PER I.C. SUDHIR, JUDICIAL MEMBER The revenue has questioned first appellate order on the following grounds :-
1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition made on account of Suspense, individual and Society for an amount of Rs. 18,45,181/-.
2. On the facts and in the circumstances of the case the Ld. CIT(A) erred deleting the addition made on account of Suspense Interest Realised for an amount of Rs. 29,40,274/- as the assessee has agreed to the addition made for the said amount during the course of assessment proceedings.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as on facts deleting the addition made on account of interest income on Rs. 18,45,181/- amounting to Rs. 64,581/-
2. At the outset of hearing, the Ld. AR pointed out that the issues raised in the ground Nos. 1 & 3 are fully covered in favour of the assessee by the decision ITA No. 2486/Del/11 of Delhi Bench of the Tribunal in the case of ACIT vs. Rohtak Central Co-op. Bank Ltd., ITA No. 2485/D/2011 (asstt. year 2008-09), order dated 22.7.2011. In support of ground No. 2 the Ld. AR submitted that during the year interest in question was not realized, hence the AO was not justified in making the addition on account of suspense interest realized for an amount of Rs. 29,40,274/-.
3. The Ld. DR placed reliance on the assessment order with this contention that the Ld. CIT(A) was not justified in deleting the additions questioned in grounds of the appeal. Ground Nos. 1 & 3
4. The relevant facts are that during the course of assessment proceedings the AO noted an addition of Rs. 18,45,181/- in the year under consideration in the account of suspense individual and Society of the assessee. The explanation of the assessee in this regard remained that the amount is not income of the assessee as this amount was deposited by individuals and societies who were eagerous to open new accounts but due to some shortage of documentary evidence or on account of legal formalities, the accounts could not be opened. It was explained that these amounts are transferred to individual and society suspense account and they are further transferred to the respective accounts of the customers as to when the account opening formalities are completed. It was submitted that even otherwise also these amounts cannot be ITA No. 2486/Del/11 forfeited by the bank as these amounts are refundable to the respective depositors. The AO did not agree with these explanation of the assessee and added the amount to the total income of the assessee. The AO further held that interest income on the said deposit cannot be ruled out and added the interest income of Rs. 64,581/- being interest at 3.5% per annum on the deposits in this account. These additions made by the AO were questioned by the assessee before the Ld. CIT(A) with the following submissions :- (a) The proposed Coop. Societies willing to register themselves with the Registrar of Coop. Societies have to follow the instructions of the Registrar of Coop. Societies before granting registration to the new societies. One of such instructions is that they have to deposit some amount with the nearby Coop. Bank normally ranging from Rs. 1000 to Rs. 3000. This amount has to be utilized as per the instructions of the Registrar of Coop. Societies. The assessee bank cannot repay or utilize this amount at its own or upon the instructions of the depositor. (b) Once such societies are registered with the Registrar of Coop. Societies, they have to get their accounts audited from the Coop. Auditors who are appointed by the Govt. the audit fee is paid by the Registrar of Coop. Societies out of this account if the society is not functioning. After incorporation of the Proposed Society, if it starts functioning and all the formalities have been complied with, them the Registrar of Coop. Societies permits to transfer this balance tos the regular account of the society. (d) After incorporation of the Society, if it is not working then the amount is utilized by the Registrar of Coop. Societies for the purpose of Government Audit Fee as well as for meeting out liquidation expenses that have to be borne by the respective society. ITA No. 2486/Del/11 (e) In other words, the amount can be strictly utilized as per the instructions of t eh Registrar of Coop. Societeis (a Govt. Department). Hence this is not an income of the assesee bank. (f) The amounts are otherwise also refundable to the respective account holders just like any other savings or current accounts. This amount is not in the nature of any fees or revenue receipt in the hands of the assesee bank rather this amount is in the nature of deposit like any other savings or current account. (g) The number of such accounts runs into thousands and hence account wise detail is not possible. However, separate ledger of sundry societies is maintained by all the branches of the assesee bank which are produced for your kind perusal. (h) Apart from the proposed societies, a very petty amount is also transferred to this head of account being deposit from the individual account holders. Sometimes, the depositor mentions his wrong bank account number on the pay-in-slip of the bank at the cash counter. The bank while posting the amount to the account of the depositor does not find the proper account and this amount is transferred to the suspense individual accounts. When the depositor gets his pass book completed from the bank and when he comes to know the missing amount of the deposit made by him, he points out the defect to the bank and the deposit is transferred to his respective account upon producing evidence of deposit. This amount cannot also be treated as income of the bank since this is only a part of deposit of the depositors. This amount has to be ultimately repaid to the respective depositors.
5. Ld. CIT(A) has deleted the addition in question concurring with the above explanation of the assessee and with this finding that the AO has not cared to give reasons as to why the explanation offered by the assessee is not tenable. He observed that the assessee cannot forfeit the deposits made by the individuals / societies and if the accounts are opened the amounts are transferred to the respective accounts or otherwise these amounts have to be ITA No. 2486/Del/11 refunded to the respective depositors. Regarding the addition of Rs. 64581/- made on account of interest the Ld. CIT(A) held that the funds in the account are available to the assessee free of cost which was advanced for generating profit, the question of deriving notional interest does not arise. We find that under almost similar facts in the case of ACIT vs. Rohtak Central Co-op Bank (supra) relied upon by the Ld. AR identical issues have been decided in favour of the assessee by the Delhi Bench of Tribunal. Relevant para No. 8 of the said decision is being reproduced hereunder :-
8. We have carefully considered the submissions of the Ld. Sr. DR. We have carefully gone through the assessment order and the order passed by the Ld. CIT(Appeals). Right from the beginning it has been the contention of the assessee that the amount outstanding in the accounts represents the amount of deposits made by the persons, who intended to open new accounts with the assesee bank and until all the formalities are completed and accounts of the assesee is opened, the said amount was lying in the said account. In case of non-opening of the account, the amount was to be refunded back to the respective depositors. These contentions of the assessee have not been controverted either by the assessing officer or the Ld. CIT(Appeals) and there is no material on record to show that such contentions of the assessee are incorrect. If the amount deposited in the said account belong to the various depositors, who intended to open the bank account with the assessee, then the said amount cannot attain the character of income in the hands of the assesee unless it is shown that the said amount has become the income of the assesee. If the said amount does not belong to the assessee and the assessee has utilized the same until the said amount is refunded back, no notional interest can be added to that amount as either the assesee has to pay interst if the said amount is credited to the saving account or the amount itself has to be refunded back in case the account is not opened. There is no question of assessing any notional interest on the said amount. Therefore, we find no fault or infirmity in the findings recorded by the Ld. CIT(Appeals) vide which the impugned addition and interest thereon is deleted, we decline to interfere. The appeal filed by the Revenue, being de-void of merit, is being dismissed. ITA No. 2486/Del/11
6. We find that the issues raised in the ground Nos. 1 & 3 are fully covered by the above cited decision wherein also the assessee was a cooperative society engaged in accepting deposits and giving loans as per guidelines of NABARD and there also an addition of Rs. 1,31,00,880/- deposited in the account of suspense individual and society was made and interest of Rs. 4,58,530/- @ 3.5 % on the said deposits was also added as income of the assessee. Discussing the case in Delhi the Tribunal has upheld the action of the Ld. CIT(A) in deleting the additions. We thus do not find infirmity in the first appellate order in the present case on the issues. The same is upheld. Ground No. 1 & 3 are accordingly rejected. Ground No. 2
7. The AO noted that in the profit and loss account of the assessee an interest of earlier years amounting to Rs. 1,00,51,715/- has been realised under the head suspense interest realized . The explanation of the assessee in this regard remained that overdue interest has not been utilized during the year hence it is not taxable on the following grounds :-
i) This is as per the master circular of Reserve Bank of India and as per the guidelines of the State Govt. ii) This amount is not taxable as per Honble Supreme Court ruling in the case of UCO Bank vs. Commissioner of Income Tax (1999) 237 ITR 889 (SC) iii) The amount is taxable on cash receipt basis. ITA No. 2486/Del/11 Iv) Section 43 D also supports the view and as per section 43 D, income from interest is accounted for on cash receipt basis or when the amount is transferred to the P & L account
v) Even if any addition is to be made of Rs. 1,29,91,989/- then deduction of Rs. 1,00,51,715/- is to be allowed on account of interest of earlier years credited during the year to P & L account.
