ACIT, Circle-1, Khammam, Khammam V. The Dist., Co-op Central Bank Ltd., Khammam, Khammam

ITA 792/HYD/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6393 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 27-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 10-06-2015
• Court: TRIBUNAL
• Department Lawyers: R B NAIK
• Assessee Lawyers: A V RAGHURAM
• Keywords: Notional interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI PARTHA SARTHI CHAUDHURI, JUDICIAL MEMBER I.T.A. NO. 792/HYD/2015 ASSESSMENT YEAR: 2008-09 ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, KHAMMAM VS M/S. THE DISTRICT CO-OP. CENTRAL BANK LTD., KHAMMAM [PAN: AAATT8809Q] (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI R.B. NAIK, DR FOR ASSESSEE : SHRI A.V. RAGHURAM, AR DATE OF HEARING : 28-06-2016 DATE OF PRONOUNCEMENT : 30-06-2016 O R D E R PER B. RAMAKOTAIAH, A.M. : S THIS IS REVENUES APPEAL AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-VII, HYDERABAD DATED 03-03-2015. REVENUE IN ITS FOUR GROUNDS IS CONTESTIN G TWO ISSUES. 2. BRIEFLY STATED AS MADE OUT BY AO, ASSESSEE IS A CO - OPERATIVE SOCIETY CARRYING ON BANKING BUSINESS WITH A S MANY AS 27 BRANCHES SPREAD OVER AT VARIOUS PARTS OF KHAMMAM D ISTRICT I.T.A. NO. 792/HYD/2015 THE DISTRICT CO-OP. CENTRAL BANK LTD., :- 2 -: DEALING MAINLY WITH FARMERS BY PROVIDING LOANS TO CA RRY OUT AGRICULTURAL ACTIVITIES. THE LOANS INCLUDE CROP LOA N, FARM LOAN, POULTRY LOAN, HORTICULTURAL LOAN AND GOLD LOAN ETC., ON WHICH INTEREST INCOME IS EARNED. IN ADDITION TO THE ABOVE, A SSESSEE ACCEPTS DEPOSITS ON WHICH INTEREST IS PAID. ASSESSEE F ILED ITS RETURN OF INCOME ON 10-11-2008 DECLARING NET LOSS OF RS. 4,90,06,570/- AND NIL INCOME AFTER EXEMPTION U/S. 80 P(2)(A)(I) OF THE INCOME TAX ACT [ACT]. 2.1. BASING ON THE INCONSISTENCY AS THE METHOD OF ACCOUNTING IS CONCERNED, THE ACCOUNTS OF THE ASSESSEE WERE DIRECTED FOR SPECIAL AUDIT U/S. 142(2A) AND THE REPO RTS OF THE CHARTERED ACCOUNTANT WHO CAUSED A SPECIAL AUDIT FOR THE YEAR CONCERNED I.E., AY. 2005-06 TO AY. 2009-10. THE AS SESSMENT U/S. 143(3) R.W.S. 147 OF THE ACT WAS COMPLETED ON 30-08-2 013 DETERMINING TOTAL INCOME OF RS. 8,33,37,893/-. WHIL E DOING SO, THE FOLLOWING POINTS HAVE BEEN NOTICED: I. IT WAS NOTICED THAT THE COMPUTATION OF THE SPECIAL AUDIT THA T THE RESERVE FOR O.D. INTEREST OF RS. 6,64,27,588/- AND RESERVE FOR NPA OF RS. 3,71,77,325/- AS SHOWN BY THE ASSESSEE WERE DISALLOWED, HOWEVER IN THE RECAST COMPUTATION, THE SAME WAS NOT ADDED BACK BY THE ASSESSEE ; II. FURTHER, IT WAS FOUND THAT ASSESSEE IS FOLLOWING THE MERCANTILE METHOD OF ACCOUNTING AND HAS BEEN OFFERE D THE INTEREST ON O.D. AND RESERVE FOR NPA ON RECEIPT BASIS. THE CONTENTION OF ASSESSEE WAS NOT ACCEPTABLE AS THE INTERES T SHOULD HAVE BEEN OFFERED ON ACCRUAL BASIS IF ASSESS EE IS I.T.A. NO. 792/HYD/2015 THE DISTRICT CO-OP. CENTRAL BANK LTD., :- 3 -: FOLLOWING MERCANTILE METHOD OF ACCOUNTING. HENCE, THE SAME WAS DISALLOWED AND REDUCED FROM THE LOSS SHOWN BY ASSESSEE. 3. ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A), AND THE CIT(A) VIDE HIS ORDER IN ITA NO. 0106/DCIT 1, KHAMMAM/CIT(A)-VII/2014-15, DT. 03-03-2015, ALLOWED THE APPEAL OF ASSESSEE, WITH THE FOLLOWING OBSERVATIONS: I. IT IS SEEN THAT THE ASSESSEE MAINTAINED MERCANTILE SYSTEM OF ACCOUNTING AND THE INTEREST ACCRUED ON NPAS CANNOT BE RECOGNIZED AS INCOME FOR THE SIMPLE REASON WHEN THE PRINCIPAL AMOUNT ITSELF IS DOUBTFUL FOR RECOVERY THAT A NY INTEREST ACCRUED ON SUCH PRINCIPAL AMOUNT CANNOT BE RECOGNIZED AS INCOME. THIS VIEW CONFIRMED BY THE HO N'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. ANNAMALAI FINANCE LTD., [275 ITR 451] AND FURTHER IN THE CASE O F TCI FINANCE LTD., VS. ACIT [91 ITD 573]. FOLLOWING THE T WO DECISIONS, AO IS DIRECTED TO DELETE THE ADDITION TOWAR DS INTEREST ON O.D; II. CIT(A) ALSO OBSERVED THAT ASSESSEE HAS BEEN CARRYING ON BANKING ACTIVITIES AND IS NON-SCHEDULE BANK AND IT IS ENTITLED TO THE BENEFIT OF SECTION 36(1)(VII)(A) OF THE AC T. ACCORDINGLY, AO IS DIRECTED TO DELETE THE ADDITION UND ER THE HEAD RESERVE FOR NPA. I.T.A. NO. 792/HYD/2015 THE DISTRICT CO-OP. CENTRAL BANK LTD., :- 4 -: AGGRIEVED BY THE ORDER OF CIT(A), REVENUE HAS PREFER RED THE GROUNDS ON TWO ISSUES. 4. ON CONSIDERING THE RIVAL CONTENTIONS AND PERUSING THE FACTS ON RECORD, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) WHICH IS AS UNDER ON THE ISSUE: 4.2. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY THE APPELLANT AND IT IS SEEN TH AT THE APPELLANT MAINTAINED MERCANTILE SYSTEM OF ACCOUNTIN G AND THE INTEREST ACCRUED ON NPAS CANNOT BE RECOGNIZED AS IN COME FOR THE SIMPLE REASON WHEN THE PRINCIPAL AMOUNT ITSELF IS D OUBTFUL FOR RECOVERY THAT ANY INTEREST ACCRUED ON SUCH PRINCIPA L AMOUNT CANNOT BE RECOGNIZED AS INCOME. THIS VIEW CONFIRME D BY THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. AN NAMALAI FINANCE LTD., (275 ITR 451) AND FURTHER IN THE CASE OF TCI FINANCE LTD., VS. ACIT (91 ITD 573). FOLLOWING THE ABOVE T WO DECISIONS, I DIRECT THE ASSESSING OFFICER TO DELETE THE ABOVE AD DITIONS. 4.1. IN GROUND NO. 3, REVENUE CONTENDS THAT HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD ., VS. JCIT [320 ITR 577] HAS UPHELD THE TAXABILITY OF PROVI SIONS FOR NON-PERFORMING ASSETS AND THEREFORE, THE ORDER OF CIT( A) IS NOT CORRECT. AS SEEN FROM THE SAID JUDGMENT, IT IS NOT ON TH E ISSUE OF BRINGING TO TAX INTEREST INCOME ON THE NPAS BUT CLAIM O F BAD DEBT U/S. 36(1)(VII) IN THE CASE OF NON-BANKING FINANCIAL COMPANY. ASSESSEE IS NOT AN NBFC, BUT A BANK, PARTICULARLY A CO -OPERATIVE BANK AND AS ADMITTED BY AO IS CARRYING ON BANKING BUS INESS. THEREFORE, THE SAID JUDGMENT GIVEN IN THE CONTEXT OF NB FC PARTICULARLY WITH REFERENCE TO PROVISION CLAIMED AS E XPENSE DEDUCTIBLE U/S. 36(1)(VII) OR (VII)(A) CANNOT BE CON SIDERED AS APPLICABLE IN BRINGING TO TAX A NOTIONAL INTEREST ON A LOAN WHICH HAS BECOME BAD. TO THE EXTENT OF CLAIM OF INTEREST ACC RUED ON I.T.A. NO. 792/HYD/2015 THE DISTRICT CO-OP. CENTRAL BANK LTD., :- 5 -: NPAS, ASSESSEES CONTENTIONS ARE CORRECT AND ACCORDING REVENUES GROUND NOS. 2 & 3 ON THIS ISSUE ARE REJECTED. 