Tiruchirapalli District Central Co-operative Bank Ltd., CHENNAI V. ACIT, Trichy

ITA 832/CHNY/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7549 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 15-02-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 01-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Keywords: Question of law; Bad and doubtful debts; Notional interest; Set aside
• 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; 143(3); 92; 37(1); 43D; 13; 119

Judgement Text

, , [ : ] IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI [ CAMP: MADURAI ] . . . ! , ' # $ %& .()(*, , # - BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER $./ ITA NOS.832, 833 & 834/MDS/2013 ' * /* / ASSESSMENT YEARS : 2007-08, 2008-09 & 2009-10 M/S TIRUCHIRAPALLI DISTRICT CENTRAL CO-OPERATIVE BANK LTD., C/O SHRI S. SRIDHAR, ADVOCATE, NEW NO.14, OLD NO.82, FLAT NO.5, 1 ST AVENUE, INDIRA NAGAR, ADYAR, CHENNAI - 600 020. PAN : AAAAT 5036 C V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I(1), TIRUCHIRAPALLI. (12/ APPELLANT) (3412/ RESPONDENT) 12 5 6 / APPELLANT BY : SHRI S. SRIDHAR, ADVOCATE 3412 5 6 / RESPONDENT BY : SH. PATHLAVATH PEERYA, CIT 5 7, / DATE OF HEARING : 15.02.2017 89/ 5 7, / DATE OF PRONOUNCEMENT : 03.03.2017 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER: THESE ARE APPEALS FILED BY THE ASSESSEE AGAINST THE ORDERS DATED 26.02.2013 OF THE COMMISSIONER OF INCOME TAX (APPEALS), TIRUCHIRAPALLI. 2 I.T.A. NOS.832 TO 834/MDS/13 2. LD.COUNSEL FOR THE ASSESSEE, AT THE OUTSET, SUBM ITTED THAT HE WAS PRESSING ONLY THE GROUNDS RELATING TO ADDITION OF INTEREST ON NON- PERFORMING ASSETS, DISALLOWANCE OF PROVISION FOR BA D AND DOUBTFUL DEBTS AND DISALLOWANCE OF EX-GRATIA PAYMENT TO EMPL OYEES WHO WERE NOT COVERED BY PAYMENT OF BONUS ACT. LD.COUNSEL AL SO SUBMITTED THAT FOR ASSESSMENT YEAR 2009-10, THERE WAS ONE OTHER GR OUND WHICH HE WAS PRESSING, ON DISALLOWANCE OF EMPLOYEES GRATUITY RELATED PAYMENT TO LIC. GROUNDS OTHER THAN ON THE ABOVE ISSUES HAV ING NOT BEEN PRESSED ARE DISMISSED. 3. APPEAL FOR ASSESSMENT YEAR 2007-08 IS FIRST TAKE N UP FOR DISPOSAL. 4. THE ASSESSEE, A CO-OPERATIVE BANK, HEADQUARTERED IN TIRUCHIRAPALLI, HAD FILED RETURN OF INCOME ORIGINAL LY ON 12.11.2007 ADMITTING NIL INCOME. THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE A CT') ACCEPTING THE NIL INCOME DETERMINED BY THE ASSESSEE. THEREAFTER THE SAID ASSESSMENT WAS SET ASIDE BY CIT, TRICHY, INVOKING H IS POWER UNDER SECTION 263 OF THE ACT. IN THE FRESH ASSESSMENT PR OCEEDINGS, ASSESSEE CLAIMED EXEMPTION FROM TAX ON THE BASIS OF PRINCIPLE OF MUTUALITY. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED. HE 3 I.T.A. NOS.832 TO 834/MDS/13 COMPLETED THE ASSESSMENT DISALLOWING THE CLAIM OF E X-GRATIA PAYMENT MADE BY THE ASSESSEE TO ITS EMPLOYEES, AND THE CLAI M FOR DEDUCTION FOR PROVISION FOR BAD DEBTS IN EXCESS OF WHAT ACCOR DING TO HIM WAS NOT IN LINE WITH SECTION 36(1)(VIIA) OF THE ACT. 5. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE THE C IT(APPEALS). THE CIT(APPEALS), DURING THE APPELLATE PROCEEDINGS, NOTED THAT ASSESSEE HAD NOT ACCOUNTED FOR ACCRUED INCOME ON NO N-PERFORMING ASSETS. AS PER THE LD. CIT(APPEALS), ASSESSEE WAS NOT A SCHEDULED BANK AND SECTION 43D OF THE ACT WAS NOT APPLICABLE TO IT. THUS, THE CIT(APPEALS) HELD THAT ASSESSEE HAD NOT ACCOUNTED F OR OVERDUE INTEREST OF ` 18,16,42,584/- ON ITS NON-PERFORMING ASSETS. THUS, THE LD. CIT(APPEALS) MADE AN ADDITION OF ` 18,16,42,584/-. 6. VIS--VIS PROVISION FOR BAD DEBTS, LD. CIT(APPEA LS) NOTED THAT THE ASSESSEE-BANK DID NOT WORK OUT AVERAGE AGGREGAT E RURAL ADVANCE IN RESPECT OF RURAL BRANCHES. ACCORDING TO LD. CIT (APPEALS), IT WAS FOR THE ASSESSEE TO CATEGORIZE ITS BRANCHES AS RURAL BR ANCHES AND NON- RURAL BRANCHES IN ACCORDANCE WITH THE DEFINITION IN EXPLANATION (IA) GIVEN BELOW SECTION 36(1)(VIIA) OF THE ACT. THE LD . CIT(APPEALS) NOTED THAT THOUGH THE ASSESSEE GAVE THE BREAK-UP OF OUTST ANDING ADVANCES IN THE RURAL BRANCHES AS ON 31.03.2006 AND 31.03.20 07, IT DID NOT 4 I.T.A. NOS.832 TO 834/MDS/13 CORRECTLY WORK OUT THE AVERAGE AGGREGATE RURAL ADVA NCES FOR THE PERIOD 01.04.2005 TO 31.03.2006 AND 01.04.2006 TO 31.03.20 07. HENCE, THE LD. CIT(APPEALS) HELD THAT THE ASSESSEES CLAIM COU LD BE CONSIDERED ONLY WHEN IT WAS ABLE TO GIVE CORRECT WORKING OF TH E AVERAGE AGGREGATE RURAL ADVANCES FOR APPLICATION OF SECTION 36(1)(VII A) OF THE ACT AND WORKING OUT THE ALLOWABLE PROVISION FOR BAD AND DOU BTFUL DEBTS. 7. INSOFAR AS EX-GRATIA PAYMENT WAS CONCERNED, AS P ER THE LD. CIT(APPEALS), BY VIRTUE OF THE JUDGMENT OF HON'BLE APEX COURT IN SOUTHERN TECHNOLOGIES LTD. (320 ITR 577), THE CLAIM WAS RIGHTLY DISALLOWED. AS PER LD. CIT(APPEALS), SUCH PAYMENTS WERE COVERED BY SECTION 36(1)(II) OF THE ACT AND THEREFORE, WHAT WA S NOT ALLOWABLE UNDER THE SAID SECTION COULD NOT BE ALLOWED UNDER G ENERAL SECTION 37(1) OF THE ACT. 8. NOW BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMI TTED THAT INTEREST ON NPA COULD NOT BE CONSIDERED FOR ADDITIO N SINCE CLASSIFICATION OF NON-PERFORMING ASSETS WAS AS PER THE PRUDENTIAL NORMS OF RESERVE BANK OF INDIA. LD. AR SUBMITTED T HAT SECTION 45Q OF RESERVE BANK OF INDIA ACT, 1934 HAD AN OVERRIDING E FFECT. IN ANY CASE, AS PER LD. AR, EVEN THOUGH SECTION 43D OF THE ACT D ID NOT APPLY TO A CO-OPERATIVE BANK, BY VIRTUE OF THE JUDGMENT OF HON 'BLE BOMBAY HIGH 5 I.T.A. NOS.832 TO 834/MDS/13 COURT IN THE CASE OF CIT V. DEOGIRI NAGIRI SAHAKARI BANK LTD. (379 ITR 24), INTEREST ON NON-PERFORMING ASSETS, WHICH WAS N OT ACCRUED OR TREATED AS INCOME BY THE ASSESSEE, COULD NOT BE THR USTED ON THE ASSESSEE, ON THE BASIS OF PRINCIPLES OF ACCRUAL. . 9. INSOFAR AS DISALLOWANCE OF THE PROVISION FOR BAD DEBT WAS CONCERNED, THE LD. A.R. SUBMITTED THAT THE ASSESSEE WAS UNABLE TO WORK OUT SUCH PROVISION IN ACCORDANCE WITH SECTION 36(1)(VIIA) OF THE ACT DUE TO PAUCITY OF TIME. ACCORDING TO HIM, THE LD. CIT(APPEALS) HIMSELF HAD POINTED OUT THAT IF ASSESSEE WAS ABLE T O SHOW THE PROVISION TO HAVE BEEN MADE IN ACCORDANCE WITH SECT ION 36(1)(VIIA) OF THE ACT, TO THAT EXTENT THE CLAIM COULD BE CONSIDER ED. AS PER THE LD. A.R., IF ASSESSEE WAS GRANTED ONE MORE CHANCE, IT W OULD CORRECTLY WORK OUT THE AVERAGE AGGREGATE RURAL ADVANCE AND TH E CLAIM UNDER SECTION 36(1)(VIIA) OF THE ACT. 10. INSOFAR AS PAYMENT OF EX-GRATIA WAS CONCERNED, LD. A.R. SUBMITTED THAT THIS WAS PAID TO EMPLOYEES WHO WERE NOT COVERED UNDER THE PAYMENT BONUS ACT AND WAS NECESSARILY INC URRED FOR THE PURPOSE OF BUSINESS AND TO MAINTAIN CORDIAL RELATIO NSHIP WITH THE EMPLOYEES. 