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TMI Blog2016 (8) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... on accrual basis looking to the guidelines of the Reserve Bank of India?" 4. Having regard to the fact that at the admission stage itself, both the learned counsel had addressed the court on the merits at length, the appeal was taken up for final hearing. 5. The assessment year is 2010-2011 and the relevant accounting period is the previous year 2009-2010. The respondent assessee, a co-operative bank, filed its return of income for assessment year 2010-11 on 30th September, 2010 declaring total income of Rs. 1,55,66,430/- wherein it did not show interest income on non-performing assets (NPA) as according to the assessee such interest was not realisable. 5.1 The Assessing Officer was of the opinion that interest on the NPA had accrued to the assessee, even if it was not actually realised, as it was following the mercantile system of accounting and accordingly added a sum of Rs. 1,72,73,000/- to the total income of the assessee. The assessee carried the matter in appeal before the Commissioner (Appeals), who upheld the order passed by the Assessing Officer. The assessee challenged the order of the Commissioner (Appeals) before the Tribunal, which allowed the appeal by deleting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. The court further observed that it has very often referred to accounting practice for ascertainment of profit made by a company or value of assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. It was submitted that there will be accrual of income if the right to receive money exists. In this regard reference was made to the decision of the Supreme Court in the case of Raja Mohan Raja Bahadur v. Commissioner of Income-Tax, U.P., (1967) 66 ITR 378, wherein the court observed that the Income Tax Act does not contain much guidance as to cases in which tax is to be levied on income received, and cases in which tax is to be levied on income acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s before the actual disbursements. The profit or loss at the end of the accounting year is, therefore based, not on the difference between what was actually received and what was actually paid out, but on the difference between the right to receive and the liability to pay. The court found it impossible to say that in such a case, the taxation is on the income, or profits and gains which were received. The court held that it can only be on profits which accrue or arise to the assessee in the accounting year. Mr. Bhatt submitted that, therefore, the consistent view adopted by the Supreme Court is that when the assessee follows the mercantile system of accounting, the liability arises the moment the right to receive accrues. It was submitted that in the facts of the present case, as the NPAs have not been written off, the right to receive interest thereon accrues to the assessee in the assessment year under consideration, and hence, the Assessing Officer was wholly justified in holding that the assessee is liable to pay tax on the interest on NPA. 6.3 Reference was made to the decision of the Supreme Court in the case of State Bank of Travancore, Trivandrum v. Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted that even if the circular of 1984 were to apply, the foundation for applicability of the same has to be laid. It was argued that at the relevant time when the circular was issued, section 43D of the Act was not on the statute book. Therefore, once the provision is enacted, the circular loses its force and that even if the circular were to apply, the applicability thereof would have to be ascertained. It was submitted that the assessee not being a non-banking financial corporation and in view of the insertion of section 43D of the Act, which clearly demarcates the classes of assessees entitled to the benefit of sticky loans, the circular stands impliedly overruled and that assuming that the 1984 circular applies, foundation would have to be laid for applicability thereof, whereas in the facts of the present case, no such foundation has been laid. It was submitted that in view of the decision of the Supreme Court in State Bank of Travancore v. Commissioner of Income-Tax (supra), the real income concept does not come into the picture and the actual receipt cannot be taken into consideration. 6.5 Strong reliance was placed upon the decision of the Supreme Court in Southern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est income then it is not chargeable to tax. The system of accounting followed only recognises it bringing the income to books. The adopted accounting policy, that is, recognising income on NPA accounts only subject to realisation, does not serve as a standard category. 6.7 Reliance was placed upon the decision of the Karnataka High Court in the case of Karnataka Bank Limited v. Assistant Commissioner of Income-Tax, (2013) 356 ITR 549, which is a converse case wherein the income-tax authorities relied upon the RBI guidelines for the purpose of contending that the assessee is estopped from treating the investment as stock-in-trade. The court, placing reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (supra) held that a method of accounting adopted by the tax-payer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. The court held that for the purpose of the Income Tax Act, if the assessee had consistently been treating the value of investment for more than two decades as stock-in-trade and claimed depreciation, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee including the special remuneration paid to the assessee which, however, was not paid on account of litigation and rejected the contention that no amount was due as extra remuneration in several years and that no income had accrued on account of such extra remuneration. The Supreme Court held that the assessee acquired