Income Tax Appellate Tribunal - Pune
Baramati Sahakari Bank Ltd., Baramati vs Assessee on 15 April, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
Before Shri Shailendra Kumar Yadav, Judicial Member,
and Shri R.K.Panda, Accountant Member.
ITA.No.454/PN/2012
(Asstt. Year : 2008-09)
The Baramati Sahakari Bank Ltd.,
Tal. Baramati,
Dist. Pune. .. Appellant
PAN: AAAAT0743J
Vs.
Addl.CIT, Range-7,
Pune. .. Respondent
Assessee by : Shri P.S.Shingte
Department by : Ms.Ann Kapthuama
Date of Hearing : 15.04.2013
Date of Pronouncement : 29.04.2013
ORDER
PER SHAILENDRA KUMAR YADAV, JM:
This appeal has been filed by the assessee on the following grounds:
1) On the facts and in the circumstances of the case and in law, the lower authorities erred in making the disallowance of Rs.28,18,000/- being Interest on Non-performing Assets which is not treated as income on the basis of RBI guidelines as well as with the clear understanding of the system of accounting as specified in AS 9, which emphasizes on recognizing the income on reasonable certainty under accrual system.
2) On the facts and in the circumstances of the case and in law, the lower authorities erred in making the disallowance of sum of Rs.1,27,000/- by invoking the provisions of section 40(1)(ia).
The disallowance may kindly be deleted.
2. The first issue is with regard to disallowance of Rs.28,18,000/- being interest on non-performing assets. At the outset of hearing, Ld. Authorised Representative pointed out that this issue is covered 2 in favour of the assessee by the order of the ITAT, Pune 'A' Bench, in the case of ACIT vs. Osmanabad Janta Sah. Bank Ltd. in ITA.No.795/PN/2011, wherein similar issue was decided in favour of the assessee, as under:
"5. We heard the rival submissions of the parties and perused the record. We find that the identical issue has been considered by the ITAT, Visakhapatnam Bench, in the case of DCIT, Vijayawada vs. The Durga Cooperative Urban Bank Ltd., Vijayawada, in ITA.No.511/Vizag/2010 dated 10.03.2011. In the said case also, it was noticed by the Assessing Officer that assessee did not include the interest of Rs.18,26,306/- on the NPA advances. Again the issue of applicability of section 43D was considered to the non-scheduled banks. The Tribunal placed its heavy reliance on the decision of the Hon'ble High Court of Delhi in the case of Vashist Chay Vyapar Ltd. [330 ITR 440 (Del.)], in which the Hon'ble Delhi High Court has considered the decision in the case of Southern Technologies Ltd. [320 ITR 577 (SC)]. The Tribunal finally held that the interest income relatable to NPA advances did not accrue to the assessee.
6. An identical view has been taken by the ITAT, Ahmedabad Bench in the case of Karnavati Cooperative Bank Ltd. Vs. Dy.CIT [134 ITD 486 (Ahmedabad)]. In the case of Karnavati Cooperative Bank Ltd. (supra), the Tribunal has considered the provisions of section 43D and its application to the non-scheduled banks. The reasons given by the Tribunal in the case of Karnavati Cooperative Bank Ltd. (supra) for holding that interest on the sticky advances/NPA advances cannot be brought to tax by following the decision in the case of UCO Bank (supra), which is as under:
"15.1. On careful analysis of this section our first observation is that Section 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The words "credited" and "actually received" has been highlighted hereinabove while reproducing the section in question. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is 3 actually received. The Act says that the incidence of 'credit' or "actually received", whichever is earlier is to be taken into account for the purpose of chargeability of income by way of interest. Simultaneously, it is noteworthy that this section is an overriding section because the opening word is "notwithstanding anything to the contrary contained in any other provisions of this Act". Therefore, in spite of anything contained in the Act, the provisions of this section shall override those provisions. Once the Statute has categorically made a law in respect of public financial institutions that interest is chargeable to tax either in the year in which credited or actually received, whichever is earlier, then it is compulsory to abide by the said Rule. According to us, no scope is left with the Revenue Authorities to ignore these provisions due to unambiguous use of language in the Section.
(ii) Status of assessee for the purpose of application Section 43-D. As far as the status of the assessee is concerned, the Assessing Officer has stated that the assessee-bank is a co-operative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an explanation (d) r.w.s. 36(1)(viia) annexed to section 43-D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, we hereby hold that the assessee is covered by one of the entities, hence the provisions of section 43-D are to be applied.
(iii) Applicability of CBDT Circular.
Next issue is that whether a Circular having effect of relaxing rigour of law can be treated as inconsistent with the provisions of a statute. In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes has issued a Circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee's taxable income, provided the Income tax Officer is satisfied that recovery is practically improbable. The CBDT u/s.119 of the I.T.Act has power to issue Circulars in exercise of its statutory powers. If the Board consider it necessary to lay down certain Rules and then direct the sub-ordinate authorities, such directions are required to be followed and such Circular would be binding on the Department unless and until held as ultra vires by a court of law. The Board has powers to relax the severity or the strictness of law and the authorities are required to follow those instructions as held in the case of C.B. 4 Gautam vs. Union of India 108 CTR 304 (SC) & 110 CTR 179 (SC); Navnitlal C.Zaveri 56 ITR 198(SC) and K.P.Varghese 131 ITR 597 (SC).
In the land-mark decision, the Hon'ble Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC) has therefore held, first, that a beneficial circular is not to be treated as inconsistent with the provisions of statute and binding on the authorities. Second, that in respect of interest on "sticky advances" interest income is to be taxed only when actually received as prescribed by CBDT Circular.
However, in the past an interesting turn had taken place by an order of the Hon'ble Kerala High Court in the case of State Bank of Travancore reported in 110 ITR 336 (Ker.), wherein it was held that the assessee, a banking company, did not credit in its account the interest that had accrued on "sticky advances" because the assessee felt that the interest could not to be realised. It credited the interest to a separate account known as "interest suspense account". On reference, the Hon'ble Court has held that there was an accrual of income liable to income-tax and the assessee was not justified in not crediting the interest income on such "stick advances" it its accounts. However, later on at the Hon'ble Apex Court while pronouncing the judgment of the said State Bank of Travancore vs. CIT reported in (1986)158 ITR 102(SC), there were Hon'ble three Judges presiding the Court, out of which Hon'ble two Judges were in the opinion that the interest on "sticky advances" was rightly treated as income which had accrued to the appellant. There was a descending note by one of the Hon'ble Judge and commented that whether an income on receipt basis or on accrual basis, it is the real income and not any hypothetical income which may have theoretically accrued, i.e. subject to tax under the Act. Nevertheless, that decision was not followed while deciding the appeal of UCO Bank (supra) by the Hon'ble three Judges of the Supreme Court, already discussed by us supra. We, therefore summarize that as of now the law as laid down in UCO Bank is that in terms of CBDT Circular the interest is to be added as income only when actually received or credited in respect of the "sticky advances"
while making assessment for a financial institution.
(iv) Interpretation of the language of the statute :
We have reproduced verbatim the provisions of section 43-D of the I.T.Act and expressed an opinion that if the statute has used the terminology for the chargeability of interest on the basis when "credited" or "actually 5 received", then in our opinion no ambiguity has been left by the Statute. If the statute is so clear that an interpretation can easily be made, then that exact meaning should be given to the language of the Section. For this legal proposition we place reliance on Keshavji Ravji and Company vs. CIT 183 ITR 01 (SC), wherein it was held as under:
"As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to whittle down the statutory language which is other-wise unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature.
When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in subsequent legislation in the same or similar context.
To say that the court could not resort to the so-called "equitable construction" of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation, another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes."
We can therefore safely draw a conclusion that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. section 43-D has to be applied in its letter and spirit. It is pertinent to mention that later on, in the case of CIT vs. Bank of America S.A. 262 ITR 504 (Bom) the question of interest on "sticky loans" was decided in favour of the assessee and held that the question is to be answered in favour of the assessee following the decision of UCO Bank reported at 237 ITR 889(SC) :: 240 ITR 355 (SC). Likewise, in an another case of CIT vs. State Bank of India 262 ITR 662 (Bom.) again it was held that the amount credited to the interest suspense account was not taxable following the decision pronounced in the case of UCO Bank (supra).
(V) Judgement in favour of Revenue :
From the side of the Revenue an order of the Tribunal has been vehemently relied upon and this is the basic 6 reason of the elaborate discussion made hereinabove so as to unfold the controversy. In the said decision of the Tribunal, viz. Jt.CIT v/s. India Equipment leasing Ltd. (2008)111 ITD 37 (Chennai), the Respected Co-ordinate Bench has expressed that quote " Prior to insertion of section 43D with effect from 1-4-1991, recognition of income was on the basis of circular of 9-101984. It said that for first three years the income may be taken on accrual basis and from 4th year onwards, the income in respect of doubtful debts was to be recognized on receipt basis. Since the income was to be assessed for first three years on accrual basis, provisions of section 43D were inserted in the Act. Circular No.621, dated 19-12-1991 gives the legislative intention stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc., so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or credited to the profit and loss account. This benefit was extended with effect from 1-4-
2000 in the case of public companies engaged in long- term financing of housing projects approved by National Housing Banks. The Legislature in their wisdom did not extend the same benefit to NBFCs which has been given to scheduled banks, public financial institutions, etc. The provisions of section 43D as stood at relevant time contained an expression 'the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the Guidelines issued by the RBI in relation to such debts'. This expression continues to exist in the newly substituted section 43D applicable with effect from 1-4-2000. This shows that the RBI Guidelines in respect of scheduled banks, public financial institutions etc., were not sufficient for recognition of income on cash basis for the purposes of income-tax. The income of such assessees was determined as per circular dated 9-10-1984. Because of this reason, section 43Dwas inserted in the statute. RBI Guidelines in case of NBFC are for the purpose of control and supervision with respect to public interest and viability of the NBFC. The Guidelines never intended for taking the interest income accrued as per section 5 out of the scope of the Act. If the contention of assessee was accepted, it would amount to insertion of 'NBFC' in section 43D, that too by a Guideline issued for different purposes by an authority other than the Parliament In other words, the doctrine of 'Casus Omissus' will deem to have been applied which is contrary to law of land."Unquote. The basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of the 7 Respected Tribunal was that if the contention of the assessee was to be accepted, then it would amount to insertion of "NBFC" in section 43-D of the I.T.Act. As against that, as far as the assessee is concerned, it is an accepted fact that the assessee is a cooperative bank and not a non-banking financial company and this noteworthy distinction has already been appreciated by us in one of the paragraphs above.
There is one more decision of the Hon'ble Apex Court which is yet to be mentioned while discussing the arguments raised from the side of the Revenue. A decision in the case of Southern Technologies Ltd. vs. Jt. CIT 320 ITR 577 (SC) has been cited but the fundamental difference is that the issue before the Hon'ble Court was in respect of provision for NPA and debited to P&L Account by a NBFC. The said provision was undisputedly made by the said NBFC as per the prudential norms made by the Reserve Bank. Therefore we want to make it clear that the question for consideration before the Hon'ble Court was that if a provision for doubtful debt is made then what will be the legal position of the applicability of Explanation to section 36(1)(vii) of the I.T. Act. For the sake of ready reference, relevant paragraph from the held portion is reproduced below:
" The income-tax is a tax on "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the Act. Therefore, if by the Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of bad debt which is written off, then one has to take into account the Explanation in computing the total income under the Income-tax Act failing which one cannot ascertain the real profits. The provision for non-performing assets debited in the profit and loss account under the Reserve Bank Directions of 1998 is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the Income-tax Act."
Therefore the distinction can easily be drawn that in the appeal before us the question is accrual of interest income on sticky loan but in this cited decision the question before he Apex court was about the admissibility of provision made in respect of doubtful debts.
( vi ) Concept of real income approved in the case of banking business:
Before us, the theory of "real income" has also been argued and in support a decision of Hon'ble Court pronounced in the case of CIT vs. Godhra Electricity Co.8
225 ITR 746 (SC). In short, the view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted.
Now at present the situation is that the Hon'ble Madras High Court in the case of CIT vs. Elgi Finance Ltd. 293 ITR 357 (Mad.) has taken a view that the assessee is a company engaged in the business of lease, finance and hire purchase and that the principle of accrual comes into play without income was recognized and that the assessee had classified its assets on the basis of notification issued by R.B.I. and found that certain assets came under the category of NPA and that from such NPA the assessee had not recognized any income in consonance with the notification issued by RBI and AS-9 issued by ICAI and that the assessee was justified in not recognizing such income. The Court had further expressed that there was no occasion to consider whether the principle of accrual would arise or not, nevertheless, the interest from such NPA would be taxed in the appropriate assessment year on the basis of actual receipt. It is worth to mention that for this decision, the Hon'ble Madras High Court has relied upon an another decision of the same High Court pronounced in the case of Jt.CIT vs. India Equipment Leasing Ltd. 293 ITR 350."
7. In the case before us, admittedly, assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit & Loss Account. Moreover, the issue of the taxability of the interest on the sticky losses/advances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Cooperative Urban Bank Ltd., Vijayawada (supra) and Karnavati Cooperative Bank Ltd. (supra). We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue's ground is dismissed."
3. Nothing contrary was brought to our knowledge on behalf of Revenue. Facts being similar, so following same reasoning, the Assessing Officer is directed not to tax interest in question on non- performing assets as discussed above.
4. The next issue is with regard to disallowance of Rs.1,27,000/- by invoking provisions of section 40(a)(ia). This disallowance 9 pertains to office rent paid to Vijay Tarachand Jain, the owner of the premises of its Daund Branch. The Assessing Officer found that the assessee paid the impugned rent without deduction of tax at source. Applying the provisions of section 40(a)(ia), deduction claimed in respect of this expenditure was disallowed.