6 I.T.A. NOS.832 TO 834/MDS/13 11. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE CIT(APPEALS). 12. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. INSOFAR AS INTEREST ACCRUED ON NPA IS CONCERNED, WE ARE OF THE OPINION THAT THE ASSESSEE WAS BOUND TO FOLLOW CLASSIFICATIO N OF NPA IN ACCORDANCE WITH PRUDENTIAL NORMS PRESCRIBED BY RESE RVE BANK OF INDIA. IT IS NOT DISPUTED THAT THE ASSESSEE HAD NO T SHOWN ANY INCOME ACCRUAL OF INTEREST ON NON-PERFORMING ASSETS IN ITS ACCOUNTS. HON'BLE BOMBAY HIGH COURT IN THE CASE OF DEOGIRI NAGARI SAH AKARI BANK LTD. (SUPRA) HAD HELD AS UNDER AT PARA 6 TO 11 OF ITS JU DGMENT: 6. THE LEARNED COUNSEL, MR. ALOK SHARMA, APPEARING FOR THE APPELLANTS- REVENUE SUBMITS THAT, THE ASSESSEE IN ALL THESE CAS ES ARE THE CO-OPERATIVE BANKS AND NOT SCHEDULED BANKS, THEREFORE, THE SPECI AL PROVISIONS OF SECTION 43D OF THE INCOME-TAX ACT WILL NOT BE APPLICABLE TO THEM. LEARNED COUNSEL FURTHER SUBMITS THAT, IN VIEW OF THE PROVISIONS OF SECTION 145 OF THE INCOME- TAX ACT, THE ASSESSEE-CO-OPERATIVE BANKS HAVE TO FO LLOW EITHER THE MERCANTILE SYSTEM OF ACCOUNTING OR CASH SYSTEM. THEY CANNOT HA VE MIXED SYSTEM OF ACCOUNT. THE LEARNED COUNSEL ALSO SUBMITS THAT, THE RBI DIRECTIONS UNDER THE RESERVE BANK OF INDIA ACT ARE PRUDENTIAL NORMS BUT HAVE NOTHING TO DO WITH THE COMPUTATION OR TAXABILITY OF THE PROVISION OF T HE NPA UNDER THE INCOME- TAX ACT. LEARNED COUNSEL FURTHER SUBMITS THAT THOUG H THE RBI DIRECTIONS DEVIATE FROM THE ACCOUNTING PRACTICE AS PROVIDED BY THE COMPANIES ACT BUT THEY DO NOT OVERRIDE THE PROVISIONS OF THE INCOME-T AX ACT AND THEY ARE OPERATING IN DIFFERENT FIELDS. THE LEARNED COUNSEL FOR THE APPELLANTS-REVENUE, LASTLY, SUBMITS THAT THE LEARNED TRIBUNAL OUGHT TO HAVE HELD THAT THE ASSESSEE CO-OPERATIVE BANK DOES NOT SATISFY THE CONDITIONS O F THE CENTRAL BOARD OF DIRECT TAXES CIRCULAR NO. F. 201/81/84/ITAII, DATED OCTOBER 9, 1984, AND, THEREFORE, COULD NOT AVAIL OF THE BENEFITS OF THE C IRCULAR. ON THE BASIS OF THE AFORESAID SUBMISSIONS, THE LEARNED COUNSEL FURTHER SUBMITS THAT SUBSTANTIAL 7 I.T.A. NOS.832 TO 834/MDS/13 QUESTION OF LAW INVOLVED IN THE ABOVE APPEALS AND, THUS, THE ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE I NCOME-TAX ACT, 1961, ARE REQUIRED TO BE CONFIRMED. LEARNED COUNSEL FOR THE A PPELLANTS SUBMITS THAT THE TRIBUNAL OUGHT TO HAVE ALLOWED THE APPEAL BY RELYIN G ON THE JUDGMENT IN THE MATTER OF SOUTHERN TECHNOLOGIES LTD. V. JOINT CIT R EPORTED IN [2010] 320 ITR 577 (SC) ; [2010] 2 SCC 548. 7. THE LEARNED COUNSEL FOR THE RESPONDENT-CO-OPERAT IVE BANKS SUBMIT THAT THE ISSUES INVOLVED IN THE ABOVE APPEALS ARE NO MORE RE S INTEGRA IN VIEW OF THE DECISION RENDERED BY THE HON'BLE SUPREME COURT IN T HE CASE OF UCO BANK V. CIT REPORTED IN [1999] 237 ITR 889 (SC) ; [1999] 4 SCC 599. 8. LEARNED COUNSEL FOR RESPONDENT SUBMITS THAT THE LEARNED TRIBUNAL HAS RIGHTLY DISMISSED THE APPEALS OF THE REVENUE BY CON FIRMING THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS). THERE IS NO SUBSTANTIAL QUESTION OF LAW INVOLVED IN THESE APPEALS AND, THUS , ALL THE APPEALS ARE LIABLE TO BE DISMISSED. 9. THE INCOME-TAX APPELLATE TRIBUNAL HAS REFERRED T HE CASE OF VASISTH CHAY VYAPAR LTD. [2011] 330 ITR 440 (DELHI). IN THIS CASE, THE REVENUE RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA). THE LEARNED INCOME-TAX A PPELLATE TRIBUNAL HAS REPRODUCED THE OBSERVATIONS MADE BY THE DELHI HIGH COURT WHILE REFERRING THE SAID CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) . THE ASSESSEE HEREIN BEING A CO-OPERATIVE BANK ALSO GOVERNED BY THE RESE RVE BANK OF INDIA AND THUS THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL N ORMS ISSUED BY THE RESERVE BANK OF INDIA ARE EQUALLY APPLICABLE TO THE CO-OPER ATIVE BANKS. THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) HELD THAT THE PROVISIONS OF SECTION 45Q OF THE RESERVE BANK O F INDIA ACT HAS AN OVERRIDING EFFECT VIS-A-VIS INCOME RECOGNITION PRIN CIPLE UNDER THE COMPANIES ACT. HENCE, SECTION 45Q OF THE RESERVE BANK OF INDI A ACT SHALL HAVE THE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINC IPLE FOLLOWED BY CO- OPERATIVE BANKS. HENCE, THE ASSESSING OFFICER HAS T O FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS, 1998, AS HELD BY THE HON'BLE S UPREME COURT. 10. THE HONOURABLE APEX COURT IN THE CASE OF UCO BA NK'S CASE (SUPRA) HAD AN OCCASION TO CONSIDER THE NATURE OF THE CENTRAL BOAR D OF DIRECT TAXES CIRCULAR AND THE HON'BLE APEX COURT HAS THUS HELD THAT THE B OARD HAS POWER, INTER ALIA, TO TONE DOWN THE RIGOUR OF THE LAW AND ENSURE A FAI R ENFORCEMENT OF ITS PROVISIONS, BY ISSUING CIRCULAR IN EXERCISE OF ITS STATUTORY POWERS UNDER SECTION 119 OF THE ACT WHICH ARE BINDING ON THE AUT HORITIES IN THE 8 I.T.A. NOS.832 TO 834/MDS/13 ADMINISTRATION OF THE ACT, IT IS A BENEFICIAL POWER GIVEN TO THE BOARD FOR PROPER ADMINISTRATION OF FISCAL LAW SO THAT UNDUE H ARDSHIP MAY NOT BE CAUSED TO THE ASSESSEE AND THE FISCAL LAWS MAY BE CORRECTL Y APPLIED. FURTHER, A SIMILAR ISSUE WAS RAISED ABOUT INTEREST ACCRUED ON A 'STICKY' LOAN WHICH WAS NOT RECOVERED BY THE ASSESSEE-BANK FOR THE LAST THR EE YEARS AND TRANSFERRED TO THE SUSPENSE ACCOUNT, WOULD OR WOULD NOT BE INCL UDED IN THE INCOME OF THE ASSESSEE FOR THE PARTICULAR ASSESSMENT YEAR. THE HO N'BLE APEX COURT HAS OBSERVED THAT : 'THE METHOD OF ACCOUNTING WHICH IS FOLLOWED BY THE ASSESSEE-BANK IS THE MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, THE ASSES SEE CON SIDERS INCOME BY WAY OF INTEREST PERTAINING TO DOUBTFUL LOANS AS NOT REAL INCOME IN THE YEAR IN WHICH IT ACCRUES BUT ONLY WHEN IT IS REA LISED. A M IXED METHOD OF ACCOUNTING IS THUS FOLLOWED BY THE ASSESSEE- BANK. THIS METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS IN ACCORDANCE WITH ACCOUNTING PRACT ICE. THE ASSESSEE'S METHOD OF ACCOUNTING, TRANSFERRING THE DOUBTFUL DEB T TO AN INTEREST SUSPENSE ACCOUNT AND NOT TREATING IT AS PROFIT UNTIL ACTUALL Y RECEIVED, IS IN ACCORDANCE WITH ACCOUNTING PRACTICE UP TO THE ASSESSMENT YEAR 1978-79 THE TAXABILITY OF INTEREST ON DOUBTFUL DEBTS CREDITED TO SUSPENSE ACC OUNT WILL BE DECIDED IN THE LIGHT OF THE BOARD'S EARLIER CIRCULAR DATED OCTOBER 6, 1952, AS THE SAID CIRCULAR WAS WITHDRAWN ONLY IN JUNE, 1978. THE NEW PROCEDURE UNDER THE CIRCULAR OF OCTOBER 9, 1984, WILL BE APPLICABLE FOR AND FROM THE ASSESSMENT YEAR, 1979-80. ALL PENDING DISPUTES ON THE ISSUE SH OULD BE SETTLED IN THE LIGHT OF THESE INSTRUCTIONS. THEREFORE, UP TO THE ASSESSM ENT YEAR 1978-79, THE CENTRAL BOARD OF DIRECT TAXES'S CIRCULAR OF OCTOBER 6, 1952 WOULD BE APPLICABLE; WHILE FROM THE ASSESSMENT YEAR 1979-80, THE CENTRAL BOARD OF DIRECT TAXES'S CIRCULAR OF OCTOBER 9, 1984 IS MADE APPLICABLE. IN THE PRESENT CASE, THE ASSESSMENT WAS MADE ON THE BASIS OF THE C ENTRAL BOARD OF DIRECT TAXES'S CIRCULAR ON OCTOBER 9,1984, SINCE THE ASSES SMENT PERTAINS TO THE ASSESSMENT YEAR 1981-82 TO WHICH THE CIRCULAR OF OC TOBER 9, 1984, IS APPLICABLE . . . IF, THE BOARD HAS CONSIDERED IT NE CESSARY TO LAY DOWN A GENERAL TEST FOR DECIDING WHAT IS A DOUBTFUL DEBT, AND DIRE CTED THAT ALL INCOME-TAX OFFICER'S SHOULD TREAT SUCH AMOUNTS AS NOT FORMING PART OF THE INCOME OF THE ASSESSEE UNTIL REALIZED, THIS DIRECTION BY WAY OF A CIRCULAR CANNOT BE CONSIDERED AS TRAVELLING BEYOND THE POWERS OF THE B OARD UNDER SEC TION 119 OF THE INCOME-TAX ACT. SUCH A CIRCULAR IS BINDING UNDE R SEC TION 119. THE CIRCULAR OF OCTOBER 9, 1984, THEREFORE, PROVIDES A TEST FOR RECOGNISING WHETHER A CLAIM FOR INTEREST CAN BE TREATED AS A DOUBTFUL CLA IM UNLIKELY TO BE RECOVERED OR NOT. THE TEST PROVIDED BY THE SAID CIRCULAR IS T O SEE WHETHER, AT THE END OF THREE YEARS, THE AMOUNT OF INTEREST HAS, IN FACT, B EEN RECOVERED BY THE BANK 9 I.T.A. NOS.832 TO 834/MDS/13 OR NOT. IF IT IS NOT RECOVERED FOR A PERIOD OF THRE E YEARS, THEN IN THE FOURTH YEAR AND ONWARDS THE CLAIM FOR INTEREST HAS TO BE T REATED AS DOUBTFUL CLAIM WHICH NEED NOT BE INCLUDED IN THE INCOME OF THE ASS ESSEE UNTIL IT IS ACTUALLY RECOVERED. IN THE PRESENT CASE, THE CIRCULARS WHICH HAVE BEEN IN FORCE ARE MEANT TO ENSURE THAT WHILE ASSESSING THE INCOME ACC RUED BY WAY OF INTEREST ON A 'STICKY' LOAN, THE NOTIONAL INTEREST WHICH IS TRANSFERRED TO A SUSPENSE ACCOUNT PERTAINING TO DOUBTFUL LOANS WOULD NOT BE I NCLUDED IN THE INCOME OF THE ASSESSEE, IF FOR THREE YEARS SUCH INTEREST IS N OT ACTUALLY RECEIVED. THE VERY FACT THAT THE ASSESSEE ALTHOUGH GENERALLY USIN G A MERCANTILE SYSTEM OF ACCOUNTING, KEEPS SUCH INTEREST AMOUNTS IN A SUSPEN SE ACCOUNT AND DOES NOT BRING THESE AMOUNTS TO THE PROFIT AND LOSS ACCOUNT GOES TO SHOW THAT THE ASSESSEE IS FOLLOWING A MIXED SYSTEM OF ACCOUNTING BY WHICH SUCH INTEREST IS INCLUDED IN ITS INCOME ONLY WHEN IT IS ACTUALLY REC EIVED. LOOKING TO THE METHOD OF ACCOUNTING SO ADOPTED BY THE ASSESSEE IN SUCH CA SES, THE CIRCULARS WHICH HAVE BEEN ISSUED ARE CONSISTENT WITH THE PROVISIONS OF SECTION 145 