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TMI Blog2018 (5) TMI 935X X X X Extracts X X X X X X X X Extracts X X X X ..... Both the captioned appeals relate to the same assessee and have been filed by the Revenue against separate orders of the learned Commissioner of Income-tax (Appeals), Palampur (hereinafter referred to as CIT (Appeals) ) dated December 23, 2015. 2. It was common ground between both the parties that the issue involved in both the appeals was common. They were therefore heard together and are being disposed of by way of this common order. 3. The sole issue in the present appeals pertains to the taxability of interest on loans categorised as non-performing assets/sticky loans whether on accrual basis as contended by the Revenue or on receipt basis as claimed by the assessee. 4. Brief facts relevant to the case are that the assessee is a co-operative society, having operations as a non-scheduled bank. During the 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/recognised, though the assessee was following the mercantile system of accounting. On being confronted with the same, the assessee contended that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, Chandigarh Bench had dealt with an identical issue in the case of Deputy CIT v. Ludhiana Central Co-op. Bank Ltd. (I. T. A. No. 526/Chd/2013 dated January 3, 2017), holding that interest on sticky loans/ non-performing assets was to be subjected to tax on receipt basis. Copy of the said order was placed before us. 8. The learned Departmental representative fairly agreed that the issue was covered in favour of the assessee by the decision of the Income-tax Appellate Tribunal, Chandigarh Bench in the case of Ludhiana Central Co-op. Bank Ltd. (supra). 9. In view of the above, we find no reason to interfere in the order of the learned Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal, 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/non-performing assets has to be brought to tax on receipt basis. The Income-tax Appellate Tribunal, 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 rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re as follows (page 893 of 237 ITR) : 'We have 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 and has not been brought to the profit and loss account of the assessee, can be included in the income of the assessee for the assessment year 1981-82. It is the case of the assessee that in respect of loans which are advanced by it to various customers, recovery of some loans is very doubtful. It is doubtful whether even the interest on the loans advanced will be recovered from the customer. In such cases, the interest calculated on the loan amount is credited in a suspense account. This amount is not brought to the profit and loss account of the assessee-bank because these are amounts which are not likely to be realised by the bank. Hence they do not form a part of the real income of the bank. If and when any such amount or a part of it is recovered, it is included in that assessment year in the total income of the assessee for the purpose of payment of Income-tax. The method of accounting which is followed by the assessee-bank is the mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted in accordance with the method of accounting regularly employed by the assessee ; provided that in a case where the accounts are correct and complete but the method employed is such that in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, the computation shall be made in such manner and on such basis as the Income-tax Officer may determine. In the present case the method employed is entirely for a proper determination of income.' (emphasis supplied by us) 15. Further the apex court also referred to the Central Board of Direct Taxes Circular dated October 9, 1984 stating that interest on loans on which there has been no recovery for three years will be subjected to tax on receipt basis, and held as follows (page 896 of 237 ITR) : 'The question whether interest earned, on what have come to be known as sticky loans, can be considered as income or not until actual realisation, is a question which may arise before several Income-tax Officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phs 20 to 23 of its order as follows (page 359 of 395 ITR) : '20. Section 45Q finds place in Chapter III-B of the Reserve Bank of India Act. Thus, the provisions of Chapter III-B of the Reserve Bank of India Act have an overriding effect qua other enactments to the extent the same are inconsistent with the provisions contained therein. In order to reflect a bank's actual financial health in its balance-sheet, the Reserve Bank has introduced prudential norms for income recognition, asset classification and provisioning for advances portfolio of the co-operative banks. The guidelines provided there under are mandatory and it is incumbent upon all co-operative banks to follow the same. In so far as income recognition is concerned, clause 4.1.1 of the circular provides that the policy of income recog nition 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 Reserve Bank of India Guidelines the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, then in the computation of income, the Reserve Bank of India Guidelines would have no role to play, and hence, an add back. In so far as income recognition is concerned, the Supreme Court has held thus (page 610 of 320 ITR) : 'Applicability of section 145 57. At the outset, we may state that in essence the Reserve Bank of India Directions, 1998 are prudential/provisioning norms issued by the Reserve Bank of India under Chapter III-B of the Reserve Bank of India Act, 1934. These norms deal essentially with income recognition. They force the non-banking financial companies to disclose the amount of non-performing asset in their financial accounts. They force the non-banking financial companies to reflect true and correct profits. By virtue of section 45Q, an overriding effect is given to the Reserve Bank of India Directions, 1998 vis-a-vis income recognition principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Reserve Bank of India Directions, 1998 and the Income-tax Act operate in different areas. These Reserve Bank of India Directions, 1998 have nothing to do with computation of taxable income. These Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '25. The distinction drawn by the Delhi High Court is that while the accounting policies adopted by the non-banking financial company cannot determine the taxable income. However, in so far as income recognition is concerned, the Assessing Officer has to follow the Reserve Bank of India Directions, 1998 in view of section 45Q of the Reserve Bank of India Act. That in so far 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 v. Deogiri Nagari Sahakari Bank Ltd. [2015] 379 ITR 24 (Bom) reiterated the above proposition by holding at paragraph 9 of its order as follows (page 27 of 379 ITR) : '9. The Income-tax Appellate Tribunal has referred the case of CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Delhi). In this case, the Revenue relied 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 Southern Technologies Limited supra. The assessee herein being a co-operative bank also govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 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 sub-sequent circular of October 9, 1984 by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 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 of the provisions of the Act, the principles of accountancy ..... X X X X Extracts X X X X X X X X Extracts X X X X
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