IN THE ITAT LUCKNOW BENCH ‘A’
Hamirpur District Co-operative Bank Ltd.
Deputy Commissioner of Income-tax
IT Appeal Nos. 114 & 115 (Lkw.) of 2012
[Assessment Years 2007-08 & 2008-09]
Date of Pronouncement – September 6, 2012
Sanjay Arora, Accountant Member
This is a set of two Appeals by the Assessee, i.e., in the quantum and penalty proceedings, albeit for different years, being assessment years (AYs) 2007-2008 and 2008-2009 respectively, challenging the disposal of its respective appeals by the Commissioner of Income-tax (Appeals)-II, Kanpur (‘CIT(A)’ for short) vide his orders of even date, i.e., 23/12/2011, passed u/s. 250 of the Income-tax Act,1961 (‘the Act’ hereinafter). The appeals relating to same assessee, with common background facts, were heard together, and are being accordingly disposed of vide a common, consolidated order. The assessee-appellant is a co-operative society, registered under the Co-operative Societies Act, 1963, carrying on the business of banking in Mahoba and Hamirpur Districts of the State of Uttar Pradesh (UP) (which constitute its notified working area) with its Head Office at Mahoba (UP). We shall take up the appeals in seriatim, which corresponds with the chronological order of their respective years, as also of the passing of the primary orders by the Assessing Officer (AO).
I.T.A. No.114/Lkw/2012 (A.Y. 2007-2008)
2. The facts of the case are abundantly clear and undisputed. The assessee, a cooperative bank, governed by the Banking Regulations Act, 1949, filed its return of income for the year on 31/10/2007 at an income of Rs.20.16 lakhs. The same was selected for scrutiny under the verification procedure under the Act vide notice u/s. 143(2) dated 26/09/2008. The assessee had claimed tax credit in respect of advance-tax paid for the relevant year at Rs.12.24 lakhs. As the same did not find reflection in the assessee’s audited balance-sheet, filed along with its return of income, the source of the payment of tax was enquired into by the AO during the course of the assessment proceedings. The assessee explained the same to be out of its accounted sources, duly debited to the profit & loss account for the year. The details of the various expenses called for by the AO revealed the same to have been included as part of the expenses reflected under the account head ‘other expenditure’ (PB pages 30, 57, 60). The aforesaid details also revealed the assessee to have claimed, through debit to the profit & loss account, expenditure for Rs.52.24 lakhs, which was in fact not an expense, but only an appropriation of profit, made by the assessee, as stated by it, in terms of the guidelines issued by U.P. Co-operative Samiti Limited. Without doubt, both these sums, claimed by way of deduction in the computation of its business income by the assessee, were clearly not allowable; in fact, under any head of income for that matter. There was in fact no dispute in this regard, being admitted, and accordingly were brought to tax in assessment. The present dispute, however, is with regard to the leviability of penalty u/s. 271(1)(c) of the Act in respect of the disallowances in their respect.
3.1 The assessee’s case is that though an assessee under the Act, its income was ‘exempt’ u/s. 80P of the Act, which, however, stood amended vide Finance Act, 2006 with effect from 01-04-2007, excluding, inter alia, co-operative banks (other than some specified categories) from the purview of the said section, resulting in a taxable income for assessment year 2007-2008. Its accounts, as in the past, were audited by the cooperative sector auditors, and who also issued audit report u/s. 44AB of the Act in the prescribed form(s). The return of income was prepared by the bank’s own staff and verified by its General Manager, Shri R. K. Pandey. The legal representation before the AO was also by the assessee’s own employee, namely, Shri R. K. Srivastava (Jr. Branch Manager, Accounts), furnishing the requisite details and particulars as called for by him from time to time. That is, the said representation was without any outside legal assistance, which was so for the first time only at the time of, and for, submitting reply to the show cause notice dated 16-11-2009issued u/s. 274 of the Act. In other words, neither its own staff nor the auditors were professionals or Chartered Accountants and, thus, not well versed with the provisions of the Act. The return of income was accordingly filed on the basis of the profit & loss account, as in the past, and which had found acceptance by the Revenue. There was no concealment or furnishing of inaccurate particulars of income and, in any case, no intention thereof. This is borne out from the fact that the assessee furnished the factual position qua the various queries raised per its replies before the AO, while the fact of payment of advance-tax was borne out by the income-tax return itself. The assesse-bank is a legal person, governed by its rules and regulations, and run by democratically elected members. There is therefore no personal interest in its finances and, thus, no personal element involved in the impugned discrepancies, which is only a result of unintentional clerical and a bonafide mistake. No case, as such, for the levy of penalty u/s. 271(1)(c) of the Act is made out. In fact, the ld. CIT(A) has not even met the abundant case law relied upon by the assessee’s counsel before him, including in the case of CIT vs. Sonali Jain (ITA. No. 88 of 2008, copy enclosed) by the hon’ble jurisdictional High Court.
3.2 The Revenue’s case, on the other hand, is that there is no presumption as to ignorance of law, which could in any case not operate as an excuse, particularly considering that the assessee is a bank. The penalty levied is for a statutory offence. There is no indication in the return of income that the computation of taxable income bears the impugned and undisputed disallowables. The assessee did not revise its return to correct the ‘omissions’ at any time, i.e., even after the issue of notice u/s. 143(2) of the Act. The non-allowable nature of the expenses, which is not in doubt, came to the fore only when its details were divulged by the assessee on being specifically enquired into by the Assessing Officer. The assessee has been filing its return of income for the past several years, and is adequately assisted by Chartered Accountants and qualified staff. It was the clear case of an intentional claim of the impugned ‘expenses’ and, thus, of concealment of particulars of income and, in any case, lack of bonafides on the part of the assessee, which is apparent from the fact that it accepted the impugned additions made to its returned income without demur, and also did not prefer any appeal there against. The onus under law, i.e., for furnishing a reasonable, substantiated explanation, or at least proving its bonafides, coupled with disclosure of all material facts, had not been discharged, so that the penalty for concealment or furnishing of inaccurate particulars of income would hold. Reliance stood placed by the first appellate authority on a host of case law.
4.1 Having heard the parties at length, and perused the material on record, as well as the case laws relied upon, we proceed to issue our findings in the matter. Our first observation is that it is patently wrong on the part of learned A.R. to contend that the Revenue (in the CIT(A)) has not considered the case law relied upon by the assessee. The ld. CIT(A) has duly examined the facts of the case, as also the law in the matter, in sufficient detail. There are bound to be some differences between the situation obtaining in each case, and what is relevant and paramount is the statement of law as enunciated or clarified by the higher courts of law; the ratio decidendi of these judgments. The ld A.R., who did not even take us through the appellate order during hearing, did not specify any infirmity therein.
4.2 Our second observation in the matter is that the primary facts are largely undisputed. The only difference that we observe is that while the assessee states that it did not have the benefit of any expert tax advice, the ld. CIT(A) holds that it was assisted by competent people. Apart there-from, we find no difference qua the primary facts, including the assessee’s acceptance of the two sums debited to its profit & loss account as being not deductible in the computation of its assessable income; rather, stating of the claim (for deduction) made in their respect as being the result of an inadvertent and bonafide mistake or omission, and which, therefore, should not saddle it with a punitive liability. That, in fact, defines and sums up the assessee’s case. That being the case, the difference between the two, i.e., the assessee and the Revenue, would lie in a finding of fact; the Revenue holding it to be not a case of ignorance of law, as claimed by the assesse, but of a deliberate and intentional omission. The issue arising for determination thus is one of application of law to the given factual situation, and which may include that on inferential fact/s as well. Further, we may clarify that the penalty under reference being only a civil liability for a statutory offence, which stands to be attracted where a reasonable cause is not shown, the question of guilty mind, which the argument qua intention entails, is of little consequence, so that the Revenue’s claim in this regard is only by way of a rebuttal of the assessee’s claim of the impugned default being occasioned by an inadvertent and bona fide omission.
4.3 It would be relevant to delineate the parameters of the provision. This is as, as clarified by the apex court in Union of India vs. Rajasthan Spinning & Weaving Mills  13 SCC 488, that for penalty u/s. 271(1)(c) to be levied, the conditions stated therein must exist (see 322 ITR at page 164). The provision (to the extent relevant) is reproduced as under:
Failure to furnish returns, comply with notices, concealment of income, etc.
“271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act is satisfied that any person –
(a) … …
(b) has failed to comply with a notice under sub-section (2) of section 115WD or under sub-section (2) of section 114WE or under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of the section 142, or
(2) has concealed the particulars of his income or furnished inaccurate particulars of such income, or
(c) has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits,
(d) he may direct that such person shall pay by way of penalty, –
(i) … …
(ii) in the cases referred to in clause (b), in addition to tax, if any, payable by him, a sum of ten thousand rupees for each such failure;
(iii) in the cases referred to in clause (c) or clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded b reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.
Explanation 1. – Where in respect of any facts material to the computation of the total income of any persons sunder this Act, –
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or
(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.”
The words employed by the statute are important. The expressions ‘concealed’ and ‘inaccurate’ having not been defined under the Act, their natural, common use meaning would apply. The Law Lexicon explains the word ‘conceal’ to mean ‘to hide or to keep secret, i.e., to hide or withdraw from observing; to cover or keep from sight; to prevent discovery or to withhold knowledge of.’ Again, the dictionary meaning of the word ‘inaccurate’ (Webster’s Dictionary) is ‘not accurate, not exact or correct; not according to truth; erroneous; an incorrect statement, copy or transcript’ [source : Dilip N. Shroff v. Jt. CIT  291 ITR 519 (at page 546)]. As per the Law Lexicon, the meaning of the word ‘particulars’ is a detail or details (in plural sense); the details of a claim; or the separate items of an account (refer : CIT v. Reliance Petroproducts Pvt. Ltd. 322 ITR 158 at page 163).
Both the words ‘conceal’ and ‘inaccurate’, thus, refer to deliberate acts on the part of the assessee, which is in fact statutorily presumed by the section; the assesse preferring a wrong claim per its return, unless of course he proves otherwise, by showing his case to fall under either of the two limbs of Explanation 1 to the provision. This is as the provision defines two scenarios, per Explanation1(A) and 1(B) to section 271(1)(c), as constituting deemed concealment (of particulars of income), which serve to shift the onus (to exhibit non-deliberateness or the bona fides in preferring an invalid – and which could be qua facts or law or both – claim per its return) on the assessee. This is as the onus to prove the positive element of deliberateness, which is a necessary ingredient for the levy of penalty, would otherwise be on the Revenue. The said Explanation requires the assessee to explain the basis of the impugned claim, with a failure to discharge the burden of proof in its respect being deemed to be a case of concealment of particulars of income. An Explanation is an integral part of a section, clarifying its scope and supplying the contents of the provision. Further, it does not derogate or detract from the main provision. This is as a penalty for concealment or furnishing inaccurate particulars of income is only with reference to the return of income as submitted, i.e., a positive act on the part of the assesse, who can therefore only be considered as being in the know of the particulars of the various claims preferred by it per its return, particularly qua the basic facts as also the primary law. That is, whether the income, particulars of which are alleged to be concealed or incorrectly furnished by the assesse per its return of income, was a result of a bonafide mistake or that of a deliberate action, would depend upon the assessee’s explanation in furnishing the information that it does thereby; in the manner it so does; and the validity of the said information in representing a fact/s or the truth. As such, as long as the assessee has not concealed any material facts, or the ‘factual’ information given by him is shown to be correct, he will not be liable for imposition of penalty u/s. 271(1)(c) of the Act, even if the claim made by him is not sustainable in law, i.e., where he either substantiates the explanation/s offered by him or the explanation/s, even if not substantiated, is found to be bonafide. If the explanation is either not substantiated or not shown to be bonafide coupled with the disclosure of material facts, Explanation 1 to section 271(1)(c) would come into play, and the assessee will be liable for penalty thereunder. Explanation 1to the provision, thus, balances the primary condition of the default of non-disclosure or improper disclosure or claim qua the impugned ‘income’ (per the return of income) as being only a result of a deliberate act on the assessee’s part, with the fact that is only the assesse, who being in the intimate know of its own affairs, could explain the reasons motivating or informing the said non or improper disclosure/claim on its part. Further, this is also in tandem and harmony with the principles of jurisprudence with regard to penalty, which finds mention in, inter alia, 85 corpus juris secundum, paragraph 1023 (refer 291 ITR at page 543):
“A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws.”
4.4 We may next consider the facts of the case, so as to determine if the requirements or the ingredients of the section are satisfied, as, without doubt penalty under section 271(1)(c) of the Act could not be levied unless the case is strictly covered by it. In our clear view, this is a case both of concealment of particulars of income as well as of furnishing inaccurate particulars thereof. With regard to the former, the present case falls under Explanation 1(A) to the provision. This is as we find no explanation toward the impugned claims by the assessee, and only understandably so. Income-tax or any other rate or tax levied on the profits or gains of a business or profession is specifically barred for deduction by the non obstante provision of section 40(a)(ii) of the Act. Its claim, in fact, goes against the grain, the very essence of the levy of income-tax, i.e., a tax on the income of the subject. How could income-tax paid (or payable) under the Act be, then, itself deductible in computing the income subject to tax thereunder? Also, how could it all be claimed to have been incurred for the purposes of its business by the assessee, which represents the primary condition for an expenditure to qualify as a business expenditure and, thus, eligible for deduction against its receipts in the computation of profits or gains or income therefrom? Likewise, there is no explanation whatsoever for the claim of Rs.52.24 lakhs. The details thereof, furnished by the assessee during the assessment proceedings, reveal it to be in fact ‘reserve funds’ created by debiting the profit & loss account. Again, there is no basis or reason for claiming deduction in its respect as an ‘expenditure’ incurred for the purpose of the business. There is neither any outgo of funds nor incurring or assumption of any liability, much less for the purpose of its business by the assessee. In fact, both the sums, claimed as business expenditure, do not even qualify to be termed as expenses, which, by definition is an outgoing or a liability assumed in its respect, for the purpose and in the course of a particular activity, (say) a business and, thus, required to be adjusted or set off against the receipts thereof in computing the income therefrom, as (say) profits and gains of the business. The first, i.e., income-tax, is a statutory liability on the profits and gains of a business, while the latter, an appropriation of the business profits made by creating certain ‘reserve funds’ for some specified purposes. An explanation contemplated by the provision, and as referred to in Explanation 1(A) or Explanation 1(B), implies a proper, reasonable and acceptable explanation, as regards the basis or the reason/s informing the claim qua an item of income (or deduction of expenditure) in computing the assessable income under the Act, even as clarified by the hon’ble apex court in the case of CIT v. Mohanakala P.  291 ITR 278 (SC) in the context of clarifying the scope of the words ‘offers no explanation’ occurring in section 68 of the Act, and which would be equally valid and applicable in the context of section 271(1)(c) of the Act as well. The said applicability, apart from being guided by the reason of parity, is apparent, as without doubt an explanation which is not proper or reasonable can hardly be termed as an explanation. In fact, the assessee’s admission of the claim under reference as being a mistake is itself sufficient to hold it to have no explanation. There being no explanation, which, as also stated by the ld. CIT(A), is also manifest in the ready acceptance of the said disallowances by the assessee in quantum proceedings, there is no scope or occasion for it to be shown as false.
Continuing further, in our view, it is also a case of furnishing inaccurate particulars of income. This is for the reason as, as afore-stated, the two ‘expenses’ claimed as business expenditure, do not qualify to be expenditure in the first place. Even an elementary understanding of accountancy would suffice to bear out the truth of this statement, which remains undisputed in the instant case. A business expense would, in addition, require of it to be incurred for the purposes of business. Admittedly, advance-tax is paid for and toward the tax obligation under the Act, i.e., only toward the tax liability on its income. Similarly, the ‘expenditure’ of Rs.52.24 lakhs, as also afore-stated, is toward creating reserve funds by the bank’s Management for various purposes, and thus only an appropriation of its profits. Both are thus only an adjustment or application of the profits of the assessee’s business.
4.5 We are conscious of the fact that an omission or oversight could form a ground for not attracting penalty. This is as a mere omission or negligence would not constitute a deliberate act. That is to say, a genuine mistake can constitute a bonafide explanation on the basis that it operates as a reasonable cause u/s. 273B, which saves penalty, notwithstanding the applicability of the section. The question in this regard, however, that arises is what separates an omission, by way of a genuine mistake, from a serious error? Such a bonafide explanation is to be coupled with the disclosure of all material facts for it to be covered by Explanation 1(B). Now, if there is such a disclosure (i.e., of all facts material to the computation of income), that would itself imply a conscious application of mind in the matter by the subject (assessee), taking it outside the purview of omission or oversight, unless of course the assessee exhibits to being misguided or mis-instructed on law. It would thus be clear that an explanation envisaged under Explanation 1(B) to section 271(1)(c) is of the same genre or category as that covered by the first limb of Explanation 1. The law, by including even the spectre of an unsubstantiated explanation, endeavors to render itself complete and justifiable under all circumstances, so that even though an explanation is not substantiated by the assessee, penalty ought not to be levied in genuine cases, i.e., where the assessee proves the bonafides of the explanation, having disclosed all the material facts in relation thereto. In fact, the two requirements are not separate and distinct, but composite – the disclosure (of the relevant facts) itself enables and only goes to establish the bonafides of the explanation. As also afore-stated (in the preceding paragraph), the plea of a mistake itself is an admission of there being no explanation, and ousts the same for being considered as an explanation under Explanation1 to section 271(1)(c).
Continuing further, and without prejudice, we consider it to be a case of serious and grave error, and a conscious disregard of its legal obligations, if not intentional, rather than that of a bonafide mistake, which would save penalty. The assessee is obliged to pay advance-tax equal to the whole of its tax liability for the relevant year during the course of the year itself in three installments falling due on 15/9, 15/12 and 15/3 of the previous year. The same is paid at Rs.12.24 lakhs on 14/12/2006 (PB page 41), i.e., prior to the expiry of the second installment. What does that show? Clearly, that, though the assessee’s entire income, as stated, may have been exempt from tax u/s. 80P for the preceding years, it was well aware of the amendment to section 80P with effect from the relevant year (i.e., of exclusion of co-operative banks from the purview of s. 80P), as well as that the tax obligation is to be discharged during the previous year itself in three installments. Two, the payment of Rs.12.24 lakhs itself shows it to be a calculated payment. So that a formal exercise in this regard was definitely made. Could be so, without being aware of the relevant provisions? Thirdly, the payment is equivalent to a taxable income of Rs.68 lakhs, given the extant tax rate of 30% and the obligation to cover 60% of tax upto the second installment. The assessee, however, files its tax return only at Rs.20.16 lakhs, i.e., at less than 1/3rd the income for which it pays advance-tax. Clearly, some adjustments were made (to the book profit) either at the time of calculating and depositing advance-tax or while finalizing and filing the tax return. What are those adjustments? We are here not concerned with the merits of those adjustments, which though is apparent from the fact that the assessee does not even contest its assessment at Rs.84.64 lakhs (worked out by making only the two adjustments under reference to the book profit), but the fact that those could not but be the result of a conscious application of mind. How could, thus, it be a case of oversight or omission. Surely, the plea of omission cannot be employed as an alibi. Similarly, the particulars of tax paid noted in the return are only from the assessee’s accounts, wherein the same is debited under the head ‘other expenditure’. How could then the person making the return, which is prepared from the same set of final accounts, be said to be not conscious of the said fact, when he simultaneously notes the particulars thereof in the return, claiming tax credit in its respect? Further, the same clearly shows that the assessee has access to services of people well conversant with the provisions of the Act, be it from its own staff or those available on hired basis (refer para 4.6).
4.6 At this juncture, we would also like to deal with the assessee’s claim of being not adequately serviced in this regard. Though, we consider to have adequately demonstrated it to be not so – that being our finding, in our view, there is in law no scope for taking such a plea. The assessee is required to get its accounts audited u/s. 44AB of the Act by an Accountant, which term is also defined thereunder. It matters little, therefore, whether or not the assessee’s auditors is a firm of Chartered Accountants, being in either case qualified to act as tax auditors. Further, could the assessee, a bank, most of whose assets are in the form of financial assets, function as a business entity, without proper accounts? In fact, the accounting and the tax regime under which it operates, besides the regulatory framework by the RBI as also NABARD, exclude any such possibility, which rather is the primary requirement of any business entity, besides being the statutory requirement per its governing law (as well as of the Act per section 44AA). Further, the assessee’s balance-sheet as at the year-end, forming part of its paper-book (PB pages 5 -11), is signed by as many as seven persons, apart from its Director and Chairman. Could it then possibly contend of being not adequately serviced? Even so, does it lie in its mouth to so contend? A person obliged to act in a particular manner, and of which he is totally aware, is duty bound to take a reasonable steps to fulfill those obligations. Nothing prevented the assessee from securing the requisite services, even as we find it to have paid its auditors handsomely. The more basic question is that could a person take advantage of its own wrong? It would be a perversity to hold in the affirmative. This is precisely its import, when it stands explained by the hon’ble apex court that an explanation means a proper, reasonable and acceptable explanation [refer: CIT v. Mohanakala P. (supra)].
We, next, examine the assessee’s claim of wrong claims being a result of a genuine mistake, excluding penalty. This plea is premised on the legal proposition that a bonafide action saves penalty [refer: Hindustan Steel Ltd. v. State of Orissa  83 ITR 26 (SC)], again, statutorily recognized per s.273B of the Act. In this regard, we are firstly of the clear view that it is for the assessee to establish the bonafides of its action; all indica in the instant case pointing it to be a case of, rather, lack of bonafides(refer para 4.5).Further, as also sought to be explained earlier, a bonafide action would, by definition, imply taking all reasonable steps as are expected by the assessee to discharge the duty or the obligation cast on it by law in a proper manner. It is only when a person so does, and yet commits a mistake, implying that the person acting was ‘aware’ of the correct position and acted in the belief of doing the right thing. A person, who does not know his job or is not qualified or does not take proper and reasonable steps in its respect, would in any case commit errors and cannot take the plea of having acted bonafide. This is also precisely the import of the verification that each return is to bear to qualify as a valid return in law. The assessee’s stand of being serviced by incompetent persons, and simultaneously, of it having committed a ‘mistake’, are thus to an extent inconsistent. It has nowhere been explained as what was the erroneous belief, including the basis thereof, which led to the mistake. In the present case, it has not been specified as to who was the person(s) preparing the return, on what basis; who checked the same, leave alone the nature and the basis of the mistaken belief that led to the ‘mistake’. The return of income, as it appears, was prepared merely by adopting the figure of net profit as per the profit & loss account without any adjustments. Why, even the simple exercise of examining the details of various expenses, furnished before the Assessing Officer during the course of assessment proceedings, and which would exhibit it to bear sums which are clearly not allowable; rather, do not even qualify as expenditure, was not undertaken. It is rather, as we see it, a case of gross negligence and dereliction of duty – and by more than one person, and would thus qualify to be a conscious disregard of its obligations.
