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TMI Blog2017 (9) TMI 1745X X X X Extracts X X X X X X X X Extracts X X X X ..... its realisation becomes reasonably certain. No infirmity in the order of the CIT(A) holding the interest on NPA's as taxable in the year of receipt, so as to warrant interference. - ITA No. 749/Chd/2017 - - - Dated:- 21-9-2017 - SMT. DIVA SINGH, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER Appellant By : Sh. Parveen Jindal Respondent By : Dr. Gulshan Rai ORDER PER DR. B.R.R. KUMAR, A.M. The appeal filed by the Revenue is directed against the order dated 24/02/2017 passed by the CIT(A)-3, Ludhiana. 2. The Revenue has raised only one effective ground which reads as under: i. On the facts and circumstances of the case 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 Travancore(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 Society registered under Punjab State Co-operative Societies Act. Moreover, the decision of the Ld. CIT(A) is perverse as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill 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 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) 158ITR 102 at p.i2o]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on which there has been no recovery for 3 years will be subjected to tax on receipt basis, and held as follows : The question whether interest earned, on what have come to be known as sticky loans, can be considered as income or not until actual realization, 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 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 wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Apex Court in the case of UCO Bank, Calcutta and Mercantile Bank Ltd. (supra) it allowed the assessee's appeal. 22. It is evident from the above that the issue regarding taxability of interest on NPA's is settled in favour of the assessee as being taxable in the year of receipt. 23. The grievance of the Revenue that the Hon'ble Supreme Court'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 derisions of this Court which have been strongly relied upon by the respondents in the present case. The first decision is the majorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. 24. Therefore, the contention of the Revenue that the decision in the case of State 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 le ..... X X X X Extracts X X X X X X X X Extracts X X X X
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