the right to receive the extra remuneration of Rs. 15,000/- per annum on the basis of the resolution passed by the company on 20th July, 1949. The right to receive extra remuneration arose only on the resolution of the company. In view of the resolution, such amount had become payable to the assessee by the company at the end of the accounting year. What was deferred on account of the pending litigation was not the accrual of right but the date of payment. The court held that since the resolution created a right in favour of the assessee to receive the extra remuneration at the agreed rate, the assessee acquired the right to receive that income by virtue of the resolution and not by virtue of the judgment which held the resolution to be valid. The court, accordingly, did not find any force in the contention that until the suit is finally decided by the court, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ascertaining when a particular income accrued or arose. 6.11 The decision of the Supreme Court in the case of Commissioner of Income Tax, Amritsar v. Shivprakash Janak Raj and Company Private Limited, (1996) 222 ITR 583, was cited for the proposition that a mere book-keeping entry cannot be income, unless income has actually resulted. The concept of real income cannot be employed so as to defeat the provisions of the Act and the rules. Where the provisions of the Act and the rules apply, it is only those provisions which must be applied or followed. There is no room nor would it be permissible for the court to import the concept of real income so as whittle down, qualify or defeat the provisions of the Act and the rules. 6.12 Next it was submitted that the assessee being a cooperative bank does not fall under any of the categories specified under section 43D of the Act which provides for payment of tax on interest on bad debts or doubtful debts only in the year of receipt and, therefore, is not entitled to the benefit of section 43D of the Act, and hence, is liable to pay tax on the interest income accrued to it under the mercantile system of accounting, whether or not it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g effect over the provisions of all other laws. It was submitted that the RBI Guidelines having been issued under the said Chapter, would prevail over the provisions of the Income Tax Act, and accordingly, interest income in respect of NPA is to be recognised in terms of the prudential norms. Moreover, in view of the provisions of section 145(1) of the Act and the RBI Guidelines, it was incumbent upon the assessee to conform to the mandatory accounting standards and that the system of accounting consistently followed by the assessee was in conformity with the accounting standards which, inter alia, provide that interest on NPA is not to be treated as income unless the same is actually received. It was submitted that in view of the provisions of section 145(1) of the Act and sections 209 and 211 of the Companies Act, the assessee was obliged to conform to the mandatory accounting methods and that the system of accounting followed by the assessee was in conformity with the accounting standards. It was submitted that the Supreme Court in Southern Technologies Limited (supra) has clearly recognised the theory of real income and held that notwithstanding that the assessee may be followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another v. Canfin Homes Limited, (2012) 347 ITR 382 (Kar), was cited wherein the court has held that if an assessee adopts the mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realised immediately, cannot be a ground for avoiding payment of tax. But, if in his account, it is clearly stated that though a particular income is due to him but it is not possible to recover the same, then it cannot be said to have accrued and the said amount cannot be brought to tax. The court found the contention of the revenue that in case of non-performing assets, even if they do not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally, to be without any basis. Reliance was placed upon the decision of the Madras High Court in Commissioner of Income-Tax v. Coimbatore Lakshmi Inv. and Finance Co. Ltd., (2011) 331 ITR 229 (Mad), for the proposition that if no income is reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion expressed by the majority in State Bank of Travancore and said: "The relevant circulars of CBDT cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of Section 119 to ensure a uniform and proper administration and application of the Income Tax Act." 7.4 Reference was made to the decision of the Supreme Court in United Commercial Bank v. Commissioner of Income-Tax (supra), to point out that the court has held that the majority decision in the State Bank of Travancore v. Commissioner of Income-Tax (supra) cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. The court observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. As such, the circular would be binding on the Department." It was submitted that the circular has not been revoked by the Board after the coming into force of section 43D of the Act and hence, the same is still operative and binding upon the income-tax authorities. Accordingly, even in terms of the circular the interest on NPA cannot be treated as income of the assessee, except in the year when it is actually received. 