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TMI Blog2014 (12) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... ond schedule of RBI so as to fall within the scope of section 43D of the Act - in Commissioner of Income tax Versus Vasisth Chay Vyapar Ltd. & others [2010 (11) TMI 88 - Delhi High Court] it was held that what to talk of interest, even the principle amount itself had become doubtful to recover - In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”- thus, there was no infirmity with the decision of the CIT(A) in holding that the interest income relatable on NPA advances did not accrue to the assessee – Decided against revenue. - ITA No. 350/PN/2013, C.O. No. 61/PN/2013 - - - Dated:- 31-10-2013 - Shri G. S. Pannu And Shri R. S. Padvekar,JJ. For the Petitioner: Mr. P. L. Pathade For the Respondent : Mr. S. N. Puranik ORDER Per G. S. Pannu, AM. The captioned appeal by the Revenue and the cross-objection by the assessee is directed against an order of the Commissioner of Income Tax (Appeals), Aurangabad dated 19.11.2012 which, in turn, has arisen from an order dated 30.12.2009 passed by the Assessing Officer u/s. 143(3) of the Income-tax Act, 1961 (in short the Act ), pertaining to the assessment year 2007-08. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act since it was following the mercantile system of accounting, it did not have the option of accounting for interest income relating to NPAs advances on receipt basis. Therefore, according to the Assessing Officer, income by way of interest on NPAs accrued to the assessee and accordingly, he brought to tax such interest income of ₹ 19,24,303/-. 4. The CIT(A) has deleted the addition and disagreed with the Assessing Officer for the following reasons : - (i) that interest on NPAs cannot be said to have accrued to the assessee as per the provisions of section 5 of the Act and in the light of the CBDT Circular No.F-201/81/84 ITA-II dated 09.10.1984; (ii) that in terms of RBI Circular in respect of Prudential Norms, Income Recognition, etc. the interest on NPAs was to be credited in the year in which such income was actually received; (iii) that following the Accounting Standard-9, issued by the Institute of Chartered Accountants of India, income/revenue is to be recognized depending on the certainty of collection of such revenue; and, because of the classification by RBI as NPAs, the certainty of recovery of interest in such cases could not be ascertained; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) relied upon by the learned Departmental Representative, the same has been distinguished by the CIT(A) following the judgement of the Hon ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra). The learned counsel has also referred to the Paper Book to point out that though the assessee was not a scheduled bank yet it was operating under a license granted by RBI and it was bound and governed by the Prudential Norms issued by RBI for Income Recognition, Asset Classification, Provisioning and other related matters and a copy of such RBI Circular dated 01.07.2008 placed at pages 23 to 42 of the Paper Book. 8. We have carefully considered the rival submissions. In so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Ostensibly, assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a scheduled bank included in second schedule of RBI so as to fall within the scope of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). In the case of M/s Vasisth Chay Vyapar Ltd, the assessee therein was a non banking financial company and it was also bound by the Prudential norms directions issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The Assessing Officer, however, added the said interest as the income of the assessee by holding that it had accrued to the assessee even it was not realized as the assessee was following mercantile system of accounting. The learned CIT (A) affirmed the order of the Assessing Officer. However, the ITAT deleted the aforesaid income. Hence the revenue prefer7r ed appeal before the Hon'ble Delhi High Court. 8.1 After hearing the rival submissions, the Hon'ble Delhi High Court took note of sec.45Q of Reserve Bank of India Act which reads as under: Chapter IIIB to override other laws. 45Q. The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del) viii) CIT vs. Eicher Ltd., ITA No.431/2009 dated 15.7.2009 (Del) 8.3 After considering the Accou8n ting Standard 9 and the various case law listed above, the Hon'ble Delhi High Court held that the interest on NPA advance cannot be treated as accrued to the assessee. 8.4 Before the Delhi High Court, the revenue took support of the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). The Delhi High Court considered the said decision of Hon'ble Apex Court and explained the same as under: We have already held that even under the Income Tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirely on the judgment of the Supreme Court in the case of Southern Technology (Supra). No doubt, in first blush, reading of the judgment gives an indication that the Court has held that Reserve Bank of India Act does not override the provisions of the Income Tax Act. However, when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the Apex Court contained in that ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon'ble Supreme Court are extracted below: Applicability of Section 145 40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB 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. Th9e y force the NBFCs to reflect true and correct profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis- -vis Income Recognition principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the permissible deductions or their exclusion under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of Income Recognition and presentation of Financial Statements. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. 11. So, however, the learned Departmental Representative has submitted that the Hon ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras)1 0has differed with the judgement of the Hon ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) on a similar issue, i.e. relating to interest income on NPAs. The learned Departmental Representative further pointed out that the Hon ble Madras High Court followed the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis. We have carefully considered the submissions put-forth by the learned Departmental Representative based on the judgement of the Hon ble Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon ble Madras High Court related to non-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Hon b ..... 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