IN INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER And SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER I.T.A. No.480/Ahd/2014 (Assessment Year : 2009-10) Pragati Sahakari Bank Ltd. Commissioner of Alembic Colony Vs. Income Tax-1 Alembic Road Baroda Baroda 390 003 PAN/GIR No. : AAAAP 0468 N (Appellant) .. (Respondent) Appellant by : Shri S.N. Soparkar, AR Respondent by : Ms. Vibha Bhalla, CIT-DR Date of Hearing 09/09/2016 Date of Pronounce ment 20/09/2016 ORDER PER SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER : above captioned appeal filed by assessee is presented against order of Commissioner of Income Tax-I, Baroda (in short CIT) dated 19/12/2013. 2. CIT in exercise of his revisionary power passed order u/s.263 of Income Tax Act, 1961 (hereinafter referred to as "the Act") whereby assessment order dated 05/12/2011 passed by Assessing ITA No.480/Ahd/2014 Pragati Sahakari Bank Ltd. vs. CIT Asst.Year 2009-10 -2- Officer u/s.143(3) of Act relevant to Assessment Year (AY) 2009-10 was set aside. CIT alleged that order passed by Assessing Officer (AO) was erroneous in so far as it was prejudicial to interests of revenue as (i) assessee had not properly disclosed nor properly examined by AO nature and identity of assets declared as Non Performing Assets (NPAs) and (ii) towards failure to disclose sum of Rs.55.60 lacs towards accrued interest on NPAs as income in Profit & Loss Account. assessee in this appeal seeks to assail action of CIT in invoking section 263 of Act and contends that subject assessment order framed u/s.143(3) of passed by AO cannot be termed as erroneous or prejudicial to interests of revenue. 3. assessee is Co-operative Bank and claims to identify NPAs towards loans and advances made to its customers as per prescribed norms laid down by Reserve Bank of India (RBI). Having identified NPA as per RBI guidelines, suitable provisioning thereof is made in books of accounts. assessee has not reported any interest income purportedly accrued on such NPAs which are doubtful of recovery. It is case of CIT that interest accrued on NPAs has escaped assessment and such interest was required to be taxed. It was alleged by CIT that AO did not examine issue in perspective ITA No.480/Ahd/2014 Pragati Sahakari Bank Ltd. vs. CIT Asst.Year 2009-10 -3- and accepted claim on face value. relevant finding of CIT, in this regard, is reproduced hereunder:- 4. I have considered submission of assessee. It is apparent that issue of accrued interest on NPA was not properly disclosed nor examined by A.O. RBI circular No.3/09.14.000/2009-10 dated 1st July, 2009 has defined NPAs as asset which ceases to generate income for bank. Those assets on which interest and / or installment or principal remain overdue for period of more than 90 days in respect of term loan are considered as NPAs. In respect of credit facilities, if amount is not paid by due date, balance becomes overdue. Further it is advised in RBI Guidelines that in case of NPAs where interest has not been received for 90 days or more, as prudential norm, there is no use debiting said account by interest accrued in subsequent quarters. However, this is subject to certain conditions. It has been also advised by RBI that identification of NPAs is done on ongoing basis and doubts in asset classification due to any reason are settled in specified internal channels within one month from date on which account would have been classified as NPA as per prescribed norms. It is further advised that treatment of asset as NPA should be based on record of recovery. banks should not treat advance as NPA merely due to existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding limit, non- submission of stock statement and non-renewal of limits on due date etc. It is further provided that where natural calamities impair repaying capacity of loan may be re- scheduled and in such cases assets should not be classified as NPAs. Similarly, exemption have been provided in case of housing loan to staff, credit facilities guaranteed by Centre and State Governments etc. In other words, this issue needed in- depth inquiry by Assessing Officer keeping in view all these factors. Assessing Officer did not examine this issue in ITA No.480/Ahd/2014 Pragati Sahakari Bank Ltd. vs. CIT Asst.Year 2009-10 -4- proper perspective. It is very important to identify persons whose transactions have been categorized as NPA in Co- operative Bank. He merely accepted claim on face value. He also did not examine properly amount shown to have been received from asset earlier declared as NPA. Accordingly, it is held that order passed by A.O is erroneous and prejudicial to interest of revenue. 5. In view of above, order dated 5.12.2011 is set aside to be passed after giving assessee reasonable opportunity of being heard on issue referred above. Assessing Officer will examine issue in detail and will pass speaking order. 