Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income-Tax,, vs The Cosmos Co.Op. Bank Ltd.,, on 9 November, 2016
आयकर अपील
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सु ी सष
ु मा चावला, या यक सद य एवं ी अ नल चतव
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BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
ITA No.611/PN/2015
Assessment Year : 2011-12
The Dy. Commissioner of Income Tax,
Circle-12, Pune. .... Appellant
Vs.
The Cosmos Co-op. Bank Ltd.,
269, Shaniwar Peth, Pune - 411 030.
PAN : AAAAT0742K .... Respondent
ITA No.664/PN/2015
Assessment Year : 2011-12
The Cosmos Co-op. Bank Ltd.,
Cosmos Tower, Plot No.6,
I.C.S. Colony, University Road,
Ganeshkhind, Shivajinagar,
Pune - 411 007.
PAN : AAAAT0742K .... Appellant
Vs.
The Jt. Commissioner of Income Tax,
Range-7, Pune. .... Respondent
Assessee by : Shri Sunil Ganoo
Department by : Shri Rajeev Kumar, CIT
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 19.10.2016 Date of Pronouncement: 09.11.2016
आदे श / ORDER
PER ANIL CHATURVEDI, AM :
The aforesaid captioned cross appeals filed by the Revenue and the assessee are directed against the order of Commissioner of Income Tax (Appeals)-5, Pune dated 27.02.2015 for the assessment year 2011-12.
2 ITA No.611/PN/2015 ITA No.664/PN/20152. The cross appeals filed by the Revenue and the assessee were heard together and are being disposed of by this consolidated order.
3. The relevant facts as culled out from the materials on record are as under :-
3.1 Assessee is a scheduled Co-operative Bank carrying on the business of banking. Assessee electronically filed its return of income for assessment year 2011-12 on 28.09.2011 declaring Total Income of Rs.1,58,80,60,111/-. Later on, assessee on 30.05.2012 revised its return of income wherein the revised total income was declared at Rs.1,70,15,28,724/-. The case was selected for scrutiny and thereafter assessment was framed under section 143(3) of the Income Tax Act, 1961 (in short "the Act") vide order dated 19.02.2014 and the total income was determined at Rs.1,83,50,04,420/-. Aggrieved by the order of Assessing Officer, assessee carried the matter before Ld. CIT(A), who vide consolidated order for assessment year 2010-11 & 2011-12 dated 27.02.2015 (in Appeal No.Pn/CIT(A)-
5/ACIT, Circle-7/367/2012-13/47 & Pn/CIT(A)-5/JCIT, Range-7/389/2013-14/47) granted partial relief to the assessee. Aggrieved by the order of Ld. CIT(A), Revenue and assessee are now in appeal before us. The effective ground raised by the Revenue in ITA No.611/PN/2015 read as under :-
"1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing the claim on account of depreciation on the merged bank losses treated as Intangible Assets. The learned CIT(A) failed to appreciate the fact that there is no provision in the IT Act under which the goodwill can be claimed or allowed as deduction. Since the banks that were merged with the appellant bank had been amalgamated while merger, it could not be said that there were any intangible assets either by way of good will or otherwise, on which depreciation as provided under section 32(1)(ii) of the IT Act, can be allowed as deduction.
4. On the other hand, the effective ground raised by the assessee in ITA No.664/PN/2015 read as under :-
3 ITA No.611/PN/2015 ITA No.664/PN/2015"1. In the facts and circumstances of the case and in law, the learned C.I.T.[A] has grossly erred in sustaining the disallowance of Rs.1,10,11,414.00 made by the learned Assessing Officer u/s 43 D of the I. T. Act 1961. The said disallowance being patently illegal, arbitrary, perverse and devoid of merits and legally unsustainable the same may please be deleted.
2. In the facts and circumstances of the case and in law, the learned C.I.T[A] has grossly erred in sustaining the disallowance of Provision for Standard Assets amounting to Rs.4,44,83.000.00 [erroneously taken as Rs.7,70,00,000.00 by learned C.I.T.[A] vide Page 43 of his impugned order] The learned C.I.T[A] has failed to appreciate that the said provision was made as per guidelines of R.B.I. which are binding on the appellant assessee and therefore the said provision is an allowable deduction. The said disallowance being patently illegal, devoid of merits and legally unsustainable the same may please be deleted.
3. In the facts and circumstances of the case and in law, the learned C.I.T.[A] has failed to appreciate that the provisions of Section 40 A [2] [b] of the I. T. Act 1961 were inapplicable to the payments made by the appellant bank to Cosmos Foundation and has further erred in disallowing 50 % each of the Outsourcing Expenses and Security Charges paid by the appellant bank to the Cosmos Foundation u/s 40A[2][b] of the I. T. Act 1961. The total disallowance of Rs.2,82,72,467.00 as sustained by the learned C.I.T.[A] being patently illegal, devoid of merits and legally unsustainable the same may please be deleted.
