Income Tax Appellate Tribunal - Pune
Vaidyanath Urban Co.Op Bank Ltd.,, Beed vs Assessee on 31 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND Ms SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.413/PN/2014
Assessment Year: 2009-10
Vaidyanath Urban Co-op. Bank Ltd.,
Head Office, Parali Vaijnath,
Dist: Beed. .... Appellant
PAN: AAAAV0305N
Vs.
The Commissioner of Income Tax,
Aurangabad .... Respondent
ITA No.1154/PN/2011
Assessment Year: 2008-09
Vaidyanath Urban Co-op. Bank Ltd.,
Head Office, Parali Vaijnath,
Dist: Beed. .... Appellant
PAN: AAAAV0305N
Vs.
The Asst. Commissioner of Income Tax,
Circle-2, Aurangabad .... Respondent
ITA No.237/PN/2013
Assessment Year: 2009-10
Vaidyanath Urban Co-op. Bank Ltd.,
Head Office, Parali Vaijnath,
Dist: Beed. .... Appellant
PAN: AAAAV0305N
Vs.
The Joint Commissioner of Income Tax,
Range-2, Aurangabad .... Respondent
And
ITA No.64/PN/2014
Assessment Year: 2010-11
Vaidyanath Urban Co-op. Bank Ltd.,
Head Office, Parali Vaijnath,
Dist: Beed. .... Appellant
PAN: AAAAV0305N
2
ITA No.64/PN/2014
ITA No.1154/PN/2011
ITA No.237/PN/2013
ITA No.413/PN/2014
Vaidyanath Urban Co-op Bank Ltd.
Vs.
The Joint Commissioner of Income Tax,
Range-2, Aurangabad .... Respondent
Appellant by : Shri S.N. Puranik
Respondent by : Smt. Mithali Madhusmitha and
Shri I.C. Nago
Date of hearing : 09-03-2015
Date of pronouncement : 31-03-2015
ORDER
PER SUSHMA CHOWLA, JM:
Three appeals filed by the assessee are against separate orders of CIT(A), Aurangabad, dated 28.10.2013, 30.06.2011 and 22.11.2012 relating to assessment years 2010-11, 2009-10 and 2008-09, respectively against respective orders passed under section 143(3) of the Income Tax Act, 1961. Another appeal filed by the assessee is against order of CIT, Aurangabad, dated 29.01.2014 relating to assessment year 2009-10 against order passed under section 263 of the Income Tax Act, 1961.
2. All the appeals relating to the same assessees were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.413/PN/2014 has raised the following grounds of appeal:-
1. Order u/s 263 passed by the Commissioner is without jurisdiction AND Bad in Law. Appellant prays to cancel the same.
2. Without prejudice to Ground No.1 above, Commissioner of Income Tax has erred in directing Assessing Officer to make addition of Rs.6,93,10,184/- alleging being accrued Interest on NPA. Same may please be deleted.
3. Without prejudice to above grounds, if it is held against the Assessee, then Interest credited to Profit & Loss A/c on realization Basis relating to period prior to 31/03/2008 may please be excluded from Income.3 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014
Vaidyanath Urban Co-op Bank Ltd.
4. Without prejudice to Ground No. 1 above, Honourable Commissioner of Income tax has erred in making addition of Rs.52,960/- in respect of 'Nominal Membership Fee', Appellant prays for deletion of the same.
5. Appellant prays for just and equitable relief.
6. Appellant prays to add, alter, amend and / or withdraw the ground / s, as and when may thought fit by appellant.
4. The issue raised in the present appeal is against the invoking of jurisdiction under section 263 of the Act.
5. The brief facts of the case are that, the assessee cooperative society was engaged in the banking business at Parli, District Beed. The assessee had furnished the return of income at Rs.65,30,570/-. The Assessing Officer completed the assessment under section 143(3) of the Act on a total income of Rs.3,26,89,030/-. The Commissioner on the verification of the assessment record was of the view that the order passed by the Assessing Officer was both erroneous and prejudicial to the interest of Revenue on account of nominal membership fees of Rs.52,960/- not being offered as revenue receipt and further, the interest on Non Performing Assets (NPA) was though accounted for on receipt basis, but the same was not offered to tax. On both the accounts, the Commissioner was of the view that the said receipts are to be included as income of the assessee for the captioned assessment year. Accordingly, the Assessing Officer was directed to make an addition of Rs.52,960/- on account of receipts of nominal membership fees and further, addition of Rs.6,93,10,184/- being accrued interest on NPA accounts was made. In respect of third addition proposed i.e. interest on investment, the submissions of the assessee were accepted after verification and it was held that no interference was warranted on the said issue.
6. The assessee is in appeal against the order of Commissioner. 4 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014
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7. It was pointed out by the learned Authorized Representative for the assessee that the nominal membership fees were received by the cooperative society and such receipts were capital receipts and it was admitted by the learned Authorized Representative for the assessee that the nominal fess / entrance fees was not refunded on termination of contract. The learned Authorized Representative for the assessee fairly conceded that the said receipt is includable in the hands of the assessee as revenue receipt.
8. In respect of second issue i.e. the treatment of interest on NPAs as being taxable as the assessee was following cash system of accounting, the learned Authorized Representative for the assessee pointed out that the Assessing Officer had taxed the said income on cash basis in the hands of the assessee and the assessee was not pressing the said ground of appeal filed against the order passed by the Assessing Officer under section 143(3) of the Act to the extent of Rs.1,62,42,236/-. However, in respect of the balance interest accruing on NPAs, it was pointed out that the issue is squarely covered in favour of the assessee by Pune Bench of the Tribunal in ACIT Vs. Osmanabad Janta Sah. Bank Ltd., in ITA No.795/PN/2011, relating to assessment year 2007-08, order dated 31.08.2012.
9. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of Commissioner.