4. ld.Counsel Mr.S.N.Soparkar senior advocate appeared on behalf of assessee and pointed out that CIT has exercised his power u/s.263 of Act primarily on ground that interest accrued on NPAs identified by assessee-bank ought to have been accounted for while computing taxable income of assessee. He submitted that such action to tax interest purportedly accrued on NPA suggested by CIT is against settled law by judiciary in this regard. ld.Sr.Counsel submitted that that assessee is Co-operative Bank and engaged in business of banking in India. assessee is governed by Rules, Regulations and Guidelines of RBI. ld.Sr.Counsel submitted that NPAs towards loans and advances given to its customers from time to time have been identified and provisioned in books of account as per prudential norms laid down by RBI in exercise of its statutory powers. income on such NPAs could not be recognized and cannot be said to have been accrued due to inherent uncertainty in ITA No.480/Ahd/2014 Pragati Sahakari Bank Ltd. vs. CIT Asst.Year 2009-10 -5- collection of principal amount itself. For proposition that interest on NPAs is not taxable on accrual basis in view of Guidelines of RBI he placed reliance upon decision of Hon ble Gujarat High Court in case of Principal Commissioner of Income-tax-5 vs. Shri Mahila Sewa Sahakari Bank Ltd.d reported at (2016) 72 taxmann.com 117 (Gujarat). ld.Sr.Counsel next referred to reply of assessee as were made before CIT in response to show-cause notice issued u/s.263 of Act and submitted that it is matter of record that before passing assessment order, discussions on issue that tax cannot be levied on interest on NPAs were duly undertaken by AO. Merely because these discussions did not find mention in assessment order by itself will not render order erroneous and prejudicial to interests of revenue. He further submitted that CIT has sought to invoke power u/s.263 of Act merely because in his opinion issue has not been examined in proper perspective. He submitted that inadequacy in inquiry, if any, in opinion of CIT would not be sufficient to invoke power u/s.263 of Act. For this proposition, he relied on decision of Hon ble Bombay High Court in case of CIT vs. Nirav Modi reported at (2016) 71 taxmann.com 272 (Bombay). He finally submitted that there was no error per se in terms of section 263 of Act in order passed u/s.143(3) of Act and therefore power exercised by CIT u/s.263 of Act is vitiated in law. Consequently, order u/s.263 of Act dated 19/12/2013 requires to be set aside. ITA No.480/Ahd/2014 Pragati Sahakari Bank Ltd. vs. CIT Asst.Year 2009-10 -6- 5. ld.CIT-DR for Revenue, on other hand, relied on order of CIT and submitted that in absence of proper enquiry on pertinent issue as pointed out and in order of CIT, action of Commissioner u/s.263 of Act suffers from error which is prejudicial to interests of revenue and thus action of CIT was in accordance with law and thus justified. 6. We have considered rival submissions. Section 263 of Income Tax Act, 1961 confers powers upon Commissioner to call for and examine records of proceeding under Act and revise any order if he considers same to be erroneous and prejudicial to interests of revenue. Commissioner can take re-course to revision u/s.263 of Act where assessment order is erroneous as well as prejudicial to interests of revenue. twin conditions are required to be satisfied simultaneously. Commissioner in present case has purported to act in exercise of power u/s.263 of Act and thereby has sought to set aside assessment order of AO passed u/s.143(3) of Act. foundation of action of Commissioner is that assessee should have offered interest on NPAs as income for year under consideration. law touching controversy in issue has been extensively dealt with in decision of Hon ble Gujarat High Court in case of Shri Mahila Sewa Sahakari Bank Ltd.(supra), wherein Hon ble High Court found merit in not charging interest on NPAs by assessee therein. action of ITA No.480/Ahd/2014 Pragati Sahakari Bank Ltd. vs. CIT Asst.Year 2009-10 -7- Commissioner in invoking section 263 of Act runs contrary to decision of Hon ble Gujarat High Court as noted above and therefore not sustainable in law. We also note that Revenue has not controverted observation on behalf of assessee that some enquiry on issue was made during course of assessment proceedings and therefore in our view CIT was not justified in substituting his opinion in place of opinion of AO without showing any perversity in action of AO. 6.1. In light of aforesaid discussion, we hold that action of Commissioner is without authority of law and therefore cannot be sustained. In consequence, order passed u/s.263 for AY 2009-10 dated 19/12/2013 is hereby set aside and quashed. 7. In result, appeal of assessee is allowed. This Order pronounced in Open Court on 20 /09/2016 Sd/- Sd/- . (R.P. TOLANI) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 20/ 09 /2016 T.C. NAIR, Sr. PS ITA No.480/Ahd/2014 Pragati Sahakari Bank Ltd. vs. CIT Asst.Year 2009-10-8- Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. Concerned CIT 4. CIT(A)-I, Baroda 5. DR, ITAT, Ahmedabad 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt.Registrar) , ITAT, Ahmedabad 1. Date of dictation .. 15.9.16 (dictation-pad 16- pages attached at end of this appeal-file) 2. Date on which typed draft is placed before Dictating Member 16.9.16 3. Other Member 4. Date on which approved draft comes to Sr.P.S./P.S .. 5. Date on which fair order is placed before Dictating Member for pronouncement 6. Date on which fair order comes back to Sr.P.S./P.S . 20.9.16 7. Date on which file goes to Bench Clerk 20.9.16 8. Date on which file goes to Head Clerk ... 9. date on which file goes to Assistant Registrar for signature on order .. 10. Date of Despatch of Order Pragati Sahakari Bank Ltd. v. Commissioner of Income-tax-1, Baroda