DCIT, Shimoga V. M/s City Co-operative Bank, Shimoga

ITA 789/BANG/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8429 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 13-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SWAPNA DAS
• Assessee Lawyers: S KRISHNA SWAMY
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NOS. 789 & 790/BANG/2016 ASSESSMENT YEARS : 2008-09 & 2010-11 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, SHIVAMOGGA VS. M/S. CITY CO-OPERATIVE BANK LTD., FORT ROAD, SHIMOGA 577 202. PAN: AADFC 8839J APPELLANT RESPONDENT APPELLANT BY : SMT. SWAPNA DAS, JCIT (DR) RESPONDENT BY : SHRI S. KRISHNASWAMY, CA DATE OF HEARING : 13.03.2017 DATE OF PRONOUNCEMENT : 17.03.2017 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THESE TWO APPEALS BY THE REVENUE ARE DIRECTED AGAI NST TWO ORDERS OF THE CIT(A) BOTH DATED: 30.11.2015 FOR THE ASSESSMENT YE AR 2008-09 AND 2010-11. THE REVENUE HAS RAISED COMMON GROUNDS IN THESE APPE ALS AS UNDER. ITA NOS. 789 & 790/BANG/2016 PAGE 2 OF 8 2. THE ASSESSEE IS A CO-OPERATIVE BANK REGISTERED UNDE R KARNATAKA STATE CO- OPERATIVE SOCIETIES ACT 1959. THE AO WHILE COMPLET ING THE ASSESSMENT U/S. 143(3) HAS ADDED THE INTEREST ON NON PERFORMIN G ASSETS (NPA). THE ASSESSEE CHALLENGED THE ACTION OF THE AO BEFORE THE CIT(A) AND CONTENTED THAT THE INTEREST CREDIT TO THE PROFIT & LOSS ACCOUNT INCLUDES INTEREST REALIZED ON BOTH PERFORMING AND NON-PERFOR MING ACCOUNT AND AS REGARDS NON-CHARGING INTEREST ON NPA THE ASSESSEE P LACED RELIANCE ON RBI GUIDELINES AND CONTENTED THAT THE ASSESSEE HAVE COMPLIED WITH STATUTORY REQUIREMENTS OF BOTH STATUTES AND THE REQ UIREMENT OF GENERAL ITA NOS. 789 & 790/BANG/2016 PAGE 3 OF 8 PROVISIONS OF SECTION 145 OF IT ACT. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT VS CANFIN HOMES LTD. 347 ITR 382. THE CIT(A) ALLOW ED THE CLAIM OF THE ASSESSEE REGARDING EXCLUSION OF INTEREST ON NPA BY FOLLOWING DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN CA SE OF CIT VS CANFIN HOMES LTD.(SUPRA). BEFORE US THE LD. DR HAS RELIED UPON THE ORDERS OF THE AO AND SUBMITTED THAT THE REVENUE DID NOT ACCEP T THE DECISION IN CASE OF CIT VS CANFIN HOMES LTD.(SUPRA). IN THE RE JOINDER, THE LD. AR HAS POINTED OUT THAT THE SLP FILED BY THE REVENUE H AS BEEN DISMISSED BY THE HONBLE SUPREME COURT. 3. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND RELEVAN T MATERIAL ON RECORD, WE NOTE THAT THE ISSUE INVOLVED IN THIS CASE IS COV ERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F CIT VS CANFIN HOMES LTD (SUPRA) WHEREIN THE HONBLE HIGH COURT HA S HELD AS UNDER: 4. IN ORDER TO APPRECIATE THIS CONTENTION, IT IS NECES SARY TO LOOK INTO THE SAID SECTION AS IT STANDS TODAY. '145. METHOD OF ACCOUNTING.