10. We have heard the rival contentions and perused the record. The Commissioner in the present case had invoked the jurisdiction under section 263 of the Act after verification of the assessment records on account of two issues. The first issue was with regard to the nominal membership fees received by the assessee from such persons, who were not the members of the cooperative society, but were associated with it on account of certain transactions. The assessee had not declared the said receipts on the premise that the same were 5 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
capital receipts. However, the said receipts were in the nature of nominal membership fees or entrance fees charged by the assessee from such non- existing members of the cooperative society who had transacted with the assessee society and hence, the said receipts were to be charged as revenue receipts in the hands of the assessee. In view of the admission of the learned Authorized Representative for the assessee in this regard, we uphold the order of Commissioner in including sum of Rs.52,960/- as income of the assessee.
11. In respect of the second issue raised by the Commissioner while exercising the jurisdiction under section 263 of the Act on account of interest accrued on NPAs, we find that the issue is squarely covered by the order of Pune Bench of the Tribunal in ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (supra), wherein it has been held that the treatment given by the assessee was on account of guidelines of RBI is not includable as income of the assessee. However, the interest, which has been received on such NPAs by the assessee is taxable in the hands of the assessee. The learned Authorized Representative for the assessee fairly pointed out that the Assessing Officer had taxed sum of Rs.1.62 crores as interest on such advances, as income of the assessee for the captioned assessment year and though the grounds of appeal has been raised by the assessee in the appeal filed against the order passed by the CIT(A) upholding the addition made by the Assessing Officer under section 143(3) of the Act, but the said ground of appeal is not being pressed in ITA No.237/PN/2011, which is listed for hearing today. However, in respect of balance interest due on NPAs, the same would not be added as income in the hands of the assessee, in view of the ratio laid down by in ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (supra). We find no merit in the exercise of jurisdiction by the Commissioner under section 263 of the Act in respect of interest on NPAs, which had though accrued to the assessee, but were not to be included in the income of the assessee on account of guidelines of RBI and the ratio laid down in ACIT Vs. 6 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
Osmanabad Janta Sah. Bank Ltd. (supra). However, the interest received by the assessee on such NPAs during the captioned assessment year is includable in the hands of the assessee to the extent of Rs.1.62 crores, which had been taxed by the Assessing Officer on cash basis.
12. The controversy before the Commissioner was with respect to non- recognition of income on accrual basis relatable to the NPAs. The Commissioner in the order passed under section 263 of the Act, was of the view that the said non-inclusion of income on accrual basis relatable to the NPAs by the Assessing Officer made the assessment order both erroneous and prejudicial to the interest of Revenue. However, we find that the said issue with regard to accrual of income on NPAs is no longer res integra but the same has already been adjudicated in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (supra) and in ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No.350/PN/2013 dated 31.10.2013. 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 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 :-
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"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 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 8 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
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 IIIB 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".
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".
8.2 The Delhi High Court also considered the decision rendered in the following cases:
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i) CIT vs. Elgi Finance Ltd., 293 ITR 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 Vallabhdas & Co 46 ITR 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 assessee.
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 entirely 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 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 Prudential 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 the Prudential Norms for recognition of revenue by NBFC".10 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014
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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- à-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
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-à-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 assessee 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 assessee 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-à-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 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 12 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
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."
13. Since the issue has already been settled, then the non-assessability of such income on accrual basis i.e. interest on NPAs, by the Assessing Officer cannot be said to be prejudicial to the interest of Revenue. However, the said principle is to be applied only in respect of non-recognition of income on accrual basis relatable to NPAs and not on the said income received by the assessee on receipt basis during the captioned assessment year. The Assessing Officer in the first round of proceedings had already made an addition of Rs.1,62,42,236/-. in the hands of the assessee, which has been upheld by the CIT(A) and though the ground of appeal has been raised by the assessee in this regard in ITA No.237/PN/2013, but the contention of the learned Authorized Representative for the assessee before us was that the said ground of appeal is not being pressed. Once a particular addition has been made in the hands of the assessee by the Assessing Officer in the assessment order, then no further addition can be made on that basis, by way of initiation of proceedings under section 263 of the Act. Accordingly, we hold that the exercise of jurisdiction by the Commissioner under section 263 of the Act in respect of interest income relatable to NPAs is invalid as the assessment order passed by the Assessing Officer is not prejudicial to the interest of Revenue and such order even if erroneous, cannot give power to the Commissioner to initiate proceedings under section 263 of the Act. In view thereof, the order of the Commissioner under section 263 of the Act is upheld on the first issue, but is held to be invalid on the second issue on non-recognition of interest income on NPAs. Thus, the grounds of appeal raised by the assessee are partly allowed.
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ITA No.1154/PN/2011 :: Assessment Year 2008-09
14. The assessee has raised the following grounds of appeal:-
1) Commissioner (Appeals) has erred in confirming the addition of Rs.17,40,000/- on account of interest on NPA not recognised as income for the year. Appellant prays for the deletion of said addition.
2) Commissioner (Appeals) has erred in confirming addition of Rs.40,02,265/- amount of dividend forfeited and credited to Reserve.
Same may please be deleted
3) Commissioner(Appeals) erred in confirming disallowance of loss on Apex Bank shares of Rs.15,83,000/-. Same may please be allowed.
4) Commissioner (Appeals) has erred in confirming disallowance of Loss on Amortisation of premium on Government Securities Rs.6,12,119/-
5) CIT (A) has erred in disallowing loss of Rs 16,16,187/- on merger of Sinhagad Urban Co-operative Bank Ltd. Same may please be allowed.
6) CIT (A) has erred in confirming addition of Rs.1,88,877/- invoking Section 41(1) on Bank transferring Creditors Balances to Reserve Fund. Same is neither Cessation nor Liability, nor Income of the Appellant Bank. Addition is prayed to be deleted.
7) CIT (A) has erred in not allowing deduction/making addition of Rs.17,32,500/- transfer to investment Fluctuation Reserve. Same may please be allowed.
8) CIT(A) has erred in disallowing Audit Fees of Rs.1,19,277/- U/s 43B. Same may please be allowed as section 43B is not applicable.
9) CIT(A) erred in confirming addition of Rs.20,547/-. Same may please be deleted.
10) Appellant prays for correct deduction U/s 36(1)(viia) of the Act
11) Appellant prays for just and equitable relief.
12) Appellant prays to add, alter amend, modify and /or withdraw the ground/s of appeal as the occasion may demand.
15. The grounds of appeal Nos.1, 3 and 7 are not pressed and hence, the same are dismissed as not pressed.
16. The assessee has also raised additional grounds of appeal, which read as under:-
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Additional Grounds
1) "Loss on merger of Sinhagad Urban Co Op Bank Ltd, Pathari Dist.
Parbhani, of Rs.80,80,935/- may please be allowed as Revenue / Business Expenditure"
2) Without Prejudice to above Ground and if appellant fails, Difference in Asset and Liability of Bank merged, being for 'Banking license'/ Goodwill, depreciation on the same may please be allowed.
17. The issue in ground of appeal No.2 raised by the assessee is against the addition of Rs.40,02,265/- i.e. the amount of dividend forfeited and credited to the Reserve account.
18. The brief facts relating to the issue are that the assessee had forfeited sum of Rs.40,02,265/- on account of dividend payable which was shown in the liabilities side of the balance sheet of the assessee and had credited the same to General Reserve Fund. The Assessing Officer was of the view that the said forfeiture of dividend payable was income of the assessee under section 2(24)(ii) of the Act and is to be included as income from other sources in the hands of the assessee. The contention of the assessee that dividend was as good as appropriation of profit and imposing tax while transferring the unclaimed dividend to Reserve Account was nothing but double taxation, was not accepted by the Assessing Officer. Further claim of the assessee that forfeiture of dividend and credit to Reserve Fund was not remission and cessation of liability, was also rejected by the Assessing Officer and an addition of Rs.40,02,265/- was made in the hands of the assessee.
19. The CIT(A) upheld the addition in the hands of the assessee, against which, the assessee is in appeal vide ground of appeal No.2.
20. The plea of the learned Authorized Representative for the assessee before us was that similar addition made in assessment year 2009-10 by the Assessing Officer has been deleted by the CIT(A), against which the Revenue is 15 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
not in appeal and following the same parity of reasoning, the addition made in the captioned assessment year should be deleted.
21. We have heard the rival contentions and perused the record. The addition made in the hands of the assessee is in respect of the unclaimed dividend, which had been transferred to the Reserve Fund Account by the assessee. The case of the assessee was that the liability is still there and there is no forfeiture of the said unclaimed dividend amount. The said provision for distribution of dividend to its members was made by the assessee bank out of its profits, which have already been assessed as income of the assessee. Such reversal of unclaimed dividend to the Reserve Account cannot be treated as income of the assessee under section 28 of the Act and also the provisions of section 41(1) of the Act are not applicable in the case. The CIT(A) while deciding similar issue in assessment year 2009-10 had observed as under:-
"8.3 It is undisputed fact that the appellant bank has made provision for distribution of dividend to its members out of profit, which has been already assessed as income of the appellant. The unclaimed dividend, therefore, amounts to excess provision for dividend which has been reversed by the appellant in the year under appeal and transferred to reserve account. If the appellant bank would have made the correct provision of dividend which has been actually claimed by the members, the quantum of income assessed in the year in which dividend has been provided for, would not have changed and the tax liability also would have remained the same. Therefore, the unclaimed dividend cannot be treated as income of the appellant u/s 28 of the Act. The A.O. is, therefore, not justified in taxing the unclaimed dividend u/s 28 of the Act.
8.4 Further, the said unclaimed dividend is also not taxable u/s 41(1) of the Act as held by the Hon'ble ITAT, Delhi in ITA No.4981/Del/2010 dated 29/04/2011 for A.Y.2007-08 in the case of Gulshan Mercantile Urban Coop.Bank Ltd., in para-5 of the order as under -
"5. We have heard both the parties and gone through the material available on record as well as the order of ld. CIT(A). The Assessing Officer had made addition on the ground that the amount of unpaid dividend was to be deposited in the Government account after certain period. In this case, there is no dispute that the amount of dividend paid has not been charged to P & L account. It forms part of appropriation of income. Therefore, when the assessee paid dividend to the shareholders, the amount was not debited to P & L account and, therefore, the provision of section 41(1) are not 16 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
applicable as there is no cessation of liability. Therefore, in our considered opinion, ld. CIT(A) was justified in deleting the addition.:
22. The Revenue is not in appeal against the relief allowed by the CIT(A) in assessment year 2009-10 and in view of the ratio laid down by Delhi Bench of the Tribunal in Gulshan Mercantile Urban Coop. Bank Ltd. in ITA No.4981/Del/2010 relating to assessment year 2007-08, order dated 29.04.2011 and also in view of the fact that such reversal of unclaimed dividend and credit to the Reserve Account cannot be treated as income of the assessee under section 28 of the Act, we direct the Assessing Officer to delete the addition of Rs.40,02,265/-. The ground of appeal No.2 raised by the assessee is thus, allowed.
23. The issue in ground of appeal No.6 raised by the assessee is against the addition of Rs.1,88,877/- on account of the transfer of creditors balance to Reserve Fund.
24. The claim of the assessee before the authorities below was that it was neither cessation nor income of the assessee. However, the authorities below had invoked the provisions of section 41(1) of the Act and made an addition of Rs.1,88,877/-.
25. The claim of the assessee before us was that the provisions of section 41(1) of the Act were not applicable. We find no merit in the plea of the assessee in this regard in view of the fact that the assessee itself had transferred the credit balance of unclaimed creditors to the Reserve Accounts and the provisions of section 41(1) of the Act are clearly attracted, wherein it is provided that where any allowance of deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and subsequently, during any previous year if any benefit has been obtained by the said person by way of remission or cessation thereof, then the 17 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
amount obtained by such person or the value of benefit accruing to him, shall be deemed to be the profits and gains of business or profession. In the facts of present case also, the assessee on its own motion had transferred the credit balance due from creditors against expenses to its Reserve Fund and the provisions of section 41(1) of the Act were clearly applicable.
26. The issue in ground of appeal No.9, as per the learned Authorized Representative for the assessee is linked to the ground of appeal No.6. The assessee had transferred to Reserve Account excess cash of Rs.20,547/-. Following same line of reasoning as in ground of appeal No.6, we hold that the provisions of section 41(1) of the Act are attracted and we confirm the addition of Rs.20,547/-. Consequently, the grounds of appeal Nos.6 and 9 raised by the assessee are thus, dismissed.
27. Now, coming to the issue raised vide ground of appeal No.4, the issue is with regard to addition made on account of disallowance of loss on amortization of premium on government securities of Rs.6,12,119/-. The learned Authorized Representative for the assessee fairly pointed out that the issue is covered by the order of Pune Bench of the Tribunal in Bhavani Urban Co-operative Bank Ltd. Vs. ACIT in ITA No.610/PN/2011, relating to assessment year 2007-08, order dated 31.07.2013 and also the Hon'ble Bombay High Court in CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom).
28. In the facts of the present ground of appeal, the assessee had debited sum of Rs.6,12,119/- on account of amortization of premium of investment in government securities in the category of Held to Maturity. The premium represented the excess of acquisition cost over the face value of Held to Maturity securities, which were amortized by the bank over the remaining period of maturity. The said issue of allowability of amortization of premium of HTM is squarely covered by the decision of Pune Bench of the Tribunal in Bhavani 18 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
Urban Co-operative Bank Ltd. Vs. ACIT in ITA No.610/PN/2011, relating to assessment year 2007-08, order dated 31.07.2013.
29. We further find that similar issue had arisen in Ratnagiri District Central Co-operative Bank Ltd. Vs. ACIT, in ITA No.386/PN/2012, relating to assessment year 2005-06, order dated 20.01.2015, wherein it was held as under:-
"11. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the provision made on account of Amortization of Securities known Held To Maturity. The case of the Revenue was that the said securities were held as investments and consequently, the purchase cost was to be adopted and there was no basis for adopting the market value of the said assets and booking the loss in the value of securities at the close of the year. The claim of the assessee on the other hand was that, in view of the guidelines framed by the RBI and NABARD, the said entries were made in the books of account which resulted in loss of Rs.58,41,016/- which was booked as an expenditure for the year under consideration.
12. We find similar issue of the allowability of Premium on Amortization of HTM Securities, arose before Pune Bench of the Tribunal in Pune District Central Co. Operative Bank Ltd. Vs. Addl.CIT in ITA No.1796/PN/2013, relating to assessment year 2009-10 and vide order dated 28th November 2014, it was held as under:-
"10. ...... We find that a similar issue of allowability or deduction on account of amortization of premium expenditure for HTM securities arose before Pune Bench of the Tribunal in assessee's own case in ITA No.1795/PN/2013 relating to assessment year 2008-09 vide order dated 22.09.2014 wherein, it was held as under:-
"2.1 The only issue remains is with regard to disallowance made by the Assessing Officer of Rs.2,20,68,302/- claimed by the assessee as amortization of premium expenditure for HTM securities by payment of over and above the value of such securities. The learned Authorized Representative has pointed out that this issue is covered in favour of the assessee by order of the Hon'ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), wherein the Hon'ble Bombay High Court on similar issue, held as under:
"As far as question (C) is concerned, we find that an identical question of law was framed and answered in favour of the assessee by this court in its judgment dated July 4, 2014, in Income Tax Appeal No.1079 of 2012, CIT v. Lord Krishna Bank Ltd. (now merged with HDFC Bank Ltd.) (2014) 366 ITR 416 (Bom). Mr. Suresh Kumar fairly stated that question (C) reproduced above is covered by the said order. In view thereof, we are of the view that even question 19 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
(C) does not arise any substantial question of law that requires an answer from us."
And a similar view has been taken by ITAT, Pune 'A' Bench in the case of Dy.CIT vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. in ITA No.449/PN/2012 and another by observing as under:
"10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find an identical issue had come up before the Tribunal in the case of Nahsik Merchant Cooperative Bank Ltd. (Supra). We find the Tribunal has discussed the issue and dismissed the grounds raised by the Revenue by holding as under :
"4. After going through rival submissions and material on record we find that with the advent of section 80P(4) w.e.f. A.Y, 2007-08 has closed the doors for cooperative banks for claiming the benefit of deduction u/s.80P(2)(a)(i) from this total income. However, the cooperative society should now be entitled to be assessed as normal banking company. The clause (4) inserted in section 80P has taken away the benefit of the erstwhile deduction available to cooperative society in carrying on business of banking or providing credit facility to its members. The new clause (4) inserted by the Finance Act, 2006 w.e.f. 01-04-2007 reads as under:
" The provision of the section was not in relation to any cooperative bank other than agricultural credit society or primary cooperative agricultural and rural development bank".
5. The intention of the provision may be derived more precisely from relevant Para 166 of the budget speech which stated that : "Co-operative banks, like any other bank, are lending institutions and should pay tax on their profits, Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Bank (PCARDB) stand on a special footing and will continue to be exempt under section 80P of the Income Tax Act.
However, I propose to exclude all other co-operative banks from the scope of that section". Accordingly, section 80P is to be amended to give effect to the above proposal. It is also proposed to amend section 2(24) to provide that profits and gains of business of banking (Including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of 'income' (with effect from 1st April, 2007)".
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Vaidyanath Urban Co-op Bank Ltd.
6. Cooperative bank unlike other commercial banks are subjected to dual control from both RBI as well as from state cooperative department. The accounting treatment for a cooperative bank is therefore a result of guidelines from both the controlling authorities. Ordinarily a deduction is not available to an assessee unless specifically provided under the Act. This is irrespective of accounting treatment provided by the assessee in its books of accounts. But at the same time it was well settled that deduction expressly mentioned under the Act are not exhaustive and profit is to be derived according to ordinary commercial principles. As per the extant RBI guidelines dated 01-07-2009 the investment portfolio of the banks is required to be classified under 3 categories viz., Held the maturity HTM), Held for Trading (HFT) and Available for Sale (AFS). The value of each kind of investment is to be done in the following manner:
Sr.No. Classification Valuation Norms of Investment.
1.....
2.....
3.....
7. In para (vii) of the CBDT Instruction No.17 of 2008 dated 26.11.2008, on 'Assessment of Bank -
check list for deduction, states as under:
"As per RBI guidelines....."
8. The ITAT, Mumbai Bench, in the case of ACIT vs. The Bank of Rajasthan Ltd. (2011) TIOL-35-ITAT- Mumbai, has held that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. It has also been held in the case of Catholic Syrian Bank Ltd. Vs. ACIT that amortization on purchase of Government securities was made as per prudential norms of the RBI and same was allowable deduction.
In view of above, assessee was justified in contending for amortization of premium paid in excess of face value of securities held to maturity (HTM) category or period remaining till maturity was found reasonable by the CIT(A). Accordingly addition of Rs.17,91,659/- made by the Assessing Officer by disallowing amount towards amortization of Government Securities (HMT) was deleted. This reasoned factual and legal finding of the CIT(A) needs no interference from our side.
We uphold the same.
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Vaidyanath Urban Co-op Bank Ltd.
9. As a result, the appeal filed by the Revenue is dismissed".
10.1 Respectfully following the decision of the Coordinate Bench of the Tribunal and in absence of any contrary material brought to our notice against the above cited decision we find no infirmity in the order of the Ld.CIT(A) deleting the addition. Accordingly, the order of the Ld.CIT(A) is upheld and the grounds raised by the Revenue are dismissed."
2.2 Nothing contrary has been brought to our knowledge on behalf of the Revenue. Facts being similar, so following the same reasoning we hold that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. In view of above, the assessee is justified in contending that the amortization of premium in excess of face value securities as HTM, period remaining difference was found reasonable. Accordingly, the disallowance of Rs.2,20,68,302/- made by the Assessing Officer claimed as amortization of premium expenditure for HTM securities by payment of premium over and above the face value of such securities is directed to be allowed."
11. The Hon'ble Bombay High Court in CIT Vs. HDFC Bank (supra) held that the assessee therein was entitled to deduction with respect to the diminution in the value of investments and amortization of premium on investments Held To Maturity on the ground of mandate of the RBI guidelines. The issue raised in the present appeal is identical to the issue before the Pune Bench of the Tribunal in the assessee's own case for assessment year 2008- 09 and Hon'ble Bombay High Court in CIT Vs. HDFC Bank (supra). We hold that amortization of premium expenditure for securities Held To Maturity in view of RBI guidelines are allowable business expenditure in the case of assessee. The grounds of appeal No.1 and 2 raised by the assessee are thus, allowed."
13. We further find that the Hon'ble Bombay High Court in CIT Vs. HDFC Bank Ltd., in Income Tax Appeal No.330 of 2012, vide order dated 23.07.2014, on a similar issue on account of deduction with respect to diminution in the value of investment and amortization of premium on investment Held To Maturity on the ground of mandate by the RBI Guidelines, after considering the decision of the Hon'ble Supreme Court in Southern Technologies Vs. JCIT, (2010) 320 ITR 577 (SC), had dismissed the appeal filed by the Revenue holding that no substantial question of law had arisen in the instant appeal.
14. The issue arising in the present appeal is identical to the issue decided by the Pune Bench of the Tribunal (supra) and Hon'ble Bombay High Court (supra), and following the same parity of reasoning, we hold that the assessee is entitled to the deduction of Rs.58,41,016/- being the Premium on Amortization of Securities. Accordingly, we direct the Assessing Officer to allow the claim of the assessee and delete the 22 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
addition of Rs.58,41,016/-. The ground of appeal No.1 raised by the assessee is thus, allowed."
30. Following the same parity of reasoning, we hold that the assessee is entitled to the claim of expenditure on amortization of premium of HTM securities amounting to Rs.6,12,119/- and consequently, the ground of appeal No.4 raised by the assessee is allowed.
31. Other issue raised by the assessee in assessment year 2008-09 is vide ground of appeal No.8 i.e. against the disallowance of audit fees of Rs.1,19,277/- under section 43B of the Act.
32. The plea of the learned Authorized Representative for the assessee before us was that vis-à-vis audit fees payable, the provisions of section 43B of the Act are not attracted. The authorities below had disallowed the expenditure of audit fees of Rs.1,19,277/- by invoking the provisions of section 43B of the Act since the said amount was payable at the close of the year. Under the provisions of section 43B of the Act, it is provided that notwithstanding anything contained in other provisions of the Act, a deduction which is otherwise allowable under the Act, shall be allowed as a deduction while computing the income of the previous year in which such sum is actually paid by the person, irrespective of the previous year, in which the liability to pay such sum was incurred by the assessee, according to the method of accounting regularly employed by him. The nature of heads of expenditure considered under section 43B of the Act are as under:-
[(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, [or] [(c) any sum referred to in clause (ii) of sub-section (1) of section 36,] [or] 23 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
[(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution [or a State financial corporation or a State industrial investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing [, or] [(e) any sum payable by the assessee as interest on any [loan or advances] from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan [or advances],] [or] [(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,]
33. The perusal of above reflects that audit fees is not included under section 43B of the Act and hence, we find no merit in the order of Assessing Officer, in this regard. Accordingly, we direct the Assessing Officer to allow the expenditure of Rs.1,19,277/- booked on account of audit fees payable. The ground of appeal No.8 raised by the assessee is thus, allowed.
34. Vide ground of appeal No.10, the grievance of the assessee is against correct deduction to be allowed under section 36(1)(viia) of the Act.
35. The learned Authorized Representative for the assessee pointed out that the Assessing Officer may be directed for allowing correct deduction under section 36(1)(viia) of the Act. In view thereof, we set-aside this issue back to the file of Assessing Officer, who shall decide the same in accordance with the law after affording reasonable opportunity of hearing to the assessee. Thus, the ground of appeal No.10 raised by the assessee is allowed for statistical purposes.
36. The assessee has also raised an additional ground of appeal in relation to allowability of loss on merger of Sinhagad Urban Co-operative Bank Ltd. of Rs.80,80,935/- or in the alternative depreciation on difference in asset and liability of bank merged. The learned Authorized Representative for the assessee fairly pointed out that as against the ground of appeal No.5, an 24 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
additional ground of appeal is being raised which is being pressed and ground of appeal No.5 is not pressed. In view thereof, ground of appeal No.5 is dismissed as not pressed. The additional ground of appeal being legal in nature, is admitted for adjudication.
37. The brief facts relating to the issue are that during the year under consideration, the assessee had taken over the Sinhagad Urban Co-operative Bank Ltd. and claimed loss on account of difference in deficit in assets over liabilities on deferred revenue expenditure over five years, as per RBI directions at 1/5th being Rs.16,16,186/-. The said loss was not allowed in the hands of the assessee. However, the assessee has now claimed that the said loss in entirety is allowable as business expenditure under section 37 of the Act i.e. the expenditure incurred for earning more profit and its scope and/or the depreciation thereon. It was fairly pointed out by the learned Authorized Representative for the assessee that no such issue was raised before the CIT(A) and in the interest of justice, the same may be set aside to the file of CIT(A). Further, the learned Authorized Representative for the assessee pointed out that the issue is similar to the issue considered by the Pune Bench of the Tribunal in The Cosmos Co-op Bank Ltd. Vs. DCIT in ITA Nos.460 & 461/PN/2012, relating to assessment years 2007-08 & 2008-09, order dated 23.01.2014.
38. The learned Departmental Representative for the Revenue, however, stressed that the said expenditure is not allowable as business expenditure in the hands of the assessee.
39. We have heard the rival contentions and perused the record. The argument of the assessee before us was that as a prudent business man, it has taken over the Sinhagad Urban Co-operative Bank Ltd. and the expenditure incurred i.e. difference in deficit in assets over liabilities was for earning more profit and the said expenditure should be allowed as revenue expenditure / loss. 25 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014
Vaidyanath Urban Co-op Bank Ltd.
The assessee while finalizing its books of account had treated the said expenditure as deferred revenue expenditure to be allowed over the period of five years, which has been negated by the authorities below. However, the stand of the assessee now before us is that the said expenditure is to be allowed in entirety, and/or depreciation on difference in asset and liability of bank merged is to be allowed.
40. We find that similar issue arose before Pune Bench of the Tribunal in The Cosmos Co-op Bank Ltd. Vs. DCIT in ITA Nos.460 & 461/PN/2012, relating to assessment years 2007-08 & 2008-09, order dated 23.01.2014, wherein it was held that the difference paid by the assessee in excess of liabilities over the realizable values of the assets taken over represent payment for any business or commercial rights of similar nature and are liable to be construed as intangible asset, contemplated under section 32(1)(ii) of the Act. Accordingly, it was held that the assessee is entitled to the allowance of depreciation in terms of section 32(1)(ii) of the Act. The relevant findings of the Tribunal are as under:-
"11. We have carefully considered the rival submissions. Section 32(1)(ii) prescribes that in respect of "knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets" acquired on or after 01.04.1998 owned wholly or partly by the assessee and used for the purposes of business or profession shall be entitled for allowance of depreciation as per the prescribed rates. The controversy before us is as to whether on account of merger of four banks assessee has acquired any asset which falls in the meaning of expression "business or commercial rights of similar nature" so as to be eligible for depreciation under clause
(ii) of sub-section (1) of section 32 of the Act.
12. Before proceeding further, it would be appropriate to refer to the scheme of merger of respective four banks, copies of which have been placed in the Paper Book. All the schemes of the merger are similar and have been approved by the Reserve Bank of India in terms of the respective statutory provisions. The scheme of merger provides that the entire undertaking, the entire business, all the properties (whether immovable or immovable, tangible or intangible) assets, investments of all kinds, all cash balances with the RBI and other banks money at call or short notice, loans & advances, any other contingency rights or benefits, lease and hire purchase contracts and assets, receivables, securitized assets, licenses, fixed assets and other assets, powers, consents, registrations, exemptions, waivers of all kinds and wheresoever situate belonging to, or enjoyed by the Transferor Bank have been taken-over by 26 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
the assessee. The liabilities taken-over mean all debts, demand deposits, saving bank deposits, term deposits, Time and Demand liabilities, rupee borrowings, bills payable, interest accrued, capital reserves and surpluses, whether statutory or not and all other liabilities including contingent liabilities, duties, undertakings and obligations of the Transferor Banks have been taken by the assessee. In-fact, the scheme specifically provides that all the licenses/registrations of the bank or its branches etc. issued by Reserve Bank of India or any authority of the State/Central Government or other authorities concerned, etc. stand transferred to the assessee Bank. Similar is the position with regard to the liabilities of the Transferor Bank including the savings bank account or current bank account or any other deposits of the customers. The scheme also envisaged taking-over of all the employers of the Transferor Bank who wished to continue in service. In sum and substance, assessee bank took over the entire business apparatus of the Transferor Bank, which included its client base, operational branches of the bank at different places and also their employees, besides the licenses and other statutory approvals enjoyed by the Transferor Bank. Now, the case set-up by the assessee is that the acquisition of huge client base, operational branches of the banks and the access to new money markets has resulted in a business advantage which is covered within the meaning of the expression "business or commercial rights of similar nature" as contemplated in clause (ii) of sub-section (1) of section 32 of the Act.
13. Therefore, the moot question is as to whether the aforesaid business/ commercial advantages, namely, taking over of huge client base, licenses, operational bank branches in different areas, etc. can be considered to fall within the expression "business or commercial rights of similar nature" contained in section 32(1)(ii) of the Act. In this context, one may refer to the judgment of the Hon'ble Delhi High Court in the case of Areva T & D India Ltd. & Ors. (supra). In the case before the Hon'ble High Court assessee company acquired the business of the transferor lock, stock and barrel under a slump sale agreement. The amount of consideration paid in excess of the net value of tangible assets transferred, was claimed as payment made by the assessee for acquisition of various business and commercial rights, which comprised of business claims; business information; business records; contracts; skilled employees; and, knowhow. Such acquisition was claimed to be an asset in the nature of 'business or commercial rights' contained in section 32(1)(ii) of the Act. The Hon'ble High Court concurred with the assessee and held that the assets in question, being intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) of the Act and were accordingly held eligible for depreciation.
14. In the aforesaid light, factually speaking, in the present case, it can be seen that the assessee by acquiring the four co-operative banks has acquired existing running banking businesses complete with the required statutory licenses, operational bank branches, customers base as also the employees, besides other assets. The plea of the Revenue is that the difference paid by the assessee in excess of liabilities over the realizable values of the assets taken-over does not represent payment for any business or commercial rights is untenable. In-fact, the impugned sum reflects the amount paid by the assessee over and above the net worth of the banks which have been taken-over, which ostensibly is a reflection of the value of the aforesaid intangible advantages obtained by the 27 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
assessee. Such advantages are to be considered in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) of the Act, having regard to the parity of reasoning laid down by the Hon'ble Delhi High Court in the case of Areva T & D India Ltd. & Ors. (supra). In the case of SKS Micro Finance Ltd. (supra), assessee acquired a running business under a slump sale agreement and the consideration paid included, sum paid for acquiring the client base of the transferor. The acquisition of rights over the assets of the transferor, inclusive of its customers base was held to be an 'intangible asset' being 'business or commercial rights of similar nature' contemplated in section 32(1)(ii) of the Act and was held eligible for depreciation. Following the aforesaid discussion, in the present case, the business advantages detailed earlier, are liable to be considered as an intangible asset, being 'business or commercial rights of similar nature' contemplated u/s 32(1)(ii) of the Act. In our considered opinion, the plea of the assessee for allowance of depreciation in terms of section 32(1)(ii) of the Act cannot be faulted either in law or on facts.
15. The other objection of the CIT(A) to the effect that the amalgamation in question is not by way of purchase but is an amalgamation by merger, in our view, is no ground to deny the claim of the assessee, which is otherwise well-founded. Therefore, having regard to the aforesaid discussion, in our view, on facts and in law the assessee is entitled for depreciation on the impugned sum for acquisition of business of commercial rights contemplated in section 32(1)(ii) of the Act. Thus, on the Ground of Appeal No.3, assessee succeeds."
41. However, the learned Authorized Representative for the assessee fairly admitted that the issue may be remitted back to the file of CIT(A) to examine the allowability of depreciation on intangible assets under section 32(1)(ii) of the Act, in the light of ratio laid down in The Cosmos Co-op Bank Ltd. Vs. DCIT (supra). In view thereof, we restore this issue back to the file of CIT(A) to re-adjudicate the issue in accordance with the ratio laid down in The Cosmos Co-op Bank Ltd. Vs. DCIT (supra) and after verifying the claim of the assessee. Reasonable opportunity of hearing to the assessee shall be afforded, in this regard. The additional ground of appeal No.1 is dismissed and alternate plea raised by the assessee is thus, allowed for statistical purposes. ITA No.237/PN/2013 :: Assessment Year 2009-10
42. The assessee has raised the following grounds of appeal:-
1. The learned CIT(A) has erred in confirming the action of Assessing Officer in making addition of Rs. 49,86,000/- on account of loss incurred 28 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
on merging of Sanjivani Urban Co Operative Bank ltd and same addition be deleted as it is regular banking business expenditure allowable u/s 37 of Income tax Act.
2. The learned CIT(A) has erred in confirming the action of Assessing Officer in making addition of Rs. 16,17,000/- on account of loss incurred on merging of Sinhgad Urban Co Operative Bank ltd and same addition be deleted as it is regular banking business expenditure allowable u/s 37 of income tax Act.
3. The learned CIT(A) has erred in confirming the action of Assessing Officer in making addition of Rs.68,895/- u/s 41(1) in respect of forfeited entries credited to reserve fund ignoring fact that the same is not taxable at all u/s 41(1) of the IT Act.
4. The learned CIT(A) has erred in confirming the action of Assessing Officer in making addition of Rs.13,760/- u/s 28 of Income Tax Act on account of excess cash found & untraced cash ignoring fact that the same is not at all income of the assessee.
5. The learned CIT(A) has erred in confirming the Assessing Officer's action of not allowing provision for loss and other contingencies Rs.1,05,330/- and the same addition may please be deleted.
6. The learned CIT(A) has erred in confirming the Assessing Officer's action of addition Rs.13, 46,936/- u/s 28 of the Act and the same addition may please be deleted.
7. The learned CIT(A) has erred in confirming Assessing Officer's action in making addition of Rs.3,37,350/- on account expenditure on investment fluctuation reserve and the same may please be deleted.
8. The learned CIT(A) has erred in confirming Assessing Officer's action of not allowing deduction of Rs.1,62,42,236/- out of Interest on Advances relating to periods up to 31/03/2006 and additions may pleas be deleted as the said income does not pertain to previous year relevant to A.Y. 2009-10 and it is not taxable in Assessment Year 2009-10.
9. Appellant prays for just and equitable relief.
10.Appellant prays to add, alter, amend and / or withdraw the ground/s during the appellate proceedings.
43. The assessee has also raised additional ground of appeal, which reads as under:-
1. "loss on merger of Sanjeevani Urban Co Op Bank Ltd, Dist. Parbhani, of Rs.2,49,30,262/- may please be allowed as Revenue / Business Expenditure"
2. Without Prejudice to above Ground and if appellant fails, Difference in Asset and Liability of Bank merged, being for 'Banking license'/ Goodwill, depreciation on the same may please be allowed.29 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014
Vaidyanath Urban Co-op Bank Ltd.
44. The learned Authorized Representative for the assessee at the outset pointed out that the grounds of appeal Nos.1 and 2 are not pressed and in the alternate, additional ground of appeal is pressed. Further, the grounds of appeal Nos.5 to 8 are not pressed. The only issue which remains for adjudication is the ground of appeal No.3, which is same as the ground of appeal No.6 raised by the assessee in ITA No.1154/PN/2011. Following the same parity of reasoning, we uphold the addition in the hands of the assessee on account of unclaimed credits for expenses transferred to Reserve Account, in view of the provisions of section 41(1) of the Act. The ground of appeal No.3 raised by the assessee is thus, dismissed.
45. The issue in ground of appeal No.4 is same as ground of appeal No.9 raised in ITA No.1154/PN/2011 and following the same parity of reasoning, we hold that sum of Rs.13,760/- i.e. excess cash transferred to Reserve Account is assessable as income in the hands of the assessee and the ground of appeal No.4 raised by the assessee is dismissed.
46. The additional ground of appeal raised by the assessee is identical to the issue raised in the additional ground of appeal raised in ITA No.1154/PN/2011. The assessee during the year under consideration had taken over another bank i.e. Sanjivani Urban Co Operative Bank Ltd. and claimed loss of Rs.2,49,30,262/- being the difference in deficit in assets over liabilities. Alternate plea was raised for allowing depreciation under section 32(1)(ii) of the Act by treating the same as intangible asset. Following the same parity of reasoning, we remit this issue also back to the file of CIT(A) to decide in line with our directions in ITA No.1154/PN/2011. Thus, the additional ground of appeal raised by the assessee is dismissed and the alternate plea is allowed for statistical purposes. 30 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014
Vaidyanath Urban Co-op Bank Ltd.
ITA No.64/PN/2014 :: Assessment Year 2010-11
47. The assessee has raised the following grounds of appeal:-
1. The learned CIT(A) has erred in confirming the action of Assessing Officer in disallowing Appellant's claim of Rs.49,86,000/- i.e. 1/5th of deferred revenue expenditure i.e. difference in Assets and liabilities of Sanjivani Urban Co-operative Bank Ltd, taken over merged in Appellants Bank. Same may please be allowed.
2. Without prejudice to Ground No.1, since Appellant Bank has incurred expenditure for acquiring license to carry on Banking Business and goodwill, customer line and infrastructure etc of Sanjivani Urban Bank, Appellant may please be allowed depreciation on the said cost, u/s 32 (1)(ii) of the Act, 1961.
3. The learned CIT(A) has erred in confirming the action of Assessing Officer in disallowing appellant claim of Rs.16,17,000/- i.e. 1/5th of deferred revenue expenditure i.e. difference in Assets and liabilities of Sinhgad Urban Co-operative Bank Ltd, taken over merged in Appellants bank. Same may please be allowed.
4. Without prejudice to Ground No.3, since Appellant Bank has incurred expenditure for acquiring license to carry on Banking Business and goodwill, customer line and infrastructure etc of Sinhgad Urban Bank, Appellant may please be allowed depreciation on the said cost u/s 32 (1)(ii) of the Act, 1961.
5. The learned CIT(A) has erred in confirming the action of Assessing Officer in making addition of Rs.4,87,790/- in respect of nominal membership fees ignoring fact that the same being capital receipt is not taxable at all under the Income Tax Act.
6. The learned CIT(A) has erred in confirming Assessing Officer's action of not allowing deduction of Rs.72,09,630/- out of Interest on Advances relating to periods up to 31/03/2006 and additions may pleas be deleted as the said income does not pertain to previous year relevant to A.Y. 2010-11 and it is not taxable in Assessment Year 2010-11.
7. Appellant prays for just and equitable relief.
8. Appellant prays to add, alter, amend and / or withdraw the ground / s during the appellate proceedings.
48. The assessee has raised grounds of appeal Nos.1 to 6, but the learned Authorized Representative for the assessee did not press any of the grounds of appeal, except alternate plea in grounds of appeal No.2 and 4. In view thereof, the grounds of appeal No.1, 3, 5 and 6 are dismissed as not pressed. However, the issue in grounds of appeal No.2 and 4 is against the allowability of 31 ITA No.64/PN/2014 ITA No.1154/PN/2011 ITA No.237/PN/2013 ITA No.413/PN/2014 Vaidyanath Urban Co-op Bank Ltd.
depreciation under section 32(1)(ii) of the Act on the intangible assets acquired by the assessee on merger of the banks. We have already remitted this issue back to the file of CIT(A) in assessment years 2008-09 & 2009-10 and following the same parity of reasoning, we remit this issue also back to the file of CIT(A), who shall decide the same in line with the ratio laid down by Pune Bench of the Tribunal in The Cosmos Co-op Bank Ltd. Vs. DCIT (supra) after affording reasonable opportunity of hearing to the assessee.
49. In the result, all the appeals of the assessee are partly allowed.
Order pronounced on this 31st day of March, 2015.
Sd/- Sd/-
(G.S. PANNU) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 31 st March, 2015
GCVSR
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A), Aurangabad;
4) The CIT, Aurangabad;
5) The DR "A" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune