Income Tax Appellate Tribunal - Ahmedabad
The Barodacity Co.Op. Bank Ltd.,, ... vs The Dy.Cit, Circle-5,, Baroda on 11 August, 2017
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'डी' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" D " BENCH, AHMEDABAD
सव ी एन.के. ब लैया, लेखा सद य एवं महावीर साद, या यक सद य के सम ।
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER And
SHRI MAHAVIR PRASAD, JUDICIAL MEMBER
आयकर अपील सं./I.T.A.
No. 2265/Ahd/2014
( नधा रण वष / Assessment Year : 2010-11)
The Baroda City Co.op Bank बनाम/ DCIT
Ltd. Vs. Circle - 5
Sanstha Vasahat, Aayakar Bhavan,
Raopura Race Course Circle,
Baroda - 390001 Baroda.
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAAAT 1465 D
(अपीलाथ' /Appellant) .. ( (यथ' / Respondent)
अपीलाथ' ओर से /Appellant by : Shri Samir Parikh, A.R.
(यथ' क* ओर से/Respondent by : Shri V.K. Singh, Sr. D.R.
ु वाई क* तार.ख /
सन Date of Hearing 08/08/2017
घोषणा क* तार.ख /Date of Pronounce ment 11/08/2017
आदे श / O R D E R
PER SHRI MAHAVIR PRASAD, JUDICIAL MEMBER :
This is an appeal by the assessee against the order of the Commissioner of Income Tax(Appeals)-V, Baroda, dated 27/05/2014 in the matter of assessment under section 143(3) of the Income Tax Act, 1961 ('the Act hereinafter') for the Assessment Year (AY) 2010-11, on the following Grounds:-
i. Learned CIT(A) is not correct in addition NPA Interest of Rs.33,64,055/-.ITA No. 2265/Ahd/2015
The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -2- ii. The assessee submits that income is never escape from income tax. In respect of interest on NPA as and when income on such advance is received is offered for income tax. In assessee's case, the amount of interest of Rs.33,64,055/- which the learned Assessing Officer believes that it is to be accounted as income on accrual basis, is already offered for income tax in next subsequent years when it actually received to the bank. iii. The Assessee is governed by Provisions of RBI as per RBI guidelines. Interest on Sticky (NPA) advances is to be recognized on receipt basis.
iv. Assessee is relying on various legal pronouncements which are given as under:
a. United Bank of India vs. Deputy Commissioner of Income tax ITAT Calcutta 'D' Bench (1999) 64 TTJ (Cal) 432 b. Deputy Commissioner of Income Tax Vs. Syndicate Bank & Others ITAT Bangalore Bench (1995) 51 TTJ (Bang) 365 c. Income Tax Officer vs. Oriental Bank of Commerce Ltd. ITAT Delhi 'B' Bench (1983) 3 ITD (DEL) 226 d. State Bank of Patiala vs. Joint Commissioner of Income Tax ITAT, Chandigarh 'B' Bench (2008) 10 DTR (Chd) (Trib) 527 ITA No. 2265/Ahd/2015 The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -3-
2. The relevant facts as culled out from the materials on record are as under:-
The assessee is a cooperative Bank engaged in the business of banking.
2.2 During the assessment proceedings, it is noticed from the balance sheet that, the assessee has shown NPA interest amounting to Rs.36,09,23,510/- and Interest on Investments at Rs.2,01,38,914/- under the head of Interest receivable. As per section 145 of the I.T. Act a person who is following; mercantile system of accounting has to show the income on accrual basis. However, it is seen that the assessee has not shown the interest accrued on NPA & Interest on Investments in the Profit & Loss Account. The assessee was asked to show cause as to why the accrued interest on NPA & Interest on Investments should not be added back to the total income.
In response to show-cause notice the assessee vide its submission dated 08/02/2013 complied with and same is reproduced hereunder:
"i. We have to state that the assessee is a co-operative bank adopting mercantile system of accounting on all incomes except interest on Non Performing Assets (NPA) as per RBI & ICAI directives.
ii. Interest Receivable on Investments is accounted on mercantile system and is offered for income tax. Balance amounting to Rs.2,01,38,914/- is accrued interest receivable on Investments which is received in subsequent year but income is accounted in current year and hence cannot be taxed twice.ITA No. 2265/Ahd/2015
The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -4- iii. So far as interest receivable on NPA, balance of Rs.36,09,23,510/- is a total amount cumulated over a number of years. This amount is not for the current year only. Hence your proposition to add this amount in current year is incorrect. Current year interest receivable on NPA is of Rs.4,21,73,387/- only. Copy of ledger account is enclosed herewith.
iv. Without prejudice to above, interest income on NPA cannot be taxed on the basis of accrual for the following reasons.
a. The assessee is a co-operative Bank engaged in the business of banking under the control of Reserve Bank of India and Registrar of Co-Operatives, Co-Operative department, Government of Gujarat.
b. The assessee bank is statutorily required to follow all the Directives and guidelines issued by the Reserve Bank of India and Co-Operative Department, Government of Gujarat.
c. As per Master Circular on Income Recognition, Asset Classification, Provisioning & Other Related Matters updated up to 30th June 2008 by Reserve bank of India (copy enclosed), it has laid down policy of Income Recognition which inter alia provides that"...... income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only 'when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis."ITA No. 2265/Ahd/2015
The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -5- d. Section 66 of the Gujarat co-operative societies Act, 1961 provides that (1) A society earning profit, shall calculate its annual net profit by deducting from the gross profit for the year, all accrued interest which is overdue for more than six months,...............".
e. Thus to follow the directives of the RBI and co- operative act provision, the assessee bank is adopting method of accounting differently for interest on NPA (Sticky Loans) that other income. The assesses is adopting cash system of accounting for interest income on ail sticky loans (Non performing Assets) and for rest of the interest it follows the accrual system of accounting. This method of accounting is consistently followed by the assessee since from long.
f. We submit that the above method of accounting is also recognized by the Institute of Chartered Accountants of India for banking industries.
g. Further, we submits that income is never escape from income tax in respect of interest on NPA as when ever income on such advances is received is, offered for income tax. In our case, the amount of interest of Rs.4,21,73,387/- which you are believing that it is to be accounted as income on accrual basis, is already offered for income tax in next subsequent years when it actually released to the bank.
Hence in any case there is no income which escapes from tax and in turn there in no deduction allowed to the assessee which is prejudicial to the interest of the revenue.
h. In support of the above submission, we have submitted documents pertaining to interest on sticky loans which ITA No. 2265/Ahd/2015 The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -6- were not offered for income tax in earlier assessment years on the basis of accrual but is offered for tax in A.Y.2010-11 on the basis of its actual recovery.
i. Based on the above submission, we respectfully submits that interest income on NPA cannot be taxed on accrual basis."
The assessee further submitted the submission vide letter dated 13/03/2013 stating that "in continuance to our earlier reply, we have to further, submit that out of total NPA interest amounting to Rs.4,21,73,387/-, interest of Rs.33,64,055/- is relating to NPA accounts which are classified as NPA within three years and rest of the interest is relating to NPA accounts which are classified as NPA for more than three years. List of NPA interest below three years and above three years in enclosed herewith."
2.3 Learned Assessing Officer was not convinced with the submission of the assessee and stated that assessee adopting mercantile system of accounting, except for interest on non-performing assets (NPA). As per Section 145 of the Act, assessee was required to following either cash or mercantile system of accounting. Mixed/hybrid accounting system was dispenses with from A.Y.1997-98. Hence, assessee was required to recognize income on accrual basis. The assessee has confirmed that out of total NPA interest amounting to Rs.4,21,73,387/-, interest of Rs.33,64,055/- is relating to NPA accounts which are classified as NPA ITA No. 2265/Ahd/2015 The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -7- within three years and rest of the interest is relating to NPA accounts which are classified as NPA for more than three years. It is pertinent to mention here that the Board's instructions on Bad and doubtful debts/irrecoverable loans - Interest thereon - Suspense account maintained for the purpose of - vide Circular : F. No.201/21/84-ITA-II , dated 09/10/1984, in which it has been clearly instructed that "it has been decided that interest in respect of doubtful debts credited to suspense account by the Banking Companies will be subject to tax but interest charged in an account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and onwards. However, if there is any recovery in the fourth year on later, the actual amount recovered only will be subjected to tax in the respective years. This procedure will apply to the assessment year 1979- 80 and onwards. The Board's Instruction No.1186, dated 22/06/1978 is modified to that extent.
2.4 In view of the above, the amount of Rs.33,64,055/- was required to credit to the Profit and Loss Account. However, it was not credited to the Profit and Loss Account. Further, it was not considered for computing the "profit and gains of business or profession" too. Since, assessee followed mercantile system of accounting, the interest of Rs.33,64,055/- accrued as interest of NPA, should have been included in the "total income" by virtue of the provisions of section 145 of the Act, which was not done". As such, the assessee in violation of provisions of section 145 ITA No. 2265/Ahd/2015 The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -8- of the IT Act had not shown the interest income of Rs.33,64,055/- in the return of income and has not offered for taxation. Hence, interest on NPA amounting to Rs.33,64,055/- is added back to the total income of the assessee. Learned AO further held that assessee is concealed the interest on NPA, hence, penalty proceedings u/s.271(1)(c) of the IT Act is initiated and addition of Rs.33,64,055/- was made against the assessee.
3. Against the said order assessee preferred first statutory appeal before the learned CIT(A) but learned CIT(A) dismissed the appeal of the assessee.
4. Now matter is before us.
5. We have gone through the relevant record and impugned order passed by the authorities below. Learned AR cited a judgment of Jurisdictional High Court [2016] 72 taxmann.com 117(Gujarat), Principal Commissioner of Income Tax - 5 vs. Shri Mahila Sewa Sahakari Bank Ltd., in this case Hon'ble High Court has held as under:
"Section 5, read with section 145, of the Income Tax Act, 1961, read with section 45Q, of the Reserve Bank of India Act, 1934 and section 5, read with section 56 of the Banking Regulation Act, 1949 - Income - Accrual of (Interest) - Assessment year 2010-11- Assessee, a co- operative Bank filed its return of income for relevant year but did not show interest income on non-performing assets (NPAs) as according to assessee it was not realizable - Assessing Officer, however, added interest as income of assessee holding that it had accrued to assessee even if it was not actually realized as it was following mercantile system ITA No. 2265/Ahd/2015 The Baroda City Co-op vs. DCIT Asst.Year -2010-11 -9- of accounting - whether expression 'banking company' has been defined under section 5(c) of Banking Regulation Act, 1949 to mean any company which transacts business of banking in India - Held, yes - Whether in view of clause (a) of section 56 of 1949 Act, expression 'banking company' would take within its sweep a co-operative bank - Held, yes - whether therefore, Assessing Officer was not justified in holding that CBDT's Circular F. No.201/21/84-ITA-II, dated 09/10/1984 (regarding non-taxability of interest not received for three years) applies only to banking companies and not to co-operative banks
- Held, yes Whether twin factors come into play while determining tax liability, namely, income recognition and computation and insofar as income recognition is concerned, it would be RBI Directions which would prevail in view of provisions of section 45Q of RBI Act and section 145 would have no role to play - Held, yes - whether in view of mandate of RBI Act and section 145 would have no role to play - Held, yes - whether in view of mandate of RBI guidelines, assessee could not have recognized income only when it was actually received - Held, yes
- Whether therefore, interest on NPAs would not be taxable on accrual basis in assessee's hands - Held, yes [Paras 20, 23, 30 & 31] [In favour of assessee]"
In the light of the view adopted by the court, enter into any detailed discussion as regards the applicability or otherwise of the CBDT Circular to the facts of the instant case. The Supreme Court in UCO Bank vs. CIT[1999] 237 ITR 889/104 Taxmann 547 has held that such circulars are not meant for contradicting or nullifying any provision of the statute. They are meant for proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in that case, in ITA No. 2265/Ahd/2015 The Baroda City Co-op vs. DCIT Asst.Year -2010-11
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consonance with the concept of income and in particular, notional income as also the treatment of such notional income under the accounting practice. The court, accordingly, did not find any inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In the aforesaid premise, until the circular is revoked, the same continues to be in force and the same having been issued to mitigate the hardships caused to the class of assessees covered by the circular, such assessees would be entitled to the benefit thereof. Merely because by virtue of the provisions of section 43D, a certain class of assessees is given benefit under the provisions of the Act would not mean that the same would override the circular.
Respectfully following the judgment of Jurisdictional High Court, we set aside the finding of the learned CIT and direct the AO to delete the impugned addition.
6. So far as Learned CIT(A) should not have added the NPA interest of Rs.33,64,055/-.
6.2 So far as Ground No.2 is concerned, it does not required any separate adjudication.
6.3 Ground No.3 has already been dealt in detail.
ITA No. 2265/Ahd/2015The Baroda City Co-op vs. DCIT Asst.Year -2010-11
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6.4 In our observation in Ground No.4, various legal pronouncements and it does not require any separate adjudication.
7. In view of the above, appeal of the assessee is allowed.
This Order pronounced in Open Court on 11/08/2017
Sd/- Sd/-
एन.के. ब लैया महावीर साद
(लेखा सद य) ( या यक सद य)
( N.K. BILLAIYA ) ( MAHAVIR PRASAD )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 11/08/2017
Priti Yadav, 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. संबं6धत आयकर आयु8त / Concerned CIT
4. आयकर आयु8त(अपील) / The CIT(A)-V, Baroda.
5. 9वभागीय त न6ध, आयकर अपील.य अ6धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER, स(या9पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad True Copy