Asstt. Commissioner of Income Tax, Jalandhar V. M/s Jalandhar Central Co op. Bank Ltd., Jalandhar

ITA 604/ASR/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8813 (ITAT-AMRITSAR)
• Duration Of Justice: 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Amritsar
• Assessment Year: 2012-2013
• Appeal Filed On: 05-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BHAWANI SHANKAR
• Assessee Lawyers: DINESH SARNA
• Keywords: Bad and doubtful debts
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 43D

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH: (CIRCUIT BENCH AT JALANDHAR) BEFORE SHRI A. D. JAIN, JUDICIAL MEMBER, AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 (ASSESSMENT YEARS-2011-12 TO 2013-14) ACIT, CIRCLE-3, JALANDHAR. (REVENUE) VS .. M/S THE JALANDHAR CENTRAL CO-OPERATIVE BANK LTD. OPP. GPO. CIVIL LINES, JALANDHAR. PAN NO.AAAAT6187E (ASSESSEE) REVENUE BY SHRI BHAWANI SHANKAR,DR. ASSESSEE BY SHRI . DINESH SARNA, AR. ORDER PER, A. D. JAIN, JUDICIAL MEMBER: THESE THREE APPEALS HAVE BEEN FILED BY THE DEPARTME NT FOR ASSESSMENT YEARS 2011-12 TO 2013-14. THERE INVOLVE COMMON ISSUE AND, THEREFORE, THEY ARE BEING DISPOSED OF BY THIS COMPOSITE ORDER. 2. THE ASSESSEE IS A CO-OPERATIVE SOCIETY ENGAGED I N THE BUSINESS OF BANKING. IT FILED ITS RETURN OF INCOME FOR A.Y. 2011-12, AT AN INCOME OF RS.5,62,00,080/-. THE CASE WAS SELECTED FOR SCRUTINY. THE AO FRAMED ASSES SMENT AT AN INCOME OF DATE OF HEARING 18.01.2017 DATE OF PRONOUNCEMENT 20 .01.2017 I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 2 RS.60,65,46,560/-, MAKING AN ADDITION OF RS.2,0,3,4 6,480/- ON ACCOUNT OF INTEREST ON NPAS ON ACCRUAL BASIS. THE LD. CIT(A), BY VIRTUE OF ORDER DATED 17.09.2015, ALLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED, THE DEPARTMENT IS IN APPEAL. 3. THE DEPARTMENT HAS SUBMITTED IN THE GROUNDS OF A PPEAL RAISED, THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION CORRECTLY MADE BY THE AO HOLDING THAT THE INTEREST DUE ON NON PERFORMING ASSETS WAS TAXAB LE, AS THE CO-OPERATIVE BANK, ASSESSEE, WAS FOLLOWING THE MERCANTILE SYSTEM OF AC COUNTING EXCEPT WITH REGARD TO THE INTEREST PERTAINING TO NPAS; THAT THE LD. CIT(A ) HAS ERRED IN HOLDING THAT THE RATIO IN DECISION OF THE HONBLE DELHI HIGH COURT I N THE CASE OF M/S VASISTH CHAY VYAPAR LTD., VIDE ORDER DATED 29.11.2010 (IN ITA N OS. 1191 OF 2007, 139, 466 AND 537 OF 2008 & ITA NO.408 OF 2003) IS APPLICABLE ; AND THAT THE LD. CIT(A) HAS ERRED IN APPLYING THE PROVISIONS OF SECTION 43D OF THE I.T. ACT TO THE PRESENT CASE, WHEREAS THE ASSESSEE IS A CO-OPERATIVE BANK SOCIETY NOT COVERED BY SECTION 43D OF THE ACT. 4. THE AO OBSERVED THAT AS PER THE AUDIT REPORT OF THE ASSESSEE, THE ASSESSEE HAD SHOWN NON PERFORMING ASSETS AMOUNTING TO RS.2,0 3,46,480/-, CALCULATED @ 12%, ON THESE NPAS ACCOUNTS IN THE RECEIPTS; THAT THE ASSESSEE WAS A CO-OPERATIVE SOCIETY; THAT