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TMI Blog2018 (2) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition. - Decided in favour of assessee - ITA No. 690/Ahd/2016 - - - Dated:- 31-1-2018 - SHRI S. S. GODARA, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER For The Revenue : Shri Mudit Nagpal, Sr. D.R. For The Assessee : Shri S. N. Soparkar, A.R. ORDER PER S. S. GODARA, JUDICIAL MEMBER This Revenue s appeal for assessment year 2012-13, arises against the CIT(A)-5, Ahmedabad s order dated 12.01.2016, in case no. CIT(A)-5/DCIT Cir.5(3)/131/2014-15, reversing Assessing Officer s action disallowing/adding an amount of ₹ 83,45,400/- on account of accrued interest on bad and doubtful debts/NPAs, in proceedings u/s.143(3) of the Income Tax Act, 1961, hereinafter the Act . 2. We come to the above sole substantive issue of addition on account of accrued interest on bad and doubtful debts/NPAs. The Assessing Officer concluded in assessment order dated 11.02.2015 that Section 43D of the Act r.w. Rule 6EA would not apply in case of the assessee bank as it is not a scheduled bank as classified to this effect by the Reserve Bank of India. He was of the opinion that Section 43D covers only scheduled bank. He further concluded that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court in the case of State Bank of Travancore Vs. CIT (supra). 3.8. On the other side, the appellant has claimed that the interest on the NPA has not accrued at all for the reason that the recovery of the principal amount itself was in doubt, when the NPA account was doubtful and sticky as per the categorization prescribed by the RBI then the interest is not required to be provided at all in the P L Account. It also relied upon the RBI Circular of July 02, 2012. As per the circular, the appellant bank was not required to make provision of interest on NPA account. This circular was in conformity with the Supreme Court judgment in the case of UCO Bank. The appellant relied upon the judgment of Hon ble Supreme Court in the case of UCO Bank Vs. ACIT [237 ITR 889] which was after the judgment in the case of State Bank of Travencore on which the AO has relied upon. The appellant also stated that the interest was said to have accrued only when right to receive is established. In the case of NPA, the recovery of principal amount itself was in doubt. Therefore, interest on such doubtful amount cannot be said to have been accrued as per the provisions of section 145 of I. T. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether CBDT circular dated 9-10- 1984 is in conflict with provisions of section 145 - Held no. Section 119 of the Income - tax Act, 1961 - Central Board of Direct Taxes - Power to issue circulars etc. - Whether, since Board has considered it necessary to lay down a general test for deciding what is a doubtful debt in circular dated 9-10-1984 and directed that all ITOs should treat such amounts as not forming part of income of assessee until realized, this direction by way of a circular cannot be considered as travelling beyond powers of Board under section 119 and such a circular is binding under section 1 1 9 - Held, yes. Circulars and Notifications - CBDT Circular No. 41(V-6), dated 6-10- 1952, CBDT Circular dated 30/06/195, CBDT Circular No. 1186, dated 20/06/1978 and CBDT Circular No. F 201/21/84/TTA-II dated 9-10- 1984. 3.11. Subsequently, the Hon ble IT AT B Bench, Ahmedabad in the case of Sardarganj Mercantile Co-op. Bank Ltd. Vs. ACIT in ITA No. 2426/Ahd/2012 dt. 15/02/2013 having considered the UCO Bank decision, RBI guidelines has decided the issue in favour of the appellant bank by stating that no interest on the NPA is chargeable to tax. The Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been credited in the p l account as it was notional had not received actually by it. Section 43 is also not applicable as assessee has not credited in the p l account but shown in the assets and liability side in the balance sheet directly and also not received actually. Thus, we have considered view that the CIT(A) was not justifying in confirming the addition. Accordingly, the assessee s appeal is allowed. 3.12. Thereafter, the Hon ble IT AT *C Bench, Ahmedabad in the case of Shri Manila Seva Sahakari Bank Ltd. Vs. ACIT (OSD) Circle - 10, in ITA No. 62/Ahd/2014 dated 27/03/2015, after considering the judgment of UCO Bank, other IT AT decisions and RBI guidelines has also decided this issue in favour of the appellant bank. The relevant portion of the decision is reproduced as under:- 5.1. However, we find that under the identical facts, the Coordinate Bench of this Tribunal in the case of ACIT vs. Solapur Siddheshwar Sahakari Bank Ltd. in ITA Nos.2220 221/PN/2013 for AYs 2009-10 2010-11 (supra) has examined the issue thoroughly by holding as under:- 4. The learned CIT(A) disagreed with the Assessing Officer, and thus the Revenue is in appeal before us. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, we find that the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Cooperative Bank operating under a license issued by RBI but was not a scheduled bank so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The assessee, on the other hand, contended that having regard to the guidelines issued by RBI regarding accounting of interest on NPAs, no interest income accrued in respect of NPAs and that the same was to be taxed only on receipt basis. The Tribunal observed that the question of taxability of interest on NPAs classified by RBI, was considered by the Hon ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) wherein after considering the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection -will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments. 