(1) INCOME CHARGEABLE U NDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON' OR 'INCOME FROM OTHER SOURCES' SHALL, SUBJECT TO THE P ROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EIT HER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOY ED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOW ED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF IN COME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ITA NOS. 789 & 790/BANG/2016 PAGE 4 OF 8 ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDE D IN SUB-SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED , UNDER SUB-SECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED B Y THE ASSESSEE THE ASSESSING OFFICER MAY MAKE AN ASSESSME NT IN THE MANNER PROVIDED IN SECTION 144.' 5. A READING OF THE AFORESAID PROVISION MAKES IT VERY CLEAR THAT SECTION 145(1) IS SUBJECT TO THE PROVISIONS OF SUB-SECTION (2). SUB-SECTION (2) PROVIDES THAT THE CENTRAL GOVE RNMENT MAY NOTIFY IN THE OFFICIAL GAZETTE FROM TIME TO TIM E ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. THEREFORE, IT IS CL EAR THE REQUIREMENT OF COMPLYING WITH CASH OR MERCANTILE SY STEM OF ACCOUNTING IS SUBJECT TO THE DIRECTIONS TO BE ISSUE D BY THE CENTRAL GOVERNMENT IN THE MATTER OF ACCOUNTING STAN DARDS. AFTER THE AMENDMENT TO SECTION 145 THE BOARD HAS IS SUED ACCOUNTING STANDARDS TO BE FOLLOWED BY WAY OF A NOT IFICATION NO. SO 69(E), DATED 25-1-1996. CLAUSE (4) OF THE AC COUNTING STANDARDS READS AS UNDER: '4. ACCOUNTING POLICIES ADOPTED BY AN ASSESSEE SHOU LD BE SUCH SO AS TO REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS OF THE BUSINESS, PROFESSION OR VOCATION IN THE FINANCIAL STATEMENTS PREPARED AND PRESENTED ON THE BASIS OF S UCH ACCOUNTING POLICIES. FOR THIS PURPOSE, THE MAJOR CONSIDERATIONS GOVERNING THE SELECTION AND APPLICAT ION OF ACCOUNTING POLICIES ARE PRUDENCE, SUBSTANCE OVER FO RM AND MATERIALITY.' 6. CLAUSE 6 DEFINES 'ACCRUAL' FOR THE PURPOSE OF PARAG RAPHS (1) TO (5) IN THE SAID ACCOUNTING STANDARDS. 'ACCRU AL' REFERS TO THE ASSUMPTION, THAT REVENUES AND COSTS ARE ACCRUED , THAT IS, RECOGNISED AS THEY ARE EARNED OR INCURRED (AND NOT AS MONEY IS RECEIVED OR PAID) AND RECORDED IN THE FINANCIAL STATEMENTS OF THE PERIODS TO WHICH THEY RELATE. RELYING ON THI S DEFINITION IN THE ACCOUNTING STANDARD, THE REVENUE CONTENDS IT IS IMMATERIAL WHETHER ANY REVENUE IS ACTUALLY RECEIVED OR NOT. IF IT IS SHOWN TO ACCRUED THAT IS SUFFICIENT TO CHARGE THE SAID INCOME. IN THIS CONTEXT IT IS ALSO NECESSARY TO TAK E NOTE OF THE GUIDELINES DATED 28-4-1995 ISSUED BY THE NATIONAL H OUSING BANK WITH REFERENCE TO NON-PERFORMING ASSET WHICH I S THE SUBJECT-MATTER OF THESE PROCEEDINGS. IT STATES THE POLICY ON INCOME RECOGNITION TO BE OBJECTIVE SHOULD BE BASED ON RECORD OF RECOVERY. INCOME FROM NON-PERFORMING ASSET (NPA) MAY NOT BE RECOGNIZED MERELY ON THE BASIS OF ACCRUAL. A N ASSET BECOMES NON-PERFORMING WHEN IT CEASES TO YIELD INCO ME. THE INCOME FROM NPAS, THEREFORE, SHOULD BE RECOGNIZED O NLY WHEN IT IS ACTUALLY RECEIVED. NPA IS AN ASSET IN RE SPECT OF WHICH INTEREST HAS REMAINED UNPAID AND HAS BECOME ' PAST DUE'. AN AMOUNT IS TO BE TREATED AS 'PAST DUE' WHEN IT REMAINS UNPAID FOR 30 DAYS BEYOND THE DUE DATE. INTEREST ON NPAS ITA NOS. 789 & 790/BANG/2016 PAGE 5 OF 8 SHOULD NOT BE BOOKED AS INCOME IF SUCH INTEREST HAS REMAINED OUTSTANDING FOR MORE THAN SIX MONTHS ON AN D FROM MARCH 31, 1995. IN FACT THIS QUESTION AROSE FOR CON SIDERATION BEFORE THE APEX COURT IN THE CASE OF STATE BANK OF TRAVANCORE V. CIT [1996] 158 ITR 102 / 24 TAXMAN 337 WHERE IT HAS BEEN HELD THAT, THE CONCEPT OF REALITY OF THE INCOME AND THE ACTUALITY OF THE SITUATION ARE RELEV ANT FACTORS WHICH GO TO THE MAKING UP OF ACCRUAL OF INCOME BUT ONCE ACCRUAL TAKES PLACE AND INCOME ACCRUES, THE SAME CA NNOT BE DEFEATED BY ANY THEORY OF REAL INCOME. THE CONCEPT OF REAL INCOME CANNOT BE SO USED AS TO MAKE ACCRUED INCOME NON- INCOME SIMPLY BECAUSE AFTER THE EVENT OF ACCRUAL, T HE ASSESSEE NEITHER DECIDES TO TREAT IT AS A BAD DEBT NOR CLAIMS DEDUCTION UNDER SECTION 36(2) OF THE ACT, BUT STILL ENTERS THE SAME WITH A DIMINISHED HOPE OF RECOVERY IN THE SUSP ENSE ACCOUNT. EXTENSION OF THE CONCEPT OF REAL INCOME TO THIS FIELD TO NEGATE ACCRUAL AFTER THE AMOUNT HAD BECOME PAYAB LE IS CONTRARY TO THE POSTULATES OF THE ACT. 7. AGAIN THE APEX COURT IN THE CASE OF UCO BANK V. CI T [1999] 237 ITR 889 / 104 TAXMAN 547 HELD THAT, UNDER THE ACCOUNTING PRACTICE, INTEREST WHICH IS TRANSFERRED TO THE SUSPENSE ACCOUNT AND NOT BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE COMPANY IS NOT TREATED AS INCOME. TH E QUESTION WHETHER IN A GIVEN CASE SUCH 'ACCRUAL' OF INTEREST IS DOUBTFUL OR NOT, MAY ALSO BE PROBLEMATIC. IF, THERE FORE, THE BOARD HAS CONSIDERED IT NECESSARY TO LAY DOWN A GEN ERAL TEST FOR DECIDING WHAT IS A DOUBTFUL DEBT, AND DIRECTED THAT ALL INCOME-TAX OFFICERS SHOULD TREAT SUCH AMOUNTS AS NO T FORMING PART OF THE INCOME OF THE ASSESSEE UNTIL REALIZED, THIS DIRECTION BY WAY OF A CIRCULAR CANNOT BE CONSIDERED AS TRAVEL LING BEYOND THE POWERS OF THE BOARD UNDER SECTION 119 OF THE INCOME-TAX ACT. SUCH A CIRCULAR IS BINDING UNDER SE CTION 119. SUCH CIRCULARS ARE MEANT FOR ENSURING PROPER ADMINI STRATION OF THE STATUTE AND, THEY ARE DESIGNED TO MITIGATE T HE RIGOURS OF THE APPLICATION OF A PARTICULAR PROVISION OF THE ST ATUTE IN CERTAIN SITUATIONS BY APPLYING A BENEFICIAL INTERPR ETATION OF THE PROVISION IN QUESTION. 