1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 13TH DAY OF NOVEMBER 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.137 OF 2015 BETWEEN: 1. COMMISSIONER OF INCOME-TAX PARK VIEW BUILDING No.284/1, 4TH MAIN P.J. EXTENSTION, DAVANGERE-577002. 2. ASST. COMMISSIONER OF INCOME-TAX CIRCLE-1, PARK VIEW BUILDING No.284/1, 4TH MAIN, P.J. EXTENSION DAVANGERE-577002. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: M/S. DAVANGERE DISTRICT CENTRAL CO-OPERATIVE BANK LIMITED D.C. OFFICE CIRCLE CHITRADURGA-577501 PAN: AAATD 6617N. ... RESPONDENT (BY SMT. R. PRATIBHA, ADV., FOR SRI. S. PARTHASARATHI, ADV.,) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 10.10.2014 PASSED IN ITA 2 NO.889/BANG/2012 FOR ASSESSMENT YEAR 2007-08, PRAYING TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (II) ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY ITAT, BANGALORE IN ITA NO.889/BANG/2012 DATED 10-10-2014 CONFIRMING ORDER OF APPELLATE COMMISSIONER AND CONFIRM ORDER PASSED BY ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, DAVANAGERE. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by revenue. subject matter of appeal pertains to Assessment year 2007-08. appeal was admitted by bench of this Court vide order dated 10.08.2015 on following substantial questions of law: (i) Whether on facts and circumstances of case, Tribunal is right in law in deleting interest accrued on non performing assets from computation of taxable income for assessment year under consideration 3 despite assessee maintaining mercantile system of accounting. (ii) Whether on facts and circumstances of case, Tribunal is right in law in holding that provision for non performing assets made by assessee is proper as it is done as per RBI guidelines without appreciating that RBI guidelines cannot override mandatory provision of Section 145 of I.T. Act which is specific provision dealing with method of accounting for determining income of particular year and decision in case of UCO Bank Vs. CIT (reported in 237 ITR page 889), Supreme Court has not given findings regarding this issue and as such Tribunal is not right in relying on this ruling of Apex Court. 2. Facts leading to filing of this appeal briefly stated are that assessee is co-operative bank. co-operative Banks became taxable entity like commercial banks from Assessment Year 2007-08. assessee therefore, filed return of income for 4 Assessment Year 2007-08. return of income was processed under Section 143(1) of Act and case of assessee was selected for scrutiny and notice under Section 143(2) of Act was issued. Assessing Officer by order dated 23.12.2009 made addition of Rs.6,99,73,139/- on account of interest income following mercantile system of accounting, provision made for non performing assets to extent of Rs.1,50,00,000/-. Assessing Officer also made addition of Rs.4,00,000/- and Rs.17,38,222/- on account of provision for audit cost and addition under Section 40(a)(ia) of Act. 3. Being aggrieved, assessee challenged aforesaid order in appeal before Commissioner of Income Tax (Appeals) who by order dated 29.12.2011 inter alia held that effective rate of interest on amount of advances was 7.5%, whereas, Assessing Officer has considered same to be 9%, which is on higher side. It was further held that 5 Assessing Officer has to correctly work out opening and closing balances after giving reasonable opportunity to assessee and after verification of books of accounts and work out correct income accruing from interest and to decide issue in light of decision of Supreme Court in case of UCO Bank Vs. CIT, 237 ITR 889. Commissioner of Income Tax (Appeals) allowed provision made for non performing assets to extent of RS.1,50,00,000/- by following decision of Supreme Court in UCO Bank supra and with regard to addition made under Section 40(a)(ia) of Act of Rs.17,38,222/-, Commissioner of Income Tax (Appeals) has given direction to Assessing Officer to call details of previous payment and to check return. Accordingly, appeal was partly allowed appeal preferred by assessee. revenue thereupon approached Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). tribunal by order 6 dated 10.10.2014 dismissed appeal preferred by revenue. In aforesaid factual background, revenue has filed this appeal. 4. When matter was taken up today, learned counsel for assessee submitted that first substantial question of law has already been answered by bench of this court vide judgment dated 30.06.2014 passed in I.T.A.No.471/2013 (Commissioner of Income Tax vs. Urban Co-operative Bank Ltd) and Special Leave Petition against aforesaid order has been dismissed by Supreme Court vide order dated 12.01.2015 keeping question of law open. aforesaid aspect of matter could not be disputed by learned counsel for revenue. For reasons assigned in judgment dated 30.06.2014 passed by this court in I.T.A.No.471/2013, first substantial question of law is answered against revenue and in favour of assessee. 