Holding it out to be a ‘genuine or bona fide mistake’ and, again, without basis, is only an alibi or a pretence.
4.7 Finally, we may discuss the decision by hon’ble jurisdictional high court in the case of CIT vs. Sonali Jain (I.T.A. No. 88/2008 dated 29/07/2011), relied upon by the assessee (PB pages 79-82). We have carefully perused the said judgment, being binding on us, and find it to be wholly inapplicable, both on facts and in law. On the legal position, the same is based on the premise of the applicability of the principle of mens rea, in view of the decisions by the hon’ble apex court in the case of K.C. Builders vs. Assistant Commissioner of Income-tax 265 ITR 562 (SC) and Dilip N. Shroff vs. Jt. Commissioner of Income-tax 291 ITR 519 (SC). The same, however, is no longer applicable in view of the larger Bench decision of the apex court in the case of Union of India vs. Dharamendra Textile Processors 306 ITR 277 (SC), since affirmed by it in the case of CIT v. Reliance Petroproducts Pvt. Ltd. (supra). On facts, it was found in that case that of the two gifts of Rs.2.50 lakhs each surrendered by the assessee as her income, one was voluntary, through a revised return, while the second, though before the first appellate authority in the quantum proceedings, was only to buy peace of mind; the assessee having a reasonable case inasmuch as the donor had deposed before the Assessing Officer confirming the gift, with the Revenue having no incriminating material with it qua the said gifts. As such, we are unable to see as to how the said decision assists the assessee in the facts and circumstances of the case, which stand discussed in considerable detail in this order, i.e., given the settled position of law, as explained by the apex court, also discussed hereinabove. In fact, but for the disclosure being voluntary, and prior to detection of the relevant ‘income’ by the Revenue – the two again being correlated facts, a revision or retraction by the assessee claiming it to be on account of an omission is disregarded in penalty proceedings. That is, the claim of omission is subject to the satisfaction – a matter of fact, of the disclosure being voluntary, and which represents the settled law. The recent judgment by the hon’ble Delhi high court in the case of CIT v. Zoom Communication (P.) Ltd.  327 ITR 510 (SC),could be said to be squarely on the point inasmuch as there is parity of facts, as well as an exposition of law in the matter in the context thereof.
5. In view of the foregoing analysis (refer paras 4.1 thro’4.7 above), we confirm the levy of penalty u/s. 271(1)(c) of the Act in the instant case. The impugned order is accordingly upheld. We decide accordingly.
I.T.A. No. 115/Lkw/2012 (A.Y. 2008-09)
The respective cases
6.1 The only issue in this appeal by the assessee is the maintainability in law of the taxability of interest ‘accruing’ on the non-performing asset (NPA) accounts in its portfolio. The assessee having, though provided for the same in its accounts by debiting the interest contractually arising on the said loan and advances to the account of the respective borrowers, simultaneously provided for the same by debiting its profit and loss account (P&L a/c) for the relevant year, with a corresponding credit to the account head ‘Provision for bad and doubtful debts’ – a balance-sheet item, following the prudential norms issued by National Bank of Agricultural and Rural Development (NABARD)/Reserve Bank of India (RBI), under whose auspices the assesse-bank operates. The basis of the Revenue’s action in bringing the said amount (Rs.19,23,403/-) to tax by disallowing the provision for bad and doubtful debts to that extent, is that the said norms do not over-ride the provisions of the Act, which is a separate code in itself for the computation of income liable to tax there-under, even as clarified by the hon’ble apex court in the case of Southern Technologies Ltd v. Jt. CIT (2010) 320 ITR 577 (SC). The interest having been duly provided by the assessee on accrual basis – it admittedly following mercantile method of accounting, the same is liable to tax u/s. 5 r/ws. 145 of the Act. The assessee could, of course, claim the same by way of a write off as irrecoverable u/s. 36(1)(vii) of the Act, and which has undisputedly not been done. Also, the said provision, irrespective of the amount at which it is provided for in its accounts, would be allowable to the assesse, a co-operative bank, by way of deduction u/s. 36(1)(viia) of the Act, and which has admittedly been claimed, and further, with reference to the total assets. The assessee could not have two basis for a claim qua provision for bad and doubtful debts, i.e., as provided for in its books of account, and the other as eligible u/s. 36(1)(viia). Reliance stands placed on the decision in the case of TVS Finance and Services Ltd. v. Jt. CIT (2009) 318 ITR 435 (Mad); Sundaram Finance Ltd. v. Asstt. CIT (2009) 318 ITR 452 (Mad); and Mansarover Co-operative Bank Ltd. v. Dy. CIT (2010) 126 ITD 72 (Lkw).
6.2 The assessee’s case, on the other hand, rests on the basis of the real income theory. Where there is uncertainty with regard to the realizability of income, it cannot be said to have accrued, so as to be brought to tax u/s. 28 r/ws. 145 of the Act. The directions by NABARD/RBI were binding on it, and provided for non-recognition of income on NPAs, save where and to the extent actually received. As such, there was a sound basis for not recognizing income on such accounts. The accounting policy, even if it is at variance with that for the preceding years, could not be impugned on that score – the only condition for the same being that the same must represent a bona fide change, and followed consistently. The hon’ble High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Del) has considered the decision in the case of Southern Technologies Ltd. (supra), and held that the same did not apply to the income recognition norms provided by the RBI, but only to the provisioning norms (against NPA accounts) specified by it; with the former having been rather approved by the apex court therein. Similarly, the hon’ble high Court in the case of CIT v. Coimbatore Lakshmi Investment & Finance Co. Ltd. (2011) 331 ITR 229 (Mad.) has held that assessee was justified in not recognizing income on non-performing assets.
7. We have heard the parties, and perused the materials on record as well as the decisions relied upon by them, including those cited at bar. The controversy arising for consideration and determination in the present case is whether non-recognizing interest income on NPAs by the assessee-bank following RBI guidelines, as a matter of accounting policy, would by itself constitute a valid ground for not recognizing the said income on the basis of its non-accrual; the adopted method of accounting being admittedly mercantile?
8.1 Interest income accrues, under most circumstances, on the basis of time; interest, by definition, being a charge toward the opportunity (or time) cost of funds placed at the disposal of the borrower–user. In fact, the rate of interest is itself stated in terms of per unit of time. So however, it may well be that despite lapse of time, so that interest is contractually due, the lender considers it as having not accrued for the reason that there is considerable uncertainty with regard its realizability. In fact, there could arise situations where even the principal sum, i.e., on and in respect of which interest income is being charged, is doubtful of recovery. Could, in such a case, interest income be said to have arisen or accrued merely for the reason that time has elapsed or the lender has passed an accounting entry in its respect in his accounts? Surely, not. Accrual (or otherwise) of income (or expenditure) is a matter of fact, and the system of accounting followed does not generate income, but merely recognizes it, i.e., brings an income, or an expenditure for that matter, already accrued, on record/books. This is what is also referred to as the real income theory, i.e., income or profits arrived at on the basis of commercial principles following the principles of commercial accounting. The same would of course be subject to the provisions of the Income-tax Act, so that where a provision of the Act impinges on a particular income or expenditure, the same would prevail and be given effect to. The case law in the matter is legion, with the same having been confirmed by the hon’ble apex court in the case of Southern Technologies Ltd. (supra) cited by the Revenue, even as observed by the hon’ble court in the case of Vasisth Chay Vyapar Ltd. (supra), relied upon by the assessee.
8.2 What, then, is the controversy about? Section 145 of the Act mandates computation of income chargeable to tax under the head ‘profits and gains of business or profession’ or ‘income from other sources’ in accordance with either cash or mercantile system of accounting regularly employed by the assessee, and in accord with accounting standards notified by the Central Government u/s. 145(2) of the Act. The Central Government has notified two Accounting Standards, being AS-I and AS-II, u/s. 145(2). AS-I emphasizes that the accounting policies to be adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of his business. Further, that the financial statements are based on the fundamental accounting assumptions of ‘going concern’, ‘consistency’ and ‘accrual’; prepared and presented conforming to the considerations of prudence, substance over form and materiality. Prudence envisages provision for all known liabilities and losses, even though the amount thereof cannot be determined with certainty, and represents a best estimate in light of the information available. AS-II mandates that any change in its accounting policy by an enterprise shall be made only where the adoption of a different policy is required by the statute or where the change would result in a more appropriate presentation of its financial statements by an assessee.
8.3 Examining the assessee’s accounting policy of recognition of income on NPAs subject to realization, we find the same to be, firstly, rather, in satisfaction of the mandate of prudence inasmuch as, without doubt, where realizability is characterized by uncertainty, income cannot be said to have accrued. As long as a reasonable certainty (as to ultimate realizability) cannot be entertained at the time of raising a claim, it would be futile to suggest or contend that the underlying income has accrued. And, as such, it would only be prudent to postpone recognition of income to the point in time of realizability or till the time the uncertainty is resolved, and to the extent it is. If that be so, we do not think it necessary to examine the question of satisfaction of the condition of change in an accounting policy in terms of AS-II; the assesse having ostensibly adopted this policy only from the current year inasmuch as the NPA norms stood revised. This is as an accounting policy that is prudent can only be regarded as meritorious and in accord with the mandate of the Act itself. So, however, the moot question that arises for being answered, is whether it could at all be stated, as a matter accounting policy, that it would be unreasonable to expect ultimate collection in respect of an NPA? That is, whether the characterization of an account as a NPA is itself sufficient to bestow with uncertainty as regards realizability of income arising thereon? Though the assessment as to whether it would be reasonable to expect ultimate collection is essentially the job of the Management, so that it would normally brook no interference, particularly so where it is based on some objective criteria, as the asset being a NPA in the instant case, we do not think that it could be stated as a matter policy that it would be unreasonable to expect realization where the account is a NPA. This is as the same is quintessentially a matter of fact, involving a finding of fact, to be determined on the basis of the underlying criteria, i.e., uncertainty or otherwise qua realization. In a given case, the non-performing asset (NPA) may be backed by adequate and sufficient security, so that there is no reasonable uncertainty or, per contra, there is reasonable certainty or expectation with regard to the ultimate realizability of income and, as such, the same cannot be said to have not accrued. In another case, the NPA may be insured or backed by a guarantee by a sound person or otherwise secured. Similarly, a borrower may be performing well, though facing a tight liquidity position for the time being, leading to the non-servicing of its account. In all such cases, could it (reasonably) be said that it is not reasonable to expect collection as interest could not be serviced for the past 90 days, which is the period of delinquency for an account to be characterized as a NPA? We think not. As such, while we are in agreement with the validity of an accounting policy conforming to the principle of prudence, in our opinion it cannot be said so of one which mandates non-recognition of income solely on the basis of an account being a NPA. It would be a different matter where the policy is stated in more broad terms, as (say) where in the opinion of the Management no reasonable certainty exists (i.e., on the assessment of the obtaining facts and circumstances) as to the realizability of the principal and income. However, when income is not taken into account solely on the ground of the account being a NPA, de hors the other relevant facts and circumstances, it may lead to an incongruity, as where the same suggest otherwise. It would, nevertheless, still be within the competence of the Management to follow the same as an accounting policy, for which it may have its own reasons, as (say) the binding nature of the guidelines by NABARD/RBI. The same, however, could not be said to be in conformity with section 145 of the Act or as binding on the Income Tax authorities, who are obliged to examine the reasonability of the assessee’s claim/s with reference to the provisions of the Act. Where, on the basis of the said examination, it is found that a reasonable uncertainty with regard to any of the NPA accounts exists, the assesseee’s claim would stand to be accepted to that extent, else not. That is, it is purely a question of fact and, resultantly, to be decided on the basis of a finding of fact. This is precisely what the hon’ble apex court has endorsed and clarified in the case of Southern Technologies Ltd. (supra), and for which reference may be made to paragraphs 33 to 40 of its Judgment, under the sub-heads ‘Scope and application of RBI’s directions, 1998’; ‘Theory of real income’; and ‘Application of Section 145 of the Act’. We may exhibit this by reproducing the relevant extracts from the said decision:
“The nature of expenditure under the Income-tax Act cannot be conclusively determined by the manner in which accounts are presented in terms of the 1998 Directions. … …
…….Such presentation will not bind the authority under the Income-tax Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions 1998 and the Income-tax Act operate in different fields.” (Para- 33, pages 607, 608)
Again, quoting from its decisions in the case of Poona Electrical Co. Ltd. v. CIT (1965) 57 ITR 521 (SC) (at page 530), the hon’ble apex court emphasizes that income-tax is a tax on ‘real income’, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act (refer para 34, pages 608, 609).
Further on, at para 40 (page 610), it states as under:
“At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued RBI under Chapter III-B of the RBI Act, 1934. These norms deal essentially with income recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect “true and correct” profits. ……… …. The accounting policies adopted by an NBFC cannot determine the taxable income.”
It would thus be abundantly clear that the hon’ble apex court, vide its said judgment, considered not only the provisioning norms for NPA accounts, but also that qua income recognition, and the contentions raised with respect to ‘real income theory’. True, no doubt, as observed in the case of Vasisth Chay Vyapar Ltd. (supra), the hon’ble apex court was seized with the issue of provision for bad and doubtful debts in respect of NPA accounts, and not income not brought on books on the basis of non-accrual, with the AO having in fact accepted the assessee’s claim toward non-recognition of interest for Rs.20.34 lakhs, the said decision, as would be apparent from a reading thereof, as well as the foregoing, deals with the latter aspect, i.e., income recognition norms as spelt out by the RBI, as well. Further, vide paragraph31 (page 606) of its decision it clarifies, in no uncertain terms, once more, that the RBI’s directions and the Act operate in different fields. And, further, that the assessee has to prove, in each case, that interest not recognized or taken into account was in fact due to uncertainty in collection of income, and it was for the AO to accept the assessee’s said claim under the Act or not to. In fact, per section 43D r/w rules 6EA/6EB, which though are not applicable to the assessee, a co-operative bank, the Act has addressed this issue, i.e., income recognition norms for schedule banks and financial companies, comprehensively, providing a complete framework for identification of bad and doubtful debt assets for the purpose of income recognition. Thereby, thus, dovetailing and aligning the requirements of the Act with the guidelines issued and the parameters prescribed for the purpose by the RBI/NABARD. The same lists the category of NPA accounts only in the case of public companies (covered under Rule 6EB), and too where the account has remained a NPA (also defined thereunder) for a period exceeding two years. In fact, even section 43D gives primacy to the bank’s accounts, so that where interest stands credited to the profit and loss account for a particular year, the same is to be treated as its income for that year even where not received. We are now in a position to answer the question posed at the beginning of our discussion (refer para 7 above). The answer is clearly in the negative.
8.4 Now, that being the case, the next question that arises before us is whether the disallowance of the assessee’s claim should be confirmed as such, or, there having been admittedly no examination by the AO, the matter remitted back to his file to allow the assessee an opportunity to present its case u/s. 145 of the Act, i.e., that the provision against un-received interest on NPA accounts was attended with reasonable uncertainty as to its realization, so that it could not be considered as accrued. Though, under regular circumstances, in view of the said non-examination by the AO, we would be inclined for the said restoration, we are not so in the facts and circumstances of the present case. This is firstly for the reason that the assessee’s accounting policy qua recognition of income, which forms the basis of its accounting for the same, is not stated in terms of uncertainty as to realization, which principle was only cited by us on the ground of it constituting a valid basis for the purpose, but only in terms of the underlying account being a NPA. An examination, where not undertaken, could only be possible where permissible in terms of the underlying accounting policy, which has to be spelled out clearly and, further, only by the assessee. We cannot write or substitute the same with what we consider could be appropriate or form a valid policy in terms of s. 145 of the Act. Secondly, and which is inter-related, that though claimed otherwise, there has been, as a matter of fact, no non-recognition of income by the assessee in the instant case. The assessee has duly debited the account of the individual borrower with the interest recoverable, crediting the same to the interest income account, forming part of the income statement (P&L a/c). The recognition of income in books of account is complete at this stage. What the assessee states as non-recognition of income is essentially by way of providing for bad and doubtful debts. To the extent the interest is not received as at the year-end, the same is not written off but debited to the profit & loss account by way of provision for bad and doubtful debts, where the account is a NPA. The same, thus, forms a part of the said provision, much in the same manner, and as also made in respect of, inter alia, the principal amount outstanding in such accounts. Once an amount is credited to the said provision account, it is immaterial whether the same is qua principal or interest; the interest amount having in fact merged with the principal on being debited to the account of the borrower. That is, the provision toward non-recoverable interest is at par with any other sum forming part of the said provision for bad and doubtful debts. The same would, thus, even has held by ld. CIT(A), be considered for deduction; the assessee being a co-operative bank, in terms of u/s. 36(1)(viiia), to which the assessee is clearly entitled. In fact, considering a part of it as qua non-recognition of income, and not as a provision for bad and doubtful debts, could rather lead to a double claim, i.e., firstly, as toward non-recognition of income and, secondly, by way of provision for bad and doubtful debts, which is to be reference to the total assets, including the interest component of the amount outstanding in the individual accounts. It is for this reason that the AO insisted on the production of the individual ledger accounts of the borrowers, with the assessee not producing the same even before the first appellate authority. Continuing further, it may well be argued that, and which appears impressive at first blush, the debit to the individual borrower accounts would not be of any consequence, as it is only toward creating a pressure on them to repay their ‘dues’. And, coupled with the simultaneous providing for the same by way of a provision for bad and doubtful debts, is equivalent to non-charge of interest. The manner in which the accounts are written or the accounting treatment could not be determinative of the matter. While it is true, even as clarified by us at the outset (refer para 8.1 of this order), that book-keeping does not create income but only records it, the point is: How would a provision toward under or non-recovery in an asset account or otherwise toward diminution in the value of an asset, be made in accounts except by way of passing an accounting entry in its respect in the regular books of account? Further, a provision in books against or in respect of a particular asset or an asset class, as (say) toward non-recovery or diminution in its value, only implies that the asset stands stated in the accounts at a higher value in the first place. We have already clarified that there is no way or manner in which the provision (for bad and doubtful debts) in respect of interest component of the amount due from a borrower could be segregated or distinguished, in principle, from the principal sum due from the concerned debtor; the two amounts merging to form a single amount due from the borrower, so that the two are equivalent, forming part of the same account, bearing the same nature and character.
8.5 Accordingly, the assessee would only be entitled to a ‘provision for bad and doubtful debts’ u/s. 36(1)(viia) of the Act qua its total advances, including interest debited to the borrower’s account and, therefore, forming part of its asset base. The assessee has not made any claim u/s. 36(1)(vii), as also observed by the ld. CIT(A), and which would, as explained by the hon’ble apex court in the case of Vijaya Bank v. CIT (2010) 323 ITR 166 (SC), require the transfer of the ‘provision for bad and doubtful debts’ to the corresponding asset (even though it may be the total or control) account as at the year-end, so that the said provision ceases to be on the assessee’s books as at the year-end.
8.6 Accrual (or otherwise) of an income (or expenditure) is matter of fact, to be decided separately for each case, on the basis of the assessment of the obtaining facts and circumstances. The same cannot be stated as an accounting policy – which by its very nature is to be applied uniformly, except where it is stated in broad terms, bearing the necessary ingredients of the qualifying criterion, i.e., existence of a reasonable certainty as to ultimate realization at the time of raising the claim or even as at the end of the accounting period. Clearly, the same would require an assessment of the relevant facts, and income to that extent shall not be recognized unless there is reasonable certainty of realization. The same would necessarily require examination of the facts and circumstances of each case, and taking a decision having regard thereto. This stands endorsed by the hon’ble apex court in the case of Southern Technologies Ltd. (supra). The adopted accounting policy, i.e., recognizing income on NPA accounts only subject to realization, does not serve as a valid qualifying category as there could be other mitigating factors, making it reasonable to expect realization despite the account being a NPA. Further, on facts, it is found that there has been in fact recognition of income, and the assessee’s claim is only qua ‘provision for bad and doubtful debts’, with reference to total assets, including the interest income booked and debited to the account of the respective borrower, and qua which the assessee is entitled to and has claimed deduction u/s.36(1)(viia). The said provision continuing to subsist in its accounts as at the year-end does not qualify to be considered as a write off (of the relevant assets). Where there is a difference in the provision (for bad and doubtful debts) in accounts and that allowable or allowed u/s. 36(1)(viia), the assessee shall tabulate a parallel provision statement u/s. 36(1)(viia), annexing it as a part of its computation of income with the return of income, each year, explaining the difference/s therein with reference to its accounts. The assessee’s claim qua Rs. 19.23 lacs on the basis of non-receipt of interest income, thus, stands rightly rejected by the Revenue.
Further on, we have, for the purposes of this order, perused each of the decisions cited before us as well as by and before the authorities below, though may have not specifically discussed each of them; finding the decision in the case of Southern Technologies Ltd. (supra)(as well as the decisions cited therein by the hon’ble apex court), as fully applicable and covering the law in the matter. The decision in the case of Manasarovar Urban Co-operative Bank Ltd. (supra) relied upon by the Revenue, is again not applicable inasmuch as the same is only toward inapplicability of deduction u/s. 36(1)(viia)to co-operative banks, as the assessee, up to A.Y. 2006-07, while the year under reference is A.Y. 2007-08. The A.O. shall, however, while giving effect to this order, verify and allow the assessee’s claim u/s. 36(1)(viia) as eligible under law, seeking the relevant, primary details from the assessee as deemed fit by him. We decide accordingly.
9. In the result, both the appeals by the assessee are dismissed.
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