4. Matter was carried before the First Appellate Authority, wherein various contentions were raised and the CIT(A) having gone through the same, has decided the issue against the assessee by observing as under:
"3.3.4. For the foregoing reasons, I am of the view that the provisions of sec. 40(a)(ia) are applicable to the amounts actually paid during the year as well as shown as payable in the books of accounts and the payments are not deductible from income if the tax is not deducted at source thereon as required under sec.194I or after deduction has not been paid before the specified date. In the case of the appellant, it is not in dispute that the tax has not been deducted at source from the amounts of rent paid/payable to the payees and therefore provisions of sec. 40(a)(ia) are clearly attracted. Accordingly, the claim of the appellant that provisions of section 40(a)(ia) are applicable only if the rent payable and outstanding as on 31st March of the relevant year is not legally tenable and therefore, rejected. Consequently, the disallowance of rent of Rs.1,27,000/- made by the Assessing Officer by invoking sec. 40(a)(ia) is upheld. Ground of appeal No.2 fails."
5. Before us, the Ld. Authorised Representative relied on the decision of ITAT, Visakhapatnam Bench, in the case of Merilyn Shipping & Transports reported in 70 DTR (Visakha)(SB) (Trib) 81, wherein the Tribunal has observed as under:
"The legislature by consciously replacing the words from "credited" or "paid" to "payable", the intent has been made clear that only the outstanding amount or the provision for expenses which are liable for TDS are to be disallowed in the event there is default in not following the TDS provisions under Chapter XVII-B. No doubt the object of s. 40(a)(ia) is to ensure that the TDS provision as provided in Chapter XVII-B is implemented without any default. The sub-section speaks of the amount 'payable' on which the tax is not deducted and 10 therefore it should apply only if any amount is 'payable', but if the amount is already paid the provisions of this section should not apply. The crucial word is 'payable'. If one looks into the TDS provisions from ss. 194A to 194K, it will be apparent that as per the language of those sections, tax is to be deducted at the time the amount is paid or at the time when the mount is credited, i.e. when the liability is admitted and it becomes payable. Therefore, wherever the payment is covered by aforesaid sections whether paid or credited, tax has to be deducted. Sections 194L and 194LA may also be looked into which say that tax has to be deducted only at the time of payment. The language in these sections therefore shows that the legislature has used different language in different sections. It is trite law that each and every word of the section has its own meaning and while drafting s. 40(a)(ia) the legislature was conscious of the fact that there may be a case where the amount is paid and there may be a case where the amount is payable and has used appropriate words so that the language maybe clear and clear meaning may be given. One may look into the language contained in Finance Bill, 2004 wherein this provision was introduced. In the Finance Bill both the words paid and payable were used. However the word paid was subsequently dropped which shows that s. 40(a)(ia) was meant to be applicable only if the amount covered therein was "payable" at the end of the year. Reference may be made for the scope and effect of s. 40(a)(ia) as clarified by CBDT in Circular No 5 of 2005, dt 15th July, 2005 to show that the intention to introduce this provision was brought to curb bogus payments by creating bogus liability. - CIT v. Upnishad Investment (P)Ltd & Ors (2002) 177 CTR (Guj) 176: (2003) 260 ITR 532 (Guj) applied."
Accordingly, he requested to allow the claim.
6. On the other hand, Ld. Departmental Representative submitted that Hon'ble Calcutta High Court in the case of CIT vs. Md.Jakir Hossain Mondal has decided similar issue in favour of the Revenue by observing as under:
"We have already delivered a judgment on 3rd April, 2013 in ITAT No.20 of 2013, G.A. No.190 of 2013 (CIT, Kolkata-XI vs. Crescent Export Syndicates) holding that the views expressed in the case of Merilyn Shipping & Transports (ITA.477/Viz/2008 dated 20.03.2012) were not acceptable. This is one reason why the matter should be remanded to the Tribunal. Another reason for remanding the matter to the Tribunal is that the finding of facts recorded by the CIT (Appeals) was not tested by the Tribunal.11
For the aforesaid reasons, the order under challenge is set aside and the matter is remanded to the Tribunal for the decision de novo.
The appeal is thus disposed of."
We find that decision of Hon'ble Calcutta High Court is against assessee which is binding on us. So following the reasoning given in the case of Md.Jakir Hossain Mondal (supra), we uphold the order of the CIT(A) on this issue, who has disallowed the sum of Rs.1,27,000/- by invoking provisions of section 40(1)(ia) of the Act.
7. In the result, the appeal filed by the assessee is partly allowed.
Pronounced in the open court on this the 29th day of April, 2013.
Sd/- Sd/-
( R.K.PANDA ) ( SHAILENDRA KUMAR YADAV )
ACCOUNTANT MEMBER JUDICIAL MEMBER
gsps
Pune, dated the 29th April, 2013
Copy of the order is forwarded to:
1. The Assessee
2. The Addl.CIT, Range-7, Pune.
3. The CIT(A)-III, Pune.
4. The CIT-IV, Pune.
5. The DR "A" Bench, Pune.
6. Guard File.
By Order
//TRUE COPY//
Private Secretary,
Income Tax Appellate Tribunal,
Pune.