The Bhatkal Urban Co-Operative Bank Ltd., Bhatkal V. DCIT, Udupi

ITA 929/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63705 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 08-10-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 24-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A SUNDAR RAJAN JT
• Assessee Lawyers: S RAMASUBRAMANIAN
• Keywords: Opportunity of being heard; Bad and doubtful debts
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO. 929/BANG/2011 ASSESSMENT YEAR : 2008-09 THE BHATKAL URBAN CO-OPERATIVE BANK LTD., P.B. NO.15, 66/1, URBAN BANK BUILDING, MAIN ROAD, BHATKAL 581 320. PAN : AABFT 0167G VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1, UDUPI. APPELLANT RESPONDENT APPELLANT BY : SHRI S. RAMASUBRAMANIAN, C.A. RESPONDENT BY : SHRI A. SUNDAR RAJAN, JT.CIT(DR) DATE OF HEARING : 08.10.2012 DATE OF PRONOUNCEMENT : 12.10.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 18.08.2011 OF THE CIT(APPEALS), MYSORE RELATING TO ASSESSMENT YEAR 2008-09. 1. THAT THE ORDER OF THE LEARNED COMMISSIONER OF I NCOME-TAX (APPEALS) IN SO FAR IT IS PREJUDICIAL TO THE INTERE STS OF THE APPELLANT ITA NO.929/BANG/11 PAGE 2 OF 8 IS BAD AND ERRONEOUS IN LAW AND AGAINST THE FACTS A ND CIRCUMSTANCES OF THE CASE. 2. THAT THE LEARNED COMMISSIONER OF INCOME-TAX (AP PEALS) ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITIO N OF RS. 48,81,411/- IGNORING THE SUBMISSION OF THE APPELLAN T THAT AMOUNT HAS NOT BEEN PROPERLY ARRIVED YET. 3. THAT THE LEARNED COMMISSIONER OF INCOME-TAX (AP PEALS) ERRED IN LAW AND ON FACTS IN HOLDING THAT THE SUM O F RS, 44,71,000/- BEING INTEREST RECEIVABLE ON LOANS THAT ARE DOUBTFUL OF RECOVERY IS LIABLE TO BE INCLUDED IN THE TOTAL INCO ME. 4. THAT THE LEARNED COMMISSIONER OF INCOME-TAX (AP PEALS) ERRED IN LAW AND ON FACTS IN NOT DIRECTING THE ASSE SSING OFFICER TO FOLLOW THE BINDING CIRCULAR # F.201/21/84-ITA-II DA TED 09.10.1984. 5. THAT THE LEARNED COMMISSIONER OF INCOME-TAX (AP PEALS) ERRED IN LAW AND ON FACTS IN CONFIRMING THE ADDITIO NAL AMOUNT OF RS. 47,52,932/- TOWARDS INTEREST RECEIVABLE ON DOUB TFUL LOANS. 6. THAT THE LEARNED COMMISSIONER OF INCOME-TAX (AP PEALS) ERRED IN LAW AND ON FACTS IN REJECTING THE CONTENTI ON OF THE APPELLANT ONLY THE TOTAL INCOME THAT ACCRUES OR ARI SES DURING THE YEAR IS TO BE INCLUDED IN TOTAL INCOME AND NOT IN I NCOME WHICH IS OF DOUBTFUL RECOVERY. 7. EACH OF THE ABOVE GROUNDS IS WITHOUT PREJUDICE TO ONE ANOTHER AND THE APPELLANT CRAVES LEAVE OF THE HONB LE INCOME TAX APPELLATE TRIBUNAL, BANGALORE TO ADD, DELETE, AMEND OR OTHERWISE MODIFY ONE OR MORE OF THE ABOVE GROUNDS EITHER BEFO RE OR AT THE TIME OF HEARING OF THIS APPEA1. 2. THE ASSESSEE IS A CO-OPERATIVE SOCIETY CARRYING ON THE BUSINESS OF BANKING. FROM THE A.Y. 2007-08, CO-OPERATIVE BANK OTHER THAN PRIMARY AGRICULTURAL CREDIT SOCIETY OR PRIMARY CO-OPERATIVE AGRICULTURE & RURAL DEVELOPMENT BANK WILL NOT ENJOY THE BENEFIT OF DEDU CTION WHICH WAS AVAILABLE TO IT EARLIER U/S. 80P OF THE ACT. THE ASSESSEES INCOME WAS THEREFORE TAXABLE FROM THE A.Y. 2007-08. ITA NO.929/BANG/11 PAGE 3 OF 8 3. IN THE COURSE OF ASSESSMENT PROCEEDINGS FOR THE A.Y. 2008-09, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE WAS FOL LOWING MERCANTILE SYSTEM OF ACCOUNTING. THE AO ALSO NOTICED THAT AS PER THE SIGNIFICANT ACCOUNTING POLICIES ANNEXED TO THE ACCOUNTS, UNDER THE HEAD REVENUE RECOGNITION, IT WAS MENTIONED THAT INTEREST INCOME ON INVESTMENTS AND EXPENDITURE ARE ACCOUNT FOR ON ACCRUAL BASIS. INTE REST ON ADVANCES, RECEIPT OF COMMISSION, RENT ON SAFE DEPOSIT LOCKERS ETC., W ERE ACCOUNTED FOR ON CASH BASIS. THE AO WAS OF THE VIEW THAT AS PER THE PROVISIONS OF SECTION 145 OF THE INCOME-TAX ACT, 1961 (THE ACT), THE AS SESSEE HAS TO EITHER FOLLOW CASH OR MERCANTILE SYSTEM OF ACCOUNTING. IT CANNOT FOLLOW HYBRID OR MIXED SYSTEM OF ACCOUNTING. THE AO THEREFORE CALLE D UPON THE ASSESSEE TO COMPUTE THE CORRECT ASSESSABLE INCOME ON THE BAS IS OF MERCANTILE SYSTEM OF ACCOUNTING. 4. IN REPLY, THE ASSESSEE SUBMITTED THAT IT WAS GOV ERNED BY THE KARNATAKA STATE CO-OPERATIVE SOCIETIES (KSCS) ACT, 1959, KSCS RULES, 1960, BESIDES BANKING REGULATION ACT ,1949. THE AS SESSEE POINTED OUT THAT AS PER KSCS ACT, 1959 R.W. KSCS RULES, 1960, A LL EXPENSES INCLUDING INTEREST PAID AND PAYABLE HAS TO BE CHARGED TO THE PROFIT & LOSS ACCOUNT AND ONLY INTEREST ACTUALLY RECEIVED HAS TO BE TAKEN TO THE PROFIT & LOSS ACCOUNT. THE ASSESSEE SUBMITTED THAT IN COMPLIANCE OF THE AFORESAID REGULATIONS, IT HAD MAINTAINED ITS BOOKS OF ACCOUNT S. IT WAS ALSO POINTED OUT THAT IN RESPECT OF INTEREST INCOME NOT ACCOUNTE D FOR IN THE BOOKS OF ACCOUNT, IT HAD FOLLOWED THE MASTER CIRCULAR OF RBI REGARDING REVENUE RECOGNITION, ASSETS CLASSIFICATION AND PRUDENTIAL N ORMS. THE ASSESSEE POINTED OUT THAT THE INTEREST INCOME WHICH NOT ACCO UNTED FOR IN THE BOOKS OF ITA NO.929/BANG/11 PAGE 4 OF 8 ACCOUNTS WERE DOUBTFUL DEBTS AND THEREFORE THEY WER E NOT RECOGNIZED AS INCOME. THE ASSESSEE POINTED OUT THAT THOUGH IT IS A CO-OPERATIVE BANK, THE RBI GUIDELINES APPLICABLE TO SCHEDULED BANKS WI LL BE BINDING ON THEM. BESIDES THE ABOVE, THE ASSESSEE ALSO POINTED OUT TH AT THE INTEREST INCOME RECEIVED AND CREDITED TO PROFIT & LOSS ACCOUNT FOR THE PREVIOUS YEAR 2007-08 IS INTEREST INCOME NOT ONLY PERTAINING TO THE PREVI OUS YEAR 2007-08, BUT ALSO INCLUDES THE PRECEDING FINANCIAL YEARS INTEREST, W HICH WAS NOT RECEIVED EARLIER, BUT RECEIVED SUBSEQUENTLY DURING THE PREVI OUS YEAR. THE ASSESSEE RELIED ON THE CBDT CIRCULAR NO.F.201/21/84/-ITA-II DATED 09.10.1984 WHEREIN IT WAS PROVIDED THAT IF INTEREST IS NOT REC EIVED FOR THREE CONSECUTIVE YEARS, THEN THE INTEREST IS TO BE TAXED IN THE YEAR OF RECEIPT. THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK V. CIT 237 ITR 889 (SC) , WHEREIN IT WAS HELD THAT THE CIRCULAR REFERRED TO ABOVE WAS BINDING AND INTEREST DUE ON L OANS WHICH WERE DOUBTFUL OF RECOVERY NEED NOT BE RECOGNIZED AS INCO ME. 5. THE AO HOWEVER REJECTED THE CLAIM OF THE ASSESSE E AND COMPUTED THE INCOME OF THE ASSESSEE FROM BUSINESS BY OBSERVI NG AS FOLLOWS:- 5.6 THE EXPLANATION OF THE ASSESSEE HAS BEEN CONS IDERED. SECTION 145 HAS BEEN AMENDED W.E.F. APRIL 1, 1997 (AY 1997- 98) SO AS TO PERMIT ONLY CASH OR MERCANTILE SYSTEM OF ACCOUNTING . THE HYBRID SYSTEM OF ACCOUNTING IS NO LONGER PERMITTED. FURTHE R THE ACT HAS BEEN AMENDED WEF APRIL 1, 1991 SO FAR AS THE INCOME BY WAY OF INTEREST IN RELATION TO CERTAIN CATEGORIES OF BAD A ND DOUBTFUL DEBTS IN CASE OF PUBLIC FINANCIAL INSTITUTIONS AND SCHEDULED BANKS IS CONCERNED. THE NEWLY INSERTED SEC 43D PROVIDED THAT SUCH INCOME SHALL BE CHARGEABLE TO TAX IN THE YEAR IN WHICH IT IS CREDITED TO ITS PROFIT AND LOSS ACCOUNT BY SUCH INSTITUTION, OR IN THE YEAR IT IS ACTUALLY RECEIVED, WHICHEVER IS EARLIER. HOWEVER THE COOPERA TIVE BANKS (OTHER THAN SCHEDULE BANKS) DO NOT COME UNDER THE PURVIEW OF SECTION 43D. ITA NO.929/BANG/11 PAGE 5 OF 8 THEREFORE, IN THE CASE OF THE ASSESSEE IN PRESENT C ONTEXT, THE JUDGMENT RELIED UPON BY IT IS NOT RELEVANT. 5.7 THUS, IN VIEW OF THE MANDATORY PROVISIONS OF S ECTION 145, IT IS NOT POSSIBLE FOR AN ASSESSEE TO ACCOUNT FOR ITEMS O F INCOME ON CASH BASIS AND EXPENSES ON ACCRUAL BASIS. SINCE THE ASSE SSEES METHOD OF ACCOUNTING IS NOT IN CONFORMITY WITH SECTION 145, T HE ASSESSEES CLAIM FOR FOLLOWING HYBRID METHOD OF ACCOUNTING IS REJECTED AND THE INTEREST INCOME ACCRUED DURING THE YEAR ON LOANS IS COMPUTED ON MERCANTILE BASIS AS UNDER: ` RS. INCOME FROM BUSINESS AS PER RETURN 14,50,27,770 ADD: INTEREST RECEIVABLE ON LOANS AS ON 3103.2008 AS PER BALANCE SHEET 6,74,71,388 LESS: INTEREST RECEIVABLE ON LOANS AS ON 31.03.2007 AS PER BALANCE SHEET 6,27,18,45 6 INTEREST INCOME ON ACCRUAL BASIS 14,97,80,702 6. THE TOTAL INCOME IS COMPUTED AS UNDER: INCOME FROM BANKING AS PER RETURN I.E., INCOME FROM BANKING ACTIVITIES 2,60,32,417 LESS: INTEREST INCOME OFFERED ON CASH BASIS INTEREST CREDITED TO I & E ACCOUNT ON CASH BASIS 14 ,50,27,770 (-) 11,89,95,353 ADD: INTEREST INCOME ON ACCRUAL BASIS 14,97,80,70 2 INCOME FROM BUSINESS 3,07,85,349 6. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) UPHE LD THE ORDER OF THE AO. BEFORE THE CIT(A), THE ASSESSEE HAD REITER ATED THE SUBMISSIONS THAT ONLY REAL INCOME CAN BE BROUGHT TO TAX AND IN THIS REGARD RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F UCO BANK (SUPRA) . THE ASSESSEE ALSO SUBMITTED THAT IT IS NOT CORRECT TO SAY THAT SINCE THE ASSESSEE SOCIETY IS NOT A SCHEDULED COMMERCIAL BANK ; THE RATIO LAID DOWN ITA NO.929/BANG/11 PAGE 6 OF 8 IN THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK (SUPRA) IS NOT APPLICABLE TO THE ASSESSEES CASE. IT WAS CONTENDED BY THE ASSESSEE THAT CO-OPERATIVE BANKS HAD TO BE TREATED AT PAR WITH COMMERCIAL BANKS AFTER THE AMENDMENT TO THE PROVISIONS OF SECT ION 80P OF THE ACT BY THE FINANCE ACT, 2006 W.E.F. 1.4.2006. THE CIT(APP EALS) HOWEVER HELD AS FOLLOWS:- 5.1 THE APPELLANTS ARGUMENT THAT IT IS EQUAL TO SCHEDULED BANK/COMMERCIAL BANK IS NOT CORRECT. THE FINANCE BI LL 2006 APPARENTLY ONLY MENTIONED THAT THE CO-OPERATIVE BAN KS ARE FUNCTIONING AT PAR WITH COMMERCIAL BANKS. THAT DOES NOT MEAN THAT THE APPELLANT HAS BECOME A COMMERCIAL BANK. IT IS STILL A CO- OPERATIVE BANK. HENCE, I AGREE WITH THE OPINION OF THE ASSESSING OFFICER ON THESE GROUNDS AND THE GROUNDS ARE DISMIS SED. 7. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. COUNSEL FOR THE ASSESSEE REITE RATED THE SUBMISSIONS AS WERE MADE BEFORE THE REVENUE AUTHORITIES. 8. THE LD. DR RELIED ON THE ORDER OF THE CIT(APPEAL S). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FROM A PERUSAL OF THE ORDER OF THE AO, IT IS CLEAR THAT THE INTEREST INCO ME RECEIVED BY THE ASSESSEE HAS BEEN DETERMINED BY HIM BY CONSIDERING THE DIFFERENCE BETWEEN INTEREST RECEIVABLE ON LOANS AS ON 31.3.200 7 AND INTEREST RECEIVABLE ON LOANS AS ON 31.3.2008 AND ADDED THE S AME TO THE INTEREST CREDITED TO THE INCOME & EXPENDITURE ACCOUNT ON CAS H BASIS. IT IS NOT IN DISPUTE BEFORE US THAT IN VIEW OF THE PROVISIONS OF SECTION 145 OF THE ACT, THE ASSESSEE HAS TO ACCOUNT FOR INTEREST INCOME ON ACCRUAL BASIS SINCE THE ITA NO.929/BANG/11 PAGE 7 OF 8 ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING. IT IS THE PLEA OF THE ASSESSEE THAT EVEN AS PER THE MERCANTILE SYSTEM OF ACCOUNTING, INTEREST INCOME NEED NOT BE OFFERED TO TAX, IF THEY PERTAIN TO DEBTS, THE RECOVERY OF WHICH ITSELF IS DOUBTFUL. IN OTHER WORDS, IT IS TH E PLEA OF THE ASSESSEE THAT THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK (SUPRA) SHOULD BE TAKEN COGNIZANCE OF WHILE TAXING INTEREST INCOME EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING AND EVEN WHERE THE ASSESSEE IS A CO-OPERATIVE BANK. APART FROM THE A BOVE, IT IS ALSO THE CLAIM OF THE ASSESSEE THAT INTEREST INCOME CREDITED TO TH E PROFIT & LOSS ACCOUNT ON RECEIPT BASIS NOT ONLY INCLUDES INTEREST INCOME PER TAINING TO FINANCIAL YEAR 2007-08, BUT ALSO INCLUDES THE PREVIOUS FINANCIAL Y EARS. IT IS THE CLAIM OF THE ASSESSEE THAT IN SO FAR AS INTEREST INCOME ACCO UNTED FOR IN THE BOOKS FOR THE PREVIOUS YEAR WHICH DID NOT PERTAIN TO THE PREVIOUS YEAR BUT ACCOUNTED FOR IN THE PREVIOUS YEAR ON RECEIPT BASIS SHOULD BE EXCLUDED. 10. WE ARE OF THE VIEW THAT BOTH THE AFORESAID SUBM ISSIONS ARE ACCEPTABLE. NEITHER THE AO NOR THE CIT(A) HAS CONS IDERED THESE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE. WE THE REFORE SET ASIDE THE ORDER OF THE CIT(A) AND REMAND THIS ISSUE WITH REGA RD TO DETERMINATION OF INTEREST INCOME THAT IS TO BE TREATED AS HAVING ACC RUED TO THE ASSESSEE UNDER MERCANTILE SYSTEM OF ACCOUNTING, KEEPING IN M IND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK (SUPRA) AND ALSO EXCLUDE THE INTEREST INCOME ACCOUNTED FOR IN THE BO OKS, WHICH DOES NOT PERTAIN TO THE PREVIOUS YEAR, BUT PERTAINS TO THE P ERIOD EARLIER TO THE PREVIOUS YEAR BUT ACCOUNTED FOR DURING THE PREVIOUS YEAR ON RECEIPT BASIS. THE ASSESSEE WILL LET IN NECESSARY EVIDENCE TO ESTA BLISH ITS CASE AND THE ITA NO.929/BANG/11 PAGE 8 OF 8 AO WILL CONSIDER THE SAME AND DECIDE THE ISSUE AFRE SH AFTER AFFORDING THE ASSESSEE OPPORTUNITY OF BEING HEARD. THE ASSESSEE IS AT LIBERTY TO PUT FORTH ALL CONTENTIONS REGARDING THE QUANTUM OF INTEREST I NCOME THAT IS TO BE BROUGHT TO TAX. 11. FOR STATISTICAL PURPOSES, THE APPEAL OF THE ASS ESSEE IS TREATED AS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF OCTOBER, 2012. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 12 TH OCTOBER , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.