8. From the above submission the AO concluded that the assesee had no objection for the addition of Rs. 29,40,274/- (Rs. 1,29,91,989/- - Rs. 1,00,51,715/-) and accordingly made the addition.
9. Before the Ld. CIT(A) the assessee submitted that the overdue interest is not taxable since the assessee is a Central Cooperative Bank operating in Jhajjar District only managed by Haryana State Govt. through the Registrar of the Coop. Society. The registrar of Cooperative Societies is the chief administrator of the assessee. The assessee bank mainly deals in loans and advances to farmers and agriculturists i.e. priority Sector on subsidized rate of interest through the amount financed by the NABARD. (National Bank for Agriculture and Development) . It was submitted that this amount represents the amount of interest not recovered on seed money. This amount is transferred to profit and loss account as and when recovered. The amount of interest of earlier years realized during the year and credited to profit and loss account is Rs. 1,00,51,715/- under the head suspense interest realized , which is evident from the profit and loss account. A reference to of master circular of the Reserve ITA No. 2486/Del/11 Bank of India and guidelines of the State Govt. through registrar of Cooperative Societies were made. As per the said circular, it was submitted that the policy of income recognition should be based on the record of recovery and therefore unrealized income should not be taken to the profit and loss account by State Cooperative Banks and Central Cooperative banks. It was pointed out that the Reserve Bank of India is a regulatory body of all the banks in India and all the circulars have tobe followed by each and every bank. Reserve Bank of India Act is applicable to all the banks including the assessee bank. The decision of Honble Supreme Court in the case of UCO Bank vs, CIT (1999) 237 ITR 889 (SC) was also cited in support, wherein it has been held that the mercantile system of accounting does not require credit of interest on doubtful debts to profit and loss account and also that the system of accounting regularly followed cannot be rejected as contrary to section 145 of the Act. It was submitted that the amount is even otherwise taxable on cash receipt basis as per instruction No. GSR 770 (E) of 1990 of the CBDT and also as per circular No. 491 dated 30.6.1987 which is binding on all the official of the Income Tax Department. It was submitted that section 43D also supports the view and as per section 43D income from interest is accounted for on cash receipt basis and when the amount is transferred to the profit and loss account. Therefore any amount of accretion to interest reserve account is not taxable. It was pointed out that the same system of accounting has been regularly followed by the assessee bank and there is no change in the system of accounting during the year. ITA No. 2486/Del/11
10. In support of the ground the Ld. DR has basically placed reliance on the assessment order and submitted that the assessee was having no objection to this addition. The Ld. AR on the other hand tried to justify the first appellate order and rejected the submissions made before the authorities below.
11. Considering the above submission of the assessee which is well supported by RBI / NABARD circular dated 17.8.2002 vide para No. 3.1 clearly states that the policy of income recognition should be based on record of recovery and therefore unrealized income should not be taken into profit and loss account by State Co-op Bank / Central Co-op Banks and that the provisions of Section 43D of the Act are clear regarding the recognition of interest income on NPA. The Ld. CIT(A) in our view has thus rightly held that overdue interest not realized during the year and credited to suspense interest account cannot be taken tobe the income of the assessee. Thus the Ld. CIT(A) has thus rightly deleted the addition in question. The same is upheld. There is no substance in the contention of the Ld. DR that the assessee was having no objection to this addition, since we find that it was an alternative submission of the assessee before the AO that even if any addition is to be made of Rs. 1,29,91,989/- then addition of Rs. 1,00,51,715/- is to be made on account of interest of earlier years credited during the year to P & L account. Even otherwise the AO is supposed to make just assessment based on the provisions of laws which can not be ignored ITA No. 2486/Del/11 since assessee is agreeable to the proposed wrong addition. The ground No. 3 is accordingly rejected.
12. In the result appeal is dismissed. Order is pronounced in the open court on 31st October, 2013. sd/- sd/- (J.S. REDDY) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER Date October, 2013 Veena Copy of order forwarded to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR By Order Deputy Registrar, ITAT