5. We first take up Revenue's appeal in ITA No.611/PN/2015.
5.1 During the course of assessment proceedings and on perusing the depreciation chart filed by the assessee, Assessing Officer noticed that assessee had treated merged bank losses/acquisition cost aggregating to Rs.15,91,74,776/-
as its intangible assets and by linking it to goodwill cost, had claimed depreciation on it @ 25% under section 32(1)(ii) of the Act. The Assessing Officer concluded that the "goodwill cost" claimed by the assessee was the excess of liabilities of the merged banks over the realizable value of the assets of the merged banks that was taken over. He was of the view that the difference of liabilities over assets cannot be interpreted to mean any business or commercial rights and further since the amalgamation of the banks was by way of merger and not by way of purchase, therefore also the question of allocation of the consideration to individual identifiable assets and liabilities of the transferor on the basis of their fair values on the date of amalgamation does not arise. He accordingly denied the claim of depreciation of Rs.3,97,93,694/-. Aggrieved by the order of Assessing Officer, 4 ITA No.611/PN/2015 ITA No.664/PN/2015 assessee carried the matter before CIT(A), who decided the issue in favour of the assessee by holding as under :-
"4.3.4 Therefore my learned predecessor had held, in respect of assessment years 2007-08 to 2009-10, that the claim of merged bank losses can neither be allowed as business expenditure nor the alternative claim of depreciation by treating such losses as intangible assets, could be allowed. The learned counsel has stated that the issue is now covered in favour of the appellant bank by the Pune Tribunal orders for the A.Ys. 2007-08 and 2008-09 in ITA Nos. 460 & 461/PN/2012 dated 23.01.2014. I have perused the orders of Pune ITAT wherein the acquisition of loss making banks by merger have been held to confer substantial business advantages and have been considered as the intangible assets, being 'business or commercial rights of similar nature' contemplated u/s 32(1)(ii) of the Income Tax Act, and therefore entitled to depreciation. The relevant portion of the ITAT order is reproduced herein under for sake of convenience:
"11. We have carefully considered the rival submissions. Section 32(1)(ii) prescribes that in respect of "knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets" acquired on or after 01.04.1998 owned wholly or partly by the assessee and used for the purposes of business or profession shall be entitled for allowance of depreciation as per the prescribed rates. The controversy before us is as to whether on account of merger of four banks assessee has acquired any asset which falls in the meaning of expression "business or commercial rights of similar nature" so as to be eligible for depreciation under clause (ii) of sub-section (1) of section 32 of the Act.
12. Before proceeding further, it would be appropriate to refer to the scheme of merger of respective four banks, copies of which have been placed in the Paper Book. All the schemes of the merger are similar and have been approved by the Reserve Bank of India in terms of the respective statutory provisions. The scheme of merger provides that the entire undertaking, the entire business, all the properties (whether immovable or immovable, tangible or intangible) assets, investments of all kinds, all cash balances with the RBI and other banks money at call or short notice, loans & advances, any other contingency rights or benefits, lease and hire purchase contracts and assets, receivables, securitized assets, licenses, fixed assets and other assets, powers, consents, registrations, exemptions, waivers of all kinds and wheresoever situate belonging to, or enjoyed by the Transferor Bank have been taken-over by the assessee. The liabilities taken-over mean all debts, demand deposits, saving bank deposits, term deposits, Time and Demand liabilities, rupee borrowings, bills payable, interest accrued, capital reserves and surpluses; whether statutory or not and all other liabilities including contingent liabilities, duties, undertakings and obligations of the Transferor Banks have been taken by the assessee. In-fact, the scheme specifically provides that all the licenses/ registrations of the bank or its branches etc. issued by Reserve Bank of India or any authority of the State/ Central Government or other authorities concerned, etc. stand transferred to the assessee Bank. Similar is the position with regard to the liabilities of the Transferor Bank including the savings bank account or current bank account or any other deposits of the customers. The scheme also envisaged taking over of all the employers of the Transferor Bank who wished to continue in service. In sum and substance, assessee bank took over the entire business apparatus of the Transferor Bank, which included its client base, operational branches of the bank at different places and also their employees, besides 5 ITA No.611/PN/2015 ITA No.664/PN/2015 the licenses and other statutory approvals enjoyed by the Transferor Bank. Now, the case set-up by the assessee is that the acquisition of huge client base, operational branches of the banks and the access to new money markets has resulted in a business advantage which is covered within the meaning of the expression "business or commercial rights of similar nature"
as contemplated in clause (ii) of sub-section (1) of section 32 of the Act.
13. Therefore, the moot question is as to whether the aforesaid business/ commercial advantages, namely, taking over of huge client base, licenses, operational bank branches in different areas, etc. can be considered to fall within the expression "business or commercial rights of similar nature" contained in section 32(1)(ii) of the Act. In this context, one may refer to the judgment of the Hon'ble Delhi High Court in the case of Areva T & D India Ltd. & Ors. (supra). In the case before the Hon'ble High Court assessee company acquired the business of the transferor lock, stock and barrel under a slump sale agreement. The amount of consideration paid in excess of the net value of tangible assets transferred, was claimed as payment made by the assessee for acquisition of various business and commercial rights, which comprised of business claims; business information; business records; contracts; skilled employees; and, knowhow. Such acquisition was claimed to be an asset in the nature of 'business or commercial rights' contained in section 32(1)(ii) of the Act. The Hon'ble High Court concurred with the assessee and held that the assets in question, being intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) of' the Act and were accordingly held eligible for depreciation.
14. In the aforesaid light, factually speaking, in the present case, it can be seen that the assessee by acquiring the four co-operative banks has acquired existing running banking businesses complete with the required statutory licenses, operational bank branches, customers base as also the employees, besides other assets. The plea of the Revenue is that the difference paid by the assessee in excess of liabilities over the realizable values of the assets taken-over does not represent payment for any business or commercial rights is untenable. In-fact, the impugned sum reflects the amount paid by the assessee over and above the net worth of the banks which have been taken over, which ostensibly is a reflection of the value of the aforesaid intangible advantages obtained by the assessee. Such advantages are to be considered in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) of the Act, having regard to the parity of reasoning laid down by the Hon'ble Delhi High Court in' the case of Areva T & D India Ltd. & Ors. (supra). In the case of SKS Micro Finance Ltd. (supra), assessee acquired a running business under a slump sale agreement and the consideration paid included, sum paid for acquiring the client base of the transferor. The acquisition of rights over the assets of the transferor, inclusive of its customers base was held to be an 'intangible asset' being 'business or commercial rights of similar nature' contemplated in section 32(1)(ii) of the Act and was held eligible for depreciation. Following the aforesaid discussion, in the present case, the business advantages detailed earlier, are liable to be considered as an intangible asset, being 'business or commercial rights of similar nature' contemplated u/s 32(1)(ii) of the Act. In our considered opinion, the plea of the assessee for allowance of depreciation in terms of section 32(1)(ii) of the Act cannot be faulted either in law or on facts.
15. The other objection of the CIT(A) to the effect that the amalgamation in question is not by way of purchase but is an amalgamation by merger, in our view, is no ground to deny the claim of the assessee, which is otherwise well founded. Therefore, having regard to the aforesaid 6 ITA No.611/PN/2015 ITA No.664/PN/2015 discussion, in our view, on facts and in law the assessee is entitled for depreciation on the impugned sum for acquisition of business of commercial rights contemplated in section 32(1)(ii) of the Act. Thus, on the Ground of Appeal No. 3, assessee succeeds", 4.3.5 In view of the above decision of the jurisdictional ITAT, wherein the impugned goodwill cost of the merged banks, has been held to result in the acquisition of an asset in the nature of 'business or commercial rights' and therefore amounts to intangible asset, the action of the Assessing Officer in not allowing depreciation on the goodwill cost cannot be sustained and accordingly, the ground no.1 in this regard is to be allowed for both the years.
4.3.6 However, it is noticed that the actual amount of Rs.395.88 lakhs has been claimed towards good will written off along with provision for merged bank losses of Rs.71.56 lakhs, totaling Rs.467,45 lakhs by way of debit to the profit & loss account for A.Y. 2010-11 on account of goodwill cost. The appellant has added back goodwill in respect of the merged banks to the extent of Rs.320.85 lakhs. The Assessing Officer has however made disallowance only of the depreciation @ 25% amounting to Rs.4,05,76,750/- in the assessment order passed for that year. Since the finding of ITAT Pune is that the goodwill amounts to intangible asset, it is clear that the entire claim of goodwill that has been claimed by way of debit to the profit & loss account, being capital in nature, had to be added back. The Assessing Officer is directed to rectify this patent mistake, if not already clone, while giving effect to this order, after giving an opportunity of being heard to the appellant."
6. Aggrieved by the order of CIT(A), Revenue is now in appeal before us.
6.1 Before us, at the outset, the Ld. AR submitted that identical issue arose in assessee's own case in assessment year 2009-10. The issue in assessment year 2009-10 was decided in assessee's favour by the Hon'ble Tribunal. He therefore submitted that the issue in the present ground of Revenue is covered in favour of assessee by the decision of the Co-ordinate Bench of the Tribunal in assessee's own case for assessment year 2009-10 (ITA No.925/PN/2013 order dated 20.05.2016). He placed on record the copy of the aforesaid order and pointed to the relevant observations of the Tribunal. He thus supported the order of CIT(A).
The Ld. DR on the other hand supported the order of Assessing Officer but however could not controvert the submissions of Ld. AR.
7. We have heard the rival submissions and perused the material on record.
The issue in the present case with respect to allowability of depreciation of the 7 ITA No.611/PN/2015 ITA No.664/PN/2015 merged banks losses. We find that identical issue arose before the Co-ordinate Bench of Tribunal in assessee's own case for assessment year 2009-10. The issue was decided by the Co-ordinate Bench of Tribunal in favour of the assessee. The relevant issue before the Co-ordinate Bench and the observations of the Co-
ordinate Bench of Tribunal are reproduced hereunder :-
"3. Ground of appeal No.2 by the assessee reads as under :
"Without prejudice to the contention that it is a business loss u/s.28 of the I.T. Act, alternatively, depreciation may be allowed as the difference between Assets acquired and Liabilities taken over represents intangible assets as contemplated under clause (ii) of section 32(1) of I.T. Act."
4. xxxxx
5. xxxxx
6. xxxxx
7. xxxxx
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10. After hearing both the sides, we find identical issue had come up before the Tribunal in assessee's own case vide ITA Nos. 460 and 461/PN/2012 for A.Yrs 2007-08 and 2008-09 order dated 23-01-2014. We find the Tribunal has decided the issue in favour of the assessee. The relevant observation of the Tribunal from Para 11 to 14 of the order read as under :
"11. We have carefully considered the rival submissions. Section 32(1)(ii) prescribes that in respect of "knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets" acquired on or after 01.04.1998 owned wholly or partly by the assessee and used for the purposes of business or profession shall be entitled for allowance of depreciation as per the prescribed rates. The controversy before us is as to whether on account of merger of four banks assessee has acquired any asset which falls in the meaning of expression "business or commercial rights of similar nature" so as to be eligible for depreciation under clause (ii) of sub-section (1) of section 32 of the Act.
12. Before proceeding further, it would be appropriate to refer to the scheme of merger of respective four banks, copies of which have been placed in the Paper Book. All the schemes of the merger are similar and have been approved by the Reserve Bank of India in terms of the respective statutory provisions. The scheme of merger provides that the entire undertaking, the entire business, all the properties (whether immovable or immovable, tangible or intangible) assets, investments of all kinds, all cash balances with the RBI and other banks money at call or short notice, loans & advances, any other contingency rights or benefits, lease and hire purchase contracts and assets, receivables, securitized assets, licenses, fixed assets and other assets, powers, consents, registrations, exemptions, waivers of all 8 ITA No.611/PN/2015 ITA No.664/PN/2015 kinds and wheresoever situate belonging to, or enjoyed by the Transferor Bank have been taken-over by the assessee. The liabilities taken-over mean all debts, demand deposits, saving bank deposits, term deposits, Time and Demand liabilities, rupee borrowings, bills payable, interest accrued, capital reserves and surpluses, whether statutory or not and all other liabilities including contingent liabilities, duties, undertakings and obligations of the Transferor Banks have been taken by the assessee. In-fact, the scheme specifically provides that all the licenses/registrations of the bank or its branches etc. issued by Reserve Bank of India or any authority of the State/Central Government or other authorities concerned, etc. stand transferred to the assessee Bank. Similar is the position with regard to the liabilities of the Transferor Bank including the savings bank account or current bank account or any other deposits of the customers. The scheme also envisaged takingover of all the employers of the Transferor Bank who wished to continue in service. In sum and substance, assessee bank took over the entire business apparatus of the Transferor Bank, which included its client base, operational branches of the bank at different places and also their employees, besides the licenses and other statutory approvals enjoyed by the Transferor Bank. Now, the case set-up by the assessee is that the acquisition of huge client base, operational branches of the banks and the access to new money markets has resulted in a business advantage which is covered within the meaning of the expression "business or commercial rights of similar nature" as contemplated in clause (ii) of sub-section (1) of section 32 of the Act.
13. Therefore, the moot question is as to whether the aforesaid business/ commercial advantages, namely, taking over of huge client base, licenses, operational bank branches in different areas, etc. can be considered to fall within the expression "business or commercial rights of similar nature"
contained in section 32(1)(ii) of the Act. In this context, one may refer to the judgment of the Hon'ble Delhi High Court in the case of Areva T & D India Ltd. & Ors. (supra). In the case before the Hon'ble High Court assessee company acquired the business of the transferor lock, stock and barrel under a slump sale agreement. The amount of consideration paid in excess of the net value of tangible assets transferred, was claimed as payment made by the assessee for acquisition of various business and commercial rights, which comprised of business claims; business information; business records; contracts; skilled employees; and, knowhow. Such acquisition was claimed to be an asset in the nature of 'business or commercial rights' contained in section 32(1)(ii) of the Act. The Hon'ble High Court concurred with the assessee and held that the assets in question, being intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) of the Act and were accordingly held eligible for depreciation.
14. In the aforesaid light, factually speaking, in the present case, it can be seen that the assessee by acquiring the four co-operative banks has acquired existing running banking businesses complete with the required statutory licenses, operational bank branches, customers base as also the employees, besides other assets. The plea of the Revenue is that the difference paid by the assessee in excess of liabilities over the realizable values of the assets taken-over does not represent payment for any business or commercial rights is untenable. In-fact, the impugned sum reflects the amount paid by the assessee over and above the net worth of the banks which have been takenover, which ostensibly is a reflection of the value of the aforesaid intangible advantages obtained by the assessee. Such advantages are to be considered in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) of the Act, having regard to the parity of reasoning laid down by the Hon'ble Delhi High Court in the case of Areva T & D India Ltd. & Ors. (supra). In the case of 9 ITA No.611/PN/2015 ITA No.664/PN/2015 SKS Micro Finance Ltd. (supra), assessee acquired a running business under a slump sale agreement and the consideration paid included, sum paid for acquiring the client base of the transferor. The acquisition of rights over the assets of the transferor, inclusive of its customers base was held to be an 'intangible asset' being 'business or commercial rights of similar nature' contemplated in section 32(1)(ii) of the Act and was held eligible for depreciation. Following the aforesaid discussion, in the present case, the business advantages detailed earlier, are liable to be considered as an intangible asset, being 'business or commercial rights of similar nature' contemplated u/s 32(1)(ii) of the Act. In our considered opinion, the plea of the assessee for allowance of depreciation in terms of section 32(1)(ii) of the Act cannot be faulted either in law or on facts."
