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TMI Blog2017 (1) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicated upon reads as follows : "1. The Ld. CIT(A) has erred in allowing relief of addition made by the AO on account of interest accrued on non performing assets by ignoring the decision of the Hon'ble Supreme Court in the case of State Bank of Travamcore (158 ITR 102). Further, the Ld. CIT(A) has wrongly relied upon the finding of Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. which is a Non Banking Financial Corporation, whereas the Assessee under consideration is a Co-operative Society registered under Punjab State Co- operative Societies Act. Moreover, the decision of Ld. CIT(A) is perverse as the Assessee is following mercantile system of accounting." 4. The issue raised in the present ground pertains to deletion of addition of Rs. 3,02,82,000/- made by bringing to tax the interest on loans categorized as NPA on accrual basis as against receipt basis claimed by the assessee. 5. Brief facts relating to the same are that, before the Assessing Officer, the assessee submitted that the interest due on Non Performing Assests, hereinafter referred to as NPA's, had been accounted for by the assessee on actual receipt basis following the directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of DIT Vs. Brahamputra Capital Financial Services Ltd. dated 18.5.2011, wherein upholding the principles of real income theory, the High Court has held that since principal amount of loan had become doubtful, no accrual of interest could be said to have occurred and, therefore, interest in such circumstances cannot be said to have accrued to the assessee. The Ld. CIT (Appeals) after going through the assessee's submissions deleted the addition concurring with the submissions made by the assessee and further by following the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra). The relevant findings of the CIT (Appeals) at para 8 of his order is as under : "8. I have considered the basis of addition made by the AO and the arguments of the AR on the issue. The only reason for the AO to make the addition is by treating the interest due on NPA as the income of the year in which the said interest had accrued and it is on the basis of assessee's method of accounting that the same has been considered as income. It is however to be appreciated that the assessee has very specifically put it on record that its method of accounting is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of M/s Southern Technologies Ltd. (supra). The Ld. DR also contended that the provisions of section 43D of the Act cannot be applied to the present case, entitling the assessee to account for the interest income of NPA accounts on receipt basis, since the said provisions did not apply to cooperative banks. 9. The learned counsel for the assessee, on the other hand, relied upon the order of the CIT (Appeals) and further stated that the arguments raised by the Revenue had been rebutted by the Ld. CIT (Appeals) in his order. The learned counsel for the assessee further filed written submissions of its arguments before us dated 11.8.2016 wherein it had stated that the assessee had been accounting for the interest on NPA accounts on receipt basis following guidelines of the RBI applicable to the assessee cooperative bank which was adopted as part of its significant accounting policy from year to year. The learned counsel for the assessee further stated that the impugned income was in consonance with the Accounting Standard-9 relating to Revenue Recognition prescribed by the Institute of Chartered Accountants of India, as per which, revenue was to be recognised, only when there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, except interest income from non-performing assets, NPA's, which was to be accounted for on receipt basis. It is also not disputed that this accounting policy, for interest earned on NPAs, was being followed consistently by the assessee in the past also. Further the fact that the assessee has been accounting for this interest as per the RBI guidelines and as per the guidelines prescribed by Punjab State Cooperative Limited, the apex bank of the assessee, is also not disputed. 13. We find that the issue of accounting for interest on sticky loans/NPA's, has been dealt with in a number of decisions both by the Apex Court and various High Courts and Tribunals also, wherein after applying the "Real Income Theory", the prescribed Accounting Standard issued by ICAI on Revenue Recognition, AS-9, the accounting practise of the asseessee relating to interest on sticky loans and the RBI guidelines relating to accounting for interest on NPA's, it was held that such income was taxable in the year of receipt only, when its realisation becomes reasonably certain. 14. The Apex Court in the case of UCO Bank, Calcutta Vs. CIT, West Bengal (1999) 4 Supreme Court Cases 599 approved th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to advance money, it is usual to find the interest is regularly charged up, but when its recovery is doubtful, the amount thereof is either fully provided against or taken to the credit of an Interest Suspense Account and carried forward and not treated as profit until actually received." Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth Edition at page 1089 state as follows: "Interest on doubtful debts should be debited to the loan account concerned but should not be credited to interest account. Instead, it should be credited to Interest Suspense Account. To the extent the interest is received in cash, the Interest Suspense Account should be transferred to Interest account; the remaining amount should be closed by transfer to the Loan account. This treatment accords with the principle that no item should be treated as income unless it has been received or there is a reasonable certainty that it will be realised. (Vide State Bank of Tranvacore v. CIT [supra]) The assessee's method of accounting, therefore, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered." 16. This view was reaffirmed in a later judgment by the Apex Court in Mercantile Bank Ltd., Vs. CIT, Bombay City-III (2006) 5 SSC 221. 17. Further the issue of taxability of interest on NPA accounts on receipt basis by Cooperative Banks has been dealt with by various High Courts, wherein it was held that the assessee was bound by RBI guidelines to account for such interest on receipt basis and by virtue of the provisions of section 45Q of the RBI Act, the RBI guidelines had an overriding effect over other Acts including the Income Tax Act, 1961. 18. The Gujarat High Court in the case of Pr.CIT-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd. (Tax Appeal No.531 of 2015 dated 5.8.2016 ,relying upon the decision of the apex court in Southern Technologies Limited vs JCIT, Coimbatore,(2010) 320 ITR 577,held that so far as Income Recognition was concerned even the AO had to follow the RBI Directions,1998 in view of section 45Q of the RBI Act and section 145 of the Income Tax Act had no role to play in the same. The Hon'ble Court held at para 20 to 23 of its order as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andards issued by the Institute of Chartered Accountants of India. These deviations prevail over certain provisions of the Companies Act, 1956 to protect the depositors in the context of income recognition and presentation of the assets and provisions created against them. Thus, the P&L account prepared by NBFC in terms of the RBI Directions, 1998 does not recognise "income from NPA" and, therefore, directs a provision to be made in that regard and hence an "add back". It is important to note that "add back" is there only in the case of provisions. [Emphasis supplied]" 22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36(1)(vii) or section 37 of the Act, then in the computation of income, the RBI Guidelines would have no role to play, and hence, an add back. Insofar as income recognition is concerned, the Supreme Court has held thus: "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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g upon the decision of the Delhi High Court in the case of CIT Vs. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440, the Court held that the AO has to follow RBI directions on Revenue Recognition, and held as follows "25. The distinction drawn by the Delhi High Court is that while the accounting policies of adopted by the NBFC cannot determine the taxable income. However, insofar as income recognition is concerned, the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act. That insofar as income recognition is concerned, section 145 of the Income Tax Act, 1961 has no role to play." 20. The Bombay High Court in the case of CIT Vs. Deogiri Nagari Sahakarii Bank Ltd. & Others, 379 ITR 241 reiterated the above proposition by holding at para 9 of its order as follows : "9. The Income Tax Appellate Tribunal has referred the case of M/s. Vasisth Chay Vyapar Limited 330 ITR 440 (Delhi). In this case, the revenue relied upon the decision of the Hon'ble Supreme in the case of Southern Technologies Ltd. supra. The learned Income Tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6th of October, 1952 and its withdrawal by the second circular of 20th of June, 1978. The majority appears to have proceeded on the basis that by the second circular of 20th of June, 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 9th of October, 1984 by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of 9th of October, 1984, does not appear to have been pointed out to the Court. What was submitted before the Court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the Court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged "in the light ..... X X X X Extracts X X X X X X X X Extracts X X X X
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