The Wayanad Dist Co-op Bank Ltd, Wynad V. The ITO, Calicut

ITA 732/COCH/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73927 (ITAT-COCHIN)
• Duration Of Justice: 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 25-03-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 11-11-2013
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMAR
• Assessee Lawyers: P BALAGOPAL
• Keywords: Bad and doubtful debts; Revised return

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO. 732/COCH/2013 ASSESSMENT YEAR : 2008-09 THE WAYANAD DISTRICT CO-OPERATIVE BANK LTD., MAIN ROAD, KALPETTA NORTH, WAYANAD-673 122. [PAN: AAAAW 0146N] VS. THE INCOME TAX OFFICER, WARD-1(4), KOZHIKODE. (ASSESSEE -APPELLANT) (REVENUE-RESPONDEN T) ASSESSEE BY SHRI P. BALAGOPAL, CA REVENUE BY SMT. LATHA V. KUMAR, JR. DR DATE OF HEARING 25/03/2014 DATE OF PRONOUNCEMENT 28/03/2014 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 27- 08-2013 PASSED BY THE LD. CIT(A), KOZHIKODE AND IT RELATES TO THE ASSESSMENT YEAR 2008-09. 2. THE ASSESSEE IS AGGRIEVED BY THE DECISION OF THE LD. CIT(A) IN CONFIRMING THE DECISION OF ASSESSING OFFICER IN REJECTING THE CLAIM OF THE ASSESSEE TO EXCLUDE THE AMOUNT OF RS.1,34,68,043/- RELATING TO INTEREST INCOME ON NON PERFORMING ADVANCES WHILE COMPUTING THE TOTAL INCOME OF THE AS SESSEE. 3. THE FACTS RELATING TO THE ISSUE ARE STATED IN BR IEF. THE ASSESSEE IS A COOPERATIVE BANK ENGAGED IN BANKING BUSINESS. FROM THE PROFIT OF THE YEAR, THE ASSESSEE TRANSFERRED A SUM OF RS.3,51,53,059/- TO RESERVE ACCOUNT BY DEBITING I.T.A. NO. 732/COCH/2013 2 THE PROFIT AND LOSS ACCOUNT. IN THE ORIGINAL RETUR N OF INCOME FILED, THE ASSESSEE ADDED THE ABOVE SAID AMOUNT TO THE NET PROFIT, AS T HE TRANSFER TO RESERVE A/C IS NOT ALLOWABLE AS DEDUCTION UNDER THE INCOME TAX ACT . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE FILED A REVISE D RETURN OF INCOME, WHEREIN THE ASSESSEE ADDED A SUM OF RS.2,16,85,016/- TO THE NET PROFIT, OUT OF THE AMOUNT OF RS.3,51,53,059/- TRANSFERRED TO THE RESER VE ACCOUNT. THE EFFECT OF THE SAME IS THAT THE ASSESSEE CLAIMED A DEDUCTION O F RS.1,34,68,043/- FROM THE TOTAL INCOME DECLARED IN THE ORIGINAL RETURN OF INC OME. BEFORE THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED THAT THE INTEREST I NCOME CREDITED TO THE PROFIT AND LOSS ACCOUNT INCLUDED FOLLOWING TWO ITEMS:- INTEREST ON NON PERFORMING ADVANCES (NPA) ACCOUNT S - RS. 72,19,986/- INTEREST ON MEDIUM TERM PLANTATION LOANS - RS. 62,48,057/- -------------------- RS.1,34,68,043/- ========== IT WAS FURTHER SUBMITTED THAT THE ASSESSEE DID NOT ACCOUNT FOR THE ABOVE SAID INTEREST AMOUNTS IN THE BOOKS OF ACCOUNTS, I..E, NO ENTRY