Ap Grameena Vikas Bank, Hyderabad vs Assessee

Page 1 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

Tax Act, 1961 under the Regional Rural Banks Act No.21 of 1976 is in the business of banking and filed its return of income for A.Y 2010-11 on 07.10.2010 declaring an income of Rs.1,22,51,93,517. The return of income was processed u/s 143(1) in the preliminary stage. The case was selected for scrutiny and accordingly notices u/s 142(1) and 143(2) were issued and served. While completing the assessment order, the total income was determined at Rs.142,04,20,490 on account of the following additions:

1. Disallowance of broken period Rs.5,59,70,000 interest

2. Disallowance of amortization Rs.6,63,76,000 provided on Govt. securities 3 Disallowance of provision for Rs.5,61,93,000 gratuity 4 Interest on NPA Rs.1,36,22,000 5 Disallowance claim towards staff Rs. 28,68,000 frauds 6 Disallowance of provision for Rs.1,60,659 audit fees

3. Aggrieved the assessee preferred appeal before the CIT (A).

BROKEN PERIOD INTEREST

4. With respect to broken period interest, while computing the total income of the assessee, the Assessing Officer made the disallowance of claim of deduction towards interest paid in acquisition of securities on the ground that investment in Held to Maturity (HTM) securities amounted to capital expenses. It was observed by the Assessing Officer that, though this issue is covered by the decisions of CIT(A) for the A.Ys. 2007-08 & 2008-

Page 2 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

09, further appeal, was made by the Department. The Assessing Officer also relied on the master circular by RBI, and circular No.665 issued by CBDT and the decision of Supreme Court in the case of Vijaya Bank Ltd. Vs. CIT (187 ITR 541) to substantiate his opinion that the broken period interest of Rs.5,59,70,000/- paid by the assessee in purchase of HTM securities, is not an allowable revenue expenses. Hence, the disallowance.

5. Before the CIT (A), the assessee objected to such disallowance and has contended that by assessing the interest received on due date, without deducting the broken period interest paid, amounts to double taxation. It was also submitted that according to AS 13, read with the I.T. Act, 1961, the pre- acquisition element of interest cannot be included in the cost of investment, as such the broken period interest is to be treated as revenue expenses. The appellant also submitted that the said issue has been decided by CIT(A)-VI, Hyderabad in favour of assessee, which was also upheld by Hon'ble ITAT, Hyderabad 'A' Bench vide its order dated 13.03.2014 in ITA NO.610/Hyd/2013. Thus, on the lines of the decision of the ITAT in ITA No.610/Hyd/2013 it was held by the CIT (A) that the broken period of interest of Rs.5,59,70,000 is an allowable expense.

6. The assessee preferred appeal before us. We find that issue is covered by Coordinate Bench decision in ITA No.610/Hyd/2013. Respectfully following the same, we dismiss this ground raised by the Revenue.

Page 3 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

Disallowance of amortization provided on Govt. securities

7. The assessee had claimed a sum of Rs. 6,63,76,000 towards amortization of premium paid on government securities. The AO disallowed it stating that there was, no provision in the Act for such a claim. As per the Assessing Officer, an amount of Rs.6,63,76,000/- was debited to Profit & Loss Account towards amortization of the premium paid, for the period of purchase to date of maturity, on acquiring the securities classified as Held to Maturity(HTM) and the claim of assessee does not fall within the ambit of provisions of Section 35D of the I.T. Act. The Assessing Officer also observed that the HTM category securities are held as investments and not as Stock-in-trade, hence, the appreciation or depreciation, in their value does not have any revenue implications. Assessing Officer had observed that, irrespective of accounting practices followed by the assessee, whether certain expenses can be claimed or not, is decided only as per the provisions of I.T. Act, but not the guidelines issued by RBI and the assessee is confused about the section under which the said premium is amortized. Accordingly, the claim was disallowed and brought to tax.

8. Before the CIT (A), the assessee objected for such addition and submitted that, when there is no specific provision under Income Tax Act, 1961, the tax liability of certain sum has to be decided in accordance with accounting practices and as

Page 4 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

per AS 26, read with I.T.Act, 1961, the premium paid on government securities is an intangible asset, whose life can be ascertained and the same should be written off, over the useful life of the asset. It was also submitted that this issue has been covered by the decision of CIT(A), Vijayawada and CIT(A)-VI, Hyderabad for earlier years, which were upheld by ITAT, Hyderabad, vide its order dated 13.03.2014 in ITA No. 610/Hyd/2013.

9. The asseessee has preferred appeal before us. We find that the issue is covered by the Coordinate Bench decision in ITA No.610/Hyd/2013 dated 13.03.2014. Respectfully following the same, we dismiss the ground of the Revenue.

PROVISION FOR GRATUITY

10. While computing the total income of the assessee, the AO disallowed the claim of the assessee for an amount of Rs. 5,61,93,000/- being the amount contributed to the gratuity fund during the year. While making the disallowance, the AO was of the opinion that the assessee bank did not have an approval for maintaining the gratuity contribution fund. It was further observed by the AO that assessee has not obtained permission for approved gratuity fund and if provision is not made towards approved gratuity fund, the gratuity payable is not allowed u/s 40A(7) of the IT Act.

11. Before the CIT (A), the assessee raised objection on such disallowance, vide the grounds of appeal raised in this

Page 5 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

regard. As per the assessee, the AO was under wrong belief that appellant bank should be recognized for the purpose of contributing to the gratuity fund, which is not correct. It has been clarified that the amounts were actually paid, during the year, as per the actuarial values and as required by statute and the high liability arisen on account of merger of various local grameena banks with the assessee bank. The proof for the payment of Rs. 5,61,93,000/- to M/s. SBI Life Insurance Co. Ltd., which is an approved fund by IRDA, was furnished and requested for allowing the claim on payment basis. The assessee also furnished the working of the quantums towards the liability.

12. The CIT (Appeals)-VI, Hyderabad after considering the grounds of appeal and also the documentary evidence as detailed below.

1) Certificate of Registration No.l11, dt.29/03/2001 issued by IRDA

2) Receipt showing the payment of gratuity amount before filing of the Return as per the provisions of Section 43B of the I.T. Act, 1961.

allowed the appeal on this ground.

13. Aggrieved the Revenue has filed appeal before us.

14. We heard both the parties. The conflict between section 40A(7) and section 43B has been considered by the Hon'ble Calcutta High Court in the case of Sree Kamakhya Tea Co. (P) Ltd. (supra) and the relevant portion of the Judgment is reproduced below (extracted from head note at page 718 to 199 ITR) :

"Under section 36(1)(va), deduction is allowed in respect of any sum paid by the assessee as an employer by way of

Page 6 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

contribution towards an approved gratuity fund, as defined in section 2(5) of the Act, created by the employer for the exclusive benefit of his employees under an irrevocable trust. After the insertion of section 40A(7), for claiming deduction for gratuity payment, the assessee was required to fulfil the conditions laid down in section 40A(7) and without fulfilling the conditions laid down therein, no assessee was entitled to deduction under 36(1)(v). This has undergone a change after the insertion of section 43B for and from the assessment year 1984-85. The provision of section 43B(b) are relevant and apposite in the context of the provisions of section 36(1)(v). Section 43B has overriding effect over the provisions of section 40A(7). Under the provisions of section 43B, a deduction in respect of any sum payable by the assessee as an employer by way of contribution inter alia to a gratuity fund is to be allowed in computing the business income of that previous year in which such sum has been actually paid by him."

15. Section 43B permits a deduction in respect of any payment by way of' contribution to a provident fund or superannuation fund or any other fund for the welfare of employees in the year in which the liability is actually discharged. We may, however, add that clause (va) has been inserted in sub-section (1) of section 36 by the Finance Act, 1987. The effect of the amendment is that no deduction will be allowed in the assessment of the employer unless such contribution is paid to the fund on or before the due date. The due date in the context means the date by which an employer is required to credit the contribution to the employees' account under the provisions of any law or the terms of the contract of service or otherwise.

16. In the present case the appellant has not made any provision for gratuity U/s.40A(7) as on 31-03-2010 as the total amount has been paid on 31-03-2010 and accordingly the said payment of gratuity of Rs.5,61,93,000/- is an allowable deduction U/s.43B of the I.T.Act, 1961.

Page 7 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

17. Reliance is placed on the decision of the Hon'ble Andhra Pradesh High Court, in the case of Hitech(India) (P) Ltd. (Supra) have held that:

"The second provision imposes a further restriction on the allowability of deduction of any sum referred to in clause (b). It provides that unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date, it shall not be allowed as deduction. For this purpose, the definition of 'due date' as given in the Explanation to clause (va) of sub-section (1) of section 36 is adopted. Sub-clause (x) of clause (24) of section 2 includes within the meaning 'income' any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or other fund set up under the provisions of the Employees State Insurance Act, 1948, or any other fund for the welfare of such employees. Thus, it is clear that the employee's contribution received by the employer would be 'income' in his hands and that would be allowed as permissible deduction under clause (va) of sub-section (1) of section 36 in computing the business income under section 28 provided the assessee credits the same to the relevant fund. Under Section 43B, the sum referred to in clause (b) of section 43B is treated differently, as it relates to the sum payable by the assessee as an employer which includes the employer's contribution as well as employees' contribution,. If such contributions which are payable to any provident fund or superannuation fund or any fund are paid within the due date, the employer will be able to avail of the benefit of deduction under section 43B".

18. Hence we dismiss the ground of the Revenue.

STAFF FRAUDS

19. In computing the total income,. the Assessing Officer disallowed the amounts of Rs.28,68,000j- claimed as provision for staff frauds, on the ground that provision for frauds cannot be equated with provision for bad and doubtful debts, and frauds were not let off or written off normally and

Page 8 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

the embezzled money usually recovered. It was also observed by the Assessing Officer that only certain provisions as prescribed by I. T. Act are allowed, and provision for staff frauds, not included in such allowable provisions and brought the amount of Rs.28,68,000 to tax.

20. The assessee objected for such disallowance and it was contended that loss through embezzlement by employees is an expenditure, and is expressly allowable u/s 37 of the I.T.Act. It was also submitted that the said issue was subject matter of appeal and orders of CIT(A) and ITAT, supported the view of the assessee ,and relied on the order of ITAT 'A' Bench, Hyderabad in ITA No.610/Hyd/2013 dated 13.03.2014./

21. Respectfully following the decisions of the ITAT on the issue in assessee's own case, CIT (A) was of the opinion that the provisions for staff frauds is an allowable expenditure and accordingly the addition of Rs.28,68,000 was ordered to be deleted.

22. Respectfully following the decision of the Coordinate Bench in ITA No.610/Hyd/2013, dated 13.03.2014, the ground of the Revenue is dismissed.

23. In the result, appeal in ITA No.1771/Hyd/2013 for the assessment year is dismissed.

Page 9 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

ITA No.1777/Hyd/2014

24. In the assessee's appeal, assessee is agitated on the addition on account of treating the unrealized interest on NPAs, as income amounting to Rs.1,36,22,000. While computing the total income of the assessee, the AO included the unrealized interest on Non-Performing Assets (NPA) to the extent of Rs.1,36,22,000 as income and brought to tax on the ground that the interest on NPA was credited in the books of accounts, in accordance with the Mercantile System of accounts, as per which the receipts are required to be accounted in books of accounts, irrespective of dates, when such amounts are received.

25. As could be seen from the information brought on record, the assessee is consistently following the method of recognizing the interest on NPA, as per the prudential norms of income recognition as issued by the RBI and accordingly has not included such interest as its income. The judicial decisions in this regard has upheld the broad argument that when the recovery of principal amount itself has become doubtful, it cannot be said that interest on such amounts accrued as income to the Banks. The order dated 29.04.2013 passed by the ITAT Hyderabad Bench in assessee's own case for A.Y 2007-08 and 2008-09 was in favour of the assessee. However, it may be relevant to refer to the decision of the ITAT Hyderabad 'A' Bench for A.Y 2009-10 dated 13.03.2014 in ITA No.610/Hyd/2013 in assessee's own case wherein ITAT following the decision of the Hon'ble Supreme Court in the case of Southern Technologies

Page 10 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

(320 ITR 577) which was not considered by ITAT in its order dated 29.04.2013 has held as under:

"As regards Ground No.5 relating to addition made by the AO towards accrued interest on non-performing assets, we find that the Tribunal has considered this issue in assessee's case at Paras 13 to 17 of its order and has held it in favour of the assessee. However, we find that the Tribunal has not considered the decision of the Hon'ble Supreme Court in the case of Southern Technologies reported in 320 ITR 577 wherein it has been held that the RBI directives were only in the context of presentation of NPAs in the balance sheet and the balance sheet of NBFC has nothing to do with the taxable income, which has to be computed as per the provisions of the I.T. Act. Though the decision of the Hon'ble Supreme Court is dated 11.01.2010 the same has not been considered by the Tribunal and hence, the finding of the Tribunal in assessee's own case for A.Ys 2007-08 and 2008-09 cannot be followed. In view of the same, this ground of appeal of the Revenue is allowed".

26. Respectfully following the decision of the ITAT Hyderabad, in assessee's own case, the CIT (A) had no hesitation in holding that unrealized interest on NPAs constitute income to the assessee on the principle that the RBI directives were only in the context of presentation of NPAs in Balance Sheet and presentation of Balance Sheets have nothing to do with taxable income, which has to be computed as per the provisions of the Income Tax Act. Accordingly, the CIT (A) held that the addition of Rs.1,36,22,000 is held to be sustainable.

Page 11 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

27. On appeal, the ld Counsel for the Assessee submitted a chart showing the issues involved and details of covered judgements/Circulars as follows:

• Judgment of the Hon'ble Supreme Court in the case of United Commercial Bank of India vs. CIT (240 ITR 355)

• Order of the Hon'ble High Court of judicature at Hyderabad for the State of Telangana and State of Andhra Pradesh in I.T.T.A No.566 of 2014 dated 4.9.2014 in the case of Andhra Pradesh Grameena Vikas Bank, Warangal for the A.Y 2007-08.

• Order passed by the ITAT Hyderabad in ITA No.1121 & 1459/Hyd/2011 for A.Y 2007-08 and 2008-09 respectively.

• TCI Finance Ltd vs. ACIT (2004) 9 ITD 573 (Hyd.)

• CIT vs. Annamalai Finance Ltd (2005) 275 ITR 451 (Mad.) • CIT vs. Durga Coop. Urban Ban k Ltd (ITA No.511/Vizag/2010 dated 10.03.2011)

• CIT vs. Vasiasth Chay Vyapar Ltd, Delhi High Court dated 29.11.2010.

28. The ld Counsel for the assessee particularly stressed on the decision of the United Commercial Bank vs. CIT (240 ITR 355 (S.C).

29. However, we are bound by the order of the Coordinate Bench of the ITAT and hence confirm the order of the CIT (A) on this issue and dismiss the assessee's appeal.

Page 12 of 13 ITA Nos.1772 & 1777 of 2014 AP Grameen Vikas Bank Warangal

30. In the result, appeal filed by the assessee is dismissed.

Order pronounced in the Open Court on 17th April, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 17th April, 2015.

Vnodan/sps Copy to:

1. Asstt. Commissioner of Income Tax, Circle -1, Warangal

2. Andhra Pradesh Grameena Vikas Bank, H.No.2-5-8/1 Old Bus Depot Road, Ramnagar, Hanamkonda, Warangal

3. The CIT(A)-VI Hyderabad

4. The CIT - VI Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

Page 13 of 13