8. THEREFORE, IT IS CLEAR, IF AN ASSESSEE ADOPTS MERC ANTILE SYSTEM OF ACCOUNTING AND IN HIS ACCOUNTS HE SHOWS A PARTICULAR INCOME AS ACCRUING, WHETHER THAT AMOUNT IS REALLY ACCRUED OR NOT IS LIABLE TO BRING THE SAID INCOME T O TAX. HIS ACCOUNTS SHOULD REFLECT TRUE AND CORRECT STATEMENT OF AFFAIRS. MERELY BECAUSE THE SAID AMOUNT ACCRUED WAS NOT REAL ISED IMMEDIATELY CANNOT BE A GROUND TO AVOID PAYMENT OF TAX. BUT, IF IN HIS ACCOUNT IT IS CLEARLY STATED THOUGH A PAR TICULAR INCOME IS DUE TO HIM BUT IT IS NOT POSSIBLE TO RECOVER THE SAME, THEN IT CANNOT SAID TO HAVE BEEN ACCRUED AND THE SAID AMOUN T CANNOT BE BROUGHT TO TAX. IN THE INSTANT CASE WE AR E ITA NOS. 789 & 790/BANG/2016 PAGE 6 OF 8 CONCERNED WITH A NON-PERFORMING ASSET. AS THE DEFIN ITION OF NON-PERFORMING ASSET SHOWS AN ASSET BECOMES NON- PERFORMING WHEN IT CEASES TO YIELD INCOME. NON-PERF ORMING ASSET IS AN ASSET IN RESPECT OF WHICH INTEREST HAS REMAINED UNPAID AND HAS BECOME PAST DUE. ONCE A PARTICULAR A SSET IS SHOWN TO BE A NON-PERFORMING ASSET, THEN THE ASSUMP TION IS IT IS NOT YIELDING ANY REVENUE. WHEN IT IS NOT YIELDIN G ANY REVENUE, THE QUESTION OF SHOWING THAT REVENUE AND P AYING TAX WOULD NOT ARISE. AS IS CLEAR FROM THE POLICY GUIDEL INES ISSUED BY THE NATIONAL HOUSING BANK, THE INCOME FROM NON- PERFORMING ASSET SHOULD BE RECOGNISED ONLY WHEN IT IS ACTUALLY RECEIVED. THAT IS WHAT, THE TRIBUNAL HELD IN THE INSTANT CASE. THEREFORE, THE CONTENTION OF THE REVENUE THAT IN RESPECT, OF NON-PERFORMING ASSETS EVEN THOUGH IT DOES NOT YI ELD ANY INCOME AS THE ASSESSEE HAS ADOPTED A MERCANTILE SYS TEM OF ACCOUNTING, HE HAS TO PAY TAX ON THE REVENUE WHICH HAS ACCRUED NOTIONALLY IS WITHOUT ANY BASIS. IN THAT VI EW OF THE MATTER, THE SECOND SUBSTANTIAL QUESTION FRAMED IS A NSWERED AGAINST, THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 4. THE CIT(A) HAS CONSIDERED THIS ISSUE IN PARA 7 & 8 AS UNDER. ITA NOS. 789 & 790/BANG/2016 PAGE 7 OF 8 ITA NOS. 789 & 790/BANG/2016 PAGE 8 OF 8 5. IN VIEW OF THE DECISION OF HONBLE JURISDICTIONAL H IGH COURT IN CASE OF CIT VS CANFIN HOMES LTD (SUPRA) WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDERS OF THE CIT(A). 6. IN THE RESULT, THE APPEALS OF THE REVENUE ARE DISMI SSED. PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF MARCH, 2017 SD/- SD/- (A.K. GARODIA) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIA L MEMBER BANGALORE, DATED, THE 17 TH MARCH, 2017. / MS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.