5. WITH REFERENCE TO ISSUE OF RESERVE FOR NPA, LD. CIT(A) HAS ALLOWED ASSESSEES CONTENTIONS BY BRIEFLY STATING A S UNDER: 5.2. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND WRITTEN SUBMISSIONS OF THE AR AND I OBSERVED THAT THE APPEL LANT HAS BEEN CARRYING ON BANKING ACTIVITIES AND IS NON-SCHEDULE BANK AND HE IS ENTITLED TO THE BENEFIT OF SECTION 36(1)(VII)(A) OF THE INCOME TAX ACT. ACCORDINGLY, I DIRECT THE ASSESSING OFFICER TO DELE TE THE ADDITION UNDER THE HEAD RESERVE FOR NPA OF RS. 3,71,77,325/- . WHILE ACCEPTING THAT ASSESSEE IS CARRYING ON BANKING ACTIVITIES AND IS ENTITLED TO BENEFIT OF SECTION 36(1)(VII)(A), WE ARE OF THE OPINION THAT THE ALLOWANCE OF THE AMOUNT WITHOUT VERIFIC ATION BY THE CIT(A) IS NOT CORRECT. WE HAVE ASKED THE LD. COUN SEL TO PLACE ON RECORD HOW THE WORKING HAS BEEN UNDERTAKEN. IT WAS SUBMITTED THAT ASSESSEE MADE PROVISIONS AS PER GUIDELIN ES OF THE RBI AND PLACED ON RECORD THE WORKING IN THE BOOKS OF ACCOUNT AT PG. 4 OF THE PAPER BOOK. EVEN THOUGH THE PROVISIONS F OR THE YEAR WAS DETERMINED AT RS. 3,71,77,324/-, THE RATIO AT WHICH IT IS CLAIMED IS NOT FORTHCOMING. THEREFORE, WHILE ACCEPTI NG ASSESSEES CLAIM THAT IT IS ENTITLED FOR RELIEF CLAIMED UNDER THE P ROVISIONS OF SECTION 36(1)(VII), WE DIRECT THE AO TO EXAMINE THE QUA NTIFICATION OF THE AMOUNT AFTER GIVING DUE OPPORTUNITY TO ASSESSEE . WE ARE OF THE OPINION THAT LD. CIT(A) HAS NOT EXAMINED THE QUANTIFI CATION OF THE CLAIM WHILE ALLOWING CLAIM ITSELF. TO THAT EXTEN T, WE MODIFY HIS ORDER AND DIRECT THE AO TO RE-DETERMINE THE AMOUNT WHIC H CAN BE ALLOWED AS PER THE PROVISIONS OF SECTION 36(1)(VII), BY EXAMINING THE PROVISIONS MADE IN THE BOOKS AND PROVISIONS OF THE ACT. FOR THIS LIMITED PURPOSE, THE ISSUE IS RESTORED TO THE FILE O F AO FOR I.T.A. NO. 792/HYD/2015 THE DISTRICT CO-OP. CENTRAL BANK LTD., :- 6 -: FRESH EXAMINATION. GROUND NOS. 4 & 5 ARE CONSIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. 6. IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STATISTICA L PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE, 2016 SD/- SD/- ( PARTHA SARTHI CHAUDHURI ) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 30 TH JUNE, 2016 TNMM COPY TO : 1. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, 1 ST FLOOR, AAYAKAR BHAVAN, BEHIND KINNERASANI THEATRE, RAJIV GUNJ, KHAMMAM. 2. M/S. THE DIST. CO-OP. CENTRAL BANK LTD., 2-1-90 TO 9 3, M.G. ROAD, GANDHI CHOWK, KHAMMAM. 3. COMMISSIONER OF INCOME TAX(APPEALS)-VII, HYDERAB AD. 4. COMMISSIONER OF INCOME TAX-VII, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.