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TMI Blog2018 (9) TMI 530X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 and 2013-14. - I.T.A.No.199/Viz/2016, I.T.A.No.461/Viz/2016, Cross Objection No.01/Viz/2018 And Cross Objection No.02/Viz/2018 - - - Dated:- 5-9-2018 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER For The Assessee : Shri C.Subrahmanyam, AR For The Revenue : Smt U Mini Chandran, DR ORDER PER D.S. SUNDER SINGH, Accountant Member: These appeals are filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], Vijayawada vide ITA No.435/CIT(A)/VJA/2014-15 dated 29.01.2016 for the assessment year 2012-13 and ITA No.194/CIT(A)/VJA/2015-16 dated 23.08.2016 for the assessment year 2013-14 and Cross Objections filed by the assessee in support of the order of the CIT(A) for the assessment years 2012-13 and 2013-14. Since the issues involved in these appeals are common, they are clubbed, heard together and disposed off in a common order for the sake of convenience as under. I.T.A.Nos.199 and 461/Viz/2016, A.Ys.2012-13 and 2013-14 2. The first issue in this appeal is related to the interest on Non Performing Assets. For the assessment year 2012-13, the assessee has claimed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/ made on account of accrual of interest on NPAs. 4. We have heard both the parties and perused the material placed on record. During the appeal hearing, the Ld.AR submitted that on identical facts in the case of District Cooperative Central Bank, Eluru Vs. ITO, Ward- 2, Eluru in ITA No.49 50/Viz/2012 for the assessment year 2007-08 and 2008-09 in order dated 25.01.2018, the ITAT held that the interest on Non- Performing Assets is to be recognized on actual receipt basis, but not on accrual basis. The ITAT has followed the decision of Hon ble Gujarat High Court in the case of Mahila Sewa Sahakari Bank Ltd. (2016) 140 DTR Guj 113 while delivering the decision. For the sake of clarity and convenience, we extract relevant part of the order of this Tribunal which is made available in para No.26.1.2 to 28 which reads as under : 26.1. We have heard both the parties and perused the materials available on record. In the case of Sri MahilaSewaSahakari Bank Ltd. (supra), Hon ble High Court of Gujarat held the issue in favour of the assessee. The head note of the above case reads as under: Income-Accrual Interest on non-performing assets of cooperative bank- In so far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ltd. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra). We have examined the case law referred by the A.R. in the light of the facts of the present case and find that the ITAT, Visakhapatnam bench in the above mentioned case on similar facts held the issue in favour of the assessee. The relevant portion is reproduced as under: 10. Turning to the facts of the case before us, the assessee herein is a cooperative 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 assessee as it is applicable to the companies registered under the Companies Act. The Hon'bleSupreme 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 effectvis- 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 Honible Supreme Court. 10.1 Based on the prudential norms, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not accrued . The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order. Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. 9. The Hon ble Supreme Court of India, in the case of UCO Bank Vs. CIT had an occasion to consider the issue. The Hon ble Supreme Court, while dealing with similar issue held as under: The method of accounting which is followed by the assessee -bank is mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all ITOs 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 s. 119. Such a circular is binding under s. 119. The circular of 9th Oct., 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. 10. Considering the facts and circumstances of the case and also applying the ratios of the judgements discussed above, we are of the view that interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank, but has been kept in a suspense account and has not been brought to the P L a/c of the assessee, could not be included in the income of the assesse. The CIT(A) rightly deleted the additions towards interest on NPAs. There is no error or infirmity in the order of CIT(A). Accordingly, we direct the A.O. to delete the additions made towards interest on NPAs. 28. Since the facts are identical, respectf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank, Eluru in I.T.A. Nos. 49 50/Viz/2012 for the assessment years 2007-08 and 2008-09 dated 25.01.2018. The ITAT in the case supra, allowed the appeal of the asessee, following the decisions of ITAT, Hyderabad and ITAT, Ahmedabad benches. For the sake of clarity and convenience, we extract relevant para No.8 to 10 of the ITAT order which reads as under. 8. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee is a cooperative bank and created the group gratuity fund/trust of the District Co-operative Central Bank Employees but the same was not yet approved by the CIT. Pending receipt of approval, the assessee had made application to LIC of India under pension and group schemes, and taken policy under Master proposal for group for payment of gratuity on 1.7.2003, and is contributing the sums to the LIC of India towards the group gratuity on actuarial basis. The assessee has not made any provision and made the payment before filing the return of income. On happening the event, the assessee bank is receiving the gratuity payment from the LIC which is being paid to the employee concerned an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Commissioner of Income-tax. This fact is not in dispute. We have carefully gone through the provisions of sec. 36(1)(v) of the Income-tax Ac. Sec. 36(1)(v) reads as follows: 36. (1) The deductions provided for in the following clauses shall be allow d in respect of the matters dealt with therein, in computing the income referred to in section 28 - (v) any sum paid by the assesseeasan employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust . We have also carefully gone through the provisions of sec. 37 of the Income-tax Act. Sec. 37 provides for deduction of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee, but laid out and expended wholly and exclusively for the purposes of the business or profession, while computing income chargeable to tax. The main contention of the Revenue is that under sec. 36(1)(v), the payment made by the assessee as employer could be allowed only in respect of approved gratuit y fund. Since the Group Gratuity Scheme is not approv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to provision of clause (b), no deduction shall be allowed in respect of any provision made by the assessee for payment of gratuity to his employer on their retirement or on termination of their employment for any reason. It is clear from the above provision that section 40A (7) of the IT Act would apply in respect of the provision only. However, in the case of the assessee, the assessee claimed deduction of the expenditure on account of actual expenses claimed under the head gratuity contribution. ITAT Ahmedabad Bench in the case of New Bharat Engineering Works (Jam) Ltd. (supra) held Disallowance under s. 40A(7) - Gratuity Actualpayment of funds to LIC and not mere provision - Not hit by s. 40A(7) - CIT vs Gujarat Machine Tools (ITA 666/A hd/1985) followed .Hon'ble Punjab Haryana High Court in the case of CIT VsBitoni Lamps Ltd. 144 Taxman 33 held that Section 40A(7) of the Income-tax Act, 1961 - Business disallowance - Gratuity - Assessment year 1979-80 - Assessee-company claimed deduction under section 40A(7) (b) (i) on account of gratuity actually deposited in fund created by it - Whether such a claim could only have been disallowed if it had been proved that gratu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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