2021 (11) TMI 375 - AT - Income Tax

Accrual of interest on non-performing assets (NPA) - Income Recognition - Accrual of income - correct system of accounting - AO disagreed with the contention of the assessee on the reasoning that the assessee is following mercantile system of accounting which requires to account for the income on accrual basis and under accrual system of accounting, the collection of the interest income is not necessary - whether the assessee was bound to recognize the income on the assets classified as NPA under the provisions of the income tax Act after ignoring the circular issued by the RBI? - HELD THAT - The provisions of section 43D of the Act provides that the income by way of interest with respect to the bad or doubtful that s shall be recognized as income in the manner as prescribed, having regard guideline issued by RBI. Accordingly, the Rule 6EA of Income Tax Rule was formulated with respect to the recognition of income for bad and doubtful debts. The Rule 6EA of the Income Tax Rule, inter-alia, provides that the income on the bad and doubtful debts shall not be recognised as income if interest thereon is overdue for more than 6 months. On perusal of the above provisions, it is revealed that the above provisions of section 45Q of the Act or the overriding provisions and therefore these should be given to the preference of the income tax Act. In other words, the assessee was bound to follow the directions issued by the RBI. Accordingly, in our considered view such income cannot be recognized in the books of accounts as alleged by the AO. At the time of hearing, the ld. DR has not brought anything on record contrary suggesting the provisions of section 45Q of the RBI Act are not applicable to the present case. We also note that in the case of Pr. CIT vs. Shri Mahila Sewa Sahakari Bank Ltd. 2016 (8) TMI 377 - GUJARAT HIGH COURT has held that the assessee being a Bank has to follow the guidelines issued by the RBI which has overriding effect over the provisions of Income Tax Act - though the income of the assessee has accrued under the mercantile system of accounting but the same cannot be charged to tax for the reason that the RBI being regulatory authority prohibits to recognize such income in the books of accounts. Hence, we do not find any reason to interfere in the finding of the learned CIT (A). Thus the ground of appeal of the revenue is dismissed. Disallowance of amortization of Government Securities expenses being an expenditure of capital in nature - whether such amount amortised over the lifetime of the investments/securities i.e. till maturity can be claimed as deduction in the profit and loss account? - HELD THAT - As per CBDT bearing Instruction No. 17/2008 dated 26th November 2008 it is revealed that the assessee is entitled to amortise the amount paid over and above the face value of the investments in the manner as discussed above. See RAJKOT DIST. CO-OP BANK LTD. C/O. AD. VYAS AND CO. 2014 (3) TMI 110 - GUJARAT HIGH COURT - Admittedly, the facts of the case on hand are not in dispute. The AO has only disallowed the amount of amortisation of the securities which were held to maturity. In view of the above, we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed. Disallowance u/s 14A r.w.r. 8D - suo-moto disallowance made by assessee - HELD THAT - No further disallowances required to be made under section 14A read with Rule 8D of Income Tax Rule as the assessee suo moto have made disallowances to the extent of exempt income. Accordingly, we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed. Depreciation of safes and fire resistant filling cabinet - AO restricted depreciation to the tune of 10% and disallowed the excess amount of depreciation confirmed by the learned CIT (A) - In the present case the AO treated the fixed assets being Safes and the Fire Resistant Filing Cabinet as furniture and fixture whereas the assessee treated the same as plant and machinery - HELD THAT - there remains no ambiguity to the fact that there was no benefit extended by the learned CIT (A) to the assessee. In other words the ground of appeal raised by the assessee before him was rejected. Thus there was no grievance to the revenue against the order of the learned CIT (A). Hence, the ground of appeal filed by the revenue before us is not maintainable. Accordingly we dismiss the same. Hence the ground raised by the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition regarding interest accrued on non-performing assets (NPAs).
2. Deletion of addition regarding disallowance of amortization of Government Securities expenses.
3. Deletion of addition under section 14A read with Rule 8D of the Income Tax Rules.
4. Deletion of addition regarding depreciation on safes and fire-resistant filing cabinets.

Issue-wise Detailed Analysis:

1. Deletion of Addition Regarding Interest Accrued on Non-Performing Assets (NPAs):
The Revenue challenged the deletion of an addition of ?1,33,59,000/- made by the Assessing Officer (AO) for interest accrued on NPAs. The assessee argued that as per RBI guidelines, interest on NPAs should not be recognized as income until realized. The AO contended that under the mercantile system of accounting, income should be recognized on an accrual basis, and RBI guidelines are for financial presentation, not for determining taxable income. The CIT(A) deleted the addition, relying on a previous order. The Tribunal upheld the CIT(A)’s decision, citing Section 43D of the Income Tax Act and Rule 6EA of the Income Tax Rules, which align with RBI guidelines. The Tribunal also referred to Section 45Q of the RBI Act, which gives RBI guidelines overriding effect over other laws, including the Income Tax Act. The Tribunal cited the Gujarat High Court's decision in Pr. CIT vs. Shri Mahila Sewa Sahakari Bank Ltd., which supported the precedence of RBI guidelines over the Income Tax Act for income recognition on NPAs.

2. Deletion of Addition Regarding Disallowance of Amortization of Government Securities Expenses:
The Revenue contested the deletion of an addition of ?68,31,402/- made by the AO for disallowance of amortization of Government Securities expenses. The AO considered the amortization as capital expenditure. The CIT(A) deleted the addition based on a previous order. The Tribunal upheld the CIT(A)’s decision, noting that the assessee, a regional rural bank, followed RBI guidelines requiring amortization of the premium paid on Government Securities over their life period. The Tribunal referred to CBDT Instruction No. 17/2008, which allows such amortization, and the Gujarat High Court's decision in CIT vs. Rajkot Dist. Co-op Bank Ltd., which supported the amortization of premium on Government Securities as per RBI guidelines.

3. Deletion of Addition Under Section 14A Read with Rule 8D of the Income Tax Rules:
The Revenue appealed against the deletion of an addition of ?7,11,889/- made by the AO under Section 14A read with Rule 8D for disallowance related to exempt income. The assessee had earned ?6,08,247/- in dividend income and disallowed ?1,00,000/- for administrative expenses. The AO disallowed an additional ?7,11,889/-. The CIT(A) deleted the addition, citing that disallowance under Section 14A cannot exceed the exempt income, referencing the Delhi High Court's decision in Joint Investment Pvt. Ltd. The Tribunal upheld the CIT(A)’s decision, noting that the disallowance cannot exceed the exempt income, as supported by the Delhi High Court's decision in P.CIT vs. Craft Builders & Construction (P.) Ltd. and the Supreme Court's dismissal of the Revenue's appeal.

4. Deletion of Addition Regarding Depreciation on Safes and Fire-Resistant Filing Cabinets:
The Revenue challenged the deletion of an addition of ?1,99,635/- made by the AO for depreciation on safes and cabinets. The AO treated these as furniture and fittings, allowing 10% depreciation, whereas the assessee claimed 15% depreciation, treating them as plant and machinery. The CIT(A) confirmed the AO's decision. The Tribunal noted that the CIT(A) did not provide any benefit to the assessee, and thus, there was no grievance for the Revenue. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)’s decisions on all contested issues. The order was pronounced on 25/10/2021 at Ahmedabad.