Ita/200002/2015 Of The Commissioner Of Income Tax And Anr v. Shri.siddeshwar

� IN THE HIGH COURT OF KARNATAKA KALABURAGI BENCH DATED THIS THE 22 DAY OF JUNE, 2016 PRESENT THE HON’BLE MR.JUSTICE ANAND BYRAREDDY AND THE HON’BLE MR.JUSTICE L. NARAYANA SWAMY INCOME TAX APPEAL No. 200002/2015 C/W INCOME TAX APPEAL No. 200004/2014INCOME TAX APPEAL No. 200005/2014INCOME TAX APPEAL No. 200006/2014INCOME TAX APPEAL No. 200007/2014INCOME TAX APPEAL No. 200008/2014 INCOME TAX APPEAL No. 200002/2015: BETWEEN: 1.The Commissioner of Income TaxDr. B R Ambedkar Road,Belgaum.Dr. B R Ambedkar Road,Belgaum. 2.Joint Commissioner of Income TaxBijapur Range, Bijapur.Bijapur Range, Bijapur. … APPELLANTS (Shri Ameet Kumar Deshpande, & R Shri Y.V. Raviraj, Advocates) AND: Shri SiddeshwarCo-Operative Bank Limited.,S.S. Road, Bijapur – 586 101PAN: AAAAS4391P … RESPONDENT (Shri G. Venkatesh, Advocate for Shri A. Shankar, Advocate) This Income Tax Appeal is filed Under Section 260A of theIncome Tax Act, praying to formulate the substantial question oflaw stated above. Allow the appeal and set aside the orders passedby the Income Tax Appellate Tribunal, B-Bench, Bangalore, inIncome Tax Appeal No.1558/Bang/2013, dated 18.07.2014 for theassessment year 2010-11 and confirm the order passed by the JointCommissioner of Income Tax, Bijapur Range, Bijapur. INCOME TAX APPEAL No. 200004/2014: BETWEEN: 1. The Commissioner of Income TaxDr. B R Ambedkar Road,Belgaum.Dr. B R Ambedkar Road,Belgaum. 2.The Assistant Commissionerof Income Tax Circle –I- Bijapur.of Income Tax Circle –I- Bijapur. … APPELLANTS (Shri Ameet Kumar Deshpande, Advocate) AND: Shri SiddeshwarCo-Operative Bank Limited.,S.S. Road, Bijapur – 586 101.PAN: … RESPONDENT (Shri G. Venkatesh, Advocate for Shri A. Shankar, Advocate) This Income Tax Appeal is filed Under Section 260A of theIncome Tax Act, praying to formulate the substantial question oflaw stated above. Allow the appeal and set aside the orders passedby the Income Tax Appellate Tribunal, B-Bench, Bangalore, inIncome Tax Appeal No.799/Bang/2013, dated 27.06.2014 for theassessment year 2009-10 and confirm the order passed by the JointCommissioner of Income Tax, Bijapur Range, Bijapur. INCOME TAX APPEAL No. 200005/2014: BETWEEN: 1. The Commissioner of Income TaxDr. B R Ambedkar Road,Belgaum.Dr. B R Ambedkar Road,Belgaum. 2. The Joint Commissioner of Income TaxBijapur Range, Bijapur. … APPELLANTS (Shri Shri Y.V. Raviraj, & Shri Ameet Kumar Deshpande, Advocates) AND: Shri SiddeshwarCo-Operative Bank Limited.,S.S. Road, Bijapur – 586 101 PAN: … RESPONDENT (Shri G. Venkatesh, Advocate for Shri A. Shankar, Advocate) This Income Tax Appeal is filed Under Section 260A of theIncome Tax Act, praying to formulate the substantial question oflaw stated above. Allow the appeal and set aside the orders passedby the Income Tax Appellate Tribunal, B-Bench, Bangalore, inIncome Tax Appeal No.789/Bang/2013, dated 27.06.2014 for theassessment year 2009-10 and confirm the order passed by the JointCommissioner of Income Tax, Bijapur Range, Bijapur. INCOME TAX APPEAL No. 200006/2014: BETWEEN: 1. The Commissioner of Income TaxDr. B R Ambedkar Road,Belgaum.Dr. B R Ambedkar Road,Belgaum. 2. The Joint Commissioner of Income TaxBijapur Range, Bijapur.Bijapur Range, Bijapur. … APPELLANTS (Shri Shri Y.V. Raviraj, & Shri Ameet Kumar Deshpande, Advocates) AND: The Sindagi UrbanCo-Operative Bank Limited.,At Post: Sindagi,Bijapur – 586 101, PAN: … RESPONDENT (Shri G. Venkatesh, Advocate for Shri A. Shankar, Advocate) INCOME TAX APPEAL No. 200006/2014: BETWEEN: 1. The Commissioner of Income TaxDr. B R Ambedkar Road,Belgaum.Dr. B R Ambedkar Road,Belgaum. 2. The Joint Commissioner of Income TaxBijapur Range, Bijapur.Bijapur Range, Bijapur. … APPELLANTS (Shri Shri Y.V. Raviraj, & Shri Ameet Kumar Deshpande, Advocates) AND: The Sindagi UrbanCo-Operative Bank Limited.,At Post: Sindagi,Bijapur – 586 101, PAN: … RESPONDENT (Shri G. Venkatesh, Advocate for Shri A. Shankar, Advocate) This Income Tax Appeal is filed Under Section 260A of theIncome Tax Act, praying to formulate the substantial question oflaw stated above. Allow the appeal and set aside the orders passed by the Income Tax Appellate Tribunal, B-Bench, Bangalore, inIncome Tax Appeal No.1573/Bang/2013, dated 27.06.2014 for theassessment year 2010-11 and confirm the order passed by the JointCommissioner of Income Tax, Bijapur Range, Bijapur. INCOME TAX APPEAL No. 200007/2014: BETWEEN: 1. The Commissioner of Income TaxDr. B R Ambedkar Road,Belgaum.Dr. B R Ambedkar Road,Belgaum. 2. The Assistant Commissioner of Income TaxCircle-I, Bijapur.Circle-I, Bijapur. … APPELLANTS (Shri Shri Y.V. Raviraj, & Shri Ameet Kumar Deshpande, Advocates) AND: The Sindagi UrbanCo-Operative Bank Limited.,At Post: Sindagi,Bijapur – 586 101PAN: AAAAT380IF … RESPONDENT (Shri G. Venkatesh, Advocate for Shri A. Shankar, Advocate) This Income Tax Appeal is filed Under Section 260A of theIncome Tax Act, praying to formulate the substantial question oflaw stated above. Allow the appeal and set aside the orders passedby the Income Tax Appellate Tribunal, B-Bench, Bangalore, inIncome Tax Appeal No.798/Bang/2013, dated 27.06.2014 for theassessment year 2009-10 and confirm the order passed by the JointCommissioner of Income Tax, Bijapur Range, Bijapur. INCOME TAX APPEAL No. 200008/2014: BETWEEN: 1. The Commissioner of Income TaxDr. B R Ambedkar Road,Belgaum.Dr. B R Ambedkar Road,Belgaum. 2. The Joint Commissionerof Income Tax Bijapur Range,Bijapur.of Income Tax Bijapur Range,Bijapur. … APPELLANTS (Shri Shri Y.V. Raviraj, & Shri Ameet Kumar Deshpande, Advocates) AND: The Sindagi UrbanCo-Operative Bank Limited.,At Post: Sindagi,Dist: Bijapur – 586 101PAN: AAAAT380IF … RESPONDENT (Shri G. Venkatesh, Advocate for Shri A. Shankar, Advocate) This Income Tax Appeal is filed Under Section 260A of theIncome Tax Act, praying to formulate the substantial question oflaw stated above. Allow the appeal and set aside the orders passedby the Income Tax Appellate Tribunal, B-Bench, Bangalore, inIncome Tax Appeal No.802/Bang/2013, dated 27.06.2014 for theassessment year 2009-10 and confirm the order passed by the JointCommissioner of Income Tax, Bijapur Range, Bijapur. These appeals coming on for hearing this day, AnandByrareddy J., delivered the following: JUDGMENT These appeals are heard and disposed of together. 2. There is one substantial question of law which is common in all the appeals namely, “Whether the interest paid to members of a Co-operative Bank above Rs.10,000/- should be added to tax or not? The point is squarely covered by a Division Bench judgmentof this Court in ITA No.100116/2014 between the Commissioner ofIncome Tax and another vs. The Bagalkot District Central Co-operative Bank dated 16.12.2015 wherein, with reference to acircular of the Government of India bearing No.19/2015 inF.No.142/14/2015 TPL, it has been held as follows: These appeals coming on for hearing this day, AnandByrareddy J., delivered the following: JUDGMENT These appeals are heard and disposed of together. 2. There is one substantial question of law which is common in all the appeals namely, “Whether the interest paid to members of a Co-operative Bank above Rs.10,000/- should be added to tax or not? The point is squarely covered by a Division Bench judgmentof this Court in ITA No.100116/2014 between the Commissioner ofIncome Tax and another vs. The Bagalkot District Central Co-operative Bank dated 16.12.2015 wherein, with reference to acircular of the Government of India bearing No.19/2015 inF.No.142/14/2015 TPL, it has been held as follows: “42.5 In view of this, the provisions of thesection 194(3)(v) of the Income-tax Act have beenamended so as to expressly provide that theexemption provided from deduction of tax frompayment of interest to members by a co-operativesociety under Section 194A(3)(v) of the Income-tax Act shall not apply to the payment of intereston time deposits by the co-operative banks to itsmembers. As this amendment is effective from theprospective dated of 1[st] June, 2015, the co-operative bank shall be required to deduct tax fromthe payment of interest on time deposits of itsmembers, on or after the 1[st] June 2015. Hence, acooperative bank was not required to deduct taxfrom the payment of interest on time deposits of itsmembers paid or credited before 1[st] June 2015.” In view of the above circular, the said substantial question oflaw does not survive for consideration. 3. The further substantial question of law that arises forconsideration in Appeal No.ITA.200002/15 & ITA.200004/2014 is, “Whether the gratuity payable to its employees is availablefor deduction?” The Tribunal having held that it is so deductible, is sought tobe questioned in the light of Section 36(1)(v) of the Income TaxAct, 1961. However, even this has been answered by a DivisionBench judgment of this Court as early as in the case of ChiefCommissioner (Admn) and Another vs. Karnataka ElectricityBoard in 1991 ITR 197 page 48, wherein it was held that the merefact that the contribution would not come within the ambit of theprovisions of section 36(1)(iv) would not disentitle the assessee toclaim the benefit under Section 37(1) if the requirements thereunderwere satisfied. Reference in the said judgment is also made to CITvs. Eastern Spinning Mills Ltd (1980) 126 ITR 686, a decision ofthe Calcutta High Court, wherein in pursuance of a statutory requirement under the West Bengal Employees’ Payment ofCompulsory Gratuity Act, 1971, a special liability was incurred bythe assessee and the provision made to meet this liability wasclaimed as a deduction under Section 37, and reasonable amountwas allowed as a deduction by the Income-tax officer. The HighCourt held that a prudent estimate of the liability was entitled todeduction under Section 37; the contention that gratuity is a subjectcovered by section 36(1) and hence deduction could be claimedonly on satisfying its provisions, was not accepted. Similar was the view of the Gujarat High Court in CIT vs.Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd. (1981) 128ITR 702 . 4. The learned counsel for the respondent would submit thatnotwithstanding that such deduction was permissible only inrespect of an approved gratuity fund as laid down in Section36(1)(v), by the provision under Section 40(A) sub-section (7)clause (a), it was permissible for the deduction to be made even in respect of gratuity fund, which is not an approved fund. If theprovision was made, it would be sufficient to make a deduction. However, the learned counsel for the revenue would pointout that the said sub-section has been substituted with effect fromthe 1.4.2000 and therefore, even merely making a provision forpayment of gratuity would not entitle the assessee to make adeduction. 4. The learned counsel for the respondent would submit thatnotwithstanding that such deduction was permissible only inrespect of an approved gratuity fund as laid down in Section36(1)(v), by the provision under Section 40(A) sub-section (7)clause (a), it was permissible for the deduction to be made even in respect of gratuity fund, which is not an approved fund. If theprovision was made, it would be sufficient to make a deduction. However, the learned counsel for the revenue would pointout that the said sub-section has been substituted with effect fromthe 1.4.2000 and therefore, even merely making a provision forpayment of gratuity would not entitle the assessee to make adeduction. The counsel for the assessee would be quick to point out thateven if it is not permissible to make a deduction, in such an event,on making payment as provided under Section 43-B (b), it wouldbe permissible if the actual payment is made and these sections aremutually exclusive and therefore, the Karnataka Electricity Boardcase is no longer relevant, by virtue of the amendment to Section40-A(7). Under Section 43-B, the assessee had not merely made aprovision but payment was actually made and therefore, wasentitled to deduction, would also answer this question as to whetherthe payment made towards a gratuity fund could be deducted. 5. One other substantial question of law framed is, “Whether interest receivable from non-performing assets,bad and doubtful debts though the actual expression used is interestpayable and not reflected in the profit and loss account, could bededucted?” In this regard, the learned counsel for the assessee hasproduced a judgment of this Court in Commissioner of Income-Taxand another vs. Canfin Homes Ltd. (2012) 347 ITR 382 (Karn) withreference to non-performing assets. The Division Bench of thisCourt has held as follows: “Therefore, it is clear, if an assessee adoptsthe mercantile system of accounting and in hisaccounts he shows a particular income as accruing,whether that amount is really accrued or not isliable to bring the said income to tax. His accountsshould reflect true and correct statement of affairs.Merely because the said amount accrued was notrealised immediately cannot be a ground to avoidpayment of tax. But, if in his account it is clearlystated though a particular income is due to him but it is not possible to recover the same, then it cannotbe said to have been accrued and the said amountcannot be brought to tax. In the instant case, wereare concerned with a non-performing asset. As thedefinition of non-performing asset shows an assetbecomes non-performing when it ceases to yieldincome. Non-performing asset is an asset inrespect of which interest has remained unpaid andhas become past due. Once a particular asset isshown to be a non-performing asset, then theassumption is it is not yielding any revenue. Whenit is not yielding any revenue, the question ofshowing that revenue and paying tax would notarise. As is clear from the policy guidelines issuedby the National Housing Bank, the income fromnon-performing asset should be recognised onlywhen it is actually received. That is what theTribunal held in the instant case. Therefore, thecontention of the Revenue that in respect of non-performing assets even though it does not yieldany income as the assessee has adopted amercantile system of accounting, he has to pay taxon the revenue which has accrued notionally iswithout any basis. In that view of the matter, the second substantial question framed is answeredagainst, the Revenue and in favour of theassessee.” second substantial question framed is answeredagainst, the Revenue and in favour of theassessee.” At this, the learned counsel for the revenue would submitthat the decision only refers to non-performing assets and it is notevident that non-performing assets would also cover otherclassification of loans and advances. In this regard, the learnedcounsel for the assessee would point out that non-performing assetswould include the other categories of substandard assets, doubtfulassets, loss assets, etc., all of which would come within the purviewof non-performing assets. In this regard, he would draw attentionto the prudential norms for income recognition, asset classificationand provisioning pertaining to advances. Volume I of ‘Tannan’s Banking Law and Practice in India’,has extracted these prudential norms in line with the internationalpractices and as per the recommendations of the NarasimhamCommittee on the financial system, the Reserve Bank of India hasintroduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the Banks so as to move towards greater consistency and transparency in the published accounts. The definition of non-performing assets is as follows: “1. Non-performing assets: An asset, including a leased asset,becomes non-performing when it ceases togenerate income for the bank. A “non-performing asset” (NPA) is a loan oran advance where: (i) the interest and / or instalment ofprincipal remain overdue for a period of more than90 days in respect of a term loan; (ii) the account remains “out of order” for aperiod of more than 90 days as indicated below, inrespect of an Overdraft / Cash Credit (OD/CC); (iii) the bill remains overdue for a period ofmore than 90 days in the case of bills purchasedand discounted; (iv) the instalment of principal or interestthereon remains overdue for two crop seasons forshort duration crops; (v) the instalment of principal or interestthereon remains overdue for one crop seasons forlong duration crops. Banks should, classify an account as NPAonly if the interest charged during any quarter isnot serviced fully within 90 days from the end ofthe quarter.” Further, asset classification which is separately dealt with reference to categories of non-performing assets, as follows: “Banks are required to classify non-performing assets further into the following threecategories based on the period for which the assethas remained non-performing and the realisabilityof the dues: (a)Sub-standard Assets (b)Doubtful Assets (c)Loss Assets” Therefore, it is evident that the mere nomenclature adopted with reference to the bad loans and advances receivable, would refer to all non-performing assets of any nature, of whatevercategory it was placed as a non-performing asset and therefore, thedecision of this court in Canfin Homes would squarely apply.Accordingly, the above question of law also stands answered. Accordingly, the appeals stand disposed of. Sd/- JUDGE Sd/- JUDGE KS