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TMI Blog2015 (4) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. Thus 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. The Hon’ble Coordinate Bench in the case of ACIT vs. Solapur Siddheshwar Sahakari Bank Ltd. [2015 (3) TMI 603 - ITAT PUNE] has noted that there is a divergent view between the Hon’ble Delhi High Court in the case of M/s.Vasisth Chay Vyapar Ltd. [2010 (11) TMI 88 - Delhi High Court] and the Hon’ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd. [2013 (3) TMI 266 - MADRAS HIGH COURT] in respect of application of the judgement of the Hon’ble Apex Court rendered in the case of Southern Technology Ltd.(supra) on income recognition norms prescribed by R.B.I. - AO directed to delete the addition. - Decied in favour of assessee. - I.T.A. No. 62/Ahd/2014 - - - Dated: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d/2012 for AY 2009-10, order dated 23/08/2013. The ld.counsel for the assessee has placed reliance on the judgement of Hon ble Gujarat High Court rendered in the case of Rambhai L.Patel v. CIT reported at (2001) 252 ITR 846 (Guj.) in support of the contention that the guidelines issued by the RBI has binding force. He submitted that as per the RBI guidelines, the interest accrued on Non-performing Assets (NPA) cannot be subjected to tax. He has also placed reliance on the decision of the Coordinate Bench (ITAT B Bench Pune) rendered in the case of Asst.CIT vs. Solapur Siddheshwar Sahakari Bank Ltd. in ITA Nos.2220 and 2221/PN/2013 for AYs 2009-10 2010-11, order dated 31/10/2014. He drew our attention towards para-10 of the said decision of the Coordiante Bench of Pune. Further, the ld.counsel for the assessee placed reliance on the decision of Coordinate Bench (ITAT A Bench Pune) rendered in the case of Asst.CIT vs. The Omerga Janta Sahakari Bank Ltd. in ITA No.350/PN/2013 for AY 2007-08, order dated 31/10/2013. The ld.counsel for the assessee placed reliance on the decision of Coordinate Bench (ITAT B Bench Ahmedabad) renderd in the case of Sardarganj Mercantile Co-op.Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 9-10-1984 is applicable in its case wherein it has been held that interest on accrual basis will not be taxed if not received for three years even though credited to 'interest suspense account'. 3.3 The issue regarding the applicability of section 43D and the argument that Hon'ble jurisdictional Tribunal in the case of Karnavati Co Op Bank has held that no interest on accrual basis on NPAs can be taxed even in cases of unscheduled banks has been examined. Before proceeding further it is considered necessary to briefly examine the statutory provisions of section 43D and explanation (ii) of clause (viia) of section 36 of the act. Special provision in case of income of public financial institutions, public companies, etc. 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakinns) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) 77[***];] 3.4 A perusal of the above statute indicates that section 43D rws Expln. (ii) of clause (viia) of section 36 prescribes exemption from disclosure of interest income on accrual basis only to those entities which are covered by the said section. The AO has clearly brought evidence on record to indicate that the appellant bank by virtue of being an co op bank does not falls within the definition of entities which are covered by the above indicated statute or to say it is not a scheduled bank. The appellant on its part has also not been able to controvert with any cogent evidence the position taken by the A O. Thus, it becomes an undisputed fact of this case that the appellant is not a scheduled bank and consequently provisions of section 43D rws Expln. (ii) of clause (viia) of section 36 would not be applicable in its case. It is a settled principle of law laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Hon'ble Tribunal in the said case ....As far as the status of the assessee is concerned, the Assessing Officer has stated that the assessee-bank is a co-operative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an Explanation (d) r.w.s. 36(1)(viia) annexed to section 43-D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, we hereby hold that the assessee is covered by one of the entities, hence the provisions of section 43-D are to be applied. A perusal of the above clearly shows that Hon'ble Tribunal has not laid down any ratio regarding application of provision of sec 43D in respect of unscheduled banks. What the Hon'ble Tribunal actually observed in the cited case was that in the absence of any contrary material, being made available for kind consideration of Hon'ble Tribunal, in that case it was a presumption that the appellant in that case i.e. Karnavati Co Op Bank was covered by provisions of sec 43D. Thus, the Hon'ble Tribunal did not lay down any ratio regarding applicability of section 43D in respect of all unscheduled banks. 3.6 It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the I T Act. Thus, the Hon'ble Court has held as under :- ....31. RBI Directions, 1998 have been issued under section 45JA of RBI Act. Under that section, power is given to RBI to enact a regulatory framework involving prescription of prudential norms for NBFCs which are deposit taking to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions is prudence, transparency and disclosure. Section 45JA comes under Chapter III-B which deals with provisions relating to Financial Institutions, and to non-banking Institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification; provisioning, etc. As stated above, basis of the 1998 Directions is that anticipated losses must be taken into account but expected income need not be taken note of. Therefore, these Directions ensure cash liquidity for NBFCs which are now required to state true and correct profits, without projecting inflated profits. Therefore, in our view, RBI . Directions, 1998 deal only with presentation of NPA provisions in the Balance Sheet of an NBFC. It has nothing to do with the computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest, they are merely disclosed as contingent liability in the Notes to Accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. 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. Such examination and finding thereon will not depend upon presentation 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. 33. The question still remains as to what is the nature of Provision for NPA in terms of RBI Directions, 1998. In our view, provision for NPA in terms of RBI Directions, 1998 does not constitute expense on the basis of which deduction could be claimed by NBFC under section 36(1)(vii). Provision for NPAs is an expense for Presentation under 1998 Directions and in that sense it is notional. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear cut distinction between . . . the real profits and statutory profits. The latter are statutorily fixed for a specified purpose. [Emphasis supplied] (p. 530) 36. To the same effect is the judgment of the Bombay High Court in the case of CWT v. Bombay Suburban Electric Supply Ltd. [1976] 103 ITR 384, where it was observed as under: . . . Income-tax is a tax on the real income, i.e., profits arrived at on commercial principles subject to the provisions of the Income-tax Act, 1961. The real profits can be ascertained only by making the permissible deduction. . . . [Emphasis supplied] (p. 391) 37. The point to be noted is that the Income-tax Act is a tax on real income , i.e., the profits arrived at on commercial principles subject to the provisions of the Incometax Act. Therefore, if by Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the said Explanation in computation of total income under the Incometax Act failing which one cannot a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in respectful compliance to V.ie same it is held that the decisions relied upon by the appellant bank possibly do not come to its rescue. It is worthwhile to mention that the above decision of Hon'ble apex takes precedence over other decisions including its own decision in the case of Godhra electricity as the same is latest and direct on the issue at hand. 3.9 A perusal of the submissions made by the appellant indicates that it has alternatively argued that in the event of its appeal not being allowed, the assessing officer be directed to allow him the credit of interests on the NPA's disclosed as income in the subsequent year. Thus it has been informed that in the subsequent year applicant has shown interest income earned on such NPAs and that credit thereof should be allowed. At the outset it is pertinent to note that the above argument of the appellant is difficult to be entertained as the same has not been raised by way of any grounds of appeal, which have been reproduced supra at para-2.1 above. As far as disclosure of income in a return of income and any modification in respect of such disclosed income in a return of income is concerned, it is seen that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer, and thus the Revenue is in appeal before us. At the time of hearing, it was a common point between the parties that an identical controversy has been considered by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No.350/PN/2013 dated 31.10.2013. In the said precedent, the Tribunal considered the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd., 330 ITR 440 (Del) as well as the judgement of the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances; and, following the proposition that in the absence of any judgement of the Jurisdictional High Court, there being contrary judgements of the non-jurisdictional High Courts, a decision which was favourable to the assessee was to be followed in view of the reasoning laid down by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) and, thus the Tribunal decided the issue in favour of the assessee. The relevant discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) is worthy of notice:- 8. We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd (Supra); wherein the Hon'ble Delhi High Court took into account 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 9.5 When recognition of revenue is postponed due to the-effect of uncertainties, it is considered as revenue of the period in which it is properly recognized . 8.2 The Delhi High Court also considered the decision rendered in the following cases; i) CIT vs. Elgi Finance Ltd., 293ITR 357 (Mad) ii) CIT vs. KKM Investments (Cal) - SLP dismissed by Supreme Court (310 ITR 4) iii) CIT vs. Motor Credit Co (P) Ltd., 127 ITR 572 (Mad) iv) UCO Bank vs. CIT 237 ITR 889 (SC) v) CIT vs. Shoorji Valiabhdas Co 46 (TR 144 (SC) vi) Godhra Electricity Co. Ltd., Vs. CIT 225 ITR 746 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 Accounting 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 assesses, 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 sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-a-vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible 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. They force the NBFCs to reflect true and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the above cited case are relevant: 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 . The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order. 10. Following the aforesaid discussion, which has been rendered on an 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) has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the CIT(A) is hereby affirmed and the Revenue has to fail on this aspect. 6. In the result, both the appeals of the Revenue are dismissed. 5.2. We also find that the Coordinate Bench of this Tribunal in the case of Sardarganj Mercantile Co-op.Bank Ltd. vs. ACIT (supra) has deleted addition by observing as under:- 5. We have heard the rival contentions and perused the material on record. The appellant is making the provision of interest as per the guidelines issued by the R.B.I. However, same has not been credited in the p l account as it was notional had not received actually by it. Section 43 is also not applicable a assessee has not credited in the p l account but shown in the assets and liability side in the balance sheet directly and also not received actually. Thus, we have considered view that the CIT(A) was not justifying in confirming the addition. Accordingly, the assessee s appeal is allowed. 6. In the result, the assessee s appeal is allowed. 5.3 The Hon ble Coordinate Bench has noted that there is a divergent view between the Hon ble Delhi High Court in the case of M/s.Vasisth Chay Vyapar Ltd. reported at 330 ITR 44 0(Delhi and the Hon ble Madra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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