7.5 An unreported decision of the Bombay High Court in Commissioner of Income Tax, Aurangabad v. M/s. Deogiri Nagari Sahakari Bank Ltd., Aurangabad rendered on 22nd January, 2015 in ITA No.53/2014 and allied matters was cited wherein the controversy before the court was relating to deletion of additions on account of interest on sticky loans. The court held that the judgment of the Supreme Court in Southern Technologies Limited (supra) pertains to non-banking financial companies whereas UCO Bank and Mercantile Bank (supra) squarely applies to the facts of that case and issues involved. Reliance was placed upon the decision of the Supreme Court in the case of Keshavlal Khemchand and Sons Private Limited and Others v. Union of India and Others, (2015) 4 SCC 770, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances, the revenue cannot be allowed to flip-flop on the issue and it ought to let the matter at rest in view of the law laid down by the Supreme Court in the above decision. It was, accordingly, urged that the view adopted by the Tribunal is in consonance with the view laid down by the Supreme Court in this regard and there being no infirmity in the impugned order, there is no warrant for interference by this court. 8. In rejoinder, Mr. M.R. Bhatt, learned counsel for the appellant submitted that insofar as the decision of the Supreme Court in the case of Commissioner of Income-Tax v. Excel Industries Limited (supra) is concerned, the same in fact goes against the assessee inasmuch as, the Supreme Court has held that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. It was submitted that in the facts of the present case, there is a liability on the part of the other party to pay the interest on the NPA. Under the circumstances, the interest thereon has ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as income for the particular financial year in which it accrued but offers the same on actual receipt, as a remedial measure, in order to comply with the provisions of the Income Tax Act, 1961 - the assessee can prepare book of accounts under prudential norms of the RBI Act and can add back the accrued interest directly to the total income for the purposes of taxation keeping in view the principles of accountancy and to honour the Income Tax Act. Accordingly, an addition of Rs. 1,72,73,000/- came to be made to the total income of the assessee being the undisclosed income in form of accrued interest on non-performing assets. 10.2 The Commissioner (Appeals) placed reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (supra) and held that there is no merit in the contention of the assessee that under commercial accounting, interest on NPAs cannot be charged. On the question of applicability of the CBDT Circular dated 9.10.1984, the Commissioner (Appeals) held that the same would not be applicable for the reason that the provisions of section 43D of the Act are clear and cannot be overridden through delegated legislation viz. circulars and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 1998 vis-a-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 RBI Directions 1998 in view of Section 45Q of the RBI 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 assessees herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been placed by the learned counsel for the parties. The earlier decisions are on the question of real income theory and the applicability of the CBDT Circular to the NBFCs and Banking Companies, etc. The decision on which both the learned counsel have placed strong reliance is in the case of Southern Technologies Limited (supra) wherein the applicability of the RBI Guidelines vis-à-vis the provisions of Income Tax Act, 1961 has been discussed. As noted hereinabove the Delhi High Court in Vasisth Chay Vyapar Ltd. (supra) has interpreted the said decision in favour of the assessee by placing reliance upon the observations made in paragraph 40 of the decision, whereas the Madras High Court in Sakthi Finance Limited (supra) has interpreted the said decision against the assessee. 14. Before adverting to the above decisions, it may be germane to refer to the historical background in respect of the controversy in issue. It appears that right from August, 1924 the distinction between an irrecoverable loan and a sticky loan was recognised by the Central Board of Revenue as also by the Reserve Bank of India in their diverse circulars in the case of banks, financial institutions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real income. The court observed that with a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common clichés. The concept of real income certainly is well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of law of income-tax as developed. 15. In UCO Bank, Calcutta v. CIT (supra) the Supreme Court was called upon to consider whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account, can be included in the income of the assessee for the assessment year 1981-82. The court observed that: "5. The method of accounting which is followed by the assessee Bank is the mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realised. A mixed method of accounting is thus followed by the assessee Bank. This method of accounting adopted by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l claim which need not be included in the income of the assessee until it is actually recovered. 14. There are, however, two decisions of this Court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in State Bank of Travancore v. CIT1 decided by a Bench of three Judges of this Court by a majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of 6-10-1952 and its withdrawal by the second circular of 20-6-1978. The majority appears to have proceeded on the basis that by the second circular of 20-6-1978 the Central Board had directed that interest in the suspense account on "sticky" advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of 9-10-1984 by which, from Assessment Year 1979-80 the banking companies were given the benefit of the circular of 9-10-1984, does not appear to have been pointed out to the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. 16. In the premises the majority decision in State Bank of Travancore v. CIT cannot be looked upon as laying down that a circular which is properly issued under Section 119 of the Income Tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five Judges in Navnit Lal C. Javeri v. K.K. Sen 17. We do not see any inconsistency or contradiction between the circular so issued and Section 145 of the Income Tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to Section 145 of the Income Tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income Tax Authorities in a specific situation and, therefore, validly issued under Section 119 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of this Court in UCO Bank v. CIT." 17. In Southern Technologies Limited v. CIT (supra), the Supreme Court was considering a case where categorisation of assets into doubtful, sub-standard and loss was not in dispute. The financial year of the appellant was July to June and the P&L account and the balance sheet were drawn as on 30th June. The P&L account and balance sheet was for the shareholders, Reserve Bank of India (RBI) and Registrar of Companies (ROC) under the Companies Act, 1956. However, for the IT Act, a separate P&L account was made out for the year ending 31st March and the balance sheet as on that date was prepared and submitted to the Assessing Officer for computing the total income under the IT Act, which was not for use of RBI or ROC. For the accounting year ending 31.3.1998, the assessee debited Rs. 81,68,516 as provision against NPA in the P&L account on three counts viz. hirepurchase of Rs. 57,38,980, bill discounting of Rs. 12,79,500 and loans and advances of Rs. 31,84,701, in all totalling Rs. 1,02,03,121 from which the Assessing Officer allowed deduction of Rs. 20,34,605 on account of hire-purchase finance charges leaving a balance provision for NPA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35. It is important to note that the net profit shown in the P&L account is the basis for NBFCs to accept deposits and declare dividends. Higher the profits, higher is the NOF and higher is the increase in the public making deposits in NBFCs. Hence, the object of the NBFCs is disclosure and provisioning. NBFCs have to accept the concept of "income" as evolved by RBI after deducting the provision against NPA, however, as stated above, such treatment is confined to presentation/disclosure and has nothing to do with computation of taxable income under the IT Act. Scope of the Finance Act (No. 2) of 2001 w.e.f. 1- 4-1989 insofar as Section 36(1)(vii) is concerned 36. Prior to 1-4-1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the P&L account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under Section 36(1)(vii). (See CIT v. Jwala Prasad Tiwari, (1953) 24 ITR 537 Bom. and Vithaldas H. Dhanjibhai Bardanwala, 1981 (130) ITR 95. Such state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the list as "provision for doubtful debts". However, these are matters of presentation of provisions for doubtful debts even under the Companies Act and have nothing to do with taxability under the IT Act. 43. As stated above, the Companies Act allows an NBFC to adjust a provision for possible diminution in the value of assets or provision for doubtful debts against the assets and only the net figure is allowed to be shown in the balance sheet, as a matter of disclosure. However, the said RBI Directions, 1998 mandate all NBFCs to show the said provisions separately on the liability side of balance sheet i.e. under the head "current liabilities and provisions". The purpose of the said deviation is to inform the user of the balance sheet the particulars concerning quantum and quality of the diminution in the value of investment and particulars of doubtful and substandard assets. Similarly, the 1998 Directions do not recognise the "income" under the mercantile system and insist that NBFCs should follow cash system in regard to such incomes. 44. Before concluding on this point, we need to emphasise that the 1998 Directions have nothing to do with the accounting treatment or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 1998 is on presentation of NPA provision in the balance sheet of an NBFC. Presentation/disclosure is different from computation/taxability of the provision for NPA. The nature of expenditure under the IT Act cannot be conclusively determined by the manner in which accounts are presented in terms of the 1998 Directions. There are cases where on facts courts have taken the view that the so-called provision is in effect a write-off. Therefore, in our view, the RBI Directions, 1998, though deviate from the accounting practice as provided in the Companies Act, do not override the provisions of the IT Act. 50. The question still remains as to what is the nature of "provision for NPA" in terms of the RBI Directions, 1998. In our view, provision for NPA in terms of the RBI Directions, 1998 does not constitute expense on the basis of which deduction could be claimed by NBFCs under Section 36(1)(vii). Provision for NPAs is an expense for presentation under the 1998 Directions and in that sense it is notional. For claiming deduction under the IT Act, one has to go by the facts of the case (including the nature of transaction), as stated above. 51. One must keep in mind another aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income of the assessee because the said Act seeks to tax the "real income" which is income computed according to ordinary commercial principles but subject to the provisions of the IT Act. Under Section 36(1)(vii) read with the Explanation, a "write-off" is a condition for allowance. If "real profit" is to be computed one needs to take into account the concept of "write-off" in contradistinction to the "provision for doubtful debt". Applicability of Section 145 57. At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued by RBI under Chapter III-B 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 correct" profits. By virtue of Section 45-Q, an overriding effect is given to the RBI Directions, 1998 vis-à-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 1998 and the IT Act operate in different areas. These RBI Directions, 1998 have nothing to do with computation of taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al norms for income recognition, asset classification and provisioning for advances portfolio of the co-operative banks. The guidelines provided thereunder are mandatory and it is incumbent upon all cooperative banks to follow the same. Insofar as income recognition is concerned, clause 4.1.1 of the circular provides that the policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis. Thus, in view of the mandate of the RBI Guidelines the assessee cannot recognise income from non-performing assets on accrual basis but can book such income only when it is actually received. Thus, this is a case where at the threshold, the assessee, in view of the RBI Guidelines, cannot recognise income from NPA on accrual basis. This is, therefore, a case pertaining to recognition of income and not computation of the income of the assessee. 21. The Supreme Court in Southern Technologies Limited (supra) has held that the 1998 Directions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, 1998 and the IT Act operate in different areas. These RBI 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 the 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 RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute." Thus, insofar as income recognition is concerned, the court has held that even the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and that as far as income recognition is concerned, section 145 of the Income Tax Act, has not role to play. 23. In the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so far as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even the principal amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not "accrued". We are in agreement with the submission of Mr. Vohra on this count, supported by various decisions of different High Courts including this court which has already been referred to above. (2) In the instant case, the assessee company being NBFC is governed by the provisions of RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee. No doubt, in first blush, reading of the judgment gives an indication that the Court has held that RBI Act does not override the provisions of the Income Tax Act. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution. The court did not agree with the view adopted by the Delhi High Court in Commissioner of Income-tax v. Vasisth Chay Vyapar (supra) and held thus: "16. In Paragraphs 31 and 34, the Hon'ble Supreme Court in no uncertain terms held that the collectibility of interest is different from accrual and in each and every case, the assessee has to prove that the income interest is not recognised or not taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept the claim of the assessee under the Income-tax Act or not to accept. In case of Southern Technologies Limited, (2010) 320 ITR 577, the Assessing Officer accepted the assessee's case towards non-recognition of interest for Rs. 20.34 lakhs as would be apparent from a reading of Paragraph No.31 of the Judgment of the Hon'ble Supreme Court in case of Southern Technologies Limited, (2010) 320 ITR 577. By a careful reading of the case of Southern Technologies Limited, (2010) 320 ITR 577, we are of the view that the assessee has to prove in each case that interest not recognised or not taken into account was in fact due to uncertainty in collection of interest and it is for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43D of the Act, a certain class of assessees is given benefit under the provisions of the Act would not mean that the same would override the circular. 29. On behalf of the appellant it has been contended that section 43D of the Act itself recognises recognition of taxability of such interest and that when a specific provision in the nature of section 43D of the Act has been made, and entities like the assessee are excluded from the purview thereof, the assessee cannot indirectly claim benefit which would amount to a benefit similar to that under section 43D of the Act. In this regard, it may be noted that the benefit claimed by the assessee is not under any provision of the Income Tax Act, 1961. The assessee being bound by the RBI Guidelines which are issued under the provisions of the RBI Act has not shown the interest on NPA as income. By virtue of the provisions of section 45Q of the RBI Act, the provisions of Chapter IIIB thereof have an overriding effect over other laws including the Income Tax Act, 1961. Therefore, notwithstanding the provisions of section 43D of the Act, since the provisions of section 45Q of the RBI Act have an overriding effect vis-à-vis income re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Banking Regulation Act, 1949. Evidently therefore, the expression "banking company" would take within its sweep a co-operative bank. The Assessing Officer has thereafter entered into a discussion on the provisions of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which provides for enforcement of security interest of banks and financial institutions and has observed that in the instant case, no material has been brought on record by the assessee to prove its efforts made in a bid to recover such debts which are classified as NPA and other categories. The Assessing Officer has also entered into a discussion as regards the quality of management, etc., without even examining as to whether or not there was any probability of interest being received on the NPAs. The Commissioner (Appeals) has placed reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (supra) and held that there is no merit in the contention of the assessee that under commercial accounting, interest on NPAs cannot be charged. On the question of applicability of the CBDT Circular dated 9.10.1984, the Commissioner (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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