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TMI Blog2015 (7) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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.Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (2010 (11) TMI 88 - Delhi High Court ) has held that the interest on NPA assets cannot be said to have accrued to the assessee. Thus we hold that the interest on NPAs is not taxable in the hands of the assessee for the captioned assessment year. Consequently, the grounds of appeal raised by the Revenue are dismissed. - Decided in favour of assessee. - ITA No. 383/PN/2014 - - - Dated:- 29-4-2015 - Sushma Chowla, JM And R. K. Panda, AM,JJ. For the Appellant : Smt Anuradha V Ravi For the Respondent : Shri Sunil Ganoo ORDER Per: Sushma Chowla: This appeal filed by the Revenue is against the order of CIT(A)-III, Pune dated 09.12.2013 relating to assessment year 2009-10 passed under section 143(3) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re reflected in the Balance Sheet as contra item. The interest receivable on sticky loans relatable to the year under consideration was ₹ 75,25,140/-. The explanation of the assessee in this regard was that the interest receivable on sticky loans were not credited to the Profit Loss Account, in view of the norms prescribed by RBI that the said income should be recognized only as and when the same is received, which system of accounting was regularly followed by the assessee. The Assessing Officer rejecting the contention of the assessee observed that since the assessee was following mercantile system of accounting, the accrued interest on such NPAs / sticky loans should be offered to tax. Reliance was placed on to the CBDT's Circular No.201/81/84/ITA-II, dated 09.10.1984 for the proposition that only when the interest accrued on bad doubtful advances remained un-recoverable for consecutive three previous years, then such interest does not form part of taxable income of the banking company in the fourth year. The Assessing Officer noted that the said advances of the assessee were inclusive of substandard, doubtful loans, which meant that the interest had not remained u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PN/2013 CO No.61/PN/2013, dated 31-10-2013 . 4.1 In the case of Osmanabad Janta Sahakari Bank Ltd. (Supra) the Tribunal held as under : 5. We heard the rival submissions of the parties and perused the record. We find that the identical issue has been considered by the ITAT, Visakhapatnam Bench, in the case of DCIT, Vijayawada vs. The Durga Cooperative Urban Bank Ltd., Vijayawada, in ITA.No.511/Vizag/2010 dated 10.03.2011. In the said case also, it was noticed by the Assessing Officer that assessee did not include the interest of ₹ 18,26,306/- on the NPA advances. Again the issue of applicability of section 43D was considered to the nonscheduled banks. The Tribunal placed its heavy reliance on the decision of the Hon'ble High Court of Delhi in the case of Vashist Chay Vyapar Ltd. [330 ITR 440 (Del.)], in which the Hon'ble Delhi High Court has considered the decision in the case of Southern Technologies Ltd. [320 ITR 577 (SC)]. The Tribunal finally he ld that the interest income relatable to NPA advances did not accrue to the assessee. 6. An identical view has been taken by the ITAT, Ahmedabad Bench in the case of Karnavati Cooperative Bank Ltd. Vs. Dy.CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e status of the assessee is concerned, the Assessing Officer has stated that the assessee-bank is a cooperative 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. (iii) Applicability of CBDT Circular. Next issue is that whether a Circular having effect of relaxing rigour of law can be treated as inconsistent with the provisions of a statute. In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes has issued a Circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee's taxable income, provided the Income tax Officer is satisfied that recovery is practically improbable. The CBDT u/s.119 of the I.T.Act has power to issue Circulars in exercise of its statutory powers. If the Board consider i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Supreme Court, already discussed by us supra. We, therefore summarize that as of now the law as laid down in UCO Bank is that in terms of CBDT Circular the interest is to be added as income only when actually received or credited in respect of the sticky advances while making assessment for a financial institution. (iv) Interpretation of the language of the statute : We have reproduced verbatim the provisions of section 43-D of the I.T.Act and expressed an opinion that if the statute has used the terminology for the chargeability of interest on the basis when credited or actually received , then in our opinion no ambiguity has been left by the Statute. If the statute is so clear that an interpretation can easily be made, then that exact meaning should be given to the language of the Section. For this legal proposition we place reliance on Keshavji Ravji and Company vs. CIT 183 ITR 01 (SC), wherein it was held as under: As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to whittle down the statuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income was to be assessed for first three years on accrual basis, provisions of section 43D were inserted in the Act. Circular No.621, dated 19-12-1991 gives the legislative intention stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc., so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or credited to the profit and loss account. This benefit was extended with effect from 1-4- 2000 in the case of public companies engaged in long-term financing of housing projects approved by National Housing Banks. The Legislature in their wisdom did not extend the same benefit to NBFCs which has been given to scheduled banks, public financial institutions, etc. The provisions of section 43D as stood at relevant time contained an expression '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 RBI in relation to such debts'. This expression continues to exist in the newly substituted section 43D applicable with effect from 1-4-2000. This sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The income-tax is a tax on real income , i.e., the profits arrived at on commercial principles subject to the provisions of the Act. Therefore, if by the Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of bad debt which is written off, then one has to take into account the Explanation in computing the total income under the Income-tax Act failing which one cannot ascertain the real profits. The provision for non-performing assets debited in the profit and loss account under the Reserve Bank Directions of 1998 is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the Income-tax Act. Therefore the distinction can easily be drawn that in the appeal before us the question is accrual of interest income on sticky loan but in this cited decision the question before he Apex court was about the admissibility of provision made in respect of doubtful debts. (vi) Concept of real income approved in the case of banking business: Before us, the theory of real income has also been argued and in support a decision of Hon'ble Court pronounced in the case of CIT vs. Godhra E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in the said decision is as under: 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 43D of the Act. Notably, section 43D of the Act prescribes that interest income on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system of accounting. The learned CIT (A) affirmed the order of the Assessing Officer. However, the ITAT deleted the aforesaid income. Hence the revenue preferred 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 in force or any instrument having effect by virtue of any such law . The High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon'ble High Court also considered accounting standard AS-9 on Revenue recognition and also extracted following relevant portion from the said accounting standard: 9. Effect of uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection. 9.2 Where the abili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 very judgment, we find that the proposition advanced by Mr.Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited ₹ 81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of Section 36(1) (vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(i)(vii) of the Act. The Assessing Officer, however, did not bring to tax ₹ 20,34,605/- as income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect 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 Accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the Accounting Policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute . 10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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'ble Madras High Court took the view that the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) also applied to the Income Recognition Norms provided by RBI and therefore it held the interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI's guidelines. But the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon'ble D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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