CO-OPERATIVE BANKS IN INDIA ARE REGIS TERED UNDER THE CO-OPERATIVE SOCIETIES ACT; THAT THE ASSESSEE IS NOT A NON-BANKI NG FINANCIAL COMPANY OR NBFC, AS IT IS NOT A COMPANY REGISTERED UNDER THE C OMPANIES ACT, 1956 AND IS ENGAGED IN THE BUSINESS OF LOANS AND ADVANCES, ACQU ISITION OF I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 3 SHARES/STOCK/BONDS/DEBENTURES/SECURITIES ISSUED BY GOVERNMENT OR LOCAL AUTHORITY OR OTHER SECURITIES OF LIKE MARKETABLE NATURE, LEAS ING , HIRE- PURCHASES, INSURANCE BUSINESS; THAT IT DOES NOT INCLUDE ANY INSTITUTION WHOSE PRINCIPAL BUSINESS IS THAT OF AGRICULTURAL ACTIVITY, INDUSTRIAL ACTIVITY, OR SALE /PURCHASE/CONSTRUCTION OF IMMOVABLE PROPERTY; THAT THE ASSESSEE BANK IS ALSO NOT A PUBL IC FINANCIAL INSTITUTION U/S 4 OF THE COMPANIES ACT, 1956; THAT THE BANK IS ALSO NOT A SCHEDULED BANK; THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING AND SO, IT HAS TO SHOW INCOME/RECEIPTS ON ACCRUAL BASIS; THAT THE ASSESSEE DID NOT PROVIDE THE DETAILS OF INDIVIDUAL DEBTORS AND PERCENTAGE OF INTEREST REGAR DING THE NPAS, THEREFORE, AN AVERAGE INTEREST RATE OF 12% WAS BEING APPLIED FOR THE PURPOSE OF ASSESSMENT; THAT SECTION 43D OF THE ACT PROVIDES FOR TAXATION OF INC OME OF BAD OR DOUBTFUL DEBTS IN THE YEAR IN WHICH THEY ARE CREDITED BY THE PUBLIC F INANCIAL INSTITUTION OR THE SCHEDULED BANK OR THE STATE FINANCIAL CORPORATION O R THE STATE INDUSTRIAL INVESTMENT CORPORATION OR THE PUBLIC COMPANY, TO IT S P & L A/C FOR THAT YEAR, OR IN THE YEAR IN WHICH IT IS ACTUALLY RECEIVED, WHICHEVE R IS EARLIER; THAT IN SECTION 43D, CO-OPERATIVE BANK OR CO-OPERATIVE SOCIETY ENGAGED I N THE BUSINESS OF BANKING HAS NOT BEEN MENTIONED; THAT IF THE INTENTION OF THE LE GISLATURE WAS TO INCLUDE SUCH ENTITIES, THEY WOULD HAVE BEEN CLEARLY MENTIONED IN SECTION 43D; THAT AS SUCH, THE ASSESSEE WAS NOT ENTITLED FOR EXEMPTION U/S 43D OF THE I.T. ACT; THAT IN JCIT VS. INDIA EQUIPMENT LEASING LTD., 111 TTJ (CHENNAI) 25 0, THE TRIBUNAL HAS HELD THAT THE ASSESSEE COULD NOT POSTPONE THE RECOGNITION OF INCOME IN RESPECT OF INTEREST ON I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 4 STICKY LOANS RELYING ON THE RBI GUIDELINES; THAT IT WAS NOTED THAT SECTION 43D OF THE ACT WAS INSERTED WITH A VIEW TO IMPROVE THE VIABILI TY OF BANKS AND PUBLIC FINANCIAL INSTITUTIONS, ETC., SO AS TO PROVIDE THAT INTEREST ON STICKY LOANS SHALL BE CHARGED TO TAX ONLY IN THE YEAR IN WHICH IT WAS ACTUALLY RECEI VED OR CREDITED TO THE P & L A/C; THAT THIS BENEFIT WAS EXTENDED W.E.F. 01.04.2000 IN THE CASE OF PUBLIC COMPANIES ENGAGED IN LONG TERM FINANCING OF HOUSING PROJECT A PPROVED BY THE NATIONAL HOUSING BANK; THAT HOWEVER, THE LEGISLATURE DID NOT EXTEND THE SAME BENEFIT TO CO- OPERATIVE BANKS, AS HAD BEEN GIVEN TO THE SCHEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS, ETC.; THAT IT WAS HELD THAT THE PROV ISIONS OF SECTION 43D OF THE I.T. ACT SHOWED THAT THE RBI GUIDELINES WERE NOT SUFFICIENT FOR RECOGNITION OF INCOME ON CASH BASIS FOR THE PURPOSE OF INCOME; THAT IT WAS H ELD THAT ONCE INCOME HAD ACCRUED, IT COULD NOT BE EXCLUDED ON RECEIPT BASIS, EXCEPT IN THE CASE OF ASSESSEES COVERED BY THE PROVISIONS OF SECTION 43D OF THE ACT , BUT THE RBI GUIDELINES COULD NOT OVERRIDE THE PROVISIONS OF SAID SECTION; THAT I T WAS HELD THAT SINCE THE ASSESSEE HAD FOLLOWED THE MERCANTILE SYSTEM OF ACCOUNTING, T HE INTEREST INCOME ON NPAS WOULD BE ASSESSED TO TAX ON ACCRUAL BASIS; THAT IT WAS NOTED THAT ACCOUNTING STANDARD 1 & 2, HAD BEEN ISSUED BY THE INSTITUTED O F CHARTERED ACCOUNTANTS OF INDIA; THAT THIS VIEW WAS ALSO SUPPORTED BY THE DEC ISION IN CIT VS. T.N.POWER FINANCE AND INFRASTRUCTURE DEVELOPMENT CORPORATION LTD., 280 ITR 491,(MAD), WHEREIN, IT WAS HELD THAT THE RBI GUIDELINES CANNOT OVERRIDE THE MANDATORY PROVISIONS OF SECTION 36(1)(VIIA) OF THE I.T. ACT; THAT AS SUCH, THE CONTENTION OF THE I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 5 ASSESSEE THAT INTEREST ON STICKY LOANS WAS NOT TO B E CONSIDERED AS INCOME, WAS NOT ACCEPTABLE; THAT MOREOVER, RBI DIRECTIONS DO NOT HA VE ANY RELEVANCE TO THE TREATMENT OF TAXABLE INCOME, SINCE THE RBI ACT AND THE I.T. ACT OPERATE IN DIFFERENT FIELDS; THAT THE RBI ACT OVERRIDES THE COMPANIES AC T, 1956 TO THE EXTENT OF PRESENTATION OF ACCOUNTS, BUT IT DOES NOT OVERRIDE THE I.T. ACT, 1961; THAT FURTHER, IN INDIA EQUIPMENT LEASING LTD. (SUPRA) AND T.N. PO WER FINANCE AND INFRASTRUCTURE DEVELOPMENT CORPORATION LTD. (SUPRA ) AND M/S SOUTHERN TECHNOLOGIES LTD. VS. JCIT, 320 ITR 577 (SC), IT H AS BEEN HELD THAT INTEREST ON STICKY LOANS /NPAS HAS TO BE RECOGNIZED AS INCOME, SINCE CO-OPERATIVE BANKS DO NOT FALL WITHIN THE PURVIEW OF SECTION 43D OF THE I .T. ACT; THAT SECTION 43D OF THE ACT INCLUDES ONLY SCHEDULED BANKS WITHIN ITS PURVI EW, WHEREAS THE ASSESSEE BANK IS NOT SUCH A BANK; THAT SECTION 43D OF THE I.T. AC T IS THE STATUTORY PROVISION IN THE I.T. ACT REGARDING RECOGNITION OF INCOME FROM STICK Y LOANS AND ONLY THE CATEGORIES OF BUSINESS LAID DOWN IN SECTION 43D WOULD BE ABLE TO RECOGNIZE INTEREST ON STICKY LOANS, ON RECEIPT BASIS; THAT THE ASSESSEE IS NOT I NCLUDED IN SUCH CATEGORIES OF BUSINESS AND HENCE, IT IS REQUIRED TO ACCOUNT FOR I NTEREST ON STICKY LOANS AS ITS INCOME; THAT EVEN IF IT DID NOT MAKE ENTRIES IN ITS BOOKS OF ACCOUNT FOR THE INTEREST ON NPAS, SUCH INTEREST WOULD BE REQUIRED TO BE ACCO UNTED FOR AS INCOME. 5. WHILE DELETING THE ADDITION MADE, THE LD. CIT(A) HAS OBSERVED AS FOLLOWS: 5.3 ON CAREFUL CONSIDERATION OF THE RIVAL CONTENTI ONS AND THE JUDICIAL PRONOUNCEMENTS RELIED UPON DECISIONS BY TH E ASSESSEE I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 6 CO-OPERATIVE SOCIETY AND BY ASSESSING OFFICER, IT H AS BEEN NOTICED THAT THE ASSESSING OFFICER HAS MADE IMPUGNE D ADDITION AS THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF A CCOUNTING AS PER WHICH THE INCOME FOR A PARTICULAR YEAR HAS TO B E ACCOUNTED FOR AS AND WHEN ACCRUED IRRESPECTIVE OF THE YEAR OF RECEIPT. HOWEVER, IT IS TO BE APPRECIATED THAT THE ASSESSEE HAS VERY SPECIFICALLY PUT IT ON RECORD THAT THE METHOD OF AC COUNTING OF THE ASSESSEE CO-OPERATIVE SOCIETY IS MERCANTILE EXC EPT WITH RESPECT TO INTEREST PERTAINING TO NPA AS THE ASSESS EE CO- OPERATIVE SOCIETY HAS FOLLOWED OVERRIDING GUIDELINE S ISSUED BY THE RBI. IT HAS BEEN SUBMITTED THAT THE SAID POSITI ON HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEARS AS WELL. FURTHER THE METHOD OF ACCOUNTING IN RESPECT OF INTE REST DUE ON NPA IS STRICTLY AS PER THE RBI GUIDELINES WHICH HAV E TO BE MANDATORILY FOLLOWED BY THE APPELLANT. IT IS ALSO N OTED THAT THE SAID METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE I S ALSO AS PER THE ACCOUNTING STANDARDS DRAFTED BY THE INSTITU TE OF CHARTERED ACCOUNTANTS OF INDIA. IT IS ALSO TO BE AP PRECIATED THAT SECTION 45Q OF THE RBI ACT STARTS WITH THE NON -OBS TANTE CLAUSE TO THE EFFECT THAT THE PROVISIONS OF THIS CHAPTER S HALL HAVE EFFECT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CON TAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY IN STRUMENT HAVING EFFECTED BY VIRTUE OF ANY SUCH LAW. IT IS AL SO NOTED THAT THE HONOURABLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. [ITA NO. 552. 565 OF 2005, IT A 11 91 OF 2007, ITA 139 466, 537 OF 2008 AND ITA 408 OF 2003 DATE OF DECISION 29.11.2010] HAS HELD THAT WHEN NBFC CLASSI FIED AN ASSET AS NON PERFORMING ASSET IN ACCORDANCE WITH TH E I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 7 DIRECTIONS ISSUED BY THE RESERVE BANK OF INDIA (RBI ), IT W AS LEGITIMATE TO INFER THAT THE INTEREST INCOME THEREU PON HAD NOT ACCRUED IN VIEW OF THE PRECARIOUS FINANCIAL POSITIO N OF THE BORROWER, EVEN THOUGH THE TAX PAYER WAS FOLLOWING T HE MERCANTILE SYSTEM OF ACCOUNTING. IT IS SEEN THAT TH E HONOURABLE DELHI HIGH COURT ALSO DISCUSSED AND DISTINGUISHED T HE DECISION OF HONOURABLE APEX COURT IN THE CASE OF STATE BANK OF TRAVANCORE VS. CIT 158 ITR 102 (SC) AND M/S SOUTHER N TECHNOLOGIES LIMITED VS. JCIT REPORTED AT (2010) 32 0 ITR 577 (SC). IN MY FURTHER OPINION, THE JUDICIAL PRONOUNCE MENTS RELIED UPON BY THE ASSESSING OFFICER ARE DISTINGUISHABLE O N FACTS. HOWEVER, THE DECISIONS RELIED UPON BY THE ASSESSEE SUPPORT ITS CASE. IN THE CIRCUMSTANCES, I DO NOT AGREE WITH THE ASSESSING OFFICER'S VIEW ON THE ISSUE AND THEREFORE THE ADDIT ION MADE DESERVES TO BE DELETED. 5.4 IN VIEW OF THE ABOVE STATED FACTS AND CIRCUMSTA NCES OF THE CASE, I AM OF THE OPINION THAT THE ASSESSING OFFICE R IS NOT JUSTIFIED IN MAKING AN ADDITION OF RS.2.03,46,480/- TO THE RETURNED INCOME OF THE ASSESSEE ON ACCOUNT OF ACCRU ED INTEREST ON NPAS. THE ADDITION OF RS.2,03.46,'480/- MADE BY THE ASSESSING OFFICER BY TREATING ACCRUED INTEREST ON N PAS AS INCOME OF THE ASSESSEE IS, THEREFORE, DIRECTED TO B E DELETED. IN THE RESULT, GROUND NO. 1 OF APPEAL TAKEN BY THE ASS ESSEE IS ALLOWED. 6. IT REMAINS AN UNDISPUTED FACT THAT THE ASSESSEE CO-OPERATIVE BANK HAS BEEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, EXCE PT WITH REGARD TO INTEREST PERTAINING TO NPAS. AS NOTED BY THE LD. CIT(A), THI S POSITION STANDS ACCEPTED BY I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 8 THE DEPARTMENT IN THE EARLIER YEARS. THE ASSESSEE H AS BEEN FOLLOWING THE RBI GUIDELINES IN THIS MATTER. ITS METHOD OF ACCOUNTING IS ENTIRELY IN ACCORDANCE WITH THE RBI GUIDELINES. THE RBI GUIDELINES NEED TO BE M ANDATORILY FOLLOWED BY THE ASSESSEE. MOREOVER, THIS METHOD OF ACCOUNTING, ADOP TED BY THE ASSESSEE, IS IN ACCORDANCE WITH THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. SECTION 45Q OF THE RBI ACT PR OVIDES, IN THE N ON OBSTANTE CLAUSE WITH WHICH IT BEGINS, THAT THE PROVISIONS OF THE C HAPTER UNDER WHICH SECTION 45Q FALLS, SHALL HAVE EFFECT, NOTWITHSTANDING ANYTH ING INCONSISTENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME BEING INFOR CE. 7. IN M/S VASISTH CHAY VYAPAR LTD. (SUPRA), IT H AS BEEN HELD THAT WHEN AN NBFC CLASSIFIES AN ASSET AS A NON-PERFORMING ASSET IN ACCORDANCE WITH THE DIRECTIONS ISSUED THE RESERVE BANK OF INDIA, IT IS LEGITIMATE TO INFER THAT THE INTEREST INCOME THEREON IS NOT ACCRUED, EVEN THOUGH THE NBFC IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. INTERALIA, M/S SOUTHERN TECH NOLOGIES LTD. (SUPRA) HAS BEEN DISTINGUISHED IN M/S VASISTH CHAY VYAPAR LTD . (SUPRA). 8. APROPOS THE APPLICABILITY OF SECTION 43D OF THE I.T. ACT, IT IS ON RECORD THAT DURING THE PROCEEDINGS BEFORE THE LD. CIT(A), THE A SSESSEE, BY WAY OF SUBMISSION DATED 17.09.2015, THE ASSESSEE HAD STATED THAT THE ASSESSEE HAD BEEN CONFIRMED BY THE HEADQUARTER OF THE PUNJAB STATE CO-OPERATIVE BA NK , TO BE A SCHEDULED BANK. THIS POSITION HAS NOT BEEN DISPUTED. I.T.A NO. 652/ASR/2015 AND ITA NOS. 604 & 605/ASR/2016 9 9. IN VIEW OF THE ABOVE, WE FIND THAT THE GRIEVANCE OF THE DEPARTMENT IS WITHOUT ANY FORCE. THE ORDER OF THE LD. CIT(A) IS A WELL VE RSED REASONED DETAILED ORDER, REQUIRING NO INTERFERENCE WHATSOEVER AT OUR HANDS. THE SAME IS, ACCORDINGLY, CONFIRMED. 10. AS NOTED AT THE BEGINNING OF THIS ORDER, ALL TH E THREE APPEALS INVOLVE THE SAME COMMON ISSUE. THAT BEING SO, OUR ABOVE OBSERVA TIONS SHALL APPLY EQUALLY, MUTATIS MUTANDIS , TO THE OTHER TWO APPEALS ALSO. 11. ACCORDINGLY, ALL THE ORDERS OF THE LD. CIT(A) I N THESE THREE APPEALS ARE UPHELD AND THE GROUNDS RAISED BY THE DEPARTMENT ARE REJECTED. 12. IN THE RESULT, ALL THREE APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20/01/2017. SD/- SD/- (T. S. KAPOOR) (A.D. JAIN) ACCOUTANT MEMBER JUDICIAL MEMBER DATED 20 /01/2017 *AKV* ON TOUR COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT BY ORDER AR/SR.P.S./P.S.