M/s The Raddi Sahakara Niyamitha, Dharwad V. DCIT, Hubli

ITA 876/BANG/2012

• Counselvise Citation: 87621114 RSA 2012
• Duration Of Justice: 1 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 30-10-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 03-07-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SHEETAL SHRI L V BHASKAR REDDY
• Keywords: Bad and doubtful debts; Revised return
• Section: 143(3); 234B; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO. 876 /BANG/201 2 (ASSESSMENT YEAR : 2007-08) THE RADDI SAHAKARA BANK NIYAMITHA , BANK ROAD, DHARWAD-580 001 PAN AAAAT 3297K VS. DY. COMMISSIONER OF INCOME TAX , CIRCLE 2(1), HUBLI. APPELLANT RESPONDENT. I.T.A. NO.890/BANG/2012 (ASSESSMENT YEAR 2007-08) (BY REVENUE) ASSESSEE BY : SMT. SHEETAL. REVENUE BY : SHRI L.V. BHASKAR REDDY. DATE OF HEARING : 30.10.2013. DATE OF PRONOUNCEMENT : 31.12.2013. O R D E R PER BENCH : THESE ARE TWO CROSS APPEALS, ONE BY THE ASSESSEE AND OTHER BY REVENUE, BOTH DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS), HUBLI DT.30.3.2012FOR ASSESSMENT YEAR 2007-08. 2. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER : 2.1 THE ASSESSEE, A CO-OPERATIVE SOCIETY, FILED ITS RETURN OF INCOME ON 31.10.2007 DECLARING INCOME OF RS.1,67,70,600. THE ASSESSEE F ILED A REVISED RETURN OF INCOME ON 2.1.2009 DECLARING INCOME OF RS.17,62,810 AFTER CLA IMING DEDUCTION UNDER SECTION 80P(2)(A)(I) OF INCOME TAX ACT, 1961 ( HEREINAFTER REFERRED TO AS 'THE ACT'). THE RETURNS 2 ITA NO.876 & 890/BANG/12 OF INCOME WERE PROCESSED UNDER SECTION 143(1) OF TH E ACT AND THE CASE WAS TAKEN UP FOR SCRUTINY. THE ASSESSMENT WAS COMPLETED BY AN ORDER UNDER SECTION 143(3) OF THE ACT DT.22.12.2009 WHEREIN THE INCOME OF THE ASSESSEE WA S DETERMINED ATRS.5,79,79,440 IN VIEW OF THE FOLLOWING DISALLOWANCES / ADDITIONS WER E MADE TO THE RETURNED INCOME. I) INTEREST RECEIVED ON LOANS RELATING TO EARLIER YEARS DISALLOWED AS INADMISSIBLE. RS.3,24,32,000. II) STALE DRAFTS / PAY ORDERS : RS.73,58,708. 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR ASSES SMENT YEAR 2007-08 DT.22.12.2009, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE CIT(APPEALS), HUBLI WHO DISPOSED OFF THE ASSESSEE'S APPEAL BY ORDER DT.30.3 .2012 DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AT (I) ABOVE AND UPHOLDING THE ADDITION MADE AT (II) ABOVE AT PARA 2.1. 3. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), HUBL I DT.30.3.2012 FOR ASSESSMENT YEAR 2007-08, BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS : 3.1 ITA NO.876/BANG/2012 ASSESSEE'S APPEAL FOR ASSESS MENT YEAR 2007-08. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT (APPEALS) ERRED IN PASSING THE ORDER IN THE MANNER IN WHICH HE DID. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT (APPEALS) ERRED IN TREATING THE DEMAND DRAFT AND PA Y ORDERS PAYABLE AS ON THE LAST DATE OF FINANCIAL YEAR AS CESSATION OF LIABILI TY AND ASSESSED THE ENTIRE AMOUNT AS INCOME OF THE BANK UNDER SECTION 41(1) OF THE IT ACT. 3. WITHOUT PREJUDICE, THE ADDITION MADE IS ARBITRA RY, EXCESSIVE AND UNREASONABLE AND OUGHT TO BE DELETED IN TOTO. 4. THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING THE INTEREST LEVIED BY ASSESSING OFFICER UNDER SECTIONS 234B & 234D OF THE ACT. 3 ITA NO.876 & 890/BANG/12 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY B E URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS THAT THE APPEAL MAY BE ALLOWED. 3.2 ITA NO.890/BANG/2012 REVENUES APPEAL FOR ASSESSM ENT YEAR 2007-08. 1. THE ORDER OF CIT (APPEALS) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE LEARNED CIT (APPEALS) HAS ERRED IN DELETI NG THE DISALLOWANCE OF INTEREST OF RS.3,24,32,000 CLAIMED AS DEDUCTION BY THE ASSESSEE BANK TOWARDS THE INTEREST RECEIVED DURING THE YEAR RELATING TO E ARLIER YEAR / YEARS. 3. THE LEARNED CIT (APPEALS) OUGHT TO HAVE CONSIDER ED THAT THE ASSESSEE IS FOLLOWING A SYSTEM REGULARLY AND CONSISTENTLY, I .E. MERCANTILE SYSTEM OF ACCOUNTING IN GENERAL AND CASH SYSTEM PARTLY AS PER RBI AND KARNATAKA CO- OPERATIVE SOCIETIES ACT, 1959 FOR THE INCOME GENERA TED FROM (A) INTEREST ON LOANS AND NON-PERFORMING ASSETS (B) COMMISSION ON B ANK GUARANTEES ( C ) LOCKER RENT. ACCORDINGLY, AN AMOUNT OF RS.3,24,32,000 FRO M THE ABOVE THREE HEADS WAS BROUGHT TO TAX ON RECEIPT BASIS BY THE ASSESSIN G OFFICER AND ANY DELETION IS NOTHING BUT DEVIATION FROM THE METHOD FOLLOWED B Y THE ASSESSEE REGULARLY AND CONSISTENTLY. 4. THE LEARNED CIT (APPEALS) OUGHT TO HAVE CONS IDERED THE DELETION OF RS.3,24,32,000 IS VIOLATION OF SECTION 145 OF THE I T ACT WHICH SAYS THAT ANY INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL, S UBJECT TO THE PROVISIONS OF SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. 5. THE LEARNED CIT (APPEALS) OUGHT TO HAVE TAKEN IN TO CONSIDERATION THE ASSESSING OFFICERS SUBMISSION BEFORE HIM VIDE A LE TTER DT.4.2.2011 STATING THAT, THE ABOVE SAID AMOUNT OF RS.3,24,32,000 WAS N OT OFFERED FOR TAXATION IN THE EARLIER YEARS ALSO. 6. THE ASSESSEE COULD NOT PROVE THE SAME IN CONSEQU ENT TO THE FRESH OPPORTUNITY GIVEN BY THE ASSESSING OFFICER NOW VIDE HIS LETTER DT.25.6.2012. 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND DELETE ANY OF THE GROUNDS OF APPEAL. ITA NO.890/BANG/2012 REVENUES APPEAL FOR ASSESSM ENT YEAR 2007-08. 4. THE GROUNDS RAISED BY REVENUE AT S.NO.1 AND 7 ARE GENERAL IN NATURE AND THEREFORE NO ADJUDICATION IS CALLED FOR THEREON. 5.1 IN THE GROUNDS RAISED AT S.NOS.2 TO 6 , REVENUE HAS CHALLENGED THE ORDER OF THE LEARNED CIT (APPEALS) IN DELETING THE DISALLOWANCE OF INTEREST AMOUNTING TO RS.3,24,32,000 4 ITA NO.876 & 890/BANG/12 CLAIMED BY ASSESSEE TOWARDS INTEREST RECEIVED DURIN G THE PERIOD UNDER CONSIDERATION PERTAINING TO EARLIER YEARS. IT IS CONTENDED BY TH E LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE DEDUCTION OF RS.3,24,32,000 IS IN VIOLATIO N OF PROVISIONS OF SECTION 145 OF THE ACT, AS PER WHICH ANY INCOME CHARGEABLE UNDER THE H EAD PROFITS AND GAINS OF BUSINESS OR PROFESSION SHALL BE COMPUTED IN ACCORDANCE WITH EI THER THE CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY USED BY THE ASSESSEE. IN SHO RT, THE CONTENTION OF REVENUE IS THAT THE ASSESSEE SHOULD FOLLOW EITHER THE CASH SYSTEM OF AC COUNTING OR MERCANTILE SYSTEM OF ACCOUNTING AND IT CANNOT FOLLOW A HYBRID SYSTEM OF ACCOUNTING AS THE ASSESSEE IN THE CASE ON HAND IS ATTEMPTING TO DO. IT WAS ALSO ARGUED TH AT THE ISSUE WAS NOT PROPERLY APPRECIATED OR EXAMINED BY THE LEARNED CIT (APPEALS ) AND THAT THE BASIS ON WHICH THE RELIEF WAS ALLOWED TO THE ASSESSEE IS NOT CLEAR. T HE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS THAT IN VIEW OF THIS, EITHER THE ORDER OF T HE LEARNED CIT (APPEALS) BE REVERSED AND THE ACTION OF ASSESSING OFFICER IN DISALLOWING THE DEDUCTION OF RS.3,24,32,000 CLAIMED ON ACCOUNT OF INTEREST RECEIVED ON LOANS OF EARLIER YEARS BE RESTORED OR THE ISSUE BE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR RE-E XAMINATION. 5.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTAT IVE STRONGLY SUPPORTED THE ORDER OF THE LEARNED CIT (APPEALS) IN ALLOWING THE ASSESSEE'S CLAIM OF DEDUCTION OF INTEREST RECEIVED ON LOANS OF EARLIER YEARS AND SUB MITTED THAT THE SAME OUGHT TO BE UPHELD FOR THE REASONS GIVEN IN PARA 6 OF THE SAID ORDER. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING FOR ALL TRANSACTIONS EXCEPT FOR THREE TYPES OF TRANSACTIONS , NAMELY :- I) INTEREST ON LOANS AND NON-PERFORMING ASSETS. 