AND ARE MEANT TO ENSURE THAT ASSESSEES OF THE KIND SPECIFIE D WHO HAVE TO ACCOUNT FOR ALL SUCH AMOUNTS OF INTEREST ON DOUBTFUL LOANS ARE UNIFORMLY GIVEN THE BENEFIT UNDER THE CIRCULAR AND SUCH INTEREST AMOUNTS ARE NO T INCLUDED IN THE INCOME OF THE ASSESSEE UNTIL ACTUALLY RECEIVED IF THE CONDITI ONS OF THE CIRCULAR ARE SATISFIED. THE CIRCULAR OF OCTOBER 9, 1984, ALSO SE RVES ANOTHER PRACTICAL PURPOSE OF LAYING DOWN A UNIFORM TEST FOR THE ASSES SING AUTHORITY TO DECIDE WHETHER THE INTEREST INCOME WHICH IS TRANSFERRED TO THE SUS PENSE ACCOUNT IS, IN FACT, ARISING IN RESPECT OF A DOUBTFUL OR 'STICK Y' LOAN. THIS IS DONE BY PROVIDING THAT NON-RECEIPT OF INTEREST FOR THE FIRS T THREE YEARS WILL NOT BE TREATED AS INTEREST ON A DOUBTFUL LOAN. BUT IF AFTE R THREE YEARS THE PAYMENT OF INTEREST IS NOT RECEIVED, FROM THE FOURTH YEAR O NWARDS IT WILL BE TREATED AS INTEREST ON A DOUBTFUL LOAN AND WILL BE ADDED TO TH E INCOME ONLY WHEN IT IS ACTUALLY RECEIVED . . . THERE IS NO INCONSISTENCY O R CONTRADICTION BETWEEN THE CIRCULAR SO ISSUED AND SECTION 145 OF THE INCOME-TA X ACT. IN FACT, THE CIRCULAR CLARIFIES THE WAY IN WHICH THESE AMOUNTS ARE TO BE TREATED UNDER THE ACCOUNTING PRACTICE FOLLOWED BY THE LENDER. THE CIR CULAR, THEREFORE, CANNOT BE TREATED AS CONTRARY TO SECTION 145 OF THE INCOME-TA X ACT OR ILLEGAL IN ANY FORM. IT IS MEANT FOR A UNIFORM ADMINISTRATION OF L AW BY ALL THE INCOME-TAX AUTHORITIES IN A SPECIFIC SITUATION AND, THEREFORE, VALIDLY ISSUED UNDER SECTION 119 OF THE INCOME-TAX ACT. AS SUCH, THE CIRCULAR WO ULD BE BINDING ON THE DEPARTMENT . . . THE RELEVANT CIRCULARS OF CENTRAL BOARD OF DIRECT TAXES CANNOT BE IGNORED. THE QUESTION IS NOT WHETHER A CI RCULAR CAN OVERRIDE OR DETRACT FROM THE PROVISIONS OF THE ACT ; THE QUESTI ON IS WHETHER THE CIRCULAR SEEKS TO MITIGATE THE RIGOUR OF A PARTICULAR SECTIO N FOR THE BENEFIT OF THE ASSES SEE IN CERTAIN SPECIFIED CIRCUMSTANCES. SO LO NG AS SUCH A CIRCULAR IS IN 10 I.T.A. NOS.832 TO 834/MDS/13 FORCE IT WOULD BE BINDING ON THE DEPARTMENTAL AUTHO RITIES IN VIEW OF THE PROVISIONS OF SECTION 119 TO ENSURE A UNIFORM AND P ROPER ADMINISTRATION AND APPLICATION OF THE INCOME-TAX ACT.' 11. THE LEARNED COUNSEL FOR THE RESPONDENT HAS PLAC ED RELIANCE IN A CASE OF MERCANTILE BANK LTD. V. CIT REPORTED IN [2006] 283 ITR 84 (SC) ; [2006] 5 SCC 221, WHERE SIMILAR QUESTION WAS RAISED BEFORE T HE APEX COURT. THE QUESTION WAS WHETHER THE ASSESSEE IS LIABLE TO BE T AXED UNDER THE INCOME- TAX ACT, 1961, IN RESPECT OF THE INTEREST ON DOUBTF UL ADVANCES CREDITED TO THE INTEREST SUSPENSE ACCOUNT. IN THIS CASE, UCO BANK'S CASE (SUPRA) WAS ALSO REFERRED AND THE HON'BLE APEX COURT HAS ALLOWED THE APPEAL TO THE EXTENT OF QUESTION RAISED AS AFORESAID. FURTHERMORE, THE RESP ONDENT CO-OPERATIVE BANKS, AS UNDERSTOOD BY SECTION 43C OF THE INCOME-T AX ACT ON THE SCHEDULED BANK. 12. LEARNED COUNSEL FOR THE APPELLANTS-REVENUE PLAC ED RELIANCE ON THE JUDGMENT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. V. JOINT CIT REPORTED IN [2010] 320 ITR 577 (SC) ; [2010] 2 SCC 548. HOWEVER, THIS JUDGMENT PERTAINS TO