WAS PASSED IN THE BOOKS OF ACCOUNT. IT WAS SUBMITTED THAT THE ABOVE SAID I NTEREST INCOME WAS INCLUDED IN THE PROFIT AND LOSS ACCOUNT FOR THE PURPOSE OF PRES ENTING THE FINANCIAL STATEMENTS AND HENCE A CORRESPONDING DEBIT WAS MADE IN THE PRO FIT AND LOSS ACCOUNT UNDER THE HEAD TRANSFER TO RESERVE ACCOUNT. IN EFFECT, THE SUBMISSION OF THE ASSESSEE APPEARS TO BE THAT THE INTEREST INCOME OF RS.1,34,68,043/- RELATING TO NON PERFORMING ASSETS IS NOT RECOGNIZED BY THE ASSE SSEE IN ITS BOOKS OF ACCOUNT AND IT HAS INCLUDED THE SAME ONLY IN THE PROFIT AND LOSS ACCOUNT. HENCE, IN ORDER TO NEUTRALIZE THE CREDIT, A CORRESPONDING DEBIT IS MADE UNDER THE HEAD TRANSFER TO RESERVE A/C. ACCORDINGLY, THE CONTENTION OF TH E ASSESSEE APPEARS TO BE THAT THE AMOUNT OF RS.1,34,68,043/- SHOULD NOT BE CONSID ERED AT ALL FOR COMPUTATION OF TOTAL INCOME. 4. THE ASSESSING OFFICER NOTICED THAT THE PROVISIO NS OF SEC. 43D OF THE ACT MANDATES THAT THE INTEREST INCOME IN RESPECT OF BAD AND DOUBTFUL DEBTS SHALL BE I.T.A. NO. 732/COCH/2013 3 CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT OR AS THE CASE MAY BE IN WHICH IT IS ACTUAL LY RECEIVED, WHICHEVER IS EARLIER. SINCE THE ASSESSEE HAS RECOGNIZED THE INTE REST INCOME OF RS.1,34,68,043/- BY CREDITING THE SAME IN THE PROFI T AND LOSS ACCOUNT AND SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING, THE AO TOOK THE VIEW THAT THE ASSESSEE CANNOT CLAIM EXEMPTION OF THE SAM E ON THE PLEA THAT THE SAID INCOME WAS NOT RECEIVED. THE AO ALSO NOTICED THAT THE ASSESSEE HAS GIVEN BREAK UP DETAILS OF OTHER RESERVE SHOWN IN THE PROFIT A ND LOSS ACCOUNT AND ALSO THE DETAILS OF OTHER PROVISIONS SHOWN IN THE BALANCE SHEET. THE AO NOTICED THAT THE ASSESSEE HAS DULY INCLUDED THE ABOVE SAID AMOUN T OF RS.1,34,68,043/- IN BOTH THE PLACES. HENCE, THE AO TOOK THE VIEW THAT THE ASSESSEE HAS DULY RECOGNIZED THE INCOME CITED ABOVE AND THE ASSESSEE WAS NOT CORRECT IN CLAIMING DEDUCTION OF THE SAME BY NOT ADDING THE WHOLE AMOUN T TRANSFERRED TO RESERVE ACCOUNT. THE AO ALSO OBSERVED THAT THE DEDUCTIONS UNDER THE HEAD BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS ARE GOVE RNED BY THE PROVISIONS OF SEC. 36(1)(VII), 36(2) AND 36(1)(VIIA) OF THE ACT A ND THE IMPUGNED CLAIM DOES NOT FALL IN THAT CATEGORY, SINCE THE ASSESSEE HAS NOT W RITTEN OFF ANY DEBT AS BAD IN ITS BOOKS OF ACCOUNT. ACCORDINGLY, THE AO REJECTED THE CLAIM OF THE ASSESSEE TO EXCLUDE INTEREST INCOME OF RS.1,34,68,043/- CREDITE D IN THE PROFIT AND LOSS ACCOUNT. 5. IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) HELD THAT THE ASSESSEE SHOULD NOT HAVE ANY GRIEVANCE SINCE THE DEDUCTION U/S 36(A )(VIIA) OF THE ACT HAS BEEN ALLOWED BY THE ASSESSING OFFICER. ACCORDINGLY, THE LD CIT(A) DISMISSED THE APPEAL FILED BY THE ASSESSEE. 6. LD COUNSEL APPEARING FOR THE ASSESSEE SUBMIT TED THAT THE ASSESSING OFFICER HAS TAKEN SUPPORT OF THE PROVISIONS OF SEC. 43D OF THE ACT FOR REJECTING THE CLAIM MADE BY THE ASSESSEE TO EXCLUDE THE INTEREST INCOME CITED ABOVE. HE SUBMITTED THAT THE PROVISIONS OF SEC. 43D SHALL APPLY ONLY TO SCHEDULED BANKS. THE LD A.R I.T.A. NO. 732/COCH/2013 4 SUBMITTED THAT THE ASSESSEE DOES NOT FALL IN THE CA TEGORY OF SCHEDULED BANK, SINCE ITS NAME IS NOT INCLUDED IN THE SCHEDULE OF T HE RESERVE BANK OF INDIA ACT. IN THIS REGARD, HE PRODUCED A COPY OF RELEVANT PORT ION OF THE RBI ACT. THE LD A.R FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT REC OGNIZED THE INTEREST INCOME RELATING TO NPA ACCOUNTS AND MEDIUM TERM PLANTATION ACCOUNTS IN THE BOOKS OF ACCOUNT. THE ASSESSEE HAS INCLUDED THE SAME ONLY I N THE FINANCIAL STATEMENTS FOR THE PURPOSE OF PRESENTATION. HENCE, THE ASSESS EE HAS EXCLUDED THE ABOVE SAID AMOUNT WHILE COMPUTING THE INCOME FOR THE PURP OSE OF INCOME TAX ACT. ACCORDINGLY, HE SUBMITTED THAT THE AO WAS NOT RIGHT IN ASSESSING THE INCOME, WHICH WAS NOT ACCOUNTED FOR BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. 7. ON THE CONTRARY, THE LD D.R SUBMITTED THAT T HE ASSESSEE HAS INCLUDED THE IMPUGNED INTEREST INCOME IN ITS PROFIT AND LOSS ACC OUNT AND OFFERED THE SAME FOR TAXATION IN ITS ORIGINAL RETURN OF INCOME. THE ASS ESSEE HAS TRASFERRED THE IMPUGNED INTEREST INCOME TO A RESERVE ACCOUNT BY DE BITING THE PROFIT AND LOSS ACCOUNT. UNDER THE INCOME TAX ACT, THE AMOUNT TRAN SFERRED TO THE RESERVE ACCOUNTS IS NOT ALLOWABLE AS A DEDUCTION. FURTHER UNDER SEC. 43D OF THE ACT, THE INTEREST INCOME RELATING TO BAD AND DOUBTFUL DEBTS IS ASSESSABLE IN THE YEAR IN WHICH IT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT OR RECEIVED, WHICHEVER IS EARLIER. SINCE THE ASSESSEE HAS CREDITED THE IMPUG NED INTEREST INCOME IN THE INSTANT YEAR, THE ASSESSING OFFICER HAS ASSESSED TH E SAME AS THE INCOME OF THE ASSESSEE. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. ACCORDING TO THE ASSESSEE, IT HAS NOT ACCOUNTED FOR THE IMPUGNED INTEREST INCOME IN ITS BOOKS OF ACCOUNT AND IT HAS BEEN INCL UDED IN THE PROFIT AND LOSS ACCOUNT ONLY FOR THE PURPOSE OF PRESENTING THE SAME TO ALL CONCERNED. IT IS FURTHER SUBMITTED THAT THE ASSESSEE HAS NEUTRALIZED THE SAME BY TRANSFERRING CORRESPONDING AMOUNT TO A RESERVE ACCOUNT BY DEBITI NG THE PROFIT AND LOSS ACCOUNT. I.T.A. NO. 732/COCH/2013 5 9. THE FINANCIAL STATEMENTS ARE USUALLY PREPARE D FROM THE BOOKS OF ORIGINAL ENTRY. IN FACT, THE AUDITOR WHO CONDUCTS AUDIT USUA LLY REPORTS THAT THE BALANCE SHEET, STATEMENT OF PROFIT AND LOSS AND CASH FLOW STATEMENT DEALT WITH BY THE REPORT ARE IN AGREEMENT WITH THE BOOKS OF ACCOUNT. HENCE, NORMALLY IT IS EXPECTED THAT THE FINANCIAL STATEMENTS REFLEC T ONLY THOSE ITEMS OF INCOME, EXPENDITURE, ASSETS AND LIABILITIES WHICH WERE DULY ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS. HENCE, A SPECIFIC QUESTION WAS ASKED TO THE LD A.R AS TO HOW THE AUDITOR COULD CERTIFY THE FINANCIAL STATEMENTS WHIC H CONTAINS ITEMS WHICH DO NOT FORM PART OF BOOKS OF ACCOUNTS. HOWEVER, THE LD A. R EXPRESSED HIS INABILITY TO COMMENT UPON THE SAME. 10. BE THAT AS IT MAY, THE FACT REMAINS THAT TH E ASSESSEE HAS BEEN INCLUDING THE INTEREST ON NPA ACCOUNTS IN THE INTEREST INCOME AND CREDITING THE SAME IN ITS PROFIT AND LOSS ACCOUNT. THE INTEREST PERTAINING T O NPA ACCOUNTS ARE THEN TRANSFERRED TO A RESERVE ACCOUNT BY DEBITING THE PR OFIT AND LOSS ACCOUNT. THE AMOUNT TRANSFERRED TO RESERVE IS NOT ALLOWABLE AS D EDUCTION AND HENCE THE ASSESSEE ITSELF HAS DISALLOWED THE SAID AMOUNT IN T HE ORIGINAL RETURN OF INCOME FILED, I.E., THE INTEREST ON NPA ACCOUNTS WAS DULY OFFERED TO TAX. ONLY IN THE REVISED RETURN OF INCOME, THE ASSESSEE HAS CLAIMED THAT THE INTEREST ON NPA ACCOUNTS SHOULD BE EXCLUDED. THE ASSESSING OFFICER , IN PARAGRAPH 10.8.2 OF THE ASSESSMENT ORDER, HAS EXTRACTED THE DETAILS OF OTH ER RESERVES DEBITED TO THE PROFIT AND LOSS ACCOUNT AND THE DETAILS OF OTHER P ROVISIONS SHOWN IN THE LIABILITY SIDE OF BALANCE SHEET. WE NOTICE THAT THE AMOUNT T RANSFERRED TO A RESERVE ACCOUNT FROM THE PROFIT AND LOSS ACCOUNT IS ACTUALL Y CREDITED TO OTHER PROVISIONS A/C USUALLY SHOWN IN THE LIABILITY SID E OF BALANCE SHEET. A PERUSAL OF THE SAME WOULD REVEAL THAT THE ASSESSEE HAS BEEN FOLLOWING THE PRACTICE OF TRANSFERRING THE INTEREST ON NPA ACCOUNTS TO RESERV E ACCOUNT / PROVISION ACCOUNT IN A REGULAR MANNER EVERY YEAR. THE ACCUMULATED BA LANCE IS BROUGHT FORWARD FROM THE PRECEDING YEAR AND THE CUMULATIVE BALANCE IS CARRIED FORWARD TO THE I.T.A. NO. 732/COCH/2013 6 SUCCEEDING YEAR, MEANING THEREBY THE ASSESSEE IS RE COGNIZING THE INTEREST INCOME FROM NPA ACCOUNTS AS ITS INCOME AND THEN TRA NSFERRING THE SAME TO A RESERVE ACCOUNT /OTHER PROVISION ACCOUNT EVERY YEAR , EVEN IF NO ENTRY IS PASSED IN THE BOOKS OF ACCOUNT AS CLAIMED BY LD A.R. WE A RE UNABLE TO COMPREHEND AS TO HOW THE ASSESSEE HEREIN CAN FOLLOW THE PRACTICE OF INCLUDING INTEREST INCOME, RESERVES / PROVISIONS ONLY IN THE FINANCIAL STATEME NTS WITHOUT PASSING NECESSARY ENTRIES IN THE BOOKS OF ACCOUNT. UNDER DOUBLE ENTR Y SYSTEM OF ACCOUNTING, THERE SHOULD BE A CORRESPONDING DEBIT FOR THE INTEREST IN COME CREDITED TO THE PROFIT AND LOSS ACCOUNT. WE NOTICE THAT THERE IS NO EXPLANATI ON FROM THE ASSESSEE ABOUT THE CORRESPONDING DEBIT. 11. IT IS A WELL SETTLED PROPOSITION THAT THE B OOKS OF ACCOUNT ARE NOT THE ONLY EVIDENCE TO BE CONSIDERED FOR ASSESSING THE INCOME OF AN ASSESSEE. INCOME PERTAINING TO THE ASSESSEE IS ASSESSABLE IN HIS HAN DS EVEN IF IT IS NOT ACCOUNTED FOR IN THE BOOKS OF ACCOUNT. IN THE INSTANT CASE, EVEN IF THE IMPUGNED INTEREST INCOME IS NOT ACCOUNTED FOR IN THE BOOKS OF ACCOUNT , THE VERY FACT THAT THE ASSESSEE HAS DECLARED THE SAME IN THE FINANCIAL STA TEMENTS, THAT TOO IN A CONSISTENT MANNER EVERY YEAR, WOULD ONLY SHOW THAT THE ASSESSEE IS RECOGNIZING THE SAME AS ITS INCOME. ONCE THE ASSESSEE RECOGNIZ ES THE INCOME FROM NPA ACCOUNTS, IN OUR VIEW, THE ASSESSEE CAN CLAIM DEDUC TION OF THE SAME ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX AC T. WE NOTICE THAT THE ASSESSING OFFICER HAS ADDRESSED THE SAID QUESTION A LSO, I.E., THE ASSESSEE COULD CLAIM FOR DEDUCTION OF THE SAME EITHER AS BAD DEBT S U/S 36(1)(VII) OF THE ACT OR AS PROVISION FOR BAD AND DOUBTFUL DEBTS U/S 36(1) (VIIA) OF THE ACT. HOWEVER, FOR ALLOWING THE CLAIM AS BAD DEBTS, THE ASSESSEE HAS TO SATISFY THE CONDITIONS PRESCRIBED U/S 36(2) OF THE ACT, WHICH IN THE INSTA NT CASE HAS NOT BEEN SATISFIED. THE CLAIM MADE BY THE ASSESSEE UNDER SECTION 36(1)( VIIA) HAS BEEN ALLOWED BY THE ASSESSING OFFICER IN TERMS OF THE SAID PROVISIO NS. WE NOTICE THAT THE ASSESSEE HAS NOT CLAIMED THE IMPUGNED DEDUCTION IN ACCORDANC E WITH THE PROVISIONS OF SEC. 36(1)(VIIA) OF THE ACT. BEFORE US ALSO, THE ASSESSEE COULD NOT EXPLAIN AS TO I.T.A. NO. 732/COCH/2013 7 HOW THE IMPUGNED INTEREST INCOME IS EXCLUDIBLE FROM THE COMPUTATION OF INCOME IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. 12. IN VIEW OF THE FOREGOING DISCUSSIONS, WE AR E OF THE VIEW THAT THE ASSESSING OFFICER WAS JUSTIFIED IN REJECTING THE CLAIM OF THE ASSESSEE TO EXCLUDE THE IMPUGNED INTEREST INCOME. THOUGH THE LD CIT(A) HAS NOT PROPERLY ADDRESSED VARIOUS ISSUES, YET, IN VIEW OF THE FOREGOING DISCU SSIONS, WE UPHOLD THE DECISION TAKEN BY HIM TO DISMISS THE APPEAL OF THE ASSESSEE. 13. IN THE RESULT THE APPEAL FILED BY THE ASSES SEE IS DISMISSED. PRONOUNCED ACCORDINGLY ON 28-03- 2014. SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 28TH MARCH,2014 GJ COPY TO: 1. THE WAYANAD DISTRICT CO-OPERATIVE BANK LTD., MAI N ROAD, KALPETTA NORTH, WAYANAD-673 122. 2. THE INCOME TAX OFFICER, WARD-1(4), KOZHIKODE. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS), KOZHIKO DE. 4. THE COMMISSIONER OF INCOME-TAX, KOZHIKODE. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN