAIM OF THE ASSESSEE DIFFERENTLY THAN AN ASSESSEE WHO WOULD HAVE NETTED THE INTEREST O N LOANS. THE ISSUE IS ALSO COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK (SUPRA) WHEREIN IT HAS BEEN HELD THAT ACCRUAL OF INCOME HAS BEEN ACCEPTED AS NOTIONAL INCOME IN ACCOUNTING PRACTICE AND ACCORDINGLY SUCH INTEREST HAS TO BE EXCLUDED AS INCOME WHICH IS NOT ACTUALLY RECEIVED AND IT WILL BE ADDED ONLY AS INCOME WHEN ACTUALLY RECEIVED. THE HONBLE SUPREME COURT HAS EXPLAINED THE DECISION IN THE CASE OF STATE BANK OF TRAVANCORE VS CIT IN 158 ITR 102(SC) IN THIS REGARD. ITA NO .6/COCH/2015 11 14 THE FACTS IN THE PRESENT CASE IS IDENTICAL TO THE FACTS IN THE CASE OF SOLAPUR DISTRICT CENTRAL COOPERATIVE BANK LTD (SUPRA) AND IN THE CASE OF UCO BANK (SUPRA). THEREFORE, I SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO DELETE THE ADDITION SO MADE. THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY, ALLOWED. 15 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DAY OF JUNE 2016 SD/ - ( B P JAIN ) ACCOUNTANT MEMBER COCHIN: DATED 21 ST JUNE 2016 RAJ* COPY TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT, 5 . DR 6 . GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN