Income Tax Appellate Tribunal - Amritsar
The Asstt. Commissioner Of Income-Tax, ... vs The Hosiarpur Central Co-Operative ... on 16 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH, AMRITSAR.
BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER
AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER
I.T.A. No. 47/Asr/2011
Assessment Year: 2007-08
The Hoshiarpur Central Vs. Additional Commissioner of
Cooperative Bank Ltd., Income Tax, Hoshiarpur Range,
Railway Road, Hoshiarpur Hoshiarpur
[PAN: AAAAT 0384K]
(Appellant) (Respondent)
I.T.A. No. 93/Asr/2011
Assessment Year: 2007-08
Deputy Commissioner of Vs. The Hoshiarpur Central
Income Tax, Hoshiarpur Circle, Cooperative Bank Ltd.,
Hoshiarpur Railway Road, Hoshiarpur
[PAN: AAAAT 0384K]
(Appellant) (Respondent)
Appellant by : Sh. Surinder Mahajan (C.A.)
Respondent by: Sh. Alok Kumar, CIT- DR
I.T.A. No. 699/Asr/2014
Assessment Year: 2010-11
Asstt. Commissioner of Vs. The Hoshiarpur Central
Income Tax, Hoshiarpur Circle, Cooperative Bank Ltd.,
Hoshiarpur Railway Road, Hoshiarpur
[PAN: AAAAT 0384K]
2
ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014
The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT
(Appellant) (Respondent)
I.T.A. No. 684/Asr/2014
Assessment Year: 2011-12
The Hoshiarpur Central Vs. Asstt. C.I.T.,
Cooperative Bank Ltd., Circle, Hoshiarpur.
Railway Road, Hoshiarpur
[PAN: AAAAT 0384K]
(Appellant) (Respondent)
I.T.A. No. 683/Asr/2014
Assessment Year: 2010-11
The Hoshiarpur Central Vs. Dy. C.I.T.,
Cooperative Bank Ltd., Circle, Hoshiarpur.
Railway Road, Hoshiarpur
[PAN: AAAAT 0384K]
(Appellant) (Respondent)
I.T.A. No. 348/Asr/2011
Assessment Year: 2008-09
The Hoshiarpur Central Vs. Additional Commissioner of
Cooperative Bank Ltd., Income Tax, Hoshiarpur Range,
Railway Road, Hoshiarpur Hoshiarpur.
[PAN: AAAAT 0384K]
(Appellant) (Respondent)
I.T.A. No. 399/Asr/2011
Assessment Year: 2008-09
3
ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014
The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT
Asstt. Commissioner of Vs. The Hoshiarpur Central
Income Tax, Hoshiarpur Circle, Cooperative Bank Ltd.,
Hoshiarpur Railway Road, Hoshiarpur
[PAN: AAAAT 0384K].
(Appellant) (Respondent)
Cross Objection No. 16/Asr/2011
(arising out of ITA No. 399/Asr/2011)
Assessment Year: 2008-09
The Hoshiarpur Central Vs. Asstt. Commissioner of
Cooperative Bank Ltd., Income Tax, Hoshiarpur Circle,
Railway Road, Hoshiarpur Hoshiarpur
[PAN: AAAAT 0384K].
(Cross Objector) (Respondent)
Appellant by : Sh. J. S. Bhasin (Adv.)
Respondent by : Sh. Alok Kumar, CIT- DR
Date of Hearing: 24.05.2018
Date of Pronouncement: 16.07.2018
ORDER
Per Bench:
This is a set of seven Appeals and one Cross Objection (CO), being cross appeals (by the Assessee and the Revenue) for Assessment Years (AYs) 2007-08, 2008-09 and 2010-11, and assessee's CO and appeal for (AY) 2008-09 and (AY) 4 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT 2011-12 respectively. The issues agitated being common, the appeals were posted for hearing and, accordingly, heard together, and are being disposed per a common, consolidated order, even as these were argued by two separate counsels, i.e., for different years.ITA Nos. 47/Asr/2011 and 93/Asr/2011 (AY 2007-08)
2. It would be relevant to briefly recount the facts of the case. The assessee is a cooperative-society in the business of banking, i.e., a cooperative bank. For the relevant year, an examination of the assessee's final accounts during the assessment proceedings by the Assessing Officer (AO), revealed a disclosure of interest accrued on Non-Performing Assets (NPA accounts) at Rs.433.06 lacs. The same being not booked as income, the assessee in explanation stated that the categorization of a loan/advance account as a NPA is in view of the uncertainty as to its realization. When the realization of the principal is at stake, there is no question of accrual of interest income on the corresponding loan/advance (asset). In view of the AO, the assessee was, in view of the borrowers' contractual obligation, bound to account for the same, and in terms thereof. He, accordingly, brought the same to tax. In appeal, the ld. CIT(A) noted that the assessee has passed contra entries in respect of interest on NPA accounts. It was further not correct to say that the said interest had been kept outside books, or that no entries in respect thereof had been passed in the books of account. The assessee had in effect followed cash system of accounting in respect of interest on NPA accounts, which is impermissible w.e.f. 01.04.1997, i.e., AY 1997-98 onwards, in view of the amendment to section 145(1) by Finance Act, 1995. In fact, section 43D of the Act provides for an exception in this regard, so that interest on specified (by RBI 5 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT or, as the case may be, NABARD) categories of bad and doubtful debts would stand to be assessed as income in the year for which it is credited by the assessee to its profit and loss account or, as the case may be, is received, whichever is earlier. Section 43D is not applicable to a cooperative bank but to a Public Financial Institution or a Scheduled Bank. As explained by the Apex Court time and again, the Act represents a separate and independent code in itself, so that the directions or income recognition policies by RBI or NABARD, etc., could not override the express provisions of the Act (State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC)). The decision in UCO Bank v. CIT [1999] 237 ITR 889 (SC), relied by the assessee, was distinguished by him on the ground that the same was decided on the basis of a beneficial Circular by the Board and, further, that prior to AY 1997- 98 mixed system of accounting was admissible under the Act. The aspect of non rejection of books of account, also raised by the assessee before him, was also discussed with reference to the decisions by the tribunal. Addition being confirmed thus, the assessee is in second appeal.
3. We have heard the parties, and perused the material on record.
The question at heart, as we perceive it, is whether interest on accounts classified as NPA has in fact accrued or not? If it has, the same has to be regarded as the assessee's income (section 5 r/w s. 145). A different position would obtain only on the basis of the specific provisions, as sections 43B, 43D, etc., of the Act, which being specific and non obstante, shall prevail. The accounting standards notified by the Central Government u/s. 145(2) of the Act, lists 'Prudence' and 'Substance over form', as among the major considerations influencing the accounting policies to be followed by an entity (assessee) for the financial 6 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT statements to represent a true and fair view of the statement of affairs of its' business. Prudence requires that a proper assessment be made, in light in the information available, of all known liabilities and losses. Substance over form requires that the accounting treatment is governed by the substance of the transaction and not its legal form. Put together, the two articulate and reinforce the real income theory, approved by the Apex Court in, among others, Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC); Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC); CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC)). The ld. CIT(A) has in our view misread the decision by the Apex Court in UCO Bank (supra). True, the assessee in that case successfully relied on a Circular (dated October 9, 1984) by the Board, providing for non-provision of interest on sticky loans, i.e., where there had been no recovery for the last three years. The Hon'ble Court, however, found the said Circular to be consistent with section 145 of the Act. The earlier decision in State Bank of Travancore (supra) was also explained. We have in the instant case itself shown section 145 to contain ingredients of real income theory. As explained in CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Del), the Apex Court in Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577 (SC) approved the real income theory engrained in the prudential income recognition norms by RBI, on the basis of which the loan accounts had been classified as NPA and, further, income not recognized thereon. We therefore find no inconsistency between the assessee following mercantile method of accounting, as stipulated by s. 145, and the non-credit of interest on NPA accounts to its profit and loss account, by the assessee. It was further argued before us that section 45Q of the Reserve Bank of India Act overrides anything inconsistent therewith contained in any other law for the time in force and, 7 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT therefore, the Act as well, which represents another consideration that prevailed with the Hon'ble Delhi High Court in Vasisth Chay Vyapar Ltd. (supra). Though it is, in view of the foregoing findings, not necessary for us to discuss this aspect, we may state that this aspect finds consideration and elaboration by the Apex Court in Southern Technologies Ltd. (supra). The scope of the Non-banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998, including the provisions of Chapter III-B of the RBI Act, 1934 (which contains the said s.45Q), stand considered therein in the context of computation of income under the Act in extenso. With reference to the judicial precedents, including Poona Electric Supply Co. Ltd. (supra), it stands explained that income under the Act has to be on the basis of real income subject to the provisions of the Act. Reference to s. 45Q, considered by the Apex Court, may therefore not be of moment. Why, on facts, we have found that there is no inconsistency between the said income recognition norms by RBI, i.e., assuming the assessee to be covered thereby, and not that by NABARD, as contended by the Revenue, in which case the question of application of section 45Q of the RBI Act does not arise. Reasonable certainty, on the basis of objective material and available information, as to the ultimate realizability of the income, is a pre-condition for recognition of income, for which reference may be made to Accounting Standard (AS) 9 issued by the ICAI, also adverted to in Vasisth Chay Vyapar Ltd. (supra). The same being missing, there is no accrual of income, i.e., on facts, the obligation to pay interest under the loan contract notwithstanding. We say so as the Revenue has not at any stage challenged the said uncertainty or contended of the income recognition norms stated to be followed by the assessee as either not relevant or not having a direct bearing on the said uncertainty. Rather, we find it queer that, on one hand, the Revenue itself notifies 8 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT accounting standards which provide primacy to 'prudence', while, on the other, objects when the assessee, in pursuance to those norms, refrains from booking income! We, accordingly, have no hesitation in, accepting the assessee's claim, directing the deletion of the amount of interest income. There is, we may though add, no question of the Revenue being not entitled to proceed in the matter in the absence of non-rejection of accounts. The limited issue that arises here is whether there has indeed been an accrual of income or not, which the assessee contends on the basis of objective data with regard to the performance of the relevant accounts in the past as well as the binding nature of the income recognition norms on it. The same have been found by us as in agreement with section 145, which cannot but be read as consistent with the real income theory, which the Hon'ble Courts have found to be engrained in the said norms. We decide accordingly, and the assessee succeeds on its Grounds 1 and 2.
4. The next issue, per Gd. 3, is in respect of disallowance of fuel and hire charges u/s. 37(1) of the Act. The assessee-bank was during assessment proceedings asked to explain the business purpose of the said expenditure, suffered and claimed at Rs.5,89,875/- for the current year, in-as-much as the same stood incurred in respect of the assessee's vehicles used by the Department of Cooperative Societies, Punjab. The letter by the Registrar of Cooperative Societies, Government of Punjab, itself clarifies that the expenditure was without any legal mandate for the same, and neither could the same be said to be incurred for assessee's business. The disallowance being affected thus, stood confirmed in first appeal for principally the same reasons. There is nothing in the charter of either the 9 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT Registrar of Cooperative Societies or of the assessee-bank, for the former to require the assessee to bear a part of the administrative burden of its' office. Aggrieved, the assessee is in second appeal.
5. We have heard the parties, and perused the material on record. The facts are not in dispute. The law per section 37(1), under which section the deduction for expenditure is being claimed, or is otherwise allowable, mandates deduction of any expenditure incurred wholly and exclusively for the purposes of its business by an assessee. As is well-settled, the word 'wholly' in the said expression refers to its quantum, while 'exclusively' therein refers to the object or purpose for incurring the expenditure. The other conditions, not applicable in the instant case, are that the expenditure should not be in the nature of capital or personal expenditure or of the nature referred to in sections 30 to 36. The scope and ambit of the word 'wholly and exclusively' stands explained by the Apex Court per its decisions, interalia, in Sassoon J. David & Co. P. Ltd. v. CIT [1979] 118 ITR 261, 275 (SC); Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101 (SC); CIT (Addl.) v. Kuber Singh Bhagwandas [1979] 118 ITR 379, 386-88 (MP)(FB); CIT v. Sales Magnesite (P.) Ltd. [1995] 214 ITR 1 (Bom). Again, the expression 'for the purpose of the business', as explained in CIT v. Mallayalam Plantations Ltd. [1964] 53 ITR 140, 150 (SC), extensively followed, is that the scope of the said expression is wider than that of the expression 'for the purpose of earning profits', obtaining in the analogous provision (s. 10(2) (xv)) of the 1922 Act. The same would include not only day to day running of the business but also rationalization of its administration and modernization of machinery; it may include measures for the preservation of the business or for the protection of the 10 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT assets and property thereof from expropriation coercive process or assertion of hostile title; it may comprehend many other acts incidental to the carrying on of a business. In short, the words connote 'commercial expediency', considered from a businessman point of view and, therefore, would not include the condition of being incurred 'necessarily'. In the present case, however, we are unable to find any commercial expediency. The assessee's only explanation, as we see it, and even as put forth by the ld. counsels before us, is that the Registrar of Societies being a regulatory body, the assessee could not refuse to accede to its prescriptions for all the cooperative banks meeting the maintenance cost of the vehicles being used by its officers. On being ask by the Bench as to how could it be said that the assessee could not refuse in the absence of any legal or contractual obligation, no satisfactory answer was forthcoming. In fact, the Registrar of Cooperative Societies (ROCS) is a registering authority, and not a regulatory authority. It is the NABARD (or RBI) under whose superintendence, direction and control, i.e., the banking policy as well as the policy framework is concerned, that is the regulatory body for the assessee-bank. Further, even so, the use of the vehicles being for the purposes of its officers, it is the purpose of the ROCS for which the expenditure stands incurred, and not for the assessee's business. In fact, even the letter dated 15.09.2008 by the ROCS, referred to during hearing (PB pgs. 40-41), even as pointed out by the ld. DR, states of the need to control the expenditure in view of its misuse, by fixing a quantitative cap in terms of litres of fuel per month. It does not point out the provision/prescription under which the contribution was being requisitioned, which is only in the nature of an exaction, apart from the fact that it does not serve any business purpose of the assessee. We may here refer to the decision in Lakshmiji Sugar Mills Co. Pvt. Ltd. v. CIT [1971] 82 ITR 376 (SC).
11ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT The assessee in that case emphasized the statutory obligation under which the contribution (for constructing roads) was made by it, pointing out to the element of compulsion therein. The Apex Court did not, however, stop thereat. It proceeded to examine the purpose for which the contribution, i.e., for the development of road, was being defrayed by the assessee. The expenditure was allowed, finding it to have been incurred to facilitate the transportation of sugarcane. The expenditure was thus incurred essentially for the benefit of the business, which got an advantage of an enduring benefit for itself. In other words, the (statutory) obligation was by itself not sufficient if the purpose of the expenditure was not for the benefit of or the running of the assessee's business. In the instant case, we find neither of these two conditions being satisfied; the former being in fact incidental in-as-much as a voluntary expenditure, shown to be for the purpose of the assessee's business, would qualify for deduction. In our considered view, therefore, the impugned expenditure does not meet the test of section 37(1), and stands rightly disallowed by the Revenue. We decide accordingly, and the Revenue succeeds.
6. The first ground of the Revenue's appeal is in respect of deletion of a sum of Rs.34,00,732/- added by the AO as income from other sources on account of non payment of dividend distribution tax by the assessee-company, which in fact claims to be not liable for the said tax. We find no basis for the said addition. Even assuming, for the sake of argument, that the dividend distribution tax was indeed payable by the assessee-company, the Revenue can only proceed under law to exact the same. It does not in any manner lead to the inference of any income having accrued to the assessee as a result. Rather, the said tax, where paid, would 12 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT stand to be debited to its operating statement (P&L A/c) for the year. We decide accordingly.
7. Vide the second ground, the Revenue contests the deletion of the disallowance of the provision on standard assets, made by the assessee-bank at the rate of 0.25%, on the ground it being only a contingent liability. The assessee alludes to the RBI/NABARD guidelines, which are to be mandatorily followed. The same, in view of the AO, would not convert the provision as toward an existing liability, only in which case would the provision be deductible u/s. 37(1), quoting from the Board Instruction No. 17/2008 dated 26.11.2008, qualifying that a provision in respect of uncertain or contingent liability, which had not accrued, would not qualify for deduction. In appeal, the assessee found favour with the ld. CIT(A) on the basis that the provision, though against standard assets, is yet a provision for bad and doubtful debts and, therefore, governed by section 36(1) (viia), which admits deduction at seven and a half per cent. of the total income (before making any deduction under this clause and Chapter VIA), with the said limit being not breached in the instant case.
8. We have heard the parties, and perused the material on record.
We find no infirmity in the impugned order. The AO shall compute the deduction u/s. 36(1)(viia) including the impugned disallowance, and where the total deduction does not exceed the statutory limit there-under, no disallowance could be made. Here it may also be relevant to state that section 36(1)(viia) is applicable to cooperative banks (other than those excluded) w.e.f. 01.04.2007, i.e., AY 2007-08 onwards. The assessee has not been shown to us as falling within the excluded categories, which we note to be the same as those saved u/s. 80P(4). As 13 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT such, clearly either of the two sections, i.e., 36(1)(viia) or section 80P, shall apply to the assessee, who cannot take an ambivalent stand with regard to its status. The parameters of a primary agricultural credit society or a primary cooperative agricultural and rural development bank, i.e., two specified excluded categories, are well settled. The AO shall accordingly examine the matter, and decide the same issuing definite findings of fact, of course, after hearing the assessee in the matter. In fact, as it appears, the assessee has not claimed deduction u/s. 80P, for otherwise this itself would have been the subject matter of dispute between the parties, with the AO clearly adverting to section 80P(4), excluding the assessee from the purview of section 80P. Why, in that case, i.e., of the assessee being considered as eligible for deduction u/s. 80P even for AY 2007-08 onwards, all the other issues would get subsumed therein as the assessee's entire income from banking business would get deducted u/s. 80P(1) r.w.s. 80P(2)(a)(i). As such, it is rather the AO who appears to be ambivalent by denying the assessee deduction u/s. 36(1)(viia) as well as u/s. 80P. We decide accordingly.
9. The third and final ground raised by the Revenue is with regard to an addition of Rs.1,27,980. The assessee had both under-charged as well as over-charged interest to its customers (i.e., on loans) as well as its depositors, as under, even as noted in the audit report: (Amount in Rs.) S. No. Particulars Less Excess
1. Interest on deposits 1,68,828 26,661
2. Interest received on loans 1,94,795 1,01,319 14 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT The AO added the entire excess interest, i.e., at Rs.1,27,980. He, as apparent, has taken only a part of the auditor's observation per their report. Taken in totality, it would imply that the income would stand reduced by Rs.48,691. The ld. CIT(A) accordingly held that there was no ground for making the impugned addition, and directed its deletion. The facts are not in dispute, and we find no infirmity in the adjudication by the ld. CIT(A). We decide accordingly, and the assessee succeeds.
10. The assessee's appeal is partly allowed and the Revenue's appeal is partly allowed for statistical purposes.
AY 2008-09 Assessee's Appeal (ITA No. 348/Asr/2011)
11. Ground 1 of the assessee's appeal raises the (same) issue of denial of claim for fuel and hire charges. Our adjudication of ground 3 for AY 2007-08 (in ITA 47/Asr/2011) shall mutatis mutandis apply for this ground as well (refer para 4 & 5 of this order)
12. Ground 2 raises the issue of disallowance of provision (at the rate of 0.25% on standard loans). While the basis of the AO's disallowance is the same as for AY 2007-08, i.e., there being no liability in praesenti, so that it is only in the nature of a contingent liability, not admissible u/s. 37(1), the ld. CIT(A), as for AY 2007-08, accepted the assessee's claim as, in his view, there was nothing to show that the claim was not covered by the provision of section 36(1)(viia). The provision against standard loans being only a provision for bad and doubtful debts, would stand to be covered u/s. 36(1)(viia). That being the case, we find no reason for the Revenue impugning the provision against standard assets. Thus, subject to the limit 15 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT prescribed u/s. 36(1) (viia), i.e., 7.5% of the income, being not breached, the assessee would be entitled to the provision against standard assets. We decide accordingly.
13. This brings us to Grounds 3 and 4. The assessee's claim u/s. 36(1)(viia), however, was examined by him to find it to include the following:
(a) Loss on sale of car: Rs.0.11 lacs
(b) Write off of perishable goods: Rs.0.46 lacs
(c) Unrealized interest for 2006-07
not realized during 2007-08 Rs.1.43 lacs
Rs. 2.00 lacs
Loss on sale of car as well as write off of perishable goods could not be regarded as a provision for bad and doubtful debts. The assessee states that while, without doubt, write off of perishable articles cannot be claimed as a provision for bad and doubtful debts, it is not barred from claiming the same against any other provision falling under Chapter IV-D. Surely, however, the assessee has to specify the provision where-under the said claim is admissible. Why, the ld. AR, on being queried by the Bench during hearing in this regard, was unable to specify the same or even the nature of the articles, stated to have since perished, or even if the said article stood included in the assessee's block of assets. That is, their accounting treatment. While, therefore, no case for a set aside is made out, we, yet, in the interest of justice, consider it proper to allow the assessee a final opportunity to present its case before the AO in the appeal effect giving proceedings. The AO shall, where a case duly substantiated, is made out by the assessee, consider the 16 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT assessee's contention and adjudicate per a speaking order. Without doubt, the onus to prove its claim, both on facts and in law, would be on the assessee. We decide accordingly.
14. Ground 4 is in respect of claim of Rs.1.43 lacs (refer para 13 above). The same was denied on the basis that the said provision could not be regarded as a provision for bad and doubtful debts. The assessee's claim is that the interest, booked as income for fy. 2006-07 (AY 2007-08), being not realized even during fy. 2007-08 (AY 2008-09), was reversed. That is, constitutes reversal of interest, so that it would not, as stated by the ld. CIT(A), stand to be debited to the provision account.
15. We have heard the parties, and perused the material on record.
The assessee bank, following accrual system of accounting, had booked income for AY 2007-08 even as the interest was pending realization. The same having not been realized even during AY 2008-09, the current year, the same was reversed. The assessee has itself claimed this reversal as a provision for bad and doubtful debts. If the income had been, as claimed, already booked as income (for AY 2007-08), all that needs to be done is to the debit the provision (for bad and doubtful debts) account, with a corresponding credit to the respective debtors account/s, whose account/s would have been debited on charge of interest for fy. 2006-07 (AY 2007-08). We find nothing wrong in the adjudication by the ld. CIT(A), nor could the ld. AR during hearing point out to any. This decides assessee's Ground 4.
17ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT This, however, yet, leaves another aspect of the matter. The assessee has, apart from the provision of Rs.2 lacs (as at para 13 above), made further provision of Rs.850 lacs u/s. 36(1) (viia), as under, i.e., at a total of Rs.852 lacs:
(a) provision made against standard assets Rs.100 lacs
(b) provision against rural advances Rs.750 lacs
Rs.850 lacs
The provision u/s. 36(1)(viia) at the rate of 7.5% of income working to Rs.98.31 lacs, the ld. CIT(A) restricted the deduction for the provision for bad and doubtful debts thereto, thus, in effect, directing a disallowance for Rs.1.69 lacs (Rs.100 lacs- Rs.98.31 lacs). The assessee's case (also refer Ground 2) is that the provision u/s. 36(1)(viia) should be considered at Rs.850 lacs, i.e., by including Rs.750 lacs, which is within the prescribed limit of 10% of the aggregate average advances made by rural branches of the bank (computed in the prescribed manner). That is, there is no scope for considering the provision (u/s. 36(1)(viia)) disjunctively. And that both the components of 36(1)(viia) must be considered together in-as-much as it is a single provision, albeit comprising of two parts, each of which is to be computed separately. As long as therefore the total provision is within the total amount computed as prescribed u/s. 36(1)(viia), no disallowance could be made with reference to either component. In our considered view, firstly, the crystallization of the amount of provision u/s. 36(1)(viia), in-so-far as it is based on assessed income, shall have to await the finalization of and, thus, could only be after giving the effect to the assessee's other claims (or counter claims), i.e., in appeal proceedings. On merits, the assessee has aggregated the provision into its 18 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT two constituents, opening and maintaining separate (provision) accounts for each of them, as is incumbent upon it. This is as though each of the two limbs is, in effect, a provision for bad and doubtful debts, the deduction for the same is to be made with reference to the upper limit for each of the two limbs, defined separately as, 'not exceeding' i.e., the specified percentage of total income in one case, and of the aggregate rural branch advances for the other. Each of the two components would therefore have to be reckoned separately, and no disallowance could be made where each of the two components does not exceed the limits specified there- for. It does not mean that the provision already made in accounts is to be disturbed to accommodate other provision, i.e., adjust the provision account, where in excess (as by Rs.1.69 lacs qua the income based provision in the instant case), with that where it is short. We say so as the section does not specify the amount of deduction per se, but permits the deduction in respect thereof up to a particular sum. As such, as along as the limit, specified separately, which is the reason for our stating of the assessee being required to maintain two provision accounts, is not breached, no disallowance could be made. Per contra, to the extent it is, disallowance for the excess claim would follow. It may be argued that the assessee could, in that case, open a single account which would make the adjustment aforesaid, i.e., transfer from one provision account to another, unnecessary. The total provision made each year would stand to be reckoned with reference to the sum of the two limbs, and as long as the aggregate of the two, i.e., 7.5% of the current year's income and 10% of the aggregate rural advances, is not breached, no disallowance could be called for. The argument needs examination. As afore-stated, each of the two limbs, nevertheless, represent a provision u/s. 36(1)(viia). This, however, would require us to consider as to if the provision component reckoned on the basis of all rural 19 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT branch advances is to be reckoned on a year-wise basis or the provision already credited in accounts is to be taken into account, i.e., if a provision for Rs.10 lacs (say) stands already made and allowed for an earlier year (AY 2007-08, say), would the assessee be eligible for another deduction of Rs.10 lacs qua rural advances assuming, for the sake of simplicity, no increase in the rural advances during the previous year relevant to AY 2008-09. This could be extrapolated for each succeeding year. It does not appear to be so, i.e., that the provision already made would have to be taken into account. This is as, where not so, the aggregate provision qua rural advances would, in time, exceed hundred per cent of such advances, i.e., as outstanding at the end of the relevant year, and which cannot be. The provision, it needs to be appreciated, is against an asset, i.e., recognizes the risk associated with its realisability and, therefore, is valid only with reference to the extant assets, i.e., as obtaining at the relevant time. The provision as on 31.03.2008 (asset) would therefore have to be reckoned with reference to the advances (by rural branches of the bank, speaking in the context of section 36(1)(viia)) as on 31.03.2008. The said provision may include that made during the earlier years, i.e., where not reversed, which thus would have to be taken into account while computing the upper limit specified qua rural advances u/s. 36(1)(viia). And in which case, therefore, the provision based on income (for each year u/s. 36(1)(viia) would have to be made, accounted for and reckoned (for the breach of the limit specified in its respect) separately. The argument aforesaid appealing at first blush, does not hold.
At this stage, we may refer to the Revenue's Ground No. 2 (for AY 2008-09, in ITA No. 399/Asr/2011). The AO regarding the entire provision of Rs.852 lacs by the assessee as against standard loans, effected an addition for the same, i.e., 20 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT Rs.852 lacs. The ld. CIT(A), while confirming disallowance of Rs.2 lacs (agitated by the assessee per its appeal), regarding the balance Rs. 850 lacs as in excess by Rs.1.69 lacs, allowed thus, in effect, a relief of Rs.848.31 lacs, which the Revenue contests per its Ground 2. Even if against standard assets, why could not the provision be regarded as a provision for bad and doubtful debts. A provision, though normally in-admissible in computing income u/s. 28, is allowed as special measure (in computing taxable income) for banks, including cooperative banks, in view of the nature of the business. While one component of the provision is based on income, so that it would necessarily have to be a regular component, i.e., for each year, based on its income, the other part is based on the aggregate (average) advances by rural branches, limit for which stands separately already specified. The provision made during the current year shall be allowed subject to the total provision (i.e., including that already made) not exceeding the limits specified in its respect.
To conclude, the issue of disallowance of Rs.1.69 lacs sustained by ld. CIT(A) and Rs.848.31 lacs deleted by him, and qua which the opposing sides are in appeal, are correlated. This also explains our considering the two together, as also apparent from the said consideration. However, while arguments were made in respect of the assessee's appeal, the Revenue's appeal was largely considered as consequential. In the absence of proper deliberation, we do not consider it proper to conclude the two (correlated) issues. Our foregoing observations notwithstanding, which may well be relied upon by either side in the set aside proceedings, we only consider it proper that the matter is restored to the file of the AO for adjudication afresh after allowing the assessee a reasonable opportunity of presenting its case, in accordance with law. No side, we may though add, be 21 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT constrained by our observations, so that is an open set aside. Ground 2 of the assessee's and the Revenue's appeal is disposed of accordingly.
Revenue's Appeal (ITA No. 399/Asr/2011)
16. The first Ground of the Revenue's appeal is the same as that for AY 2007- 08, decided by us vide para 6 of this order, which shall therefore apply mutatis mutandis for this year as well. We decide accordingly.
Assessee's CO ( No. 16/Asr/2011)
17. This brings us to the assessee's CO, raising two grounds. The same was withdrawn by the ld. counsel, Shri J.S. Bhasin, at the time of hearing, making an endorsement to that effect on the appeal memo itself. The ld. DR did not raise any objection thereto. No prejudice to either side, in our view, would be caused by the said withdrawal; the CO in fact raising issues which are the subject matter of the Revenue's appeal. We accordingly allow the withdrawal. We decide accordingly.
18. In the result, the assessee's appeal is partly allowed; the Revenue's appeal is partly allowed for statistical purposes; and the assessee's CO is dismissed as withdrawn.
AY 2010-11 Assessee's Appeal (ITA No. 683/Asr/2014)
19. The first issue, raised per Grounds 1 and 1.1, is in relation to confirmation of the addition of interest subvention. The same was not pressed during hearing, with the ld. Counsel, Shri Bhasin, making an endorsement to that effect on the appeal 22 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT memo itself. As no prejudice in our view is thereby caused to the Revenue, the same is allowed. The said grounds are accordingly dismissed as not pressed.
20. The assessee vide its ground 2 contests the upholding of the disallowance of Rs.200 lacs effected u/s. 37(1) r/w.s. of the Act, which reads as under:
General.
37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
The assessee does not deny that the leave encashment has not been paid, provision for which has been disallowed invoking section 43B(f). The said provision of law, however, has been declared unconstitutional by the Hon'ble Court in Exide Industries Ltd. v. Union of India [2007] 292 ITR 470 (Cal), being inconsistent with the decision by the Apex Court in Bharat Earthmovers Ltd. v. CIT [2000] 245 ITR 428 (SC). The same, however, did not find favour with the Revenue in view of the specific provision of 43B(f). During hearing, the ld. counsel would, on a query by the Bench, fairly concede that the decision in Exide Industries Ltd. (supra) stands since stayed by the Hon'ble Apex Court, also adducing a copy of the order by the Tribunal (Nanital, Almora Kshetriya Gramin v. Jt. CIT- in ITA No. 4240/Del/2012 and others, dated 09.11.2015/copy on record) noting the same. He would however maintain that section 43B(f) is not applicable in the instant case as the assessee bank has entered into a contract with LIC of India to whom only therefore the assessee paid premium. It is the LIC of India ('LIC' for short), the insurer, that shall, on the liability crystallizing, settle the leave encashment, at the defined rates, with the assessee's employees, i.e., on their retirement. This view, he would 23 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT continue, is in fact supported by the decision by the Hon'ble Court in CIT v. Hindustan Latex Ltd. [2012] 209 Taxman 42 (Cal), the operative part of which reads as under:
'In any event what was intended by introduction of clause (f) was to deny the deduction of liabilities not actually incurred or in other words to exclude the provision being made as against future liabilities, from being granted a deduction. In the instant case, it was not a provision of future liability which was claimed as a deduction. The assessee, a Govt. company had insured itself against the liabilities that may arise out of claims made by the employees towards leave encashment. The assessee being covered by a valid insurance policy and premium being regularly paid, incurs no liability towards leave encashment. The liability being covered by valid insurance policy, is solely that of the insurance. Even if section 43B(f) stands, m the case of the assessee, where the liability is borne by the insurer, there can be no situation where assessee could make a valid claim for deduction u/s. 433(f) since the actual liability is not incurred in any of the years. However, it cannot be doubted for a moment that the premium paid towards the renewal and continued validity of insurance policy necessarily becomes business expenditure wholly and exclusively incurred for the business purpose and allowable as deduction under section 37.' On a query by the Bench as to where, then, the premium paid to LIC has been debited which ought to be, in that case, to the provision account, he could not furnish a satisfactory answer, stating that the matter, for factual verification, be restored to the file of the AO, a proposition to which the ld. CIT-DR did not object.
21. We have heard the parties, and perused the material on record.
Though it may appear that the assessee has raised a new plea, its ground only raising the issue of the unconstitutionality of section 43B(f), the relevant facts being also not on record, it is not so. The assessee vide its letter dated 31.01.2013 to the AO has brought forth this aspect, stating of having deposited like amount (i.e., Rs.200 lacs) in a scheme framed by LIC of India. The issue arising, notwithstanding the assessee's ground before us, is the sustainability of the impugned disallowance. The Apex Court, while staying the decision in Exide Industries Ltd. (supra), clarified that the assessments are to be proceeded with and 24 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT framed on the basis that section 43B(f) is on the statute book, even as noted by the tribunal in Nanital, Almore Kshetriya Gramin (supra). The assessee having purchased a policy in respect of its leave encashment liability (of its employees), which, as explained in Bharat Earthmovers Ltd. (supra), accrues on a year to year basis, claims that the said liability having been contracted to the insurers, it incurs no liability on account of leave encashment when it makes a provision. What for, then, one may ask, is the provision being made? The same, in fact, stands specifically made to comply with the audit objection by NABARD (in view of NABARD Resolution 9, dated 24.12.2009) while carrying inspection of the assessee's account for fy. 2008-09, requiring the assessee to provide for staff leave salary (as on 31.03.2009) on accrual basis by hiring the services of a certified actuary, further adding that the bank estimates its' liability toward the same at Rs.690 lacs (refer assessee's letter dated 31.01.2013), reproduced at para 7.2 (pgs. 8-11 of the assessment order). It is this provision only, made at Rs.200 lacs during the current year, for which deduction, claimed u/s. 37(1), is being denied with reference to section 43B(f). If, even as the Hon'ble Court observes in Hindustan Latex Ltd. (supra), the premium stands paid to LIC of India on annual basis, the same gets allowed u/s. 37(1) of the Act as business expenditure. Why, then, should the assessee make the provision? Both the provision and, concomitantly, the payment (to the insurers) is only in respect of assessee's liability toward employee's leave encashment, since accrued. However, 43B overrides the method of accounting regularly employed by the assessee - mercantile, in the instant case, so that the expenditure, specified therein, otherwise allowable, would only be so ( i.e., deducted in computing income u/s. 28) on its payment. Exception is made for liabilities accruing during the relevant year, where paid by the due date of filing the 25 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT return of income u/s. 139(1) for that year. It is in this context that the ld. counsel was enquired by the Bench as to how the payment of premium stands accounted for, which ought to be therefore adjusted against (debited to) the provision account. As it appears, the assessee has made a provision of Rs.200 lacs on account of liability toward staff leave encashment, also paying this amount to the LIC of India (during the year). The assessee, making the payment to LIC is in fact discharging its liability toward leave encashment. As such, to the extent of payment the assessee's claim shall not be hit by section 43B(f). The matter, for factual verification, is restored back to the file of the AO who, upon satisfaction, shall allow the assessee's claim qua the said expenditure to the extent of payment made to LIC of India during the year, i.e., in terms of section 43B. We say so as the provision made is not for the liability accruing during the year, but that since accrued, so that the deduction shall be restricted to the amount paid/discharged during the year. We decide accordingly.
22. Ground 3 of the assessee's appeal is in respect of disallowance of a payment of Annual Maintenance Charges (AMC). The bank was observed during assessment proceedings to have paid Rs.19.11 lacs by way of AMC for CCTV cameras on 27.03.2010. The contract being for one year, i.e., 27.03.2010 to 26.03.2011, the assessee had claimed expenditure for full year, while only a period of four days of the contract period (of one year) had expired during the relevant year. The amount, worked proportionately at Rs.18,84,820, was thus prepaid and, accordingly, disallowed, which was confirmed on the same basis.
23. We have heard the parties, and perused the material on record.
26ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT The assessee's case, which though did not find favour with the Revenue, is that the expenditure had been paid upfront as per the maintenance contract, and irretrievably lost. The expenditure had thus accrued as well as paid. There is no concept of deferred revenue expenditure under the Act.