7 5. With regard to second substantial question of law, learned counsel for revenue submitted that assessee had claimed benefit under Section 36(1)(viia) of Act and assessee has to first set off bad debt written off against provision made under Section 36(1)(viia) of Act. It is further submitted that if actual write off is in excess of provision made under Section 36(1)(viia) of Act, then as per proviso to Section 36(1)(vii), actual write off in excess of provision of Section 36(1)(viia) would alone be allowed under Section 36(1)(vii). It is also argued that allowing provision under Section 36(1)(viia) of Act and on actual write off under Section 36(1)(vii) of Act would amount to double deduction and same is in contravention of law laid down by Supreme Court in CATHOLIC SYRIAN BANK LTD. VS. CIT (SC) 343 ITR 270. It is further submitted that principle laid down in aforesaid decision has not been taken note of by tribunal and therefore, 8 matter requires re consideration. It is also urged that reliance placed on decision of this court in COMMISSIONER OF INCOME-TAX VS. CANFIN HOMES LTD., 347 ITR 382 is of no assistance to assessee as in aforesaid decision, effect of Section 36(1)(viia) of Act has not been considered. 6. On other hand, learned counsel for assessee submitted that tribunal was justified in holding that accounting interest income on non performing asset on cash basis by assessee though it was following mercantile system of accounting was correct since, once particular asset is shown to be non performing asset then assumption is that it is not yielding any revenue and therefore, question of showing that revenue and paying tax would not arise. In support of aforesaid submissions, reliance has been placed on decisions in 'UCO BANK VS. CIT', 237 ITR 889 SC, 'CIT VS. CANFIN HOMES LTD.', 347 ITR 382 (KAR), CIT VS. URBAN CO-OPERATIVE BANK IN ITA 9 NO.471/2013 (KAR), CIT VIS URBAN CO- OPERATIVE BANK IN SLP NO.1066/2015 (SC) and 'UCO BANK VS. CIT', 360 ITR 567 (KOL). 7. We have considered submissions made by learned counsel for parties and have perused record. In course of assessment proceedings, it was noticed that assessee had debited Rs.1.5 Crores as provision for non performing asset but in income computation sheet same has not been added. assessee was given opportunity to explain why non performing asset provision has not added back to total income, in income computation sheet and again deduction 7.5% under Section 36(1)(viia) has not been claimed. assessee thereupon submitted that provision has been made as per norms of Reserve Bank of India and details of non performing assets as well as provisions made were provided. Commissioner of Income Tax (Appeals) held that deduction for provision for bad and doubtful debt is 10 allowed under Section 36(1)(viia) of Act in light of decision of Supreme Court in UCO Bank Ltd. supra. tribunal in its order dated 10.10.2014 inter alia has held that though assessee has used nomenclature as provision for non performing assets but in pith and substance, provision has been created for bad and doubtful debts and in doing so assessee has followed guidelines framed by Reserve Bank of India. tribunal has therefore, affirmed finding recorded by Commissioner of Income Tax (Appeals). 8. This court in Canfin Homes Ltd. supra after taking note of Section 145 of Act has held that once particular asset is shown as non performing asset then assumption that it is not yielding any revenue. When asset is not yielding any revenue, question of showing that revenue and paying tax would not arise. contentions, which are sought to be raised by learned counsel for revenue do not arise for consideration in context of substantial question of 11 law, which has been framed by this court. concurrent findings have been recorded by Commissioner of Income Tax (Appeals) as well as tribunal in this regard, which cannot be termed as perverse. In view of preceding analysis, second substantial question of law is answered against revenue and in favour of assessee. In result, we do not find any merit in this appeal, same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss Commissioner of Income-tax, Davangere / Asst. Commissioner of Income-tax, Circle-1, Davangere v. Davangere District Central Co-operative Bank Limited