Income Tax Appellate Tribunal - Pune
Pune District Central Co.Op. Bank ... vs Assessee on 28 November, 2014
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.1796/PN/2013
(Assessment Year: 2009-10)
Pune District Central
Co-operative Bank Ltd.,
4B, B.J. Road,
Sadhu Vaswani Chowk,
Pune - 411001
PAN: AAAAP7372D .... Appellant
Vs.
The Addl. Commissioner of Income Tax,
Range - 1, Pune .... Respondent
ITA No.2085/PN/2013
(Assessment Year: 2009-10)
The Addl. Commissioner of Income Tax,
Range - 1, Pune .... Appellant
Vs.
Pune District Central
Co-operative Bank Ltd.,
4B, B.J. Road,
Sadhu Vaswani Chowk,
Pune - 411001
PAN: AAAAP7372D .... Respondent
Assessee by : S/Shri M.K.Kulkarni and
D.V. Kotwal
Revenue by : Smt. M.S. Verma, CIT
Date of hearing : 09-10-2014
Date of pronouncement : 28-11-2014
ORDER
PER SUSHMA CHOWLA, JM:
The cross appeals filed by the assessee and the Revenue are against the order of CIT(A)-I, Pune dated 30.08.2013 relating to 2 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
assessment year 2009-10 against order passed under section 143(3) of the Income-tax Act.
2. The cross appeals of the assessee are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.1796/PN/2013 has raised the following grounds of appeal:
1. On the facts and circumstances of the case and in law the Ld. CIT(A) erred in confirming the disallowance made by the A.O. of Rs.1,94,73,302/- claimed as amortization of premium expenditure for HTM securities by payment of premium over and above the face value of such securities. The CIT(A) was not correct in confirming disallowance of such amortization expenditure as various Judicial precedents of High Court and Tribunals have held it to be an allowable expenditure. It be held accordingly.
2. On the facts and circumstances of the case and in law the Ld CIT(A) was not correct in his decision to disallow such amortization expenditure holding that there was no provision in the I. T. Act, 1961 to allow amortization premium as deduction either in the year of acquisition of HTM securities or over the period of maturity on deferred basis. This also runs to contrary Cl. (vii) of Instruction No.17/2008 dt. 26-11-2008 of CBDT. The deduction claimed be allowed.
3. On the facts and circumstances of the case and in law the Ld. CIT(A) was not justified in confirming the addition made by the A.O. of Rs.40,30,000/- holding it as provision for investment depreciation fund. In view of judicial precedents available on the subject the same cannot be disallowed. In the circumstances and in view of the legal interpretations made the claim be allowed to the appellant-Bank.
4. On the facts and circumstances of the case and in law the Ld. (A) was not justified in confirming the disallowance made by A.O. of Rs.10,00,000/- calling it as provision simplicter as contingent liability. The Investment fluctuation Fund is created to protect the wild fluctuations in market value of HTM Securities which are made as compulsory SLR investments and which are also treated as stock-in-trade of the Bank. Since this is for protection of SLR Securities it cannot be called a contingent provision and it be allowed as deduction accordingly.
5. On the facts and circumstances of the case and in law the Ld.CIT(A) was not justified in confirming the disallowance made by A.O of Rs.42,15,00,000/-. The Ld. CIT(A) did not appreciate the legal position correctly placed before him that such claim became necessary in view of Central Govt. debt waiver scheme 3 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
which was to be implemented by the State Govt. which amounted in fact the claim of deduction of NPA interest recognition. The appellant bank was obliged to honour the scheme which was also supported by Reserve Bank of India. The claim be allowed accordingly.
6. On the facts and circumstances of the case and in law the appellant bank has offered such interest which was claimed as deduction at Rs.42,15,00,000/- as and when it was reimbursed to the appellant bank by the State Government. This fact was explained to Ld. CIT (A) that for this purpose the appellant Bank has changed its accounting method regularly employed by it. It was also elaborately explained that such changed accounting method has been consistently followed subsequently. In view of this no disallowance was called for. The same be deleted.
7. On the facts and circumstances of the case and in law the addition due to disallowance of Rs.42,15,00,000/- has effectively resulted into assessment of the same income twice. The entire amount of Rs.42,15,00,000/- was offered for taxation in subsequent years as and when the same was reimbursed by the Government and received by the Bank. The disallowance of the said amount also runs contrary to the 'Real Income Theory'. The disallowance on this count also is not sustainable. It be quashed.
8. On the facts and circumstances of the case and in law the Ld. CIT(A) was not justified in not considering the oral submissions made before him regarding the disallowance of depreciation on different assets of Rs.66,66,960/- though no specific ground of appeal was raised before him in appeal memo F. No. 35. The grant of depreciation at correct rates is mandatory even if not claimed by the assessee. The matter be restored to the file of the A.O for correct working of the same for allowance in the interest of justice.
9. On the facts and circumstances of the case and in law the levy of interest u/s 234A, 234B and 234C is not justified. The levy of interest be quashed.
10. The appellant craves/leave to add, amend or alter any of the above grounds of appeal.
4. The Revenue in ITA No.2085/PN/2013 has raised the following grounds of appeal:
1. The order of the Ld. Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case.
2. The Ld. Commissioner of Income-tax (Appeals) grossly erred in deleting the addition of Rs.1,31,60,000/- made by the Assessing Officer by way of disallowing the provision made by the assessee for contribution to the Rajya Swarga Sewa Nidhi instead of confirming the said addition.4 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
3. The Ld. Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that the provision made by the assessee was nothing but a contingent liability and also not in the nature of expenditure incurred for the purpose of business.
4. The Ld. Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that the assessee had not made any such provision for the previous assessment year which would clearly establish that the assessee was under
no obligation to make the impugned provision.
5. For these and such other grounds as may be urged at the time of the hearing, the order of the Ld. Commissioner of Income tax (Appeals) may be vacated and that of the Assessing Officer be restored.
6. The appellant craves leave to add, alter to amend any or all the grounds of appeal.
ITA No.1796/PN/2013: Assessee's Appeal
5. The issue in the grounds of appeal No.1 and 2 raised by the assessee is against the disallowance of Rs.1,94,73,302/- claimed as amortization of premium expenditure for HTM securities.
6. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the present appeal is squarely covered by the judgment of the Hon'ble Bombay High Court in CIT Vs. HDFC Bank (2014) 107 DTR (Bom) 140 and the decision of Pune Bench of the Tribunal in DCIT Vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. in ITA No.449/PN/2012 and CO No.130/PN/2013.
7. The brief facts of the case are that, in the return of income, the assessee had claimed deduction on account of amortization of premium on government securities amounting to Rs.1.94 crores. It was further stated that the said claim was supported by the RBI Circular / Instruction dated 13.07.2005. The Assessing Officer was of the view that the assessee had prepared the Profit & Loss Account on 5 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
the basis of Guidelines / Circulars issued by the RBI for banking business. As per the RBI Circular, the devolution of securities Held To Maturity (HTM) were required to be valued at its realized price and only securities Held For Trading (HFT) or Available For Sale (AFS) needs to be valued at its realizable price on the last day. The devolution in the value of these securities i.e. HFT and AFS category were to be provided in the books of account as per the RBI Circulars. The assessee had debited a sum of Rs.1.94 crores to its Profit & Loss Account as premium amortized and the same was claimed as an allowable expenditure. The Assessing Officer however, observed that the assessee's claim was not acceptable since the RBI had required banks to classify investments into two categories for the purpose of valuation i.e. permanent and current. The Assessing Officer further observed that while the depreciation in respect of permanent investments was not likely to affect their realizable value and therefore, need not be provided for; however, the depreciation in the current investments should be fully provided for. Further, reliance was placed on the CBDT's Circular No.655 dated 05.10.1983 under which, the Assessing Officer has to determine on the facts and circumstances of the each case, as to whether any particular security stock in trade or investment, was valued taking into account the guidelines issued by the RBI in this regard. In view of the said CBDT's Circular, the assessee's claim on amortization of premium on securities Held To Maturity at Rs.1.94 crores was not accepted and was added to the income of the assessee.
8. The CIT(A) vide para 3.4.1 observed as under:-
"3.4.1 In the case of the appellant, it is not in dispute that the Securities in question were held in the category of HTM and during the year the appellant has not shifted these securities to 6 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
other categories. The very fact that the premium paid on Govt. Securities was amortized in the books of account clearly shows that the securities were held as HTM securities by the appellant on capital account. Therefore, the said securities are permanent securities in the nature of capital assets and the premium paid by the appellant forms integral part of the cost of capital assets and the same cannot be segregated from the cost and claimed as deduction."
9. Further, reliance was on the decision of the Apex court in Southern Technologies Ltd. reported in (2010) 320 ITR 577 (SC), wherein it was held that prudential / provisioning norms issued by the RBI under the RBI Act cannot have overriding effect on the Income Tax provisions and the said Norms or the Guidelines laid down in RBI circulars having nothing to do with computation of taxable income under the I T Act. Such classification and treatment of standard assets, sub standard assets, Non-performing assets, amortization of premium etc. are confined to presentation / disclosure in annual accounts of the bank and these guidelines cannot overrule the permissible deductions or their exclusions under the Income Tax Act. Further, reference was made by the CIT(A) to the CBDT's Instruction No.17/08 dated 26.11.2008 and vide para 3.4.3, it was observed as under:-
"3.4.3. As could be noticed from the above Instruction, it only refers to the earlier guidelines of RBI on the classification of investment portfolio of banks and states that the latest guidelines of the RBI may be referred to for allowing any such claims. It is important to note that the instruction was issued prior to the decision of the Apex Court in Southern Technologies (supra), wherein it is held that the RBI Guidelines or prudential norms issued by RBI are not intended to regulate income-tax laws. Similarly, in the case of Bank of Rajasthan in ITA No. 2246/Mum/2009, relied upon by the appellant, the decision of the Apex Court in Southern Technologies (supra) was not brought to the notice of the ITAT, Mumbai. There is no provision under the IT Act to allow amortization of premium as deduction either in the year of acquisition of HTM securities or over the period of maturity on deferred basis."7 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
10. The assessee is in appeal against the said decision of CIT(A). 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 (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 8 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
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)".
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.....
9
ITA No.1796/PN/2013
ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
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.
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." 10 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
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.
12. The issue in ground No.3 raised by the assessee is against the addition of Rs.40,30,000/- holding it as provision for investment depreciation fund.
13. The brief facts relating to the issue are that, the assessee during the year under consideration had also claimed deduction on account of provision for amortization of premium on government securities amounting to Rs.40,30,000/-. The said claim was also made in view of the RBI Circular / Instruction dated 13.07.2005. The claim of the assessee was not allowed by the Assessing Officer in view of the CBDT's guidelines and also because it was only a provision in the books of account and not an actual expenditure debited to the books of account.
14. The CIT(A) upheld the order of Assessing Officer as it was only a provision made in the books of account and not actually written off. 11 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
Secondly, as per the CIT(A) there was no provision under the I T Act to allow such provision for amortization of premium as deduction either in the year of creation of provision or over the period of maturity of HTM securities on deferred basis. Before the CIT(A), the assessee raised a new claim that the bank shifted some of the HTM securities to AFS classification on 25.12.2008 and in the process it suffered a loss of Rs.40,30,000/- and it was not a provision for amortization. The CIT(A) observed that the assessee has failed to furnish the details to substantiate the new claim and even in the statement of facts, it was stated that it was a provision for amortization of government securities. The CIT(A) from the annual accounts, further noted that it was only a provision for investment depreciation fund made in the books of account and do not represent actual loss or depreciation on conversion of HTM securities to AFS, hence the loss claimed by the assessee was not allowed by the CIT(A), against which the assessee is in appeal before us vide ground of appeal No.3.
15. The learned Authorized Representative for the assessee fairly conceded that in the accounts, it was mentioned as provision for investment depreciation fund, however, it was actually depreciated value of the investments. The learned Authorized Representative for the assessee pointed out that the securities Held To Maturity were transferred to AFS i.e. available for sales against which, no details were filed before the Assessing Officer. Our attention was drawn to Schedule 16 of the balance sheet and the Resolution passed in Marathi along with its English translation and the plea of the assessee was that in order to determine the facts, the issue may be sent back to the Assessing Officer.
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16. The learned Departmental Representative for the Revenue pointed out that the said amount was only a provision made in the books of account and had not been actually written. The alternate plea of the assessee before the CIT(A) was that the bank had shifted some securities from HTM to AFS classification and was not a real provision for amortization, was not substantiated either before the Assessing Officer or CIT(A). The learned Departmental Representative for the Revenue stressed that the notional losses could not be allowed as deduction and it was pointed out that even the Hon'ble Bombay High Court in CIT Vs. HDFC Bank (supra) had held that the assessee was entitled to deduction with respect to amortization of premium on investments Held To Maturity but not as a provision. Reliance was placed on the ratio laid down in Vijaya Bank Vs. CIT reported in (2010) 323 ITR 166 (SC).
17. We have heard the rival contentions and perused the record. The assessee in its books of account had made a provision on account of investment depreciation fund at Rs.40,30,000/-. The assessee has filed the translated copy of the published Profit & Loss Account and balance sheet and the perusal of the same reflects that under Schedule II, it had made the said provision under the head 'Reserve Fund and other Reserve Fund'. The assessee during the course of proceedings before the CIT(A), changed its stand and claimed that the government securities of Rs.5 crores held by the bank in HTM category were transferred to AFS category as per the Resolution passed by the bank on 25.12.2008. The original Resolution in Marathi along with its translated copy was furnished before us during the course of hearing. The assessee suffered a loss of Rs.40,30,000/- on the said transfer of securities from HTM to AFS. Before the Assessing Officer, the 13 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
assessee had not raised the said claim, however, before the CIT(A), the said claim was raised, but no evidence in this regard was filed. Now, the assessee has furnished the Resolution of the bank evidencing the said transfer which in turn, resulted in loss of Rs.40,30,000/-. The plea of the assessee before us was that the said amount was booked under the provision for investment depreciation fund by mistake and was actually the depreciated value of the investments on its transfer from HTM to AFS securities. The perusal of the Profit & Loss Account English version reflects the assessee to have claimed the expenditure of Rs.40,30,000/- on account of investment depreciation fund under Schedule 16 provisions. In the entirety of the facts and circumstances and the revised claim made by the assessee, we are of the view that the facts and issue needs to be relooked into to determine the nature of entry passed by the assessee and following the principles of natural justice, we deem it fit to restore this issue back to the file of Assessing Officer, who shall decide the issue de novo after considering the revised plea of the assessee and the relevant documents in this regard. The Assessing Officer shall afford reasonable opportunity of hearing to the assessee. The ground of appeal No.3 raised by the assessee is thus, allowed for statistical purposes.
18. The grounds of appeal No.4 and 8 were not pressed by the assessee and the same are dismissed as not pressed.
19. The issue raised vide grounds of appeal No.5 to 7 is against the addition made of Rs.42.15 crores on account of reversal of interest on performing assets.
20. The brief facts relating to the issue are that, during the course of assessment proceedings, the Assessing Officer noted that the assessee 14 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
had introduced a change in method of accounting from this year in respect of interest income earned from performing assets. The bank decided to account for interest income only on realization and as such, interest amounting to Rs.42.15 crores was de-reversed and de- recognized by the assessee by way of the Note to the annual accounts. The plea of the assessee before the Assessing Officer was that the said change in the method of accounting was with regard to recognition of interest income on performing assets of agricultural loans as per the guidelines issued by the RBI. It was explained by the assessee that up to financial year 2007-08, interest on performing assets of agricultural loans even though not actually received / recovered was credited to the interest received account and was shown in the balance sheet as non-overdue interest receivable accounts. However, as per the norms of the RBI from the year under consideration, the unrealized interest was not credited to the interest received account and the same was shown on the liabilities side of the balance sheet as provision for unrealized interest, as being done for interest earned on non- performing assets. In view of guidelines issued by the RBI, the said interest was not received by the assessee was not credited to the Profit & Loss Account. Further, the assessee changed its method of accounting during the year as the Central Government had announced Farmers Debts Waivers Scheme, 2008 and the change in method of accounting did not result into any suppression of income. The Assessing Officer in view of the assessee following mercantile system of accounting observed that all income was required to be offered to tax on accrual basis. The Assessing Officer further noted that the assessee had changed its method of accounting of interest from mercantile to cash system only for the interest in question and for all 15 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
other entries, the bank had been following mercantile system of accounting. The case laws relied upon by the assessee were distinguished by the Assessing Officer as the same were rendered prior to amendment in section 145(3) of the Act.
21. Before the CIT(A), the assessee claimed that it had introduced the change in accounting method in respect of recognition of interest on performing agricultural loans only and the change was consistently followed in subsequent assessment years. The reason for the change in accounting method was the announcement of the Agricultural Debts Waiver and Debt Relief Scheme, 2008. In view of the said scheme, the RBI declared prudential norms of income recognition, asset classification, provisioning and capital adequacy. The highlights of the Agricultural Debts Waiver Scheme are referred to under para 6.3 at pages 24 and 25 of the appellate order and the norms issued by the RBI are reproduced under para 6.3.1 on pages 26 and 27 of the appellate order. Before the CIT(A), it was also explained that bearing the government contribution equal to 25% towards farmers loan, the assessee bank was supposed to accept the loss due to waivers scheme and the accounting system was changed to incorporate the losses and the sum of Rs.42.15 crores was debited to the Profit & Loss Account and the same amount was actually written off in the accounts and simply was not a provision for write off. The CIT(A) vide para 6.5.2 at page 32 of appellate order on reconciliation of entries passed by the assessee in the interest account observed that the gross interest receipts accrued during the year on performing assets was revised by Rs.42.15 crores by the said change in the method of accounting of interest earned on performing assets.
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22. The second plea of the assessee before CIT(A) was that in view of Agricultural Debt Waiver Scheme, it had written off the said amount was also not accepted as the said scheme related to the waiver of amount of loan together with applicable interest but the assessee had failed to furnish the details and even otherwise, the Debt Waiver scheme announced by the government was not applicable to the loans and interest in question. Further, even presuming that the assessee has such eligible loans, the CIT(A) observed that the loans were not actually written off in the books of account by way of waiver. Hence, the norms and guidelines prescribed by the RBI with respect to recognition of interest income were not applicable as the assets involved were performing assets. As per the CIT(A), reversal of interest in question was pre-mature as the assets were performing assets and the interest was not over due as on 31.03.2009. Further, it was held that even presuming that the prudential norms of RBI were applicable to such performing assets, the CIT(A) observed that the said RBI guidelines were issued to supervise and exercise control on banks and NBFCs and were not for the purpose of recognition of income or making provisions for bad & doubtful debts for the purpose of Income Tax. The CIT(A) further held that once the income had accrued as per the method of accounting regularly followed by the assessee, the same had to be included in the total income. Further, it was observed that the provisions of section 43D of the Act were not applicable to the cooperative banks and there was no question of extending the benefit under section 43D of the Act to the assessee bank. It was also observed by the CIT(A) that where there was no certainty of recovery of interest when the principal amount was doubtful of recovery due to the Debt Waiver Scheme and the proper course of action for the 17 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
assessee was to write off of such amount as bad & doubtful debts in the books of account and claim deduction under section 36(1)(viia) of the Act. The CIT(A) has given a finding that the assessee had neither written off of the principal nor the interest was written off in the books of account and hence, claim of the assessee was not allowable under section 36(1)(viia) of the Act.
23. The learned Authorized Representative for the assessee pointed out that under section 45(2) of the RBI Act, guidelines were issued to the banks and NBFCs to regulate its business. It was further pointed out by the learned Authorized Representative for the assessee that during the year under consideration, it had changed the accounting system from mercantile to cash in respect of performing agricultural loans in view of guidelines issued by the RBI. The learned Authorized Representative for the assessee further pointed out that the said performing assets could not be treated as NPA's without passing through the filter of RBI guidelines as the assets in consideration were performing assets. However, in view of debt waiver scheme introduced by the Govt. of India with regard to agricultural loans, the interest due on such performing assets was not due to the assessee and hence, the same was not accounted for in the books of account. It was further pointed out by the learned Authorized Representative for the assessee that in respect of agricultural loans, if interest was not received for one year, then it becomes NPA in the next year and in view thereof, it was claimed as deduction in the Profit & Loss Account. The learned Authorized Representative for the assessee further pointed out that up to assessment year 2007-08, the income of the assessee bank was not taxable. The learned Authorized Representative for the assessee fairly conceded that in the balance sheet, the said assets were stated to be 18 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
performing assets. However, the change in the method of accounting was effected by the assessee and this was the first year of change in the method of accounting. The learned Authorized Representative for the assessee also pointed out in respect of loans given to the farmers less than Rs.5 lakhs each, because of the debt waiver scheme, amount of Rs.456.98 crores was received and Rs.346.04 crores was paid by the government during the year and Rs.110.94 crores was received from the government in the succeeding year.
24. The learned Departmental Representative for the Revenue stressed that the assessee changed its method of accounting only in respect of interest on performing assets and such hybrid system of accounting after 01.04.1997 was not permitted under section 145 of the Act. The learned Departmental Representative for the Revenue stressed that the computation of income has to be done as per the provisions of Income Tax Act and not on the basis of RBI guidelines. The learned Departmental Representative for the Revenue had placed reliance on the following decisions:-
1. Hon'ble Karnataka High Court in Karnataka Bank Ltd Vs. ACIT (2013) 34 taxmann.com
2. Hon'ble Madras High Court in the case of Sakthi Finance Ltd T.C. (A) Nos.282 and 283 of 2007
3. Hon'ble Kerala High Court judgment in Art Leasing Ltd. Vs CIT 187 TAXMAN 29 (2010)
4. Hon'ble Madras High Court in CIT Vs. Amrutanjan Finance Ltd 15 taxmann.com 392
25. It was further pointed by the learned Departmental Representative for the Revenue that the debt waiver scheme placed at page 128 of the Paper Book is not applicable to the assessee as the 19 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
assessee is a district cooperative bank and was not covered under the scheme.
26. The learned Authorized Representative for the assessee however, pointed out that it was a cooperative bank and was covered under the scheme.
27. We have heard the rival contentions and perused the record. The issue raised vide grounds of appeal No.5 to 7 is in relation to reversal of interest on performing assets amounting to Rs.42.15 crores. The assessee during the year under consideration adopted a change in method of accounting in respect of interest income earned from certain performing assets. In the Notes to the annual accounts, the assessee declared that the interest relating to non-performing assets i.e. agricultural loans would be accounted for only on realization and interest amounting to Rs.42.15 crores was de-reversed and de-recognized by the assessee. The explanation of the assessee for the said change in the method of accounting of interest on non- performing assets was the Agricultural Waiver Scheme, 2008 issued by the Central Government under which, guidelines were issued by the RBI, that where the such interest on agricultural loans was not received by the assessee, the same was not to be credited to the Profit & Loss Account. The Central Government had announced Farmers Debts Waiver Scheme, 2008 and in view of the said scheme being introduced by the Central Government, the RBI issued the guidelines to the respective banks. The assessee claims that it had followed the said guidelines and changed its method of accounting vis-à-vis the interest accruing on performing assets of agricultural loan. The 20 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
assessee claims that it had written off the said amount in its books of account.
28. Admittedly, the assessee was following mercantile system of accounting under which, it had to recognize its income for the relevant year even if the same had not been received by the assessee. Similarly, the expenditure had to be recognized even if the same was not paid during the year under consideration. The assessee from year to year was following the said method of accounting and in the preceding year had accounted for the interest earned from the performing assets of agricultural loans in its books of account. Where the assessee did not receive the interest till the close of the succeeding year, then such interest on agricultural loans was written off in the books of accounts. In other words, the assessee for the financial year 2007-08 had accounted for the interest on performing assets in its books of account as this income for the preceding year and in cases where the said interest was not received by the assessee, the same could be written off till 31.03.2009. However, for the year under consideration and as claimed by the assessee for the succeeding years, the said practice of recognizing the interest on the performing assets of agricultural loans was not followed by the assessee, because of RBI guidelines.
29. The CIT(A) had referred to the highlights of the Agricultural Debt Waiver Scheme, 2008 under para 6.3 at pages 24 & 25 of the Paper Book. The perusal of the said scheme reflects that the amount eligible for debt waiver or debt relief shall comprise of:-
"a) in the case of short-term production loan, the amount of such loan (together with applicable interest):21 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
(i) disbursed up to March 31, 2007 and overdue as on December 31, 2007 and remaining unpaid until February 29, 2008;
(ii) restructured and rescheduled by banks in 2004 and in 2006 through the special packages announced by the Central Government, whether overdue or not; and
(iii) restructured and rescheduled in the normal course up to March 31, 2007 as per applicable RBI guidelines on account of natural calamities, whether overdue or not.
b) in the case of an investment loan, the instalments of such loan that are overdue (together with applicable interest on such instalments) if the loan was:
(i) disbursed up to March 31, 2007 and overdue as on December, 2007 and remaining unpaid until February 29, 2008;
(ii) restructured and reschedule by banks in 2004 and in 2006 through the special packages announced by the Central Government; and
(iii) restructured and rescheduled in the normal course up to March 31, 2007 as per applicable RBI guidelines on account of natural calamities.
Explanation: In the case of an investment loan disbursed up to March 31, 2007 and classified as non-performing asset or suit filed account, only the installments that were overdue as on December 31, 2007 shall be the eligible amount."
30. In respect of other farmers, there was a One Time Settlement scheme under which, the farmers were to be given rebate of 25% of the eligible amount, subject to the condition that the farmers pays the balance 75% of the eligible amount. Vide para 7 of the said scheme, every branch of Scheduled Commercial Bank, Regional Rural Bank, Cooperative Credit Institutions, Urban Cooperative Bank and local area bank covered under the scheme were directed to prepare two lists, one consisted of small and marginal scale farmers, who were eligible for debt waiver and second consisted of other farmers who were eligible to relief under the OTS scheme. The list shall include the 22 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
particulars of landholding, the eligible amount and the amount of debt waiver or debt relief proposed to be granted in each case. Further, under clause 8 of the said scheme, it has stipulated as under:-
"8. Interest and other charges:
8.1 The lending institutions shall not charge any interest on the 'eligible amount' for any period after February 29, 2008.
However, in the case of an 'other farmer' who defaults in paying his share of the eligible amount on or before June 30, 2009 and becomes ineligible for OTS relief, the bank may charge interest for the period after June 30, 2009.
8.2 Installments of investment credit which fall overdue after 31.12.2007 shall be recovered by the lending institutions along with the applicable interest. Lending institutions may, however, in appropriate cases, reschedule these installments in accordance with the normal policy of the lending institution concerned."
31. As per clause 8, the institutions were directed not to charge any interest on the eligible amount for any period after 29.02.2008. However, in case of other farmers who defaults to pay his share of eligible amount on or before 30.06.2009 and becomes in-eligible for the relief, it was directed that the bank may charge interest for the period after 30.06.2009.
32. In view of the said scheme formulated by the Central Government, the Reserve Bank of India declared norms of income recognition, asset classification, provisioning and capital adequacy which are reproduced under para 6.3.1 at pages 26 and 27 of the appellate order. As per clause 3, the RBI directs that the government had clarified that the lending institutions would not charge any interest on the eligible amount for the period from 29.02.2008 to 30.06.2009. However, the banks may charge normal rate of interest on the eligible amount from 01.04.2009 up to the date of settlement. The date for payment of 25% by way of single installment by other farmers eligible for debt relief of 25% Govt. of India was extended to 23 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
31.12.2009 and it was further pointed out that in case, the payment was delayed by farmers beyond 31.12.2009, the outstanding amount in the relevant accounts of such farmers shall be treated as NPAs. It was also clarified that where the farmers pay less than 75% of their share, the burden was to be borne by the banks. Further, instructions were given to the banks to make a suitable entries vis-à-vis the amount to be received from the Govt. of India against the waivers scheme.
33. The case of the assessee was that in view of the above said guidelines of RBI, pursuant to the Agricultural Waiver Scheme announced by the Central Government, the assessee made suitable entries in the books of account by way of non-recognition of the interest income on such performing assets of agricultural loans. The assessee claims that the said provisions were written off in the books of account. The first aspect of the issue is whether the claim of the assessee can be considered as an admissible deduction where the assessee had made the entries in the books of account in view of the guidelines of RBI, which are contrary to the mercantile system of accounting followed by the assessee. We have in the paras hereinabove while deciding the issue of allowability of deduction on account of amortization of premium expenditure for HTM securities, where the said expenditure was booked on the basis of the RBI guidelines, which in turn, as per the Assessing Officer were contrary to the provisions of Income Tax Act, had held that as the cooperative banks unlike other commercial banks were subjected to 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. The Pune Bench of 24 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
the Tribunal in DCIT Vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. (supra) had further held, which has been referred by us under para 10 of the order, that ordinarily 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. In view thereof, as in the issue raised earlier where relief has been allowed to the assessee on account of entries made by following the RBI guidelines, we are of the view that similar conduct of the assessee in following the RBI guidelines issued is to be adopted in the hands of the assessee. Though the said provision is with regard to the non- performing assets, however, similii is drawn for adjudicating the present issue before us i.e. the interest due on performing assets of agricultural loans. In view of the present guidelines which were issued after the announcement of Agricultural Debt Waiver Relief Scheme by the Central Government, the assessee was to de-recognize the interest on agricultural loans which were performing assets of the assessee for the year under consideration. As per the RBI guidelines, the assessee was entitled not to recognize the interest on the eligible amount and work out the interest relatable to such eligible amount which is not to be recognized as income for the year under consideration. 25 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
34. Another aspect to be kept in mind is that in the succeeding years because of the debt waivers scheme, the assessee received sum Rs.456.98 crores and Rs.346.04 crores from the government during the year and Rs.110.94 crores was received from the government in the succeeding years. The scheme related to small farmers and has been adopted by the Central Government and the payments against the same have been paid.
35. The issue which has to be decided in the present facts and circumstances, first what is the eligible amount which is governed by the debt waiver scheme of the Central Government and interest on which was not to be recognized by the assessee following the RBI guidelines. From the details furnished by the assessee, the necessary data cannot be culled out, so in all fairness, we deem it fit to restore this issue back to the file of the Assessing Officer, who shall first determine the eligible amount which is covered under the said agricultural waiver scheme issued by the Central Government and thereafter, determine the interest relatable to such eligible amount. The assessee is directed to furnish the requisite information / details before the Assessing Officer and the Assessing Officer thereafter, shall reconcile the same with the debt waiver scheme and determine the eligible amount. Further, the assessee claims that the interest on such performing assets that are covered by agricultural waiver scheme has been written off in its books of account. The Assessing Officer is directed to verify whether the interest on agricultural loans has been written off by the assessee in its books of account. The Assessing Officer thus, shall decide the issue of allowability of the said expenditure in the hands of the assessee in line with our directions. 26 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
36. The learned Departmental Representative for the Revenue had placed reliance on the series of case laws which are found to be factually different and the ratio laid down in the said decisions is not applicable to the facts of the case. The grounds of appeal No.5 to 7 raised by the assessee are thus, allowed as indicated above.
37. The issue in ground of appeal No.9 raised by the assessee is against the levy of interest under sections 234A, 234B and 234C of the Act. The levy of interest under sections 234A, 234B and 234C of the Act is consequential. Hence, the ground of appeal No.9 raised by the assessee is dismissed.
ITA No.2085/PN/2013: Revenue's Appeal
38. The only issue raised by the Revenue is against the deletion of addition of Rs.1,31,60,000/- on account of contribution to the Rajya Swarga Seve Nidhi.
39. The brief facts relating to the issue are that, the assessee had claimed deduction on account of contribution to Rajya Swarga Seve Nidhi of Rs.1,31,60,000/-. The claim of the assessee was that the contribution was made towards State Cadre Employment Fund of @ 10 paise per Rs.100/- of outstanding agricultural credit business as at the end of the previous year. The assessee had incurred this expenses on 17.12.2009 amounting to Rs.1,30,19,195/-. The assessee was asked to explain the basis of the said claim and whether it was supported by any RBI Circular or Instruction. However, no Circular was produced during the assessment proceedings, but the contention of the assessee was that the said provision was made as per the decision of Government of Maharashtra dated 13.10.1989. The bank 27 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
had made provision for Annual Contribution to Co-operative State Cadre Employment Fund as per Rule 53A of the Maharashtra Co- operative Societies Rules, 1961 and the Circular issued by the Government of Maharashtra, Co-operative Department No.1089/CR- 30, dated 13.10.1989. It was also stated that the assessee cooperative bank had made payment for the provision made for annual contribution to Co-operative State Cadre Employment Fund as detailed below:-
Date Amount
26.09.2009 1,09,92,202/-
17.12.2009 1,30,19,151/-
40. The Assessing Officer was of the view that the amount debited to the fund was nothing but provision for contingent liability and the sum of Rs.1,31,60,000/- thus, added to the income of the assessee.
41. Before the CIT(A), the assessee contended that the contribution was made as per the statutory provisions, it was also diversion of income by overriding title at source. It was also argued that it was a provision made for a definite and an ascertained liability as the contribution was made towards State Cadre Employment Fund at 10 paise per Rs.100/- of outstanding agricultural credit business as at the end of the previous year as per the MCS Rules and the orders of the State Government. The CIT(A) allowed the claim of the assessee holding the said contribution made by the assessee to be a statutory liability and not contingent liability.
42. The Revenue is in appeal against the said order of CIT(A). 28 ITA No.1796/PN/2013 ITA No.2085/PN/2013
Pune Dist. Central Co.op Bank Ltd.
43. We have heard the rival contentions and perused the record. The issue arising by the grounds of appeal raised by the Revenue is against the order of CIT(A) in allowing the claim of the assessee to the extent of Rs.1,31,60,000/- which was a provision made for contribution to the Rajya Swarga Seve Nidhi claim. The CIT(A) vide para 5.2 noted that the contribution in question was made by the assessee as per the orders of the State Government issued under MCS Act. The relevant provisions of MCS Act i.e. section 69A is reproduced by the CIT(A) under para 5.2 at pages 16, 17 and 18 of the appellate order which are being referred to, but are not being reproduced for the sake of brevity. Further, the relevant MCS Rules i.e. Rule 53A providing the rates of annual contribution were also scanned and reproduced by the CIT(A) under para 5.3 at pages 18 and 19 of the appellate order which are also being referred to, and not being reproduced. The CIT(A) vide para 5.4 held as under:-
"5.4 On a perusal of the above provisions, it could be noticed that as per the provisions of MCS Act and MCS Rules, a Fund to be called 'the Co-operative State Cadre Employment Fund' was established and it shall be utilized for meeting the expenses on the salaries, allowances and other emoluments to be paid to the persons appointed to the Co- Operative State Cadre and the other expenditure relating to the Cadre. Every society or class or classes of societies, which in the opinion of the State Government, derive any benefit, directly or indirectly, from the services of any Secretary belonging to the Cooperative State Cadre of Secretaries, and every other body corporate carrying on any trade, business or industry or class or classes of such corporate bodies, which in the opinion of the State Government, derives such benefit as aforesaid, and which are notified by the State Government in this behalf, contribute annually to the said Fund, at such rate and in such manner as may be prescribed. The appellant Bank is one on the notified bodies included' at S. No.6 of the table reproduced hereinabove and accordingly has made provision for annual contribution, to Co. Op. State Cadre Employment Fund as per Rule 53A of MCS Rules, 1961 and Circular dated 13th Oct. 1989 issued by Govt. of Maharashtra and it is business expenditure. It is also important to note that under sub-section (5) of Sec. 69A of MCS Act the Registrar is empowered to issue demand notice in case the society fails to pay the contribution as required by sub-section (4) of sec. 69A and such demand shall be a charge on the income of 29 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
the society. The appellant bank control over the utilization of fund. A similar question came up before Madhya Pradesh court in the case of Keshkal Co-operative Marketing Society Ltd. v. CIT (165 ITR 437). In that case, the co-operative society was under the obligation to create a fund which is to be managed by the Registrar of the Cooperative Societies and in that context, it was held that this fund will not be includible in the income of the assessee. In the present case also, the contribution has to be taken out from the income of the appellant under the requirement of the statutory provisions and therefore in my considered opinion, it is not application of income or appropriation out of the profits. The provision for contribution cannot be said to be a provision for contingent liability as the amount to be contributed every year is fixed by the State Govt. under MCS rules and such amount has to be paid to the fund. In fact the appellant has paid the following amounts to the fund in the subsequent year out of the opening balance of the provision and the provision made of Rs.1,31,60,000/- during the year.
Date Amount
26.09.2009 1,09,92,202/-
17.12.2009 1,30,19,151/-
In view of the above facts, it is not correct to say that the provision was made by the appellant for a contingent liability. The liability is an ascertained liability, which was also discharged by the appellant by making actual payments to the fund in the subsequent year."
44. The finding of the CIT(A) is that the contribution made by the assessee was a statutory requirement and was not application of income or appropriation out of profits. We are in conformity with the observations of CIT(A) that the provision made by the assessee cannot be said to be a provision for contingent liability because the amount was contributed by the assessee from year to year and the contribution is fixed by the State Government under the MCS Rules. Once the amount is so fixed by the State Government and the same is paid by the assessee to the said fund then, the same is to be allowed as a deduction in the hands of the assessee. Undoubtedly, the assessee during the year under consideration, had made a provision of Rs.1,31,60,000/- but the said amount was paid in the succeeding year i.e. Rs.1,09,92,202/- on 26.09.2009 and Rs.1,30,19,151/- on 30 ITA No.1796/PN/2013 ITA No.2085/PN/2013 Pune Dist. Central Co.op Bank Ltd.
17.12.2009. The liability being an ascertained liability, which in turn, was discharged by the assessee by making payment in the succeeding year, is an allowable expenditure in the hands of the assessee. Upholding the order of CIT(A), we dismiss the grounds of appeal raised by the Revenue.
45. In the result, the appeal of the assessee is allowed for statistical purpose and the appeal of the Revenue is dismissed.
Order pronounced in the open Court on this 28th day of November, 2014.
Sd/- Sd/-
(G.S. PANNU) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 28 th November, 2014.
GCVSR
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A)-I, Pune;
4) The CIT-I, Pune;
5) The DR "A" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune