Income Tax Appellate Tribunal - Ahmedabad
Shri Mahila Sewa Sahakari Bank Ltd.,, ... vs Assessee on 27 March, 2015
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'सी', अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" C " BENCH, AHMEDABAD
सम ी एन.एस.सैनी, लेखा सद य एवं ी कुल भारत, या यक सद य ।
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER And
SHRI KUL BHARAT, JUDICIAL MEMBER
आयकर अपील सं./I.T.A. No. 62/Ahd/2014
( नधा रण वष / Assessment Year : 2010-11)
Shri Mahila Sewa Sahakari बनाम/ The Asst.CIT (OSD)
Bank Ltd. Vs. Circle-10
109, Sakar-II, Ahmedabad-380 009
Opp.Town Hall
Ellisbridge, Ahmedabad
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAWFS 8845 D
(अपीलाथ# /Appellant) .. ($%यथ# / Respondent)
अपीलाथ# ओर से / Appellant by : Shri R.C. Shah, AR
$%यथ# क' ओर से/Respondent by : Shri M.K. Singh, Sr.DR
ु वाई क' तार*ख /
सन Date of Hearing 13/02/2015
घोषणा क' तार*ख /Date of Pronounce ment 27/03/2015
आदे श / O R D E R
PER SHRI KUL BHARAT, JUDICIAL MEMBER :
This appeal by the Assessee is directed against the order of the Ld.Commissioner of Income Tax(Appeals)-XVI, Ahmedabad ('CIT(A)' in short) dated 13/12/2013 pertaining to Assessment Year (AY) 2010-11. The assessee has raised the following revised grounds of appeal:-
1. That the C.I.T.(Appeals) erred in confirming the addition of Rs.172.73 lacs, being interest on N.P.A. accounts not credited to ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -2- P&L account. It is submitted that having regard to the facts of the case and judicial decisions, the addition of Rs.17273000 be deleted.
2. That the C.I.T.(Appeals), while confirming the addition of Rs.172.73 lacs, erred in not following the decisions of the Honourable I.T.A.T., Ahmedabad itself in the cases of Sardarganju Mercantile Co-
op.Bank Ltd. V. A.C.I.T. and Karnavati Co-op.Bank Ltd. V. D.C.I.T. though in the later decision, the decision of the Honourable Supreme Court in the case of Southern Technologies Ltd. relied upon by him in a wrongful manner was duly considered and distinguished and thereby causing great hardship and injustice to the appellant and, therefore, the appellant be awarded such cost/compensation as may appear to be just to the Honourable members.
2. The only effective ground is against the confirmation of addition of Rs.1,72,73,000/- being interest on N.P.A. accounts not credited to P&L account.
3. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 28/02/2013, thereby the Assessing Officer (AO in short) made addition on accrued interest on NPAs amounting to Rs.1,72,73,000/-. Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions of the assessee dismissed the appeal. Now, the assessee is further in appeal before us.
ITA No.62/Ahd/2014Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -3-
4. The ld.counsel for the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of Coordinate Bench (ITAT 'B' Bench Ahmedabad) rendered in the case of DCIT vs. Surat National Co-operative Bank Ltd. in ITA No.2793/Ahd/2012 for AY 2009-10, order dated 23/08/2013. The ld.counsel for the assessee has placed reliance on the judgement of Hon'ble Gujarat High Court rendered in the case of Rambhai L.Patel v. CIT reported at (2001) 252 ITR 846 (Guj.) in support of the contention that the guidelines issued by the RBI has binding force. He submitted that as per the RBI guidelines, the interest accrued on Non-performing Assets (NPA) cannot be subjected to tax. He has also placed reliance on the decision of the Coordinate Bench (ITAT 'B' Bench Pune) rendered in the case of Asst.CIT vs. Solapur Siddheshwar Sahakari Bank Ltd. in ITA Nos.2220 and 2221/PN/2013 for AYs 2009-10 & 2010-11, order dated 31/10/2014. He drew our attention towards para-10 of the said decision of the Coordiante Bench of Pune. Further, the ld.counsel for the assessee placed reliance on the decision of Coordinate Bench (ITAT 'A' Bench Pune) rendered in the case of Asst.CIT vs. The Omerga Janta Sahakari Bank Ltd. in ITA No.350/PN/2013 for AY 2007-08, order dated 31/10/2013. The ld.counsel for the assessee placed reliance on the decision of Coordinate Bench (ITAT 'B' Bench Ahmedabad) renderd in the case of Sardarganj Mercantile Co-op.Bank Ltd. vs. ACIT in ITA No.2426/Ahd/2012 for AY 2009-10, order dated 15/02/2013. The ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -4- ld.counsel for the assessee submitted that the facts are identical to the facts in the case of Sardarganj Mercantile Co-op.Bank Ltd. vs. ACIT(supra). He further relied on the decision of the Coordinate Bench (ITAT 'B' Bench Chandigarh) rendered in the case of Asst.CIT vs. Punjab State Co-op.Bank Ltd. reported at (2013) 34 taxmann.com 128 (Chandigarh - Trib.), order dated 06/03/2013. The ld.counsel for the assessee also submitted that on the principles of "income recognition" as per guidelines of the RBI, the interest income is required to be offered for taxation on cash basis and not on accrual basis.
4.1. On the contrary, ld.Sr.DR Shri M.K.Singh supported the orders of the authorities below and submitted that the assessee is a Co-operative Bank and guidelines of RBI relied upon by the ld.counsel for the assessee are in respect of Scheduled Banks. He submitted that the ratio laid down by the Hon'ble Apex Court in the case of Southern Technology Ltd. (320 ITR 577) is applicable on the facts of the present case.
5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has decided this issue in paras-3.2 to 3.11 of his order, by observing as under:-
"3.2 I have carefully considered the facts of the case in the light of submissions made by the appellant , the arguments taken by the assessing officer and the material available on records. The arguments taken by the appellant indicate that the addition made by the Id A O is being challenged on following grounds:-ITA No.62/Ahd/2014
Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -5- > That provision of sec 43D are not applicable in its case for disclosing any interest on accrual basis on NPAs.
> That Hon'ble jurisdictional Tribunal in the case of Karnavati Co Op Bank has held that no interest on accrual basis on NPAs can be taxed even in cases of unscheduled banks.
> That it is mandatory upon appellant not to charge interest on accrual basis in view of RB1 Guidelines.
> That following the theory of real income, taxability of any notional income like accrued interest on NPAs would not arise.
> That credit of income disclosed as interest income in subsequent years be allowed against addition made in the current year.
> That CBDT Circular bearing F No. 201/21/84-ITA-II dated 9-10-1984 is applicable in its case wherein it has been held that interest on accrual basis will not be taxed if not received for three years even though credited to 'interest suspense account'.
3.3 The issue regarding the applicability of section 43D and the argument that Hon'ble jurisdictional Tribunal in the case of Karnavati Co Op Bank has held that no interest on accrual basis on NPAs can be taxed even in cases of unscheduled banks has been examined. Before proceeding further it is considered necessary to briefly examine the statutory provisions of section 43D and explanation (ii) of clause (viia) of section 36 of the act.
Special provision in case of income of public financial institutions, public companies, etc. 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,-
(a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts;
(b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -6- shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier.
Explanation.-For the purposes of this section,-
(a) "National Housing Bank" means the National Housing Bank established under section 3 of the National Housing Bank Act, 1987 (53 of 1987);
(b) "public company" means a company,-
(i) which is a public company within the meaning of section 394 of the Companies Act, 1956(1 of 1956);
(ii) whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; and
(iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989 given under section 30 and section 31 of the National Housing Bank Act, 1987 (53 of 1987);
(c) "public financial institution" shall have the meaning assigned to it in section 4A95 of the Companies Act, 1956 (1 of 1956);
(d) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36;
(e) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
(f) "State industrial investment corporation" means a Government company within the meaning of section 61796 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects.] Expln. (ii) of clause ( viia) of section 36 ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -7- "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakinns) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) 77[***];] 3.4 A perusal of the above statute indicates that section 43D rws Expln. (ii) of clause (viia) of section 36 prescribes exemption from disclosure of interest income on accrual basis only to those entities which are covered by the said section. The AO has clearly brought evidence on record to indicate that the appellant bank by virtue of being an co op bank does not falls within the definition of entities which are covered by the above indicated statute or to say it is not a scheduled bank. The appellant on its part has also not been able to controvert with any cogent evidence the position taken by the A O. Thus, it becomes an undisputed fact of this case that the appellant is not a scheduled bank and consequently provisions of section 43D rws Expln. (ii) of clause (viia) of section 36 would not be applicable in its case. It is a settled principle of law laid down by honourable Apex Court and reiterated by several high Courts that if the provisions of law are un ambiguous and clear then no interpretation is to be applied. Hon'ble Apex Court in the case of Smt Tarulata Shyamv vs GIT (1977) 108 ITR 345 observed that 'to us there appears no justification to depart from the normal rule of construction according to which the intention of legislature is primarily to be gathered from the words used in the statute'. In the said case, the court observed views of rowlatt J in case of 'Cape Brandy Syndicate' that 'in a taxing act one has to look merely at what is clearly said. There is no room for any intendment, there is no equity about the tax, there is no presumption as to a tax. Nothing is to be read in, nothing is to be applied. One can only look fairly at the language used.' Again in the case of Padma Sundarrao vs State of Tamilnadu (2002) 255 ITR 147 and also in the case of Prakashnath Khanna vs CIT (2004) 266 ITR 1 (SC) Hon'ble Apex Court observed that 'once it is shown that the case of the assessee comes within the latter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be'. It is further seen that in several other judgements as in the cases quoted at 40 ITR 142(SC), 72 ITR 286(SC), 222 ITR 831 (Guj) etc. it has been held time and again that once the provisions of a statute are clear, no meanings or intentions are required to be attached therein and that they have be followed in the letter and spirit. It has been held that an interpretation of law is to be attempted only when the statute suffers from any ambiguity. Under the circumstances, the argument that provisions of section 43D are applicable in ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -8- appellants case squarely fails as the law explicitly prohibits benefit of section 43D to ineligible entities. Needless to say in eligible entities here would mean those tax payers who do not fall within the clear ambit of that section.
3.5 Coming to the argument that Hon'ble jurisdictional Tribunal in the case of Karnavati Co Op Bank has laid down that provisions of sec 43D are applicable in the case of unscheduled banks has been examined and it' is noted that the appellant has misinterpreted and inadequately appreciated the observation of Hon'ble Tribunal in the said case. It is pertinent to point out at this stage the observations of the Hon'ble Tribunal in the said case "....As far as the status of the assessee is concerned, the Assessing Officer has stated that the assessee-bank is a co-operative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an Explanation (d) r.w.s. 36(1)(viia) annexed to section 43-D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, we hereby hold that the assessee is covered by one of the entities, hence the provisions of section 43-D are to be applied."
A perusal of the above clearly shows that Hon'ble Tribunal has not laid down any ratio regarding application of provision of sec 43D in respect of unscheduled banks. What the Hon'ble Tribunal actually observed in the cited case was that in the absence of any contrary material, being made available for kind consideration of Hon'ble Tribunal, in that case it was a presumption that the appellant in that case i.e. Karnavati Co Op Bank was covered by provisions of sec 43D. Thus, the Hon'ble Tribunal did not lay down any ratio regarding applicability of section 43D in respect of all unscheduled banks.
3.6 It is equally important to point out at this stage that on similar facts on the issue of taxability of accrued interest on NPAs in the case of one Sarangpur Co Op Bank for A Y 2007-08 & 2009-10, where on identical addition made by the A O was confirmed by the undersigned vide orders dated 24-1-2013 which was challenged by the appellant before the Hon'ble Tribunal. In its order bearing ITA No 529 & 530/Ahd/2013 dated 21-6-2013 hon;ble Tribunal has in para-5 of their impugned order have observed that what is fundamental to this controversy is the status of the appellant as to whether it is a scheduled bank or not. Thus the Hon'ble Tribunal has remitted the issue back to the file of the A O with following remarks :-
ITA No.62/Ahd/2014Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11 -9- ".....With these brief backgrounds, we have heard both the sides. Although the assessee is before us for the second time, but still we feel that some of the areas of the dispute have remained unanswered. First question which is yet to be addressed is whether the assessee is a scheduled bank or not. In this regard, the assessee is expected to place on record the requisite evidence, through which it can be ascertained that the assessee falls under any of the category as prescribed in Explanation to section 43D of the Act. Because of this reason, we hereby direct the assessee to obtain the requisite certificate from the concerned authority clearly mentioning the status of the assessee-bank, and place the same before the AO......"
From a plain reading of the above, it clearly transpires that the Hon'ble Tribunal has appreciated the argument that provisions of section 43D would not be applicable to the appellant if it is not a scheduled bank. Consequently, the argument of the appellant for not offering interest income on accrual basis fails on this account.
3.7 Coming to the next argument of the appellant that interest on NPAs has not been offered on accrual basis in view of mandatory RBI guidelines, it is seen that the issue is now evenly settled in favour of revenue by the decision of Hon'ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577 dt 11-1-2010 In the cited case the appellant had taken an argument that interest on NPAs was not charged in view of mandatory RBI guidelines. Hon'ble Supreme Court have held that RBI guidelines have nothing to do with the taxability of an income otherwise permissible under the I T Act. Thus, the Hon'ble Court has held as under :-
"....31. RBI Directions, 1998 have been issued under section 45JA of RBI Act. Under that section, power is given to RBI to enact a regulatory framework involving prescription of prudential norms for NBFCs which are deposit taking to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions is prudence, transparency and disclosure. Section 45JA comes under Chapter III-B which deals with provisions relating to Financial Institutions, and to non-banking Institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification; provisioning, etc. As stated above, basis of the 1998 Directions is that anticipated losses must be taken into account but expected income need not be taken note of. Therefore, these Directions ensure cash liquidity for NBFCs which are now required to state true and correct profits, without projecting inflated profits. Therefore, in our view, RBI . Directions, 1998 deal only with presentation of NPA provisions in the Balance Sheet of an NBFC. It has nothing to do with the computation or taxability of the provisions for NPA under the Income-tax Act.ITA No.62/Ahd/2014
Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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32. Prior to RBI Directions, 1998, Advances were stated net of provisions for NPAs/bad and doubtful debts. They were shown at net figure (Advances less Provisions for NPAs) and the amount of provision for NPA was shown in the notes to the accounts only. Such presentation of NPA Provision warranted disclosure. Therefore, Para 9(1) of RBI Direction^, 1998 stipulates that every NBFC shall separately disclose in its Balance Sheet the provision for NPAs without netting them from the income or against the value of assets. That, the provision for NPA should be shown separately on the Liabilities side of the Balance Sheet under the head "Current Liabilities and Provisions" and not as a deduction from "Sundry Debtors/ Advances".
Therefore, RBI has taken a position as a matter of disclosure, with which we agree, that if an NBFC deducts a provision for NPA from "sundry debtors/loans and advances", it would amount to netting from the value of assets which would constitute breach of Para 9 of RBI Directions, 1998. Consequently, NPA provisions should be presented on the "Liabilities side" of the Balance Sheet under the head "Current Liabilities and Provisions" as a Disclosure Norm and not as accounting or computation of income norm under the Income-tax Act. At this stage, we may clarify that the entire thrust of RBI Directions. 1998 is on , presentation of NPA provision in the Balance Sheet of an NBFC. Presentation/disclosure is different from computation/taxability of the provision for NPA. The nature of expenditure under the Income-tax Act cannot be conclusively determined by the manner in which accounts are presented in terms of 1998 Directions. There are cases where on facts courts have taken the view that the so-called provision is in effect a write off. Therefore, in our view, RBI Directions, 1998, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the Income-tax Act. Some companies, for example, treat write offs or expenses, or liabilities as contingent liabilities. For example, there are companies which do not recognize mark-to-market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P&L Account in terms of Accounting Standards. Consequent/y, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest, they are merely disclosed as contingent liability in the Notes to Accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the Income-tax Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions, 1998 and the Income-tax Act operate in different fields.
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33. The question still remains as to what is the nature of "Provision for NPA" in terms of RBI Directions, 1998. In our view, provision for NPA in terms of RBI Directions, 1998 does not constitute expense on the basis of which deduction could be claimed by NBFC under section 36(1)(vii). Provision for NPAs is an expense for Presentation under 1998 Directions and in that sense it is notional. For claiming deduction under the Income-tax Act, one has to go by the facts of the case (including the nature of transaction), as stated above. One must keep in mind another aspect. Reduction in NPA takes place in two ways, namely, by recoveries and by write off. However, by making a provision for NPA, there will be no reduction in NPA. Similarly, a write off is also of two types, namely, a regular write off and a prudential write off. [See Advances Accounts by Shukla, Grewal, Gupta, Chapter 26, Page 26.50] If one keeps these concepts in mind, it is very clear that RBI Directions, 1998 are merely prudential norms. They can also be called as disclosure norms or norms regarding presentation of NPA Provisions in the Balance Sheet. They do not touch upon the nature of expense to be decided by the Assessing Officer in the assessment proceedings....."
3.8 The argument of the appellant regarding the applicability of decisions delivered by Hon'ble Apex Court, jurisdictional High Court and the jurisdictiona! Tribunal in respect of the interest on NPAs not being taxable in view of the real income theory have also been analysed. It is seen that principal reliance has been placed upon the decision in the case of Godhara Electricity 225 ITR 746 dt 3/9/97 . Without prejudice to the fact that facts of Godhra electricity and current appeal are clearly distinguished it is noted that we now leave the benefit of a direct and incidentally subsequent decision of Hon'ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577 dt 11-1-2010. After comprehensively analyzing various facets of income viz a viz method of accounting and also provisions of IT Act particularly concerning NPA's, Hon'ble Apex Court has thus held as under :-"
".....On the issue of real income theory Theory of "Real Income"
34. An interesting argument was advanced before us to say that a provision for NPA, under commercial accounting, is not an "income" hence the same cannot be added back as is sought to be done by the Department. In this connection, reliance was placed on "Real Income Theory".
35. We find no merit in the above contention. In the case of Poona Electric Supply Co. Ltd. v. ClT[1965] 57 ITR 521, this is what the Supreme Court had to say :
ITA No.62/Ahd/2014Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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". . . Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear cut distinction between . . . the real profits and statutory profits. The latter are statutorily fixed for a specified purpose." [Emphasis supplied] (p. 530)
36. To the same effect is the judgment of the Bombay High Court in the case of CWT v. Bombay Suburban Electric Supply Ltd. [1976] 103 ITR 384, where it was observed as under:
". . . Income-tax is a tax on the real income, i.e., profits arrived at on commercial principles subject to the provisions of the Income-tax Act, 1961. The real profits can be ascertained only by making the permissible deduction. . . ". [Emphasis supplied] (p. 391)
37. The point to be noted is that the Income-tax Act is a tax on "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the Income- tax Act. Therefore, if by Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the said Explanation in computation of total income under the Income- tax Act failing which one cannot ascertain the real profits. This is where the concept of "add back" comes in. In our view, a provision for NPA debited to P&L Account under the 1998 Directions is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the Income-tax Act.
38. One of the contentions raised on behalf of NBFC before us was that in this case there is no scope for "add back" of the Provision against NPA to the taxable income of the assessee. We find no merit in this contention. Under the Income-tax Act, the charge is on Profits and Gains, not on gross receipts (which, however, has Profits embedded in it). Therefore, subject to the requirements of the Income-tax Act, profits to be assessed under the Income-tax Act have got to be Real Profits which have to be computed on ordinary principles of commercial accounting. In other words, profits have got to be computed after deducting Losses/Expenses incurred for business, even though such losses/expenses may not be admissible under sections 30 fu 43D of the Income-tax Act, unless such Losses/Expenses are expressly or by necessary implication disallowed by the Act. Therefore, even applying the theory of Real Income, a debit which is expressly disallowed by Explanation to section 36(1)(vii), if claimed, has got to be added back to the total income of the assessee because the C3id Act seeks to tax the "real income" which is income computed according to ordinary commercial principles but subject to the provisions of the Income-tax Act. Under ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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section 36(1)(vii) read with the Explanation, a "write off" is a condition for allowance. If 'Yea/profit" is to be computed one needs to take into account the concept of "write off" Jn contradistinction to the "provision for doubtful debt"..,.."
An examination of the above decision clearly postulates that Hon'ble Apex Court has held that there is no merit on the contention that under commercial accounting interest on NPAs cannot be charged. Following its own decision in the case of Puna Electricity supply Co 57 UTR 121 of Hon'ble Bombay High Court in the case of Bombay Suburban Ele. Supply Ltd 103 ITR 384 it was held that "....Income tax Act in the tax of real income i.e. the profits arrived at on commercial principles subject to the provisions of the I T Act....." In view of the above ratio laid down by Hon'ble Apex Court and in respectful compliance to V.ie same it is held that the decisions relied upon by the appellant bank possibly do not come to its rescue. It is worthwhile to mention that the above decision of Hon'ble apex takes precedence over other decisions including its own decision in the case of Godhra electricity as the same is latest and direct on the issue at hand.
3.9 A perusal of the submissions made by the appellant indicates that it has alternatively argued that in the event of its appeal not being allowed, the assessing officer be directed to allow him the credit of interests on the NPA's disclosed as income in the subsequent year. Thus it has been informed that in the subsequent year applicant has shown interest income earned on such NPAs and that credit thereof should be allowed. At the outset it is pertinent to note that the above argument of the appellant is difficult to be entertained as the same has not been raised by way of any grounds of appeal, which have been reproduced supra at para-2.1 above. As far as disclosure of income in a return of income and any modification in respect of such disclosed income in a return of income is concerned, it is seen that the procedure for the same is prescribed u/s. 139 of the Act. There is no provision under the Act, of the type requested by the appellant, to allow deduction of income of a particular year against any other income. Consequently, the argument of the appellant for credit of income offered subsequently deserves to be rejected and hence is rejected.
3.10 The argument of the appellant that CBDT Circular dt 9-10-1984 supra, is applicable in its case and that the same is binding upon the A O has been examined and found to be untenable. It is a settled principle of law that the circulars, notifications issued by the CBDT are part of delegated or subordinated legislation. It is also an equally settled principle of law that the parent legislation cannot be override through the delegated legislation vij circulars and notifications. The provisions of section 43D are clear and therefore the same cannot be overridden by a ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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circular. Without prejudice it is seen that the statutory provisions were brought to act much later then the said circular (which was issued in 1984) and therefore the said Circular in any case would not have any effect or binding force upon the A O. it is a trite law that a circular issued prior to introduction of parent statute would have no relevance or binding force upon the A O. Consequently, the argument of the appellant that the A O is bound by the CBDT Circular fails.
3.11 In view of the discussions made in the preceding paragraphs, it is held that the addition of Rs.1,72,73,000/- made by the A O on account of accrued interest on NPAs is based upon correct understanding of the contemporary statutory provisions and judicial citations and do not requires any further interference. The appellant on its part has not been able to effectively demonstrate with any cogent evidence that the addition was unwarranted Consequently, the addition of Rs. 1,72,73,000/- made by the A O on account of accrued interest on NPAs is confirmed and the ground of appeal No., 1 raised is dismissed.
4.0 In the result, the appeal is dismissed."
5.1. However, we find that under the identical facts, the Coordinate Bench of this Tribunal in the case of ACIT vs. Solapur Siddheshwar Sahakari Bank Ltd. in ITA Nos.2220&221/PN/2013 for AYs 2009-10 & 2010-11 (supra) has examined the issue thoroughly by holding as under:-
"4. The learned CIT(A) disagreed with the Assessing Officer, and thus the Revenue is in appeal before us. At the time of hearing, it was a common point between the parties that an identical controversy has been considered by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No.350/PN/2013 dated 31.10.2013. In the said precedent, the Tribunal considered the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd., 330 ITR 440 (Del) as well as the judgement of the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances; and, following the proposition that in the absence of any judgement of the Jurisdictional High Court, there being contrary judgements of the non-jurisdictional High Courts, a decision which was ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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favourable to the assessee was to be followed in view of the reasoning laid down by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) and, thus the Tribunal decided the issue in favour of the assessee. The relevant discussion in the order of the Tribunal dated 31.10.2013 (supra) is reproduced as under :-
"8. We have carefully considered the rival submissions. In so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Ostensibly, assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a 'scheduled bank' included in second schedule of RBI so as to fall within the scope of section 43D of the Act. Notably, section 43D of the Act prescribes that interest income on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consideration.
9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Co-operative Bank operating under a license issued by RBI but was not a 'scheduled bank' so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The assessee, on the other hand, contended that having regard to the guidelines issued by RBI regarding accounting of interest on NPAs, no interest income accrued in respect of NPAs and that the same was to be taxed only on receipt basis. The Tribunal observed that the question of taxability of interest on NPAs classified by RBI, was considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) wherein after considering the decision of the Hon'ble ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) is worthy of notice:-
"8. We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd (Supra); wherein the Hon'ble Delhi High Court took into account the decision rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). In the case of M/s Vasisth Chay Vyapar Ltd, the assessee therein was a non banking financial company and it was also bound by the "Prudential norms directions" issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The Assessing Officer, however, added the said interest as the income of the assessee by holding that it had "accrued" to the assessee even it was not realized as the assessee was following mercantile system of accounting. The learned CIT (A) affirmed the order of the Assessing Officer. However, the ITAT deleted the aforesaid income. Hence the revenue preferred appeal before the Hon'ble Delhi High Court.
8.1 After hearing the rival submissions, the Hon'ble Delhi High Court took note of sec.45Q of Reserve Bank of India Act which reads as under:
"Chapter IHB to override other laws.
45Q. The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law".ITA No.62/Ahd/2014
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The High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon'ble High Court also considered accounting standard "AS-9" on "Revenue recognition" and also extracted following relevant portion from the said accounting standard:
9. Effect of uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection.
9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments.
9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, It is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.
9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.
9.5 When recognition of revenue is postponed due to the-effect of uncertainties, it is considered as revenue of the period in which it is properly recognized".ITA No.62/Ahd/2014
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8.2 The Delhi High Court also considered the decision rendered in the following cases;
i) CIT vs. Elgi Finance Ltd., 293ITR 357 (Mad)
ii) CIT vs. KKM Investments (Cal) - SLP dismissed by Supreme Court (310 ITR 4)
iii) CIT vs. Motor Credit Co (P) Ltd., 127 ITR 572 (Mad)
iv) UCO Bank vs. CIT 237 ITR 889 (SC)
v) CIT vs. Shoorji Valiabhdas & Co 46 (TR 144 (SC)
vi) Godhra Electricity Co. Ltd., Vs. CIT 225 ITR 746
vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del)
viii) CIT vs. Eicher Ltd., ITA No.431/2009 dated 15.7.2009 (Del) 8.3 After considering the Accounting Standard 9 and the various case law listed above, the Hon'ble Delhi High Court held that the interest on NPA advance cannot be treated as "accrued" to the assesses, 8.4. Before the Delhi High Court, the revenue took support of the 'decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). The Delhi High Court considered the said decision of Hon'ble Apex Court and explained the same as under:
"We have already held that even under the Income Tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirety on the judgment of the Supreme Court in the case of Southern Technology (Supra). No doubt, in first blush, reading of the judgment gives an indication that the Court has held that Reserve Bank of India Act does not override the provisions of the income Tax Act. However, when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the Apex Court contained in that very judgment, we find that the proposition advanced by Mr.Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited Rs.81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of Section 36(1) (vii) of the Act. The Assessing Officer did not allow the ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(i)(vii) 'of the Act. The Assessing Officer, however, did not bring to tax Rs.20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to "Income Recognition"
and held that income had to be recognized in terms of the Prudent/a Norms, even, though the same deviated from mercantile system of accounting and/or section 45 (sic. 145) of the Income Tax Act. It can be said, therefore, that the Apex Court approved the 'real income' theory which is engrained in fie Prudential Norms for recognition of revenue by NBFC".
9. The Hon'ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-a-vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon'ble Supreme Court are extracted below:
"Applicability of Section 145 ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis-a-vis "Income Recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the 'permissible deductions" or "their exclusion"
under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of Income Recognition and presentation of Financial Statements. The Accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the Accounting Policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute".
10. Turning to the facts of the case before us, the assesses herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assesses as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court.
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10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant:
"What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not "accrued".
The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order."
10. Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs.
11. So, however, the learned Departmental Representative has submitted that the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras) has differed with the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) on a similar issue, i.e. relating to interest income on NPAs. The learned Departmental Representative further pointed out that the Hon'ble Madras High Court followed the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis. We have carefully considered the submissions put-forth by the learned Departmental Representative based on the judgement of the Hon'ble Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon'ble Madras High Court related to non-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Hon'ble Madras High Court took the view that the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) also ITA No.62/Ahd/2014 Shri Mahila Sewa Sahkari Bank Ltd. vs. ACIT (OSD) Asst.Year - 2010-11
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applied to the Income Recognition Norms provided by RBI and therefore it held the .interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI's guidelines. But the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon'ble Delhi High Court and the Hon'ble Madras High Court as noted by the Hon'ble Madras High Court in its order.
12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC).
13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in the case of The Durga Cooperative Urban Bank Ltd. (supra) and accordingly the order of the CIT(A) is liable to the affirmed. We hold so.
14. In the result, the appeal of the Revenue is dismissed."
5. Since it was a common point between the parties that the facts and circumstances in the present case are identical to those considered by us in the case of The Omerga Janta Sahakari Bank Ltd. (supra), following the said precedent the present claim of the assessee deserves to be upheld. Thus, the order of the CIT(A) is hereby affirmed and the Revenue has to fail on this aspect.
6. In the result, both the appeals of the Revenue are dismissed."
5.2. We also find that the Coordinate Bench of this Tribunal in the case of Sardarganj Mercantile Co-op.Bank Ltd. vs. ACIT (supra) has deleted addition by observing as under:-
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"5. We have heard the rival contentions and perused the material on record. The appellant is making the provision of interest as per the guidelines issued by the R.B.I. However, same has not been credited in the p&l account as it was notional had not received actually by it. Section 43 is also not applicable a assessee has not credited in the p&l account but shown in the assets and liability side in the balance sheet directly and also not received actually. Thus, we have considered view that the CIT(A) was not justifying in confirming the addition. Accordingly, the assessee's appeal is allowed.
6. In the result, the assessee's appeal is allowed."
5.3 The Hon'ble Coordinate Bench has noted that there is a divergent view between the Hon'ble Delhi High Court in the case of M/s.Vasisth Chay Vyapar Ltd. reported at 330 ITR 44 0(Delhi and the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd. reported at (2013) 31 taxmann.com 305 (Mad.), in respect of application of the judgement of the Hon'ble Apex Court rendered in the case of Southern Technology Ltd.(supra) on income recognition norms prescribed by R.B.I. The Hon'ble Coordinate Bench in view of the fact that there were divergent views of Hon'ble Delhi High Court and Hon'ble Madras High Court, applied the ratio of the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. reported at (1973) 88 ITR 192 (SC). In the present case also, there is no judgement by the Hon'ble Jurisdictional High Court, therefore for the same reasoning, we decide this issue in favour of the assessee and the AO is hereby directed to delete the addition. Thus, ground of assessee's appeal is allowed.
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6. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on Friday, the 27th day of March, 2015 at Ahmedabad.
Sd/- Sd/-
(एन.एस.सैनी) (कुल भारत)
लेखा सद य या यक सद य
( N.S. SAINI ) ( KUL BHARAT )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 27/ 03 /2015
ट*.सी.नायर, व. न.स./T.C. NAIR, Sr. PS
आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to :
1. अपीलाथ# / The Appellant
2. $%यथ# / The Respondent.
3. संबं4धत आयकर आयु6त / Concerned CIT
4. आयकर आय6 ु त(अपील) / The CIT(A)-XVI, Ahmedabad
5. 7वभागीय $ त न4ध, आयकर अपील*य अ4धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड; फाईल / Guard file.
आदे शानुसार/ BY ORDER, स%या7पत $ त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation .. 16.3.15 (dictation-pad 9- pages attached at the end of this File)
2. Date on which the typed draft is placed before the Dictating Member .. 19.3.2015
3. Other Member...
4. Date on which the approved draft comes to the Sr.P.S./P.S.................
5. Date on which the fair order is placed before the Dictating Member for pronouncement......
6. Date on which the fair order comes back to the Sr.P.S./P.S.......27.3.15
7. Date on which the file goes to the Bench Clerk.....................27.3.15
8. Date on which the file goes to the Head Clerk..........................................
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................