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TMI Blog2013 (9) TMI 1082X X X X Extracts X X X X X X X X Extracts X X X X ..... e reads as under : 1. Whether on the facts and circumstances of the case the CIT(A) is correct in deciding that assessee can offer his interest received from bad and doubtful debts (NPA) on actual receipt basis as per RBI guidelines even though assessee is following mercantile system of accounting. In spite of that, provision of section 43D is not applicable to the assessee . 3. Briefly stated facts are as under. The assessee is a cooperative bank carrying on the business of banking. The assessee filed the return of income for A.Y. 2009-10 declaring total income of ₹ 5,15,43,200/-. Assessment has been completed by the AO u/s.143(3) of the Act. 3.1 So far as the issue in respect of interest on NPA is concerned, the AO has observed that the assessee has not offered accrued interest on NPA for taxation. In the opinion of the Assessing Officer as the assessee is following mercantile system of accounting, the accrued interest on NPA has to be offered for tax. The assessee filed the written submission and contended that interest on the NPA account is treated separately and income is recognised on actual receipt basis. The AO did not accept that the provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Section 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books 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 notwithstand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the land-mark decision, the Hon'ble Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC) has therefore held, first, that a beneficial circular is not to be treated as inconsistent with the provisions of statute and binding on the authorities. Second, that in respect of interest on sticky advances interest income is to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt to the so-called equitable construction of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation, another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 5 out of the scope of the Act. If the contention of assessee was accepted, it would amount to insertion of 'NBFC' in section 43D, that too by a Guideline issued for different purposes by an authority other than the Parliament In other words, the doctrine of 'Casus Omissus' will deem to have been applied which is 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 nonbanking 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the principle of accrual comes into play without income was recognized and that the assessee had classified its assets on the basis of notification issued by R.B.I. and found that certain assets came under the category of NPA and that from such NPA the assessee had not recognized any income in consonance with the notification 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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