11. Respectfully following the decision of the Tribunal in assessee's own case in the immediately preceding 2 assessment years, the ground raised by the assessee is allowed."
8. Before us, Revenue has not placed any material to demonstrate that the aforesaid decision of the Co-ordinate Bench of the Tribunal for assessment year 2009-10 has been set-aside by higher judicial authorities or the facts of the case in the year under consideration are different from that of earlier years. In view of the aforesaid facts and since the facts in the year under consideration being identical to that of assessment year 2009-10, we for similar reasons and respectfully following the order of the Co-Ordinate Bench of Tribunal, find no reason to interfere with the order of CIT(A). Thus the ground of Revenue is dismissed.
9. In the result, the appeal of Revenue in ITA No.611/PN/2015 is dismissed.
10. We now take up assessee's appeal in ITA No.664/PN/2015.
11. First ground is with respect to disallowance under section 43D of the Act.
11.1 Assessing Officer noticed that assessee treated the account of the borrowers as Non Performing Asset (NPA) if interest or loan installment was not received for three months. It was assessee's submission that it was doing the categorization of advances as per RBI guidelines. Assessing Officer was of the 10 ITA No.611/PN/2015 ITA No.664/PN/2015 view that assessee was not charging interest for one quarter as laid down in Rule 6EA. He was of the view the provisions of section 43D r.w. Rule 6EA extends the benefit in respect of bad and doubtful debts, provided interest was not taken into account for at least six months. According to the Assessing Officer, the assessee was bound to account for at least 2 quarters interest as it was following mercantile system of accounting. He therefore concluded that interest of one quarter of bad and doubtful debts was required to be added to the income under section 43D of the Act. He also observed that in the preceding two assessment years, similar addition was made by calculating the accrued interest on NPA' as per Rule 6EA i.e. by calculating interest for six months as against the interest on NPA' calculated by the assessee for three months and the additions made in those years were upheld by CIT(A). He accordingly made addition of Rs.1,10,11,414/- under section 43D of the Act. Aggrieved by the order of Assessing Officer, assessee carried the matter before CIT(A), who upheld the order of Assessing Officer by holding as under :-
"8.2 During the appellate proceedings, the learned counsel for the appellant vehemently objecting to the addition made by the Assessing Officer submitted that the appellant being a scheduled bank is covered under the provisions of Sec.43D and therefore, there was no justification for the Assessing Officer to make any addition in this regard. He accordingly, pleaded that the additions made by the Assessing Officer of Rs.2,30,52,692.91/- and Rs.1,10,11,414/- be deleted.
8.3 The submissions of the appellant on this issue were examined with reference to the facts of the case and the provisions of section 43D read with Rule 6EA by my ld. predecessor who held :
"Rule 6EA reads as under :
[6EA. The provisions of section 43D shall apply in the case of every public financial institution, scheduled bank, State financial corporation and State industrial investment corporation where its income by way of interest pertains to the following categories of bad and doubtful debts, namely:--
(a) (i) Non-viable or sticky advances, i.e., where irregularities of the nature specified in sub-clause (ii) are noticed in the accounts of the borrowers for a period of six months and more and there are no minimum prospects of regularisation of accounts, or where the accounts or information in relation to such accounts reflect usual signs of sickness, such as,--
(1) apparent stagnation in the business as a result of the slow or negligible turnover;
(2) frequent requests for overdrawing or issue of cheques without ensuring availability of funds in the account;
(3) bills purchased or discounted remain overdue for 3 months and more or the recovery of such bills from the borrower poses difficulties;11 ITA No.611/PN/2015 ITA No.664/PN/2015
(4) in the case of term-loans, instalments which are overdue for 6 months or more; (5) unexplained delays by the borrower in submission of quarterly or half-yearly operating statements or stock statements or balance sheets and other information required by the bank;
(6) slow movement or stagnation of stocks observed during inspections; (7) low or negligible level of activity observed during inspections or suspension or closure of the business;
(8) persistent delay in compliance with vital requirements like execution of documents, producing additional security when required or non-compliance with such requirements;
(9) diversion of funds to sister units or acquiring capital assets not relevant to the business or large personal withdrawals by the borrowers; (10) intentional non-adherence to project schedules leading to sub-stantial cost escalations and requirement of additional term-finance; (11) the pressure on the liquidity leading to non-payment of wages to workers or statutory dues or rents of office and factory premises;
(12) the current liabilities exceeding current assets; (13) any grave irregularities observed by the auditors of the borrowers which remain to be rectified;
(14) basic weakness revealed by the financial statements of the unit, for example, continued cash loss beyond one year.
(ii) The irregularities referred to in sub-clause (i) in the accounts of the borrowers are,--
(1) where the accounts are overdrawn beyond the drawing power or the sanctioned limit, for a temporary period;
(2) instalments in respect of term-loans are overdue for less than 6 months or import bills under letters of credit or instalments under deferred payment carried are overdue for less than 3 months;
(3) bills not exceeding 10% to 15% of the total outstandings in the bills purchased or discounted account of the borrower are overdue for payment for a period of less than 3 months and refund in respect of unpaid bills is not forthcoming immediately.
(b) Advances recalled, i.e., where the repayment is highly doubtful and revival of the unit is not considered worthwhile and a decision has been taken to recall the advances.
(c) Suit-filed accounts, i.e., where legal action or recovery proceedings have been initiated and suits are pending for recovery of advances.
(d) Decreed debts, i.e., where suits have been filed and decree obtained and such decree is pending for execution.
(e) Debts recoverability whereof has become doubtful on account of shortfalls in value of security, difficulty in enforcing and realising the securities, or inability or unwillingness of the borrower to repay the banks dues, partly or wholly, and such debts have not been included in preceding clauses (a) to (d).] 6.3.1 As could be seen from the above Rule, income of the appellant bank being a scheduled bank, by way of interest pertaining to non-viable or sticky advances where irregularities of the nature specified in sub-clause (ii) of the Rule are noticed in the accounts of the borrowers for a period of six months and more and there are no minimum prospects of regularization of accounts of the borrowers, can be offered to tax in the year of receipt as per the provisions of sec.43D. In the case of the appellant, the account of the borrowers is treated as NPA if interest or loan installment is not received for more than three months. It is also admitted by the appellant that its accounting software is programmed in such a way that any account is flagged as NPA as per RBI guidelines only and not as per Rule 6EA. In other words, a particular loan is treated as NPA where irregularities in the accounts of the borrowers are noticed for a period of three months as against the period of six months provided in the rule. The contention of the appellant in this regard is that the period of three months is considered having regard to the guidelines issued by the RBI in respect of NPAs which are more specific in nature.12 ITA No.611/PN/2015 ITA No.664/PN/2015
This contention of the appellant cannot be accepted as Rule 6EA clearly provides that irregularities in the borrowers account have to be observed tor a period of six months and then only, the advance can be treated as NPA for the purpose of recognition of interest income from such debt. In this context, reference can be made to the decision of the ITAT, Mumbai in the case of GIC Housing Finance Ltd. vs. Additional Commissioner of Income-tax, Range 2(1) as reported in 140 TTJ 203, wherein the ITAT, Mumbai had an occasion to examine the expression 'having regard to the guidelines issued by the National Housing Bank' used in clause (b) of sec.43D and observed as under :-
The Legislature having laid down the broad principles of its policy in section 43D(b) of the Act, has left the details to be supplied by the rule making authority. What is delegated to the rule making authority is the power to determine, the debts which can be considered as bad and doubtful, interest income on which can be considered as not having accrued, to an assessee following mercantile system of accounting. In doing so, the rule making authority has been directed to have regard to the guidelines issued by the NHB in relation to such debts. Section 43D of the Act, does not mandate the rule making authority to follow the guidelines issued by the NHB in relation to bad and doubtful debts. In exercise of such power the rule making authority has enacted Rule GEB of the Rules. The rule so enacted originally was in conformity with the guidelines issued by NHB. The guidelines were revised by NHB in the year 2004 but the rule making authority did not think it fit to revise the rules to be in conformity with the revised guidelines. In our view it cannot be said that the guidelines of the NHB as and when they are revised have to be treated by implication incorporated in Rule 6EB of the Rules. NHB is not the rule making authority for the purposes of section 43D of the Act. The discretion is left to the rule making authority to follow or not follow tile guidelines of NHB as and when they ore revised. The purpose of classification of debts as bad and doubtful by the NHB and the purpose of not recognising interest income for the purposes of the Act, are different. The considerations that weigh with the relevant authorities are also different. Therefore it cannot be said that the rule making authority under the Act has to automatically follow the guidelines of NHB as they exist from time to time. In that view of the matter, we cannot agree with the submission of the learned counsel for the assessee, that the guidelines issued by the NHB, has to be read as part of section 43D of the Act. We cannot also agree that the expression "Having regard to" used in section 43D of the Act, means that the rule making authority should amend the rules as and when the guidelines of NHB are revised or that we have to read the guidelines of NHB as part of section 43D of the Act."
6.3.2 Thus, the ITAT, Mumbai clearly held that the expression "Having regard to"
used in section 43D of the Act, does not mean that the rule making authority should amend the rules as and when the guidelines of NHB are revised or that one has to read the guidelines of NHB as part of section 43D of the Act. Since similar expression 'having regard to' is used in clause (a) of sec. 43D also, the principle is equally applicable in case of guidelines issued by RBI. In view of this legal position, when Rule 6EA provides a period of six months for observation of irregularities in borrowers' accounts before the same are treated as NPA, it is not correct to reduce the period to three months, on the ground that the appellant followed guidelines of RBI. As already mentioned hereinabove, the Apex Court in the case of Southern technologies Ltd. (supra) clearly held that the RBI Guidelines or prudential norms issued by RBI are not intended to regulate income-tax laws. Therefore, the Assessing Officer is justified in principle in holding that before treating the debt as NPA, the irregularities in borrowed accounts have to be noticed for a period of six months as provided in Rule 6EA, instead of three months as considered by the appellant. However, the Assessing Officer worked out the three months interest relatable to such NPAs on proportionate basis by taking the total advances, total NPAs and the average rate 13 ITA No.611/PN/2015 ITA No.664/PN/2015 of interest charged by the appellant on these advances which does not give the true and correct position of interest attributable to such NPAs. Considering this aspect, I am of the considered opinion that this is a fit case for issue of direction to the Assessing Officer. The Assessing Officer is accordingly directed to obtain the revised details of NPAs as per Rule 6EA i.e. considering the period of irregularities for a period of six months as against three months and restrict the non-recognition of income in respect of NPAs u/s.43D to that extent. The additional income, if any, on account of such restriction i.e. extending the period of irregularities of the nature specified under Rule 6EA in the borrowers account to six months from three months, shall be brought to tax u/s.5 on accrual basis. Needless to say, the appellant shall furnish the necessary details to the Assessing Officer in this regard. Subject to these directions, this ground is partly allowed".
8.4 The view of the CIT(A) had been endorsed by the Pune ITAT in the appellant's own case for A.Y. 2008-09 in order dated 23.01.2014 wherein the computation of interest income in relation to bad and doubtful debts on the basis of the methodology prescribed in Rule 6EA of the I. T. Rules has been affirmed by following the Mumbai Bench of the Tribunal decision in the case of GIC Housing Finance Ltd. (supra). In view of the decision of the Pune ITAT the addition of Rs.2,30,52,692/- and Rs.1,10,11,414/- for A.Y. 2010-11 & 2011-12 respectively u/s 43D of the Income Tax Act, is confirmed. Ground no.4 for A.Y. 2010-11 & Ground no.3 for A.Y. 2011-12 are dismissed."
12. Aggrieved by the order of CIT(A), assessee is now in appeal before us.
12.1 Before us, at the outset, Ld. AR submitted that on identical facts in assessee's own case in earlier year, the issue was decided by the Hon'ble Tribunal against the assessee. He also placed on record the copy of the order of Tribunal for assessment year 2009-10 (ITA No.925/PN/2013 order dated 20.05.2016). He therefore submitted that the ground be decided accordingly. Ld. DR supported the order of lower authorities.
13. We have heard the rival submissions and perused the material on record.
The issue in the present ground is with respect to addition under section 43D of the Act. Before us, Ld. AR has submitted that on identical facts and in assessee's own case for assessment year 2009-10, the issue was decided against the assessee.
We find that the issue was decided by the Co-ordinate Bench by observing as under :-
14 ITA No.611/PN/2015 ITA No.664/PN/2015"20. Ground of appeal No.6 by the assessee reads as under :
"6. The Learned CIT(A)-III of Income Tax was not right legally as well as factually in holding that Sec 43 D applies to the appellant bank. The Learned CIT(A)-III of Income Tax has overlooked the fact that the appellant bank being a scheduled bank, the RBI directions should be applied to identify the Doubtful Debts as prescribed u/s 43D.lt is therefore prayed that addition sustained of Rs.6,53,00,000.00 on account of Sec 43 D may be quashed being illegal and devoid of any merit."
21. The Ld. Counsel for the assessee at the outset submitted that the above ground has been decided against the assessee by the order of the Tribunal in assessee's own case. In view of the above submission of the Ld. Counsel for the assessee the above ground is dismissed."
14. In view of the submissions made before us by Ld. AR, and in view of the decision of the Co-ordinate Bench in assessee's own case in assessment year 2009-10, we find no reason to interfere with the order of CIT(A) and thus the ground of assessee is dismissed.
15. Ground No.2 is with respect to disallowance of provision for standard assets.
16. During the course of assessment proceeding, Assessing Officer noticed that assessee had debited Rs.4,44,83,000/- towards contingent provision against standard assets. Assessing Officer was of the view that the provision made by the assessee was against the contingency which may occur in future and such contingency provision was not an expenditure incurred during the year under consideration but was a contingent provision and therefore not allowable. He accordingly disallowed Rs.4,44,83,000/-. Aggrieved by the order of Assessing Officer, assessee carried the matter before CIT(A) who upheld the order of Assessing Officer by holding as under :-
"10.2 The issue was taken by the appellant in second appeal before ITAT vide ground no.5 for A.Y. 2007-08 and ground no.4 for A.Y. 2008-09. The ITAT held that undisputedly, the claim is a contingent provision made on the basis of percentage on the value of standard assets. The provision does not reflect any particular debt which is doubtful or bad but is only a general and non-specific provision and it has been rightly classified as a contingent provision by the Income tax Authority. Therefore it was held by the ITAT that the provision made was contingent in nature 15 ITA No.611/PN/2015 ITA No.664/PN/2015 and the lower authorities had made no mistake in disallowing the same in view of the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra). In view of this decision in Pune ITAT, ground of appeal no.5 for the A.Y. 2011-12 is dismissed."
17. Aggrieved by the order of CIT(A), assessee is now in appeal before us.
17.1 Before us, at the outset, Ld. AR submitted that on identical facts in the case of Sindhudurg Dist. Central Co-op. Bank Ltd. (ITA No.617/PN/2011 order dated 02.03.2012), the issue was decided by the Hon'ble Tribunal against the assessee.
He also placed on record the copy of the aforesaid order of Tribunal. He therefore submitted that the ground be decided accordingly. Ld. DR supported the order of lower authorities.
18. We have heard the rival submissions and perused the material on record.
Before us, Ld. AR has fairly conceded that on an identical issue in the case of Sindhudurg Dist. Central Co-op. Bank Ltd. (supra), the Co-ordinate Bench has decided the issue against the assessee. The relevant portion of the order in the case of Sindhudurg Dist. Central Co-op. Bank Ltd. (supra) reads as under :-
"26. The next Ground is with regard to the addition of Rs 14,00,000/- on account of contingent provision for standard assets. The Assessing Officer disallowed the provision on the ground that such liability was of unascertained nature and a contingent liability. In appeal before the Commissioner of Income-tax (Appeals), it was submitted by the assessee that the stated provision was made for standard assets as per the guidelines issued by the RBI vide Circulars dated 9.4.1999, 2.12.1999 and 10.5.2000 and that such directions of the RBI were binding on the assessee as held by the Hon'ble Uttaranchal High Court in the case of CIT v. Nainital Bank Ltd. 309 ITR 335 (Uttaranchal). The Commissioner of Income-tax (Appeals) rejected the submissions of the assessee. According to him, the submission of the assessee was not legally sustainable and the issue in appeal stood covered by the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. v. Jt. CIT 320 ITR 577 (SC). He further held that as the amount claimed was not for an ascertained liability, it could not be allowed under section 37 of the Act. The Commissioner of Income-tax (Appeals) accordingly affirmed the action of the Assessing Officer against which the assessee is in further appeal before us.
27. Before us, learned Counsel for the assessee submitted that the claim in question is on account of a provision made for standard assets as per the prevailing RBI guidelines. The learned Counsel pointed out that in terms of the guidelines, the assessee bank had prepared a statement of standard assets, sub-standard assets, 16 ITA No.611/PN/2015 ITA No.664/PN/2015 etc. and made a provision in the books of account. It was submitted that the directions of RBI in the form of prudential norms was mandatory and, therefore, the provisions made in pursuance of the same constituted an allowable expenditure. In this regard, reliance was placed on the judgment of the Hon'ble Uttaranchal High Court in the case of Nainital Bank Ltd. (supra) wherein the binding nature of the RBI guidelines have been appreciated and the provision created on that basis was found to be allowable expenditure.
28. On the other hand, learned Departmental Representative pointed out that the Commissioner of Income-tax (Appeals) made no mistake in disallowing the impugned claim following the subsequent judgment of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (supra)
29. We have carefully considered the rival submissions. In our view, the Commissioner of Income-tax (Appeals) has correctly appreciated the position and sustained the disallowance following the judgment of the Hon'ble Supreme Court the case of Southern Technologies Ltd. (supra). The Hon'ble Supreme Court has clearly pointed out that claim for deduction of an expenditure is liable to be governed by the provisions of the Act and not merely on account of the RBI guidelines. In our view, the ratio of the judgment of the Hon'ble Supreme Court the case of Southern Technologies Ltd. (supra) clearly applies to the present case and the claim of the assessee has been rightly rejected by the lower authorities. Thus, on this Ground, assessee has to fail."
19. In view of the submissions made before us by Ld. AR, and in view of the decision of the Co-ordinate Bench in the case of Sindhudurg Dist. Central Co-op.
Bank Ltd. (supra), we find no reason to interfere with the order of CIT(A) and thus the ground of assessee is dismissed.
20. In the result, the appeal of the assessee is dismissed.
21. In the combined result, the appeal of the Revenue and appeal of the assessee are dismissed.
Order pronounced on this 9th day of November, 2016.
Sd/- Sd/-
(SUSHMA CHOWLA) (ANIL CHATURVEDI)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 9th November, 2016.
सज
ु ीत / GCVSR
17
ITA No.611/PN/2015
ITA No.664/PN/2015
आदे श क& ' त(ल)प अ*े)षत/Copy of the order is forwarded to :
1) The Assessee;
2) The Department;
3) The CIT(A)-5, Pune;
4) The Pr.CIT-4, Pune;
5) The DR "A" Bench, I.T.A.T., Pune;
6) Guard File.
आदे शानस
ु ार/ BY ORDER,
स या पत त //True Copy//
व र ठ नजी स"चव / Sr. Private Secretary
आयकर अपील य अ"धकरण, पण
ु े / ITAT, Pune