ACIT, Circle-1, Khammam, Khammam V. The District Co-operative Central Bank Ltd., Khammam, Khammam

ITA 904/HYD/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5949 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 16-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A V RAGHURAM
• Assessee Lawyers: K J RAO
• Keywords: Notional interest
• Section: 148

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 904/HYD/2016 ASSESSMENT YEAR: 2007-08 ACIT, CIRCLE -1 KHAMMAM VS. THE DISTRICT CO-OPERATIVE CENTRAL BANK, LTD., KHAMMAM PAN AAATT 8809Q (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.J. RAO (DR) REVENUE BY : SHRI A.V. RAGHURAM (AR) DATE OF HEARING : 01-12-2016 DATE OF PRONOUNCEMENT : 21-12-2016 ORDER PER P. MADHAVI DEVI, J.M.: IN THIS APPEAL, THE REVENUE IS AGGRIEVED BY THE ORD ER OF THE CIT(A) - 7, HYDERABAD, DATED 01-02-2010, DELETING THE ADDITION OF RS. 2,31,63,080/- MADE BY THE A.O. BY DISALLOWING THE INTEREST ON O.D. AND RESERVE FOR NPA. 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE, A CO-OPERATIVE SOCIETY, CARRYING ON BANKING BUSINESS WITH AS MANY AS 27 BRANCHES SPREAD OVER VARIOUS PARTS OF KHAMMAM DISTRICT, DEAL ING MAINLY WITH FARMERS BY PROVIDING LOANS TO CARRY OUT AGRICULTURA L ACTIVITIES, FILED ITS RETURN OF INCOME FOR THE A.Y. 2007-08 ON 29-06-2007 , DECLARING NET LOSS OF RS. 4,61,25,543/-, AND NIL INCOME AFTER C LAIMING EXEMPTION U/S 80P(2)(A)(I) OF THE IT ACT. DURING ASSESSMENT P ROCEEDINGS U/S 143 (3) OF THE ACT, NET LOSS WAS DETERMINED AT RS.3,09, 01,563/- 3. SUBSEQUENTLY THE ASSESSMENT WAS RE-OPENED BY ISS UING A NOTICE U/S 148 OF THE ACT. MEANWHILE, DUE TO INCON SISTENCY IN THE ITA NO.904/HYD/2016 THE DISTRICT CO-OPERATIVE CENTRAL BANK, LTD., KHAMMAM. PAGE 2 OF 5 METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE, SPECIAL AU DIT U/S 142(2A) OF THE ACT WAS ORDERED AND THE RESPECTIVE R EPORTS WERE TAKEN ON RECORD. DURING THE RE-ASSESSMENT PROCEEDINGS, TH E ASSESSEE FILED RECAST COMPUTATION OF TOTAL INCOME. THE A.O. NOTI CED THAT THE ASSESSEE HAS DEBITED TO THE PROFIT AND LOSS, AN AMO UNT OF RS.2,31,63,080/- TOWARDS RESERVE FOR OVERDUE INTERE ST. THE ASSESSEE FURNISHED THE DETAILS OF THE SAME STATING THAT THE ABOVE INTEREST PERTAINS TO NON PERFORMING ASSETS AND IN TERMS OF T HE PRUDENTIAL NORMS FOR INCOME RECOGNITION PRESCRIBED BY THE RBI, THE INTEREST ACCRUED ON NON PERFORMANCE ASSETS SHOULD NOT BE REC OGNIZED AS INCOME AND THEREFORE THE INTEREST OF INCOME RELATAB LE TO NPAS DID ACCRUE TO THE BANK AND THE RESERVE FOR OVERDUE INTE REST SHOULD BE ALLOWED. THE A.O HOWEVER WAS NOT CONVINCED WITH TH E ASSESSEES CONTENTIONS AND HELD THAT THE INTEREST SHOULD HAVE BEEN OFFERED ON ACCRUAL BASIS AND NOT ON RECEIPT BASIS AS THE ASSESSEE HAS BEEN FOLLOWING THE MERCANTILE METHOD OF ACCOUNTING AND T HEREFORE HE DISALLOWED THE CLAIM OF RS.2,31,63,080/- AND REDUCE D IT FROM THE LOSS SHOWN. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) WHO ALLOWED THE SAME BY FOLLOWING THE ORDER OF HIS PREDECESSOR IN THE ASSESSEES OWN CASE FOR THE A.Y. 2008-09. AGGR IEVED, BY THE RELIEF GIVEN BY THE CIT(A), THE REVENUE IS IN APPEA L BEFORE US. 4. AT THE TIME OF HEARING, WHILE THE LD DR, SUPPOR TED THE ORDERS OF THE AUTHORITIES BELOW, THE LD COUNSEL FOR THE ASSES SEE SUBMITTED THAT THIS ISSUE HAD ARISEN IN THE ASSESSEES OWN CASE FO R A.Y. 2008-09, BEFORE THE A BENCH OF THIS TRIBUNAL AND BY ORDERS DATED 30-06-2015, THE TRIBUNAL HAS CONFIRMED THE ORDER OF THE CIT(A). THE COPY OF THE SAID ORDER IS ALSO FILED BEFORE US. 5. HAVING REGARD TO THE RIVAL CONTENTIONS MADE MATE RIAL ON RECORD WE FIND THAT THE REGISTRY HAD RAISED VARIOUS DEFECT S IN FILING OF THE APPEAL BY THE DEPARTMENT WHICH HAVE NOT BEEN RECTIF IED TILL DATE AND THEREFORE REVENUES APPEAL IS LIABLE TO BE DISMISSE D. ITA NO.904/HYD/2016 THE DISTRICT CO-OPERATIVE CENTRAL BANK, LTD., KHAMMAM. PAGE 3 OF 5 NOTWITHSTANDING THAT, WE ALSO FIND THAT ON MERITS A LSO, THE ISSUE IS COVERED AGAINST THE REVENUE. THE RELEVANT PORTION O F THE TRIBUNALS ORDER IS REPRODUCED HEREUNDER FOR READY REFERENCE. 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 MERCANTI LE 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, THEN ANY INTEREST ACCRUED ON SUCH PRINCIPAL AMOUNT CANNOT BE RECOGNIZED AS INCOME. THIS VIEW CO NFIRMED 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 LTD 573]. FOLLOWING THE TWO DECISIONS, AO IS DIRECTED TO DELETE THE ADDITION TOWARDS INTEREST ON O.D; II, CIT(A) ALSO OBSERVED THAT ASSESSEE HAS BEEN CAR RYING ON BANKING ACTIVITIES AND IS NON-SCHEDULE BANK AND IT IS ENTIT LED TO THE BENEFIT OF SECTION 36(1)(VII)(A) OF THE ACT. ACCORDINGLY, AO I S DIRECTED TO DELETE THE ADDITION UNDER THE HEAD 'RESERVE FOR NPA'. AGGRIEVED BY THE ORDER OF CIT(A), REVENUE HAS PREFE RRED THE GROUNDS ON TWO ISSUES. 4. ON CONSIDERING THE RIVAL CONTENTIONS AND PERUSIN G 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 THAT THE APPEL LANT MAINTAINED MERCANTILE SYSTEM OF ACCOUNTING AND THE INTEREST AC CRUED ON NPAS CANNOT BE RECOGNIZED AS INCOME FOR THE SIMPLE REASO N WHEN THE PRINCIPAL AMOUNT ITSELF IS DOUBTFUL FOR RECOVERY TH AT ANY INTEREST ACCRUED ON SUCH PRINCIPAL AMOUNT CANNOT BE RECOGNIZ ED AS INCOME. THIS VIEW CONFIRMED BY THE HON'BLE MADRAS HIGH COUR T IN THE CASE OF CIT VS. ANNAMALAI FINANCE LTD., (275 LTR 451) AND F URTHER IN THE CASE OF TCL FINANCE LTD., VS. ACLT (91 LTD 573). FO LLOWING THE ABOVE TWO DECISIONS, I DIRECT THE ASSESSING OFFICER TO DE LETE THE ABOVE ADDITIONS'. 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 PROVISIONS FOR NON-PER FORMING ASSETS AND THEREFORE, THE ORDER OF CIT(A) IS NOT CORRECT. AS S EEN FROM THE SAID JUDGMENT, IT IS NOT ON THE ISSUE OF BRINGING TO TAX INTEREST INCOME ON THE NPAS BUT CLAIM OF BAD DEBT U/S. 36(1)(VII) IN THE CASE OF NON- ITA NO.904/HYD/2016 THE DISTRICT CO-OPERATIVE CENTRAL BANK, LTD., KHAMMAM. PAGE 4 OF 5 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 BUSINESS. THEREFORE, THE SAID JUDGMENT GIVE N IN THE CONTEXT OF NBFC PARTICULARLY WITH REFERENCE TO PROVISION CL AIMED AS EXPENSE DEDUCTIBLE U/S. 36( 1 )(VII) OR (VII)(A) CANNOT BE CONSIDERED AS APPLICABLE IN BRINGING TO TAX A NOTIONAL INTEREST O N A LOAN WHICH HAS BECOME BAD. TO THE EXTENT OF CLAIM OF INTEREST ACCR UED ON NPA, ASSESSEES CONTENTIONS ARE CORRECT AND ACCORDING RE VENUES GROUND NOS. 2 & 3 ON THIS ISSUE ARE REJECTED. 6. RESPECTFULLY FOLLOWING THE SAME, WE FIND NO MERI T IN THE REVENUES APPEAL AND THE APPEAL IS ACCORDINGLY DISM ISSED. 7. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DECEMBER, 2016. SD/- SD/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER J UDICIAL MEMBER HYDERABAD, DATED: 21 ST DECEMBER, 2016 KRK COPY TO:- 1) ACIT, CIRCLE-1, KHAMMAM. 2) THE DISTRICT CO-OPERATIVE CENTRAL BANK LTD., MG ROAD, KHAMMAM. . 3) CIT ( APPEALS)-7, HYDERABAD 4) THE PCIT-7, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., H YDERABAD. 6) GUARD FILE ITA NO.904/HYD/2016 THE DISTRICT CO-OPERATIVE CENTRAL BANK, LTD., KHAMMAM. PAGE 5 OF 5 DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 01-12-16 2. DRAFT PLACED BEFORE AUTHOR 05-12-16 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5 APPROVED DRAFT COMES TO THE SR.P.S./PS 6. KEPT FOR PRONOUNCEMENT ON 7. FILE SENT TO THE BENCH CLERK 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER