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TMI Blog2015 (3) TMI 886X X X X Extracts X X X X X X X X Extracts X X X X ..... ances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Cooperative Urban Bank Ltd., Vijayawada (supra) and Karnavati Cooperative Bank Ltd. (2011 (11) TMI 367 - ITAT AHMEDABAD )to hold interest on the sticky advances/NPA advances cannot be brought to tax. We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue's ground is dismissed. - Decided in favour of assessee. Scope of Section 14A - Disallowance of carried forward losses - whether losses are forming part of total income in view of Sec.14A as the same is result of profits and gains of business or profession? - CIT(A) directed the Assessing Officer to allow the set off of the brought forward losses of the earlier year - Held that:- As relying on CIT vs. Kribhco [2012 (7) TMI 591 - DELHI HIGH COURT ] wherein held Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. It was noticed by the Assessing Officer that the assessee bank has not considered the interest receivable on sticky advances/non-performing assets (NPA) as income and same has been directly taken to the Balance Sheet without routing through the Profit and Loss Account. The Assessing Officer has observed that the provisions of section 43D of the I.T. Act, cannot be applied to the assessee bank as it is not a scheduled bank but a cooperative bank. In opinion of the Assessing Officer, after considering the provisions of section 43D, non-scheduled cooperative banks are specifically excluded from the exemption including interest of sticky advances. The Assessing Officer also took into consideration the CBDT Circular No.F-201/81/84 ITA-II dated 09.10.1984. In the opinion of the Assessing Officer, said Circular was issued regarding clarification about taxability of the interest accrued on doubtful/bad advances of banking companies, where such interest remains unrecovered consecutively for three years then such interest shall not form part of taxable income of the banking company in the fourth year. In sum and substance, in the opinion of the Assessing Officer, to get the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g or doubtful and as such its taxability needs to be postponed till actual realization of interest. The above contentions of the A.O. are, therefore, erroneous and hence rejected. (ii) The A.O. has also contended that the decision in the case of UCO Bank Vs. CIT 154 CTR 88 (SC) is not applicable to the appellant bank as the decision is in the case of commercial bank. In this decision the Hon'ble Apex Court has laid down that interest on a loan whose recovery is doubtful and which has not been recovered by the assessee bank for last three years but has been kept in a suspense account and has not been brought to profit loss account of the assessee could not be included in the income of the assessee. Though the assessee is a Non Scheduled Bank, the ratio laid down by the Hon'ble Apex Court in the case of UCO Bank is certainly applicable to the Non Scheduled Banks carrying on banking business under the license issued by RBI. The contention raised by the A.O. is, therefore, not correct. (iii) The A.O. has also contended that CBDT Circular No.F- 201/81/84 ITA-II dated 09/10/1984 is not applicable to the appellant as the appellant is not a Banking Company and the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved. In such cases, recognition of revenue shall be made on only receipt basis or only when it is reasonably certain that, the ultimate collection will be made. In view of AS-9, appellant bank recognized revenue (interest income) on advances classified as NPA on actual receipt basis, because the certainty of recovery of interest was not known to the bank as per the RBI Norms. (v) The appellant bank consistently followed the said system of accounting in respect of interest on NPA as per Prudential Norms of Recognition of Income and Asset Classification since beginning. This is in consonance with the provisions of section 145 of the Act. It is well settled law that the method of accounting regularly followed and which is regularly accepted by the revenue while assessing income of the earlier years has to be accepted by the A.O. while assessing income of the subsequent years. (vi) The assessee is a co-operative bank and it has to follow the Reserve Bank of India's Guidelines issued from time to time. Through 'Master Circular on Income Recognition, Asset Classification, Provisionary and other related matters - UCBS,' the Reserve Bank has issued following Guidelines f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that, no doubts, there is a legal right to receive the interest but there are also ground realities which do not permit strict enforcement of this right. While holding that such interest even though accrued as per mercantile system of accounting but did not give real income to the assessee. The Hon'ble ITAT has observed as under: In our considered opinion, any other view of the matter will result in distortion in the financial results disclosed by the books of accounts maintained by the assessee. It is also important to remain alive to the fact that the provisions of s.145(1) are subject to, inter alia, mandate to AS-I which also prescribed that 'Accounting policies adopted by the assessee should be such so as to represents a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented by on the basis of such accounting policies. In the name of compliance with s. 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Apex Court in the case of TRO Vs. Custodian, Special Court Act, 1934 reported in 293 ITR 369 (SC) wherein it was held that where an Act makes a provision with non-obstante clause that would override the provisions of other Acts. (3) The assessee is bound to follow Accounting Standard-9 issued by ICAI wherein it has been laid down that the revenue which is doubtful of recovery/where recovery of income is uncertain, the revenue need not be recognized. (4) Even under the provisions of Income Tax Act, interest which is doubtful of recovery cannot be said to have accrued . The real income can only be taxed and if unrecoverable interest on NPA is considered as income true and fair view as per books of accounts and final statements of accounts would not be reflected. (5) The decision in the case of Southern Technology Ltd. Vs. JCIT 320 ITR 577 (SC) is not applicable to the facts of the case of the assessee as in the said case the issue about allowability of claim of deduction in terms of section 36(1)(vii) of the Act has been decided. In the said case, the Hon'ble Apex Court made distinction with regard to income recognition and held that income had to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, circulars issued by RBI and CBDT, the ratio laid down by the various decisions relied on by the appellant and also the decisions referred to in earlier para, I am of the considered view that the A.O. is not justified in making this addition. The A.O. is directed to delete the addition. The A.O. is also directed to obtain the following details from the A.O. (a) The details of NPA accounts with NPA statements of banks submitted to RBI. (b) The detail of interest accrued during the year on NPA accounts. (c) The detail of interest actually received during the year on NPA accounts. (d) The detail of interest received or accrued during the year on NPA accounts and credited to profit and loss account. (e) The detail of interest received or accrued during the year and debited to Profit and Loss account on account of Provision for Overdue Interest Reserve or Interest on NPA Accounts. and then the following interest, if any, on NPA should be added to the total income of the assessee. (a) Interest on NPA accounts actually received during the year. (b) Interest actually received or accrued on NPA accounts and first credited and then debited to Profit and Loss accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The words credited and actually received has been highlighted hereinabove while reproducing the section in question. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is actually received. The Act says that the incidence of 'credit' or actually received , whichever is earlier is to be taken into account for the purpose of chargeability of income by way of interest. Simultaneously, it is noteworthy that this section is an overriding section because the opening word is notwithstanding anything to the contrary contained in any other provisions of this Act . Therefore, in spite of anything contained in the Act, the provisions of this section shall override those provisions. Once the Statute has categorically made a law in respect of public financial institutions that interest is chargeable to tax either in the year in which credited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxed only when actually received as prescribed by CBDT Circular. However, in the past an interesting turn had taken place by an order of the Hon'ble Kerala High Court in the case of State Bank of Travancore reported in 110 ITR 336 (Ker.), wherein it was held that the assessee, a banking company, did not credit in its account the interest that had accrued on sticky advances because the assessee felt that the interest could not to be realised. It credited the interest to a separate account known as interest suspense account . On reference, the Hon'ble Court has held that there was an accrual of income liable to income-tax and the assessee was not justified in not crediting the interest income on such stick advances it its accounts. However, later on at the Hon'ble Apex Court while pronouncing the judgment of the said State Bank of Travancore vs. CIT reported in (1986)158 ITR 102(SC), there were Hon'ble three Judges presiding the Court, out of which Hon'ble two Judges were in the opinion that the interest on sticky advances was rightly treated as income which had accrued to the appellant. There was a descending note by one of the Hon'ble Judge an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes. We can therefore safely draw a conclusion that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. section 43-D has to be applied in its letter and spirit. It is pertinent to mention that later on, in the case of CIT vs. Bank of America S.A. 262 ITR 504 (Bom) the question of interest on sticky loans was decided in favour of the assessee and held that the question is to be answered in favour of the assessee following the decision of UCO Bank reported at 237 ITR 889(SC) :: 240 ITR 355 (SC). Likewise, in an another case of CIT vs. State Bank of India 262 ITR 662 (Bom.) again it was held that the amount credited to the interest suspense account was not taxable following the decision pronounced in the case of UCO Bank (supra). (V) Judgement in favour of Revenue : From the side of the Revenue an order of the Tribunal has been vehemently relied upon and this is the basic reason of the elaborate discussion made hereinabove so as to unfold the controversy. In the said decision of the Tribunal, viz. Jt.CIT v/s. India Equipment leasing Ltd. (2008)111 ITD 37 (Chennai), the Respected Co-ordinate Bench has expressed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary to law of land. Unquote. The basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of the Respected Tribunal was that if the contention of the assessee was to be accepted, then it would amount to insertion of NBFC in section 43-D of the I.T.Act. As against that, as far as the assessee is concerned, it is an accepted fact that the assessee is a cooperative bank and not a non-banking financial company and this noteworthy distinction has already been appreciated by us in one of the paragraphs above. There is one more decision of the Hon'ble Apex Court which is yet to be mentioned while discussing the arguments raised from the side of the Revenue. A decision in the case of Southern Technologies Ltd. vs. Jt. CIT 320 ITR 577 (SC) has been cited but the fundamental difference is that the issue before the Hon'ble Court was in respect of provision for NPA and debited to P L Account by a NBFC. The said provision was undisputedly made by the said NBFC as per the prudential norms made by the Reserve Bank. Therefore we want to make it clear th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication issued by RBI and AS-9 issued by ICAI and that the assessee was justified in not recognizing such income. The Court had further expressed that there was no occasion to consider whether the principle of accrual would arise or not, nevertheless, the interest from such NPA would be taxed in the appropriate assessment year on the basis of actual receipt. It is worth to mention that for this decision, the Hon'ble Madras High Court has relied upon an another decision of the same High Court pronounced in the case of Jt.CIT vs. India Equipment Leasing Ltd. 293 ITR 350. 7. In the case before us, admittedly, assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit Loss Account. Moreover, the issue of the taxability of the interest on the sticky losses/advances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Cooperative Urban Bank Ltd., Vijayawada (supra) and Karnavati Cooperative Bank Ltd. (supra). We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue's ground is dismissed. 8. The n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be minus or in a loss. Logically, as a squiter, it will follow that in case the assessee has a negative/minus figure as per the computation made any of the provisions of Chapter VIA the expenditure incurred cannot allowable under Section 37 of the Act, in view of Section 14A. The said position cannot be accepted. Income will include negative income or a loss. The corollary is that the entire income is included under the provisions of the Act by firstly including the entire receipts or incomes as stipulated in the charging section but after excluding the income stipulated in Chapter III. Thereafter, total income is computed under the Act by applying provisions of Chapter IV, V and VI'. From this income, deductions are permitted and allowed in terms of Chapter VIA. Deductions do not mean that deduction allowed has the effect that the income, on which deduction is allowed, ceases to be part of the total income. This is not the scheme, effect and purport of the Act. The expression income which does not form part of the total income refers to the nature, character or type of income and not the quantum. 32. Section 14A states that for the purpose of computing total income un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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