O/TAXAP/700/2017 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 700 of 2017 With TAX APPEAL NO. 759 of 2016 TO TAX APPEAL NO. 761 of 2016 With TAX APPEAL NO. 889 of 2012 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India or any order made thereunder? PRINCIPAL COMMISSIONER OF INCOME TAX-1, RAJKOT....Appellant(s) Versus KUTCH DISTRICT CENTRAL CO-OP. BANK LTD.,....Opponent(s) Appearance: MR PRANAV G DESAI, ADVOCATE for Appellant(s) No. 1 MR DARSHAN R PATEL, ADVOCATE for Opponent(s) No. 1 in Tax Appeal Nos.700/2016 and 759 to 761/2016 MR BANDISH SOPARKAR, ADVOCATE for Opponent (s) No. 1 in Tax Page 1 of 8 HC-NIC Page 1 of 8 Created On Wed Nov 08 09:35:05 IST 2017 O/TAXAP/700/2017 JUDGMENT Appeal No.889/2012 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Date : 11/10/2017 COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These Tax Appeals involve identical questions. We may notice facts from Tax Appeal No.700 of 2017. Appeal is filed by Revenue to challenge judgment of Income Tax Appellate Tribunal dated 07.04.2017. Since other Tax Appeals have been admitted, we ADMIT this Tax Appeal also for consideration of following substantial question of law. [A] Whether ITAT has erred in law in deleting addition made by Assessing Officer u/s. 36(1)(viia) of the Income Tax Act ? Learned advocate Shri Darshan Patel appeared for respondent and waived service of notice of admission. 2. Respondent assessee is cooperative bank. For assessment year 2010 11, assessee had filed return of income on 14.10.2010 declaring total Page 2 of 8 HC-NIC Page 2 of 8 Created On Wed Nov 08 09:35:05 IST 2017 O/TAXAP/700/2017 JUDGMENT loss of Rs.3.22 crores (rounded off). return was taken in scrutiny. During such scrutiny assessment, one of issues examined by Assessing Officer was of assessee's claim of deduction of Rs.93.03 lakhs. Assessing Officer noticed that P & L account, assessee had debited said sum under head reserve for overdue interest . Assessing Officer called upon assessee to explain this, in response to which, assessee conveyed that assessee is cooperative bank governed by Gujarat Cooperative Societies Act, 1961, Banking Regulations Act, 1949 and rules and regulations framed by Reserve Bank of India ('RBI' for short), as per which, it is mandatory for bank to follow directives issued by RBI. During year under consideration, bank had made provision for overdue interest of Rs.93.03 lakhs against interest accrued but not receivable on non performing assets which were irrecoverable, sticky loans, or doubtful loans. assessee pointed out that as per Reserve Bank of India circular dated 22.06.1996, bank had to follow prudential norms of State Central Cooperative Banks and District Central Cooperative Page 3 of 8 HC-NIC Page 3 of 8 Created On Wed Nov 08 09:35:05 IST 2017 O/TAXAP/700/2017 JUDGMENT Banks. As per these guidelines, such banks are required to make 100% provision for entire overdue interests as on 31st March of year. bank further pointed out that when loan itself had become NPA, there was no possibility of recovering interest and thus no prudent businessman would consider interest accruing out of such NPA as income leading to additional tax burden. 3. Assessing Officer was however unmoved. He was of opinion that assessee's case would be governed under section 36(1)(viia) of Act. Within parameters of such provisions, deduction cannot be granted. RBI directives cannot govern taxability of income. Primarily on such grounds, Assessing Officer added back said sum of Rs.93.03 lakhs which was claimed by way of deduction by assessee by way of provision for overdue interest. 4. assessee carried matter in appeal. Commissioner of Income Tax (Appeals) allowed appeal. He relied on decision of Income Tax Appellate Tribunal and of Bombay High Court in Page 4 of 8 HC-NIC Page 4 of 8 Created On Wed Nov 08 09:35:05 IST 2017 O/TAXAP/700/2017 JUDGMENT case of Commissioner of Income Tax v. Vasisth Chay Vyapar Ltd. reported in [2011] 330 ITR 440. 5. Revenue carried matter in appeal before Tribunal. Tribunal by impugned judgment, rejected Revenue's appeal. Tribunal relied on its earlier judgment in case of assessee for earlier assessment years, in which, reliance was placed on decision of Bombay High Court in case of CIT v. Deogiri Nagar Sahakari Bank Ltd. & Ors. reported in (2015) 379 ITR 24 (Bom). 6. Learned counsel for Revenue submitted that deduction under section 36(1)(viia) of Act in respect of any provision of bad and doubtful debts made by bank comes with ceiling of prescribed percentage of total income computed before making any deduction under chapter VIA. Commissioner of Income Tax (Appeals) as well as Tribunal granted deduction ignoring this statutory limitation. Counsel further submitted that effect of decision of Supreme Court in case of Southern Technologies Limited v. Joint CIT reported in 320 ITR 577 was not examined. In said judgment, Supreme Court has Page 5 of 8 HC-NIC Page 5 of 8 Created On Wed Nov 08 09:35:05 IST 2017 O/TAXAP/700/2017 JUDGMENT held that RBI directives would not govern taxability certain receipt. 7. On other hand, learned advocate Shri Darshan Patel and Shri Bandish Soparkar appearing for assessees submitted that bank was bound by RBI directives, as per which, bank would have to make 100% provision for entire overdue interest on NPA. account having become non performing account, there was little chance of recovering even principal sum. Merely because interest goes on accruing, same cannot be taxed even though possibility of recovering interest was almost nonexistent. Learned advocate submitted that various Courts have taken similar view and granted deduction on principal of taxing real income. Our attention was drawn to decision of Division Bench of this Court in case of Principal Commissioner of Income tax 5 v. Shri Mahila Sewa Sahakari Bank Ltd. reported in [2016] 72 taxmann.com 117 (Gujarat) in which said issue came up for consideration. 8. In our opinion, entire issue is covered by judgment of this Court in case of Shri Mahila Sewa Page 6 of 8 HC-NIC Page 6 of 8 Created On Wed Nov 08 09:35:05 IST 2017 O/TAXAP/700/2017 JUDGMENT Sahakari Bank Ltd. (supra). In said case, Court has considered following substantial question of law: Whether on facts and in circumstances of case, Income Tax Appellate Tribunal is right in law and on facts in holding that interest on non performing assets is not taxable on accrual basis looking to guidelines of Reserve Bank of India ? 9. Court answered question in favour of assessee and concurred with view of Delhi High Court in case of Vasisth Chay Vyapar Ltd.(supra). In said decision, contrary to what was argued before us by counsel for Revenue, Court had not only noticed but also referred to at some length judgment of Supreme Court in case of Southern Technologies Limited (supra). 10. In result, question is answered in favour of assessee and against Revenue and all Tax Appeals are dismissed. (AKIL KURESHI, J.) Page 7 of 8 HC-NIC Page 7 of 8 Created On Wed Nov 08 09:35:05 IST 2017 O/TAXAP/700/2017 JUDGMENT (BIREN VAISHNAV, J.) ANKIT Page 8 of 8 HC-NIC Page 8 of 8 Created On Wed Nov 08 09:35:05 IST 2017 Principal Commissioner of Income-tax-1, Rajkot v. Kutch District Central Co-Op. Bank Ltd