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TMI Blog2017 (1) TMI 1533X X X X Extracts X X X X X X X X Extracts X X X X ..... n ground between both the parties that the issue involved in both the appeals was common. They were therefore heard together and are being disposed off by way of this common order. 3. The sole issue in the present appeals pertains to the taxability of interest on loans categorized as NPA s/sticky loans whether on accrual basis as contended by the Revenue or on receipt basis as claimed by the asssessee. 4. Brief facts relevant to the case are that the assessee is a Co-operative Society, having operations as a non Scheduled Bank. During assessment proceedings for the impugned assessment years, the Assessing Officer noted that the assessee had shown non performing assets(hereinafter referred to as NPA s) on which no interest income had been credited/recognized, though the assessee was following mercantile system of accounting. On being confronted with the same, the assessee contended that interest on NPA s was being accounted for on receipt basis consistently in the past also following the Accounting Standard-9 relating to Revenue recognition prescribed by the institute of Chartered Accountants of India, which required income to be recognized only on becoming certain. It was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he I.T.A.T. Chandigarh Bench has, we find, in the case of Ludhiana Central Co-op. Bank Ltd., (Supra), categorically held that in the case of assessees, being Co-operative Banks, the interest on sticky loans/ NPA s has to be brought to tax on receipt basis. The I.T.A.T., while rendering this judgment, has noted that in a number of decisions of High courts and the apex court, it has been held that interest on sticky loans is to be accounted for on receipt basis following the Real Income theory , the prescribed Accounting Standard AS-9 issued by the Institute of Chartered Accountants Of India, the RBI guidelines relating to accounting for interest on NPA s and the accounting practice of the assessees .Further it has taken note of the decision of the Gujarat High Court in the case of Pr. CIT-5 vs. Shri Mahila Sewa Sahkari Bank Ltd. which held that so far as income recognition was concerned the Assessing Officer had to follow the RBI Directions, 1998, in view of Section 45Q of the RBI Act, which provided that the policy of income recognition has to be objective and based on the record of recovery and that income from non performing assets is not to be recognized on accrual basis but on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income of the assessee for the purpose of payment of income-tax. The method of accounting which is followed by the assesseebank is 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 is in accordance with accounting practice. In Spicer and Pegler's Practical Auditing the relevant passage occurring at page 186-187 has been reproduced in the minority judgment of this Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala [(1986) 158 ITR 102 at p.i2o]. It is as follows: Where interest has not been paid, it is sometimes left out of account altogether. This prevents the possibility of irrecoverable interest being credited to revenue, and distributed as profit. On the other hand, this treatment does not record the actual state of the loan account, and in the case of banks and other concerns whose business it is to advance money, it is usual to find the interest is regularly charged up, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such accrual of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all income tax officers should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under Section 119 of the Income Tax Act. Such a circular is binding under Section 119. The circular of 9th of October, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 only disclosure norms and have nothing to do with computation of total income under the IT Act or with the accounting treatment. The 1998 Directions only lay down the manner of presentation of NPA provision in the balance sheet of an NBFC. The court has referred to the deviations between the RBI Directions and the Companies Act as follows: 42. Broadly, there are three deviations: (i) in the matter of presentation of financial statements under Schedule VI to the Companies Act; (ii) in not recognising the income under the mercantile system of accounting and its insistence to follow cash system with respect to assets classified as NPA as per its norms; (iii) in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful of recovery under the norms of the accounting standards issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the above discussion what emerges is that while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition of income in terms of the recognised accounting principles and after such income is recognised, the computation thereof, in terms of the provisions of the Income Tax Act, 1961. Insofar as the computation of taxability is concerned, the same is solely governed by the provisions of the Income Tax Act and the accounting principles have no role to play. However, recognition of income stands on a different footing. Insofar as income recognition is concerned, it would be the RBI Directions which would prevail in view of the provisions of section 45Q of the RBI Act and section 145 would have no role to play. Hence, the Assessing Officer has to follow the RBI Directions. 19. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t s decision in the case of State Bank of Travancore (supra) applies to the present case, we find is misplaced, since as pointed out above by the Ld. counsel of the assessee, it has been overruled by the Apex Court itself in the case of UCO Bank Limited (supra) wherein it was pointed out by the Apex Court that while rendering the judgment in the case of State Bank of Travancore (supra), the circular dated 9.10.1984 had not been brought to the notice of the Court, nor the subsequent decision of the Apex Court in the case of K.P.Varghese Vs. ITO (1981) 131 ITR 597 (SC). The relevant extracts of the decision in UCO Bank Limited are reproduced hereunder : 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 The State Bank of Travancore v. Commissioner of Income- Tax, Kerala (1986 (158) ITR 102) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Bank of Travancore (supra) applies to the assessee s case is dismissed. 25. The argument of the learned D.R. that the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) would not apply to the assessee s case since the assessee is a cooperative society while in the case of Vasisth Chay Vyapar Ltd. (supra), the assessee was a NBFC, is also dismissed since the principle enunciated by the Delhi High Court in Vasisth Chay Vyapar Ltd. (supra) has been followed in the case of Shri Mahila Sewa Sahakari Bank Ltd. (supra) by the Hon'ble Gujarat High Court and various other decisions cited by the assessee before us, and the assessee in all those cases being a cooperative bank, the decision rendered therein squarely applies to the case of the assessee. 26. The argument of the learned D.R. that the assessee is following the mercantile system of accounting is also dismissed since this aspect has been dealt with by various High Courts referred to above wherein they have categorically held that even following the mercantile system of accounting the interest on NPA account cannot be said to have accrued in the impugned year since the recovery of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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