By Sri. Y v. Raviraj, Advocate

Date of Order 30-01-2017 ITA No.100026/2014 C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 1/18 IN THE HIGH COURT OF KARNATAKADHARWAD BENCH DATED THIS THE 30 DAY OF JANUARY 2017 PRESENT THE HON’BLE DR. JUSTICE VINEET KOTHARI AND THE HON’BLE MR. JUSTICE SREENIVAS HARISH KUMAR I.T.A.No. 100026 OF 2014 (TIT)C/w. I.T.A.No. 100025 OF 2014 (TIT) BETWEEN: 1.THE COMMISSIONER OF INCOME TAXNAVANAGAR, HUBLI. 2.THE DEPUTY COMMISSIONER OF INCOME TAXCIRCLE 2 (1), HUBLI ... APPELLANTS(COMMON) (BY SRI. Y. V. RAVIRAJ, ADVOCATE) AND: THE RADDI SAHAKARA BANK NIYAMITHABANK ROAD, DHARWAD – 580 001PAN AAAAT 3297K ... RESPONDENT(COMMON) (BY SRI. K. R. KAMBIYAVAR AND S. PARTHASARTHI,ADVOCATES) Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 2/18 I.T.A. NO.100026/2014 IS FILED UNDER SECTION260A OF THE INCOME-TAX ACT, 1961 PRAYING TO SETASIDE THE ORDER PASSED BY THE INCOME TAXAPPELLATE TRIBUNAL, BANGALORE BENCH 'B' INI.T.A.NO.890/BANG/2012 DATED 31.12.2013 ANDCONFIRM THE ORDER PASSED BY THE DEPUTYCOMMISSIONER OF INCOME TAX CIRCLE-2(1), HUBLI.I.T.A. NO.100025/2014 IS FILED UNDER SECTION260A OF THE INCOME-TAX ACT, 1961 PRAYING TO SETASIDE THE ORDER PASSED BY THE INCOME TAXAPPELLATE TRIBUNAL, BANGALORE BENCH 'B' INI.T.A.NO.876/BANG/2012 DATED 31.12.2013 ANDCONFIRM THE ORDER PASSED BY THE DEPUTYCOMMISSIONER OF INCOME TAX CIRCLE-2(1), HUBLI. THESE APPEALS COMING ON FOR FINAL HEARINGTHIS DAY, Dr.VINEET KOTHARI. J, DELIVERED THEFOLLOWING: COMMON JUDGMENT Mr. Y. V. Raviraj, Advocate for appellantsMr. H. R. Kambiyavar & S. Parthasarthi,Advocates for respondent 1.These two appeals have been filed by theRevenue against the orders passed by the learnedIncome Tax Appellate Tribunal, Bangalore Bench ‘B’(hereinafter referred to as ‘the Tribunal’, for short) on Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 3/18 31.12.2013, deleting the addition made in the hands ofthe petitioner-assessee, which is the Co-operative Bank,under Section 41(1) of the Income Tax Act, 1961(hereinafter referred to as ‘the Act, for short), to theextent of Rs.73,58,708/- for A.Y.2007-08. 2.The learned Assessing Authority has made thesaid addition in the income of the petitioner-assessee onthe ground of Demand Drafts and Pay Orders payableas on the last date of the Financial Year, which were notso far encashed by the concerned customers. Thereforetreating the same as cessation of liability under Section41(1) of the Act, the learned Assessing Authority addedback the said amount to the declared income of theassessee. 3.The learned Tribunal’s findings in this regard as recorded in para 8.5.1. are quoted below for readyreference: Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 4/18 2.The learned Assessing Authority has made thesaid addition in the income of the petitioner-assessee onthe ground of Demand Drafts and Pay Orders payableas on the last date of the Financial Year, which were notso far encashed by the concerned customers. Thereforetreating the same as cessation of liability under Section41(1) of the Act, the learned Assessing Authority addedback the said amount to the declared income of theassessee. 3.The learned Tribunal’s findings in this regard as recorded in para 8.5.1. are quoted below for readyreference: Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 4/18 “8.5.1 We have heard both parties andperused and carefully considered the materialon record including the judicial decisions citedon either side. The Assessing Officer hasinvoked the provisions of Section 41(1) of theAct to bring the amount of Rs.73,58,708received for making drafts and pay orders totax in the hands of the assessee in the periodunder consideration. Section 41(1) of the Act,specifically deals with amounts that wereallowed as a deduction in the pastassessments as trading liabilities which in alater year ceases OR are remitted by thecreditors. If and when in a later year there isevidence to show that the liability is remitted,it can be brought to tax. In order to invokesection 41(1) of the Act, it must be firstestablished that the assessee had obtainedsome benefit in respect of a trading liabilitywhich was earlier allowed as a deduction. Itis not enough if the assessee derives somebenefit in respect of such liability, but it isessential that such benefit arises by way of‘remission’ or ‘cessation’ of liability. In Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 5/18 Sugauli Sugar Works (P) Ltd reported in(1999) 234 ITR 518 (SC) it was held that aunilateral action cannot bring about acessation or remission as a ‘remission’ canonly be granted by a creditor and ‘cessation’can only occur either by operation of law orthe debtor by unequivocally declaringintention not to honour his liability whenpayment is demanded by the creditor. In thecase on hand, taking into account the factsand circumstances involved, we find merit inthe arguments put forth by the learnedAuthorised Representative since theoutstandingly liability of Rs.73,58,708 onaccount of Demand Drafts and pay orders isstill reflected in the books of accounts of theassessee as on 31.3.2007 and therefore thesame stands acknowledged by the assesseeand the liability subsists. In this view of thematter, we find that the authorities belowhave failed to establish the primary requisitefor invoking the provisions of Section 41(1) ofthe Act and hold that the provisions of Section41(1) of the Act would not be attracted in the Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 6/18 case on hand in respect of the outstandingliability of Rs.73,58,708. 8.5.2 As per the RBI Circular referred to bythe assessee it is required to keep theamounts related to such stale drafts / payorders as a liability in the books of accountfor ten years after which the amount wouldbe transferred to the RBI. A reading of thisCircular would indicate that there is nocessation of liability in favour of the bank atall. For ten years the stale DDs/Pay ordersremain as a liability of the concerned persons,in the books of the bank and thereafter it getstransferred to the RBI. In thesecircumstances, the liability would not becomethe income of the assessee bank. 8.5.3 In the case on hand, the fact that theassessee has not credited the amount ofRs.73,58,708 received for making of Draftsand Pay Orders to its profit and loss accountin the period under consideration, is not indispute. In fact, the said amount admittedlyappeared as an outstanding liability towards 8.5.3 In the case on hand, the fact that theassessee has not credited the amount ofRs.73,58,708 received for making of Draftsand Pay Orders to its profit and loss accountin the period under consideration, is not indispute. In fact, the said amount admittedlyappeared as an outstanding liability towards Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 7/18 drafts and pay orders in the Balance Sheet ofthe assessee as on 31.3.2007. We, thereforefind merit in the arguments put forth by thelearned Authorised Representative which isfurther fortified by the decisions rendered bythe co-ordinate bench of this Tribunal in thecases of Canara Bank (ITANo.390/Bang/2011 dt.8.6.2012) and VijayBank (ITA No.455/Bang/2011 dt.22.4.2012).Following, the aforesaid decisions of the co-ordinate bench of the Tribunal (supra), wedelete this addition of Rs.73,58,708 made bythe Assessing Officer under Section 41(1) ofthe Act as being unsustainable.” 4.The learned counsels at bar submitted beforethe Court that this controversy is no longer res integraand the Division Bench of this Court in TheCommissioner of Income Tax Vs. Karnataka VikasGrameen Bank in ITA No.100014/2014 and connectedcase, decided on 14.12.2015, has held, following thedecision of the Hon’ble Supreme Court in the case of T. Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 8/18 V. Sundaram Iyengar and Sons Limited reported in(1996) 222 ITR 344, that such an addition cannot bemade under Section 41(1) of the Act, since the liabilityof the assessee Bank to pay back the amounts to thecustomers in respect of such stale Demand Drafts andPay Orders does not cease in law. The relevant extractfrom the judgment of the Division Bench of the Court ascontained in para 18 thereof including the extract fromthe decision of the Hon’ble Supreme Court is quotedbelow for ready reference: “18.A careful perusal of the aboveprovision leads us to infer that Section 41(1)can be pressed into service when anallowance or deduction is sought to be madein respect of loss, expenditure or tradingliability is incurred by the assessee. In theinstant case, the sum of Rs.58,38,581/- hasremained with the assessee owing to thefact that the payees or holders of thedraft/pay orders had not encashed them. Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 9/18 The language employed by the legislaturebeing unambiguous, it would beincongruous to construe the said sum aseither a loss, expenditure or trading liabilityincurred by the assessee. While dealing witha situation of unclaimed amount, theHon’ble Supreme Court in the case of T.V.Sundaram Iyengar[1], has held as follows:- “12. Weare unable to uphold thedecision of the Tribunal. The amountswere not in the nature of securitydeposits held by the assessee forperformance of contract by itsconstitutents. As it appears from thefacts of the case, the amounts weredepleted by adjustments made fromtime to time. The CIT(A) found that theassessee wrote back the amounts toits P&L a/c because the varioustrading parties did not claim theseamounts for a long time. The amountsrepresented credit balances in thename of the trading parties and was Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 10/18 taken to its P&L a/c. The CIT(A) heldthat these amounts were not revenuereceipts but were of capital nature.The provisions of s.41(1) were notattracted in the facts of this casebecause the assessee’s liability to pay back the amounts to its customers hadnot ceased. The Tribunal agreed withthis view." (underlining is by us) Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 10/18 taken to its P&L a/c. The CIT(A) heldthat these amounts were not revenuereceipts but were of capital nature.The provisions of s.41(1) were notattracted in the facts of this casebecause the assessee’s liability to pay back the amounts to its customers hadnot ceased. The Tribunal agreed withthis view." (underlining is by us) 19.The Tribunal adverting to the aboveruling has rightly deleted the sum ofRs.58,38,581/- added by the assessingauthority by holding it as unsustainable inlaw.” 5.Having perused the record, we are in respectfulagreement with the aforesaid decision of the DivisionBench of this Court and we do not find any reason totake a different view of the matter and in view of theaforesaid, we do not find any substantial question of lawarising in the present case. Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 11/18 6.Further, the learned counsel for the Revenuealso pointed out that with regard to another substantialquestion of law as stated in the memorandum of appealfiled by the Revenue about the taxability of the accruedinterest on the non-performing assets of the borrowers,this Court in the case of The Commissioner of IncomeTax Vs. Shri. Siddeshwar Co-operative Bank Limited (ITANo.200002/2015 along with other connected appeals,decided on 22.06.2016, following the previous decisionsof this Court in the case of Commissioner of Income Taxand another Vs. Canfin Homes Ltd., reported in (2012)347 ITR 382 (Karn), has held that such accrued intereston non-performing assets cannot be brought to tax inthe hands of the assessee. The relevant portion of thejudgment of the Division bench of this Court inCommissioner of Income Tax Vs. Shri. Siddeshwar Co-Operative Bank Limited (supra) is also quoted below forready reference: Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 12/18 “5. One other substantial question of lawframed is, “Whether interest receivable from non-performing assets, bad and doubtful debtsthough the actual expression used is interestpayable and not reflected in the profit andloss account, could be deducted?” In this regard, the learned counsel forthe assessee has produced a judgment of thisCourt in Commissioner of Income-Tax andanother vs. Canfin Homes Ltd. (2012) 347 ITR382 (Karn) with reference to non-performingassets. The Division Bench of this Court hasheld as follows: “Therefore, it is clear, if an assesseeadopts the mercantile system ofaccounting and in his accounts heshows a particular income as accruing,whether that amount is really accruedor not is liable to bring the said incometo tax. His accounts should reflect trueand correct statement of affairs. Merelybecause the said amount accrued was Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 13/18 In this regard, the learned counsel forthe assessee has produced a judgment of thisCourt in Commissioner of Income-Tax andanother vs. Canfin Homes Ltd. (2012) 347 ITR382 (Karn) with reference to non-performingassets. The Division Bench of this Court hasheld as follows: “Therefore, it is clear, if an assesseeadopts the mercantile system ofaccounting and in his accounts heshows a particular income as accruing,whether that amount is really accruedor not is liable to bring the said incometo tax. His accounts should reflect trueand correct statement of affairs. Merelybecause the said amount accrued was Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 13/18 not realised immediately cannot be aground to avoid payment of tax. But, ifin his account it is clearly stated thougha particular income is due to him but itis not possible to recover the same, thenit cannot be said to have been accruedand the said amount cannot be broughtto tax. In the instant case, were areconcerned with a non-performing asset.As the definition of non-performingasset shows an asset becomes non-performing when it ceases to yieldincome. Non-performing asset is anasset in respect of which interest hasremained unpaid and has become pastdue. Once a particular asset is shownto be a non-performing asset, then theassumption is it is not yielding anyrevenue. When it is not yielding anyrevenue, the question of showing thatrevenue and paying tax would notarise. As is clear from the policyguidelines issued by the NationalHousing Bank, the income from non- Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 14/18 performing asset should be recognisedonly when it is actually received. Thatis what the Tribunal held in the instantcase. Therefore, the contention of theRevenue that in respect of non-performing assets even though it doesnot yield any income as the assesseehas adopted a mercantile system ofaccounting, he has to pay tax on therevenue which has accrued notionally iswithout any basis. In that view of thematter, the second substantial questionframed is answered against, theRevenue and in favour of the assessee.” At this, the learned counsel for therevenue would submit that the decision onlyrefers to non-performing assets and it is notevident that non-performing assets wouldalso cover other classification of loans andadvances. In this regard, the learned counselfor the assessee would point out that non-performing assets would include the othercategories of substandard assets, doubtful Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 15/18 assets, loss assets, etc., all of which wouldcome within the purview of non-performingassets. In this regard, he would drawattention to the prudential norms for incomerecognition, asset classification andprovisioning pertaining to advances. Volume I of ‘Tannan’s Banking Law and Practice in India’, has extracted theseprudential norms in line with the internationalpractices and as per the recommendations ofthe Narasimham Committee on the financialsystem, the Reserve Bank of India hasintroduced, in a phased manner, prudentialnorms for income recognition, assetclassification and provisioning for theadvances portfolio of the Banks so as to movetowards greater consistency andtransparency in the published accounts. The definition of non-performing assets is asfollows: 1.Non-performing assets: Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 16/18 An asset including a leased asset,becomes non-performing when it ceases togenerate income from the bank. A “non-performing asset” (NPA)is a loanor an advance where; The definition of non-performing assets is asfollows: 1.Non-performing assets: Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 16/18 An asset including a leased asset,becomes non-performing when it ceases togenerate income from the bank. A “non-performing asset” (NPA)is a loanor an advance where; (i)The interest and/or installment ofprincipal remain overdue for a period of morethan 90 days in respect of a term loan; (ii)the account remains ‘out of order’for a period of more than 90 days as indicatedbelow, in respect of an Overdraft/Cash Credit(OD/CC); (iii)the bill remains overdue for aperiod of more than 90 days in the case of billspurchased and discounted; (iv)the installment of principal orinterest thereon remains overdue for two cropseasons for short duration crops; (v) the installment of principal orinterest thereon remains overdue for one cropseasons for long duration crops; Banks should, classify an account asNPA only if the interest charged during any Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 17/18 quarter is not serviced fully within 90 daysfrom the end of the quarter.” Further, asset classification which is separatelydealt with reference to categories of non-performing assets as follows: “Banks are required to classify non-performing assets further into the followingthree categories based on the period for whichthe asset has remained non-performing andthe realisability of the dues: (a)Sub-standard assets: (b)Doubtful Assets: (c)Loss assets: Therefore, it is evident that the merenomenclature adopted with reference to the badloans and advances receivable, would refer toall non-performing assets of any nature, ofwhatever category it was placed as a non-performing asset and therefore, the decision ofthis court in Canfin Homes would squarelyapply. Accordingly, the above question of lawalso stands answered. Date of Order 30-01-2017 ITA No.100026/2014C/w. ITA No.100025/2014The Commissioner of Income Tax & Another Vs.The Raddi Sahakara Bank Niyamitha 18/18 Accordingly, the appeals stand disposed of.” 7.In view of this, we are of the opinion that nosubstantial question of law now arises for furtherconsideration by this Court and the questions of law asstated in the memorandum of appeal also stand covered bythe decisions of this Court as noted above. 8.Therefore, the present appeals filed by the Revenue deserve to be dismissed. The appeals are accordingly dismissed. No costs. Sd/-JUDGE Sd/-JUDGE gab