NON-BANKING FINANCIAL COMPANIES. UCO BA NK'S CASE (SUPRA) AND MERCANTILE BANK (SUPRA) CASE SQUARELY APPLIES TO TH E FACTS OF THE PRESENT CASE AND ISSUES INVOLVED. WE, THEREFORE, DO NOT FIND IT NECESSARY TO INTERFERE IN THE JUDGMENT OF THE APPELLATE TRIBUNAL. WE HOLD THA T NO SUBSTANTIAL QUESTION OF LAW ARISES IN THESE APPEALS. IT MAY BE TRUE THAT SECTION 43D OF THE ACT WOULD NO T BE APPLICABLE TO THE ASSESSEE SINCE IT WAS A CO-OPERATIVE BANK. HOW EVER, BY VIRTUE OF THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT, REPRODUC ED ABOVE, PRIMACY HAS BEEN GIVEN TO SECTION 45Q OF THE RBI AC T. WE ARE, THEREFORE, OF THE OPINION THAT INTEREST ON NPA COUL D NOT HAVE BEEN ADDED TO THE INCOME OF THE ASSESSEE. IN TAKING THI S VIEW, WE ARE ALSO FORTIFIED BY THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SHRI SIDDESWAR CO-OPERATIVE BANK LTD. (20 16) 96 CCH 128, 11 I.T.A. NOS.832 TO 834/MDS/13 WHERE THEIR LORDSHIP HAD MADE AN ANALYSIS OF THE PR OVISIONS CONSIDERING THE IMPORTANCE OF PRUDENTIAL NORMS OF R BI BASED ON VOL.I OF TANNANS BANKING LAW & PRACTICE IN INDIA. WE, TH EREFORE, DELETE SUCH AN ADDITION. 13. GROUND NO.8 STANDS ALLOWED. 14. INSOFAR AS PROVISION FOR BAD DEBT IS CONCERNED, THE ONLY PLEADING OF THE ASSESSEE IS THAT IT SHOULD BE GIVEN A CHANCE FOR WORKING OUT AVERAGE AGGREGATE RURAL ADVANCE FOR THE PURPOSE OF APPLICATION OF SECTION 36(1)(VIIA) OF THE ACT. THE CIT(APPEALS) HIMSELF NOTED AT PARA 6.4 OF HIS ORDER THAT WHEN FIGURES OF AGGREGATE AVERAGE ADVANCES ARE CORRECTLY FURNISHED BY THE ASSESSEE, T HE DEDUCTION OF PROVISION CAN BE RE-WORKED AND ALLOWED. CONSIDERIN G THESE FACTS, WE ARE OF THE OPINION THAT THE MATTER CAN BE REVISITED BY THE ASSESSING OFFICER. WE SET ASIDE THE ORDERS OF THE LOWER AUTH ORITIES WITH REGARD TO DISALLOWANCE OF PROVISION FOR BAD AND DOUBTFUL DEBT S AND REMIT THE ISSUE BACK TO A.O. TO CONSIDER AFRESH IN ACCORDANCE WITH LAW. ASSESSEE IS DIRECTED TO FURNISH THE INFORMATION CAL LED FOR BY THE ASSESSING OFFICER WITH REGARD TO AVERAGE AGGREGATE RURAL ADVANCES OF ITS RURAL BRANCHES CORRECTLY. 12 I.T.A. NOS.832 TO 834/MDS/13 15. GROUND NO.3 IS ALLOWED FOR STATISTICAL PURPOSES . 16. COMING TO THE CLAIM OF EX-GRATIA PAYMENT, IT IS NOT DISPUTED THAT THESE PAYMENTS WERE MADE TO THE EMPLOYEES OF THE AS SESSEE, WHO WERE NOT COVERED BY PAYMENT OF BONUS UNDER BONUS AC T. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE EMPLOYEES OF THE A SSESSEE, WHO WERE PAID THE EX-GRATIA, WERE SHAREHOLDERS OR PERSO NS ENTITLED FOR SHARE OF PROFITS OR DIVIDEND. THIS BEING THE CASE, IN OUR OPINION, SUCH EX-GRATIA TO EMPLOYEES WHO WERE NOT COVERED UNDER T HE PAYMENT OF BONUS ACT, COULD NOT BE CONSIDERED AS PAID FOR A PU RPOSE WHICH WAS NOT WHOLLY FOR THE PURPOSE OF ASSESSEES BUSINESS. SECTION 36(1)(II) OF THE ACT HAS NO APPLICABILITY TO PAYMENTS MADE TO EM PLOYEES WHO WERE NOT ELIGIBLE FOR SHARE OF PROFITS OR DIVIDEND. 17. GROUND NO.10 STANDS ALLOWED. 18. IN THE RESULT, ASSESSEES APPEAL FOR ASSESSMENT YEAR 2007-08 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 19. COMING TO THE ASSESSEES APPEAL FOR ASSESSMENT YEAR 2008-09, THERE HAS BEEN NO ADDITION MADE BY THE LD. CIT(APPE ALS) FOR INTEREST ACCRUAL ON NPA. THE ONLY TWO GROUNDS ON WHICH LD. AR ARGUED AND WHICH ARE RELEVANT FOR THE APPEAL FOR ASSESSMENT YE AR 2008-09 ARE THE 13 I.T.A. NOS.832 TO 834/MDS/13 CONCERNING PROVISION FOR BAD AND DOUBTFUL DEBTS AND EX-GRATIA PAYMENT. 20. INSOFAR AS PROVISION FOR BAD AND DOUBTFUL DEBTS , WE GIVE SIMILAR DIRECTION AS GIVEN AT PARA 14 ABOVE IN RELATION TO ASSESSEES APPEAL FOR ASSESSMENT YEAR 2007-08. 21. INSOFAR AS EX-GRATIA PAYMENT IS CONCERNED, WE A RE OF THE OPINION THAT FOR SAME REASONS AS MENTIONED BY US AT PARA 16, IT COULD NOT HAVE BEEN DISALLOWED. SUCH DISALLOWANCE STANDS DELETED. 22. TAKING UP THE APPEAL OF THE ASSESSEE FOR ASSESS MENT YEAR 2009-10, HERE ALSO WE FIND THAT NO ADDITION HAS BEE N MADE BY THE LD. CIT(APPEALS) OR A.O. FOR INTEREST ACCRUALS ON NPA. THE ONLY GROUNDS PRESSED BY THE LD. A.R. RELATABLE TO THE APPEAL FOR ASSESSMENT YEAR 2009-10 WERE ON PROVISION FOR BAD AND DOUBTFUL DEBT S, EX-GRATIA PAYMENT AND GRATUITY PAID TO LIC. 23. INSOFAR AS PROVISION FOR BAD AND DOUBTFUL DEBTS IS CONCERNED, WE GIVE DIRECTIONS GIVEN IN PARA 14 ABOVE, FOR ASSE SSMENT YEAR 2009- 10 ALSO. 14 I.T.A. NOS.832 TO 834/MDS/13 24. AS FAR AS EX-GRATIA PAYMENT IS CONCERNED, WE AR E OF THE OPINION THAT DISALLOWANCE WAS INCORRECTLY MADE. FOR SAME R EASONS MENTIONED BY US AT PARA 15 ABOVE IN RELATION TO ASSESSEES AP PEAL FOR ASSESSMENT YEAR 2007-08, WE DELETE SUCH DISALLOWANC E. 25. COMING TO THE ISSUE OF DISALLOWANCE OF PAYMENT OF ` 1,40,60,607/- TO GRATUITY FUND OF LIC, THE AMOUNT A DDED BACK BY THE ASSESSEE IN ITS COMPUTATION IS MENTIONED BY THE A.O . IN THE ASSESSMENT ORDER AS ` 3,90,366/-. AS PER THE A.O., ASSESSEE COULD NOT GIVE CLARIFICATION DETAILS OF THE PAYMENT. THOUGH A GROUND IN THIS REGARD HAS BEEN RAISED BY THE ASSESSEE BEFORE THE C IT(APPEALS), LD. CIT(APPEALS) HAD NOT GIVEN ANY SPECIFIC FINDING. W E ALSO FIND THAT THE ASSESSMENT ORDER ITSELF WAS VERY CRYPTIC ON THIS IS SUE AND HAD NOT GIVEN ANY DETAILS REGARDING PAYMENT OF GRATUITY AND WHY IT WAS BEING DISALLOWED. CONSIDERING THE FACTS AND CIRCUMSTANCE S, WE ARE OF THE OPINION THAT THE QUESTION REGARDING ALLOWANCE OF GR ATUITY PAYMENT REQUIRES A FRESH LOOK BY THE A.O. WE SET ASIDE ORD ERS OF THE AUTHORITIES BELOW IN THIS REGARD AND REMIT THE ISSU E REGARDING PAYMENT OF GRATUITY, BACK TO THE FILE OF THE ASSESSING OFFI CER FOR CONSIDERATION AFRESH, IN ACCORDANCE WITH LAW. 15 I.T.A. NOS.832 TO 834/MDS/13 26. GROUND NO.14 OF THE ASSESSEE FOR ASSESSMENT YEA R 2009-10 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 27. AS ALREADY MENTIONED BY US, NONE OF THE GROUNDS FOR ANY OF THE YEARS WERE ARGUED BY THE ASSESSEES REPRESENTATIVE. 28. TO SUM UP, APPEALS OF THE ASSESSEE FOR ALL THE ASSESSMENT YEARS ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 3 RD MARCH, 2017 AT CHENNAI. SD/- SD/- ( . . . ! ) (%& .()(* ) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) ' # /JUDICIAL MEMBER , #/ ACCOUNTANT MEMBER /CHENNAI, ;$ /DATED, THE 3 RD MARCH, 2017. KRI. 5 3'7 ! 3'7' /DR 6. !* ? /GF.