True, once a liability has accrued, in terms of the liability to pay, on the basis of a contract, it cannot be said that the expenditure had not accrued. The expenditure, however, is for the purpose of the assessee's business, i.e., for maintenance of CCTV cameras installed at the different branch offices of the bank. As such, the payee is obliged under the contract to provide support services as envisaged under the contract for full one year, i.e., a period of 365 days, beginning 27.03.2010. The probability of this services being required, which would be for regular (periodic) maintenance or on breakdown, etc. spreads evenly throughout the year. Why, as observed by the Bench during hearing, to no reply by the ld. AR, would not the CCTV cameras be liable to be serviced, if required to, even on the last day of the contract year, i.e., 26.03.2011, or for that matter, at any time after 31.03.2010 (up to 26.03.2011). The benefit of the service, thus, arises to the assessee only for four days of the current year. The matching principle, a fundamental accounting concept, would thus come into play, so that expenditure relatable only to four days, i.e., the period for which the benefit acquired under the contract had elapsed during the relevant year, shall be accounted for and reckoned as expenditure, and the balance unexpired amount capitalized. It is, in fact, this principle that advocates for making a provision for all known liabilities, be it for depreciation, leave encashment, etc., even though the liability under the contract may not have arisen. It would be a different matter, we may add, where the benefit that stands to be derived from the expenditure incurred is tenuous or not liable to 27 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT be suitably quantified. This is not so in the instance case, as without doubt, the contract is time based, so that the benefit there-under inures only during the said period. It is in that sense similar to the estimate for liability to pay interest under a contract, which arises only at the end of the account (contract) period. Interest expenditure, over the period for which the interest bearing loan (liability) outstands during the relevant year, can only be said to have accrued during the relevant year. That is, the liability to interest, irrespective of the contractual obligation in its respect, arises on lapse/efflux of time. The assessee's having availed the 'benefit' of the loan for a definite period of time during the year, interest liability to the corresponding extent would, independent of the contractual obligation as to payment, be deductible on matching principle basis. We therefore find no infirmity in the orders by the Revenue Authorities on this issue. Why, however, we fail to understand, should not the Revenue allow the balance amount (Rs.18.85 lacs) as deduction for the following year, i.e., AY 2011-12, also in appeal before us. Though no ground in its respect has been taken by the assessee, who does not appear to have raised this issue by way of rectification application u/s. 154, that would not detain us to state that the assessment for AY 2011-12, subject to verification by the AO, the Revenue should have allowed the assessee's claim for the balance amount in the following year (AY 2011-12). That would in fact accord with the Boards' Circular dated April 11,1955. The proceedings under the Act are not adversarial proceedings, and the purview of an appellant authority is the correct determination of the assessee's taxable income and, thus, tax liability, for the year under reference. The Assessing Officer shall, accordingly, on being moved by the assessee in this respect, allow the assessee's claim for the balance amount, seeking such reasonable satisfaction as he may deem fit. Our observation in the matter is 28 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT guided, apart from the decision by the Hon'ble Courts qua the purview of the appellate authority, principally the tribunal, as also its duty which, as explained in CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC), is to deal with and determine all the questions which arise out of the subject matter of appeal, in light of the evidence and consistently with the justice of the case. We decide accordingly dismissing the assessee's Ground 3.
24. Ground 4 of the assessee's appeal was not pressed during the hearing, with the ld. AR making an endorsement to that effect on the appeal memo itself. The same being not objected to, and causing in our view, no prejudice to other side, is permitted to be withdrawn. The ground is accordingly dismissed as withdrawn. We decide accordingly.
Revenue's Appeal (ITA No. 699/Asr/2014)
25. The only issue raised is with regard to the assessment of unpaid dividend distribution tax as income from other sources u/s. 56 of the Act. Our decision qua the Ground 1 of the Revenue's appeal for AY 2007-08 shall mutatis mutandis apply for this year as well. We decide accordingly, dismissing the Revenue's grounds 1 and 2.
26. In the result, the assessee's appeal is partly allowed for statistical purposes, and the Revenue's appeal is dismissed.
AY 2011-12 Assessee's Appeal (ITA No. 684/Asr/2014)
27. The first issue, raised by ground 1 and 1.1, is in relation to confirmation of the addition of interest subvention. The same was not pressed during hearing, with 29 ITA Nos. 47,93,348,399&CO.16/Asr/2011, 699,683,684/Asr/2014 The Hoshiarpur Central Coop. Bank Ltd. v. Addl/ Asst./Dy CIT the ld. counsel Shri Bhasin making an endorsement to that effect on the appeal memo itself. As no prejudice in our view is thereby caused to the Revenue, the same is allowed. The said grounds are accordingly dismissed as not pressed.
28. Our adjudication in respect of assessee's Ground 3 of the assessee's appeal for AY 2010-11 (refer para 21) shall mutatis mutandis apply for the Revenue's Ground 2. We decide accordingly.
29. In the result, the assessee's appeal is partly allowed.
Order pronounced in the open court on July 16, 2018
Sd/- Sd/-
(N. K. Choudhry) (Sanjay Arora)
Judicial Member Accountant Member
Date: 16.07.2018
/GP/Sr. Ps.
Copy of the order forwarded to:
(1) The Appellant: The Hoshiarpur Central Cooperative Bank Ltd., Railway Road, Hoshiarpur (2) The Respondent: Additional Commissioner of Income Tax, Hoshiarpur Range, Hoshiarpur (3) The CIT(Appeals), Jalandhar (4) The CIT concerned (5) The Sr. DR, I.T.A.T True Copy By Order