5 ITA NO.876 & 890/BANG/12 II) COMMISSION ON BANK GUARANTEES. III) LOCKER RENT. IT IS THE CONTENTION OF THE ASSESSEE THAT THIS METHOD OF ACCOUNTING FOLLOWED BY IT IS AS PER THE REQUIREMENTS OF THE KARNATAKA CO-OPERATIVE SOCIETIES ACT, 1939 AND AS PER THE RBI GUIDELINES. IT IS SUBMITTED THAT THIS ACT SPEC IALLY PROVIDES THAT THE INTEREST INCOME ON LOANS IS TO BE RECOGNISED ON RECEIPT BASIS. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE DECISION OF C O-ORDINATE BENCHES OF THIS TRIBUNAL IN THE CASE OF SHIVA SAHAKARI BANK NIYAMITA IN ITA NO. 257/BANG/2012 DT.21.12.2012 AND DAVANGERE URBAN CO-OPERATIVE BANK LTD. V ADDL. CIT (ITA NOS.919, 920 & 921/BANG/2012 DT.5.7.2013). THE LEARNED AUTHORISED REPRESENTATIV E ALSO SUBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING THIS METHOD CONSISTENTLY OVER TH E YEARS AND IT HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEARS. THE LEARNED A UTHORISED REPRESENTATIVE ALSO SUBMITTED THAT A PLETHORA OF JUDICIAL PRONOUNCEMENT S SUPPORTED ITS POSITION THAT A PARTICULAR METHOD OF ACCOUNTING, CONSISTENTLY FOLLO WED OVER THE YEARS SHOULD NOT BE DISTURBED BY THE ASSESSING OFFICER WITHOUT ANY VALI D REASONS. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT IN VIEW OF THE ABOVE AVERMENTS AND SINCE THE ORDER OF THE LEARNED CIT (APPEALS) IN DELETING THE DISALLOWANCE OF RS.3,24,32,000 CLAIMED BY ASSESSEE TOWARDS INTEREST RELATING TO LOANS OF EARLIER YEARS IS CORRECT, THE ORDER OF THE LEARNED CIT (APPEALS) OUGHT TO BE UPHELD AND THE GROUND RAISED BY REVENUE ON THIS ISSUE BE DISMISSED. 5.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. AS PER THE DETAILS THAT EMANAT E FROM THE RECORD, WE FIND THAT IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER OBSERVED THAT IN THE 6 ITA NO.876 & 890/BANG/12 COMPUTATION OF INCOME FILED ALONG WITH THE RETURN O F INCOME, THE ASSESSEE HAD ADDED AN AMOUNT OF RS.2,05,44,000 AS INTEREST RECEIVABLE BUT DEDUCTED A SUM OF RS.3,24,32,000 TOWARDS INTEREST RECEIVED ON LOANS FOR EARLIER YEAR S. AS PER THE ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE, IT ACCOUNTS ONLY THE INTEREST RECE IVED IN ITS BOOKS OF ACCOUNT AND DOES NOT ACCOUNT FOR INTEREST RECEIVABLE IN ITS BOOKS. ACCORDING TO THE ASSESSING OFFICER, THIS METHOD IS NOT CORRECT AND HE THEREFORE DISALLOWED T HE DEDUCTION OF RS.3,24,32,000 CLAIMED BY THE ASSESSEE IN THE COMPUTATION TOWARDS INTEREST RECEIVED ON LOANS OF EARLIER YEARS. 5.3.2 ON APPEAL, THE LEARNED CIT (APPEALS) DELETED THE DISALLOWANCE MADE, OBSERVING AS UNDER : (I) THE ASSESSEE BANK FOLLOWED A MIXED OR HYBRID SY STEM OF ACCOUNTING. THE ASSESSEE FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING ON ALL ISS UES EXCEPT TWO, I.E. INTEREST RECEIVED ON NPA ASSETS AND INTEREST ON LOANS TO FARMERS. IN RESPECT OF THESE TWO, THE ASSESSEE BANK FOLLOWED CASH SYSTEM OF ACCOUNTING I.E. ON REC EIPT BASIS; (II) THE ASSESSEE HAS FOLLOWED THE SAME SYSTEM OF ACCOUNTING IN THE EARLIER YEARS ALSO; (III) THE SYSTEM FOLLOWED BY THE ASSESSEE BANK IS IN TUNE WITH THE DECISION RENDERED BY THE HON'BLE APEX COURT IN THE CASE OF UCO BANK V CI T (237 ITR 889). 5.3.3 ON AN APPRECIATION OF THE FACTS OF THE CASE, AND THE REASONING OF THE LEARNED CIT (APPEALS) IN ALLOWING THE ASSESSEE'S CLAIM, WE FIND MERIT IN THE CONTENTIONS OF THE ASSESSEE. THE ACT PERMITS THE ASSESSEE TO FOLLOW E ITHER THE MERCANTILE SYSTEM OF ACCOUNTING OR THE CASH SYSTEM OF ACCOUNTING. IT IS A SETTLED PRINCIPLE THAT WHATEVER SYSTEM OF ACCOUNTING IS FOLLOWED BY THE ASSESSEE, I T SHOULD BE FOLLOWED CONSISTENTLY AND 7 ITA NO.876 & 890/BANG/12 REGULARLY UNLESS THERE ARE GOOD AND SOUND REASONS F OR CHANGE IN THE SYSTEM OF ACCOUNTING. THE REASONS ADDUCED BY THE ASSESSEE FOR ACCOUNTING OF INTEREST ON LOANS IN ITS BOOKS ON RECEIPT BASIS ARE, IN OUR VIEW, CONVINCING. SUCH A N ACCOUNTING SYSTEM, AS THE ONE FOLLOWED BY THE ASSESSEE, IS AS PER THE PROVISIONS OF THE KA RNATAKA CO-OPERATIVE SOCIETIES ACT, 1939 AND THE REASONS ADDUCED FOR ADOPTING SUCH A SY STEM HAS BEEN VALIDATED BY THE HON'BLE APEX COURT IN THE CASE OF UCO BANK (SUPRA). FURTHER, IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS BEEN FOLLOWING THIS SYSTEM OF ACCOUNTI NG REGULARLY OVER THE YEARS, WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT IN EARLIER YEARS AN D AS SUCH IS IN TUNE WITH THE PRINCIPLES LAID DOWN BY VARIOUS JUDICIAL PRONOUNCEMENTS CITED BY THE ASSESSEE. WE FIND THAT SIMILAR ISSUE OF INTEREST ON LOANS AND ADVANCES WAS BEFORE THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DAVANGERE URBAN CO-OPERATIVE BANK LT D. V ADDL. CIT (ITA NOS.920 & 921/BANG/2012 DT.5.7.2013). AFTER DUE CONSIDERATIO N OF THE RIVAL SUBMISSIONS AND THE VARIOUS CASE LAWS, THE BENCH IN ITS ORDER AT PARAS 3.4 AND 3.5 THEREOF HAS HELD AS UNDER : 3.4 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE EITHER PARTY AND ALSO PERUSED THE REASONING OF THE CIT (A) IN ALLOWI NG THE ASSESSEES CLAIM FOR BOTH THE ASSESSMENT YEARS UNDER DISPUTE. THE BANGA LORE BENCH OF THE TRIBUNAL HAD AN OCCASION TO DEAL WITH A SIMILAR ISS UE RAISED BY THE REVENUE IN THE CASE OF ITO V. SHIVA SAHAKARI BANK NIYAMITHA (SUPRA). AFTER DUE CONSIDERATION OF RIVAL SUBMISSIONS AND ALSO PERUSIN G VARIOUS CASE LAWS, THE HONBLE EARLIER BENCH HAD RECORDED ITS FINDINGS WHI CH ARE EXTRACTED AS UNDER: 8. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THEIR RIVAL CONTENTIONS, WE FIND THAT UNDISPUTEDLY THE ASSESSEE IS IN THE BANKING BUSINESS AND IS ALSO GOVERNED BY THE BANKING REGULA TIONS. WHETHER THE INTEREST ACCRUED ON NPAS WHICH ARE DOUBTFUL OF BEI NG RECOVERED SHOULD BE RECOGNIZED AS ASSESSEES INCOME ON ACCRUAL OR ON RE CEIPT BASIS IS THE QUESTION BEFORE US. LET US FIRST CONSIDER THE APPL ICABILITY OF THE DECISIONS RELIED UPON BY THE LEARNED DR. THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD WAS CONSIDERING THE ISSUE OF ALLOWABILITY OF PROVISIONS OF NPA U/S 36(1)(VII) OF THE INCOME-TAX ACT WHILE THE CASE BEFORE US IS WITH REGARD TO THE ACCRUAL OF INTEREST ON NPAS AND RECOGNITION OF THE SAME ON RECEIPT BASIS AND NOT ON ACCRUAL BASIS. FURTHER , THE HONBLE SUPREME COURT, WHILE HOLDING THAT THE RBI DIRECTIONS ARE ON LY NORMS AND ACT IN A DIFFERENT FIELD AS AGAINST THE INCOME-TAX ACT, HAS ALSO OBSERVED THAT 8 ITA NO.876 & 890/BANG/12 COLLECTABILITY OF A RECEIPT IS DIFFERENT FROM ACCRU AL AND HENCE IN EACH CASE, THE ASSESSEE HAS TO PROVE THAT INTEREST IS NOT RECOGNIZ ED OR TAKEN INTO ACCOUNT DUE TO UNCERTAINTY IN CALCULATION OF THE INCOME AND IT IS FOR THE AO ACCEPT THE CLAIM OF THE ASSESSEE UNDER THE IT ACT OR NOT TO AC CEPT IT, IN WHICH CASE, THERE WILL BE ADDED BACK EVEN UNDER THE REAL INCOME THEOR Y. IT WAS ALSO OBSERVED THAT THE INCOME-TAX ACT IS TAX ON REAL INCOME I.E., THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF ACT BUT A PROVISION FOR DOUBTFUL DEBTS IS ONLY A NOTIONAL EXPENSE WHICH IS A DEBIT TO THE P & L ACCOUNT WHICH IS EXPRESSLY DISALLOWED BY EXPLANATIO N TO SEC. 36(1)(VII) WHICH IF CLAIMED HAS GOT TO BE ADDED BACK TO THE TOTAL IN COME OF THE ASSESSEE BECAUSE ACT SEEKS TO THE REAL INCOME AND FOR THIS P URPOSE WRITE OFF IS A CONDITION FOR ALLOWANCE. IT IS, THEREFORE, CLEAR T HAT THE FACTS AND, HENCE ITS FINDING ON NON-ALLOWABILITY OF THE PROVISIONS OF NP AS CANNOT BE APPLIED TO THE FACTS OF THE CASE BEFORE US BUT ITS OBSERVATION THA T FOR RECOGNIZING THE INTEREST INCOME ON NPAS, AO HAS TO CONSIDER THE FACTS OF E ACH CASE HAS RELEVANCE TO THE CASE BEFORE US. IN VIEW OF THE SAME, WE HOLD T HAT THE DECISION OF THE HONBLE SUPREME COURT IS ON A DIFFERENT SET OF FACT S. THE SECOND DECISION RELIED UPON BY THE LEARNED DR IS THAT OF CHENNAI B ENCH OF THE TRIBUNAL IN THE CASE OF INDIA EQUIPMENT LEASING LTD., WHICH IS ON T HE SAME SET OF FACTS AS BEFORE US, AS IT WAS HELD IN FAVOUR OF THE REVENUE. COMING TO THE DECISIONS RELIED UPON (BY) THE LEARNED AR, WE FIND THAT THE D ECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CANFIN HOMES LTD., IS ALS O ON THE SAME SET OF FACTS AS BEFORE US AND IS BINDING ON THIS TRIBUNAL. IN T HE SAID DECISION, AT PARA 8 OF THE ORDER, THE HONBLE LE HIGH COURT HAS HELD AS UNDER: THEREFORE, IT IS CLEAR IF AN ASSESSEE ADOPTS MERCA NTILE 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 TAX. HIS ACCOUNTS SHOULD REFLECT TRUE AND CORRECT STATEMENT OF AFFAIRS. MERELY BECAUSE THE SAID AMOUNT; ACCRUED WAS NOT REALIZED IMMEDIATE LY CANNOT BE A GROUND TO AVOID PAYMENT OF TAX. BUT, IF IN HIS ACCOUNT, IT IS CLEARLY STATED THAT THOUGH A PARTICULAR INCOME IS DUE TO HIM BUT IS NOT POSSIB LE TO RECOVER THE SAME, THEN IT CANNOT BE SAID TO HAVE BEEN ACCRUED AND THE SAID AMOUNT CANNOT BE BROUGHT TO TAX. IN THE INSTANT CASE, WE ARE CONCER NED WITH A NON-PERFORMING ASSET. AS THE DEFINITION OF NON-PERFORMING ASSET S HOWS AN ASSET BECOMES NON-PERFORMING WHEN IT CEASES TO YIELD INCOME. NON -PERFORMING ASSET IS AN ASSET IN RESPECT OF WHICH INTEREST HAS REMAINED UNP AID AND HAS BECOME PAST DUE. ONCE A PARTICULAR ASSET IS SHOWN TO BE A NON- PERFORMING ASSET THEN THE ASSUMPTION IS IT IS NOT YIELDING ANY REVENUE. WHEN IT IS NOT YIELDING ANY REVENUE, THE QUESTION OF SHOWING THAT REVENUE AND P AYING TAX WOULD NOT ARISE. AS IS CLEAR FROM THE POLICY GUIDELINES ISSU ED BY THE NATIONAL HOUSING BANK, THE INCOME FROM NON-PERFORMING ASSET SHOULD B E RECOGNIZED ONLY WHEN IT IS ACTUALLY RECEIVED. THAT IS WHAT THE TRIBUNAL HELD IN THE INSTANT CASE. THEREFORE, THE CONTENTION OF THE REVENUE THAT IN RE SPECT OF NON-PERFORMING ASSETS EVEN THOUGH IT DOES NOT YIELD ANY INCOME AS THE ASSESSEE HAS ADOPTED A MERCANTILE SYSTEM OF ACCOUNTING, HE HAS TO PAY TA X ON THE REVENUE WHICH HAS ACCRUED NOTIONALLY IS WITHOUT ANY BASIS. IN TH AT VIEW OF THE MATTER, THE SECOND SUBSTANTIAL QUESTION FRAMED IS ANSWERED AGAI NST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 9 ITA NO.876 & 890/BANG/12 9. IN VIEW OF THE SAME, RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT (CITED SUPRA), THE REVENU ES APPEAL IS DISMISSED. 3.5 IN CONFORMITY WITH THE FINDINGS OF THE EARLIER BENCH (SUPRA) AND ALSO THE ASSERTION OF THE HONBLE JURISDICTIONAL HIGH CO URT (SUPRA), WE ARE OF THE VIEW THAT THE CIT (A) WAS JUSTIFIED IN ALLOWING THE ASSESSEES CLAIMS FOR BOTH THE AYS UNDER APPEAL. FOLLOWING THE AFORESAID DECISIONS OF THE CO-ORDINAT E BENCHES OF THIS TRIBUNAL, WE ARE OF THE VIEW THAT THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN ALLOWING THE ASSESSEE'S CLAIM AND CONSEQUENTLY UPHOLD THE ORDER OF THE CIT( APPEALS) ON THIS POINT. 6. IN THE RESULT, REVENUES APPEAL FOR ASSESSMENT Y EAR 2007-08 IS DISMISSED. ITA NO.876/BANG/2012 ASSESSEE'S APPEAL FOR ASSESS MENT YEAR 2007-08. 7. THE GROUNDS RAISED BY THE ASSESSEE AT S.NOS.1, 3 AND 5 ARE GENERAL IN NATURE AND NOT BEING URGED BEFORE US, NO ADJUDICATION IS CALLED FO R THEREON. 8.0 DISALLOWANCE TOWARDS STALE DDS AND PAY ORDERS UNDER SECTION 41(1) OF THE ACT : RS.73,58,708. 8.1 THE GROUND RAISED AT S.NO.2 RELATES TO THE ADDITION OF RS.73,58,708 BY THE ASSESSING OFFICER TREATING THE DEMAND DRAFTS AND PA Y ORDERS PAYABLE AS ON THE LAST DATE OF THE FINANCIAL YEAR AS CESSATION OF LIABILITY UND ER SECTION 41(1) OF THE ACT AND ACCORDINGLY TREATING THE SAME AS INCOME OF THE ASSESSEE. 8.2 IN THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSING OFFICER OBSERVED THAT THE ASSESSEE HAS SHOWN AN AMOUNT OFRS.73,58,70 8 AS LIABILITY TOWARDS DD / RD PAYABLE AND PAY ORDERS PAYABLE AS ON 31.3.2007. AS PER THE ASSESSING OFFICER THE AMOUNTS IN DDS AND PAY ORDERS WHICH WERE NOT ENCASH ED BY THE CUSTOMERS AS ON 31.3.2007 REQUIRE TO BE TREATED AS INCOME OF THE ASSESSEE BAN K AS THERE IS A CESSATION OF LIABILITY 10 ITA NO.876 & 890/BANG/12 RELYING ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN BATLIBOI & CO. PVT. LTD. REPORTED IN 149 ITR 604 AND HOLDING THAT THE RBI CI RCULAR REFERRED TO BY THE ASSESSEE IS NOT BINDING ON THE DEPARTMENT. 8.3 ON APPEAL, THE LEARNED CIT (APPEALS) UPHELD TH E ADDITION MADE BY THE ASSESSING OFFICER UNDER SECTION 41(1) OF THE ACT FO R THE FOLLOWING REASONS : (I) THE AMOUNT DEPOSITED FOR MAKING DDS AND PAY OR DERS NOT ENCASHED BY THE CUSTOMERS AND OUTSTANDING AS ON THE END OF THE FINA NCIAL YEAR REQUIRES TO BE TREATED AS INCOME OF THE ASSESSEE BANK UNDER SECTION 41(1) OF THE ACT; (II) UNCLAIMED ACCOUNTS CONSTITUTE TRADING RECEIP TS AS PER THE DECISION IN THE CASE OF BATLIBOI & CO. ;PVT. LTD. (SUPRA); (III) ANY AMOUNT RECEIVED BY THE ASSESSEE ON ACCOU NT OF BUSINESS REGULATIONS SHALL BE TREATED AS INCOME OF THE PREVIOUS YEARS IN WHICH IT CEASES TO BE REPAYABLE TO THE PERSONS FROM WHOM IT WAS COLLECTED, AS DECIDED IN T HE CASE OF TVS SUNDARAM IYENGAR & SONS LTD. (222 ITR 344) (SC). 8.4.1 IN SUPPORT OF THE GROUNDS RAISED, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT THE CASE OF THE ASSESSEE IS THAT THE ABOVE SUMS AMO UNTING TO RS.73,58,708 DO NOT REPRESENT INCOME U/S.41(1) OF THE ACT. IT IS SUBMITTED THAT FOR ANY AMOUNT TO CONSTITUTE INCOME U/S.41(1) OF THE ACT IT OUGHT TO HAVE BEEN TREATED AS AN ALLO WANCE OR DEDUCTION IN AN ASSESSMENT YEAR EARLIER TO THE PREVIOUS YEAR IN WHICH IT IS SOUGHT TO BE TREATED AS INCOME. IT IS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT THE AMOUNTS COLLECTED TO ISSUE DRAFTS AND PAY ORDERS ARE HELD IN TRUST BY THE BANK AND THESE AMOUNTS HAV E NEVER EVEN BEEN TREATED AS AN ALLOWANCE 11 ITA NO.876 & 890/BANG/12 OR DEDUCTION. THE ONLY INCOME THAT THE BANK EARNS FOR ISSUE OF DRAFTS AND PAY ORDERS IS COMMISSION WHICH HAS ALREADY BEEN OFFERED AS INCOME IN THE RELEVANT PERIODS. 8.4.2 THE LEARNED AUTHORISED REPRESENTATIVE FURTHER ARGUED THAT THE JUDICIAL DECISIONS RELIED ON BY THE ASSESSING OFFICER, NAMELY OF THE T.V. SUN DARAM IYENGAR & SONS (SUPRA) AND BATLIBOI & CO. PVT. LTD. (SUPRA) ARE NOT APPLICABLE TO THE CAS E ON HAND AS THE FACTS ARE DIFFERENT. IN BOTH THE CASES RELIED ON BY THE ASSESSING OFFICER, THE R ESPECTIVE ASSESSEES THEREIN HAD TRANSFERRED THE BALANCE LYING IN THE UNCLAIMED DEPOSITS TO THE CREDIT OF THE PROFIT & LOSS ACCOUNT, TREATING THE SAME AS INCOME IN COMPUTING THE PROFITS AS PER BOOKS OF ACCOUNT BUT HAD NOT OFFERED / TREATED THE SAME AS INCOME FROM INCOME TAX PURPOSES . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT IN THE CASE ON HAND, THE ASSESSEE HAS NOT TRANSFERRED THE AMOUNT ADDED BY THE ASSESSING OFFICER TO THE PROFIT AND LOSS ACCOUNT BU T HAS CONTINUED TO TREAT THEM AS LIABILITIES IN THE BALANCE SHEET AS ON 31.3.2007. IT IS FURTHER S UBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT AS PER THE RBI CIRCULAR, THE AS SESSEES BANK IS REQUIRED TO KEEP THE STALE DDS / PAY ORDERS AS A LIABILITY IN ITS BOOKS OF AC COUNT FOR A PERIOD OF 10 YEARS AFTER WHICH IT IS TO BE TRANSFERRED TO THE RBI. 8.4.3 THE LEARNED AUTHORISED REPRESENTATIVE RELIED ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CANARA BANK LTD. IN ITA NO.390/BANG/2011 DT.8.6.2012 TO WHICH ONE OF US WAS PARTY, WHEREIN THE BANK TRANSFERRED A SUM OF RS.52,77,81,540 REPRESENTING AMOUNTS COLLECTED TOWARDS ISSUE OF DRAFTS AND PAY O RDERS TO THE PROFIT AND LOSS ACCOUNT AFTER SEEKING NECESSARY PERMISSION FROM THE RESERVE BANK OF INDIA (RBI) TO DO SO. THE ASSESSING OFFICER IN THAT CASE TREATED THE ABOVE AMOUNT AS IN COME OF THE BANK. THE CO-ORDINATE BENCH OF THE TRIBUNAL HELD THAT THE SAME DOES NOT CONSTITUTE INCOME AFTER DULY CONSIDERING THE DECISION OF THE T.V. SUNDARAM IYENGAR & SONS (SUPRA) AND DIS TINGUISHED THE SAME ON FACTS. 12 ITA NO.876 & 890/BANG/12 8.4.4 THE LEARNED AUTHORISED REPRESENTATIVE FURTHER RELIED ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF VIJAYA BANK L TD. (ITA NO.455/BANG/2011 DT.22.6.2012) TO WHICH ONE OF US WAS PARTY, WHEREIN THE BANK TRANSFE RRED A SUM OFRS.10,50,47,796 REPRESENTING AMOUNTS COLLECTED TOWARDS ISSUE OF DRAFTS AND PAY O RDERS TO THE PROFIT AND LOSS ACCOUNT AFTER SEEKING NECESSARY PERMISSION FROM THE RBI TO DO SO. THE ASSESSING OFFICER IN THAT CASE TREATED THE ABOVE AMOUNT AS INCOME OF THE BANK. THE TRIBUN AL, IN THAT CASE ALSO, AFTER DULY CONSIDERING THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF TV SUNDARAM IYENGAR & SONS (SUPRA) HELD, AT PARAGRAPH 12 OF ITS ORDER AS UNDER : 12. IN THE PRESENT CASE THE ASSESSEE NEVER WANT ED THE AMOUNT TO BE TREATED AS ITS INCOME BY CREDIT TO THE PROFIT AND LOSS ACCOUNT. I T WAS ONLY BECAUSE OF RBIS DIRECTION THE AMOUNT WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT. THE RBIS DIRECTIONS ARE ALSO CLEAR THAT THE ASSESSEE SHOULD NOT USE THE AMOUNT TRANSFERRED TO GENERAL RESERVE FOR ANY PURPOSE OTHER THAN MEETING ANY FUTURE CLAIMS BY THE PERSONS ENTITLED TO CLAIM THE AFORESAID AMOUNT. TH E AMOUNT WAS ALSO NOT AVAILABLE FOR DISTRIBUTION OF DIVIDEND. IN THE LIGHT OF THE AFORESAID FACTS AND CIRCUMSTANCES PREVAILING IN THE CASE OF THE ASSESSEE, WE ARE OF T HE VIEW THAT THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TV SUNDARAM IY ENGAR AND SONS (SUPRA) WILL NOT BE APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE LEARNED AUTHORISED REPRESENTATIVE STRONGLY CON TENDS THAT THE CASE OF THE ASSESSEE IN THE CASE ON HAND IS ON A BETTER FOOTING THAT OF EITHER THE CASE OF CANARA BANK OR VIJAYA BANK (REFERRED TO ABOVE) FOR THE FACT THAT IN BOTH THOSE CASES, THE BANKS HAD CREDITED THE PROFIT AND LOSS ACCOUNT WITH THOSE AMOUNTS WHICH WERE TREATED AS INCOME BY THE ASSESSING OFFICERS. IN THE CASE ON HAND, HOWEVER, THE ASSESSEE HEREIN HAS NOT CREDITED THE PROFIT AND LOSS ACCOUNT AND RATHER HAS CONTINUED TO SHOW THE AMOUNTS RECEIV ED TOWARDS ISSUE OF PAY ORDERS AND DRAFTS AS A LIABILITY IN ITS BALANCE SHEET AS ON 31.3.2007 . 8.5.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CA REFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE JUDICIAL DECISIONS CITED ON EI THER SIDE. THE ASSESSING OFFICER HAS INVOKED 13 ITA NO.876 & 890/BANG/12 THE PROVISIONS OF SECTION 41(1) OF THE ACT TO BRING THE AMOUNT OF RS.73,58,708 RECEIVED FOR MAKING DRAFTS AND PAY ORDERS TO TAX IN THE HANDS OF THE ASSESSEE IN THE PERIOD UNDER CONSIDERATION. SECTION 41(1) OF THE ACT, SPECIFICA LLY DEALS WITH AMOUNTS THAT WERE ALLOWED AS A DEDUCTION IN THE PAST ASSESSMENTS AS TRADING LIABIL ITIES WHICH IN A LATER YEAR CEASES OR ARE REMITTED BY THE CREDITORS. IF AND WHEN IN A LATER YEAR THERE IS EVIDENCE TO SHOW THAT THE LIABILITY IS REMITTED, IT CAN BE BROUGHT TO TAX. IN ORDER TO INVOKE SECTION 41(1) OF THE ACT, IT MUST BE FIRST ESTABLISHED THAT THE ASSESSEE HAD OBTAINED SOME BENEFIT IN RESPECT OF A TRADING LIABILITY WHICH WAS EARLIER ALLOWED AS A DEDUCTION. IT IS NO T ENOUGH IF THE ASSESSEE DERIVES SOME BENEFIT IN RESPECT OF SUCH LIABILITY, BUT IT IS ESSENTIAL T HAT SUCH BENEFIT ARISES BY WAY OF REMISSION OR CESSATION OF LIABILITY. IN SUGAULI SUGAR WORKS ( P) LTD REPORTED IN (1999) 234 ITR 518 (SC) IT WAS HELD THAT A UNILATERAL ACTION CANNOT BRING ABOUT A CESSATION OR REMISSION AS A REMISSION CAN ONLY BE GRANTED BY A CREDITOR AND CESSATION CAN O NLY OCCUR EITHER BY OPERATION OF LAW OR THE DEBTOR BY UNEQUIVOCALLY DECLARING INTENTION NOT TO HONOUR HIS LIABILITY WHEN PAYMENT IS DEMANDED BY THE CREDITOR. IN THE CASE ON HAND, TAKI NG INTO ACCOUNT THE FACTS AND CIRCUMSTANCES INVOLVED, WE FIND MERIT IN THE ARGUMENTS PUT FORTH BY THE LEARNED AUTHORISED REPRESENTATIVE SINCE THE OUTSTANDINGLY LIABILITY OF RS. 73,58,708 ON ACCOUNT OF DEMAND DRAFTS AND PAY ORDERS IS STILL REFLECTED IN THE BOOKS OF ACCOUNTS OF THE ASS ESSEE AS ON 31.3.2007 AND THEREFORE THE SAME STANDS ACKNOWLEDGED BY THE ASSESSEE AND THE LIABILI TY SUBSISTS. IN THIS VIEW OF THE MATTER, WE FIND THAT THE AUTHORITIES BELOW HAVE FAILED TO ESTA BLISH THE PRIMARY REQUISITE FOR INVOKING THE PROVISIONS OF SECTION 41(1) OF THE ACT AND HOLD THA T THE PROVISIONS OF SECTION 41(1) OF THE ACT WOULD NOT BE ATTRACTED IN THE CASE ON HAND IN RESPE CT OF THE OUTSTANDING LIABILITY OF RS.73,58,708. 14 ITA NO.876 & 890/BANG/12 8.5.2 AS PER THE RBI CIRCULAR REFERRED TO BY THE AS SESSEE IT IS REQUIRED TO KEEP THE AMOUNTS RELATED TO SUCH STALE DRAFTS / PAY ORDERS A S A LIABILITY IN THE BOOKS OF ACCOUNT FOR TEN YEARS AFTER WHICH THE AMOUNT WOULD BE TRANSFERR ED TO THE RBI. A READING OF THIS CIRCULAR WOULD INDICATE THAT THERE IS NO CESSATION OF LIABILITY IN FAVOUR OF THE BANK AT ALL. FOR TEN YEARS THE STALE DDS / PAY ORDERS REMAIN AS A LIABILITY OF THE CONCERNED PERSONS, IN THE BOOKS OF THE BANK AND THEREAFTER IT GETS TRANSF ERRED TO THE RBI. IN THESE CIRCUMSTANCES, THE LIABILITY WOULD NOT BECOME THE I NCOME OF THE ASSESSEE BANK. 8.5.3 IN THE CASE ON HAND, THE FACT THAT THE ASSESS EE HAS NOT CREDITED THE AMOUNT OF RS.73,58,708 RECEIVED FOR MAKING OF DRAFTS AND PAY ORDERS TO ITS PROFIT AND LOSS ACCOUNT IN THE PERIOD UNDER CONSIDERATION, IS NOT IN DISPUTE. IN FACT, THE SAID AMOUNT ADMITTEDLY APPEARED AS AN OUTSTANDING LIABILITY TOWARDS DRAFTS AND PAY ORD ERS IN THE BALANCE SHEET OF THE ASSESSEE AS ON 31.3.2007. WE, THEREFORE FIND MERIT IN THE ARGU MENTS PUT FORTH BY THE LEARNED AUTHORISED REPRESENTATIVE WHICH IS FURTHER FORTIFIED BY THE DE CISIONS RENDERED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASES OF CANARA BANK (ITA NO.3 90/BANG/2011 DT.8.6.2012) AND VIJAYA BANK (ITA NO.455/BANG/2011 DT.22.4.2012). FOLLOWING, TH E AFORESAID DECISIONS OF THE CO-ORDINATE BENCH OF THE TRIBUNAL (SUPRA), WE DELETE THIS ADDIT ION OF RS. 73,58,708 MADE BY THE ASSESSING OFFICER UNDER SECTION 41(1) OF THE ACT AS BEING UNS USTAINABLE. 9. IN THE GROUND RAISED AT S.NO.4 , THE ASSESSEE DENIES ITSELF LIABLE TO BE CHARGED INTEREST UNDER SECTIONS 234B & 234D OF THE ACT. THE CHARGING OF INTEREST IS CONSEQUENTIAL AND MANDATORY AND THE ASSESSING OFFIC ER HAS NO DISCRETION IN THE MATTER. IN THIS VIEW OF THE MATTER, WE UPHOLD THE ASSESSING OFFICERS ACTION IN CHARGING THE SAID 15 ITA NO.876 & 890/BANG/12 INTEREST. THE ASSESSING OFFICER IS, HOWEVER, DIREC TED TO RECOMPUTE THE INTEREST, IF ANY, CHARGEABLE WHILE GIVING EFFECT TO THIS ORDER. 10. IN THE RESULT, REVENUES APPEAL FOR ASSESSMENT YEAR 2007-08 IS DISMISSED AND THE ASSESSEE'S APPEAL FOR THE SAME YEAR IS PART LY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 1 ST DEC., 2013. SD/- SD/- (N.V. VASUDEVAN) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMB ER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - B BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER SR. PRIVATE SECRETARY, ITAT, BANGALORE