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, It is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the-effect of uncertaint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax ₹ 20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deducibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to Income Recognition and held that income had to be recognized in terms of the Prudent/a Norms, even, though the same deviated from mercantile system of accounting and/or section 45 (sic. 145) of the Income Tax Act. It can be said, therefore, that the Apex Court approved the real income theory which is engrained in fie Prudential Norms for recognition of revenue by NBFC . 9. The Hon ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz., a) Income Recognition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assesses as it is applicable to the companies registered under the Companies Act. The Hon ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the 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. 10.1 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 (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon ble Delhi High Court in the above cited case are relevant: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Madras High Court as noted by the Hon ble Madras High Court in its order. 12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 88ITR 192 (SC). 13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in the case of The Durga Cooperative Urban Bank Ltd. (supra) and accordingly the order of the C1T(A) is liable to the affirmed. We hold so. 14. In the result, the appeal of the Revenue is dismissed. 5. Since it was a common point between the parties that the facts and circumstances in the present case are identical to those considered by us in the case of The Omerga Janta Sahakari Bank Ltd. (supra), following the said precedent the present claim of the assessee deserves to be upheld. Thus, the order of the CIT(A) is hereby affirmed and the Revenue has to fail on this aspect. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no substantial question of law involved in these appeals and thus all the appeals are liable to be dismissed. 9. The Income Tax Appellate Tribunal has referred the case of M/s. Vasisth Chay Vyapar Limited 330ITR 440(Delhi). In this case, the revenue re lied upon the decision of the Hon ble Supreme Court 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.Southern Technologies Limited supra. The assessee herein being a Cooperative bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the Co-operative banks. The Hon ble Supreme Court in the case of Southern Technologies Limited supra held that, provisions of Section 45 Q of Reserve Bank of India Act has as an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by corporative banks,. Hence, the Assessing Officer has to follow the Reserve Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessment year 1981-82 to which the Circular of 9-10-1984 is applicable. If, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Assessing Officer s 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 traveling 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 9-10- 1984, therefore, provides a test for recognizing 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 doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 11. The learned counsel for respondent has placed reliance in a case of Mercantile Bank Ltd., Bombay Vs. The Commissioner of Income Tax, Bombay City HI reported in (2006) 5 SCC 221, where similar question was raised before the Apex Court. The question was whether the assessee is liable to be taxed under Income Tax Act, 1961 in respect of the interest on doubtful advances credited to the interest on doubtful advances credited to the interest suspense account. In this case, the Uco Bank s case (supra) was also refered and the Hon ble Apex Court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent Cooperative banks, as understood by Section 43 of the Income Tax Act on the Scheduled Bank. 12. Learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co-op. Bank Ltd. has held that no interest on accrual basis on NPAs can be taxed even in cases of unscheduled banks. It was also observed that as per the RBI guidelines dated 02/07/2012 of which relevant para is reproduced for ready reference as under also states that it was mandatory upon the appellant to not to charge the interest on accrual basis. 3. INCOME RECOGNITION 3.1. Income Recognition Policy 3.1.1.The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non - performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. 3.16. Further, following the theory of real income, question of taxability of any notional income like accrued interest on NPA would not arise, more particularly when the recovery of the principal loan amount is doubtful. Even the Hon ble Supreme Court in the case of UCO Bank, distinguishing the judgment of State Bank of Travancore has held that the circulars issued earlier were not applicable in view of section 43D substi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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