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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 ..... ing mercantile system of accounting. 3. The issue raised in the present appeal pertains to deletion of Rs. 2,67,88,000/- by the CIT(A) on account of interest on loans categorized as NPA on accrual basis as against receipt basis claimed by the assessee. The addition was made by the AO on the basis that the assessee was following mercantile system of accounting and hence the interest on NPA's needs to be included. 4. The similar issue has been earlier dealt by the Coordinate Bench of ITAT, Chandigarh in the assessee's own case for the AY 2009-10. Before us the Ld. DR relied on the order of the AO while the Ld. AR relied on the earlier order of the ITAT Chandigarh Bench. For brevity and ready reference the relevant portion of the order in the case of the assessee in ITA No. 562/CHD/2013 is reproduced hereunder: 13. We find that the issue of accounting for interest on sticky loans/NPA's, has been dealt with in a number of decisions both by the Apex Court and various High Courts and Tribunals also, wherein after applying the "Real Income Theory", the prescribed Accounting Standard issued by ICAI on Revenue Recognition, AS-9, the accounting practise of the asseessee relating to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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, but when its recovery is doubtful, the amount thereof is either fully provided against or taken to the credit of an Interest Suspense Account and carried forward and not treated as profit until actually received." Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth Edition at page 1089 state as follows: "Interest on doubtful debts should be debited to the loan account concerned but should not be credited to interest account. Instead, it should be credited to Interest Suspense Account. To the extent the interest is received in cash, the Interest Suspense Account should be transferred to Interest account; the remaining amount should be closed by transfer to the Loan account. This treatment accords with the principle that no item should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. tfu 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 the income of the assessee until it is actually recovered." 16. This view was reaffirmed in a later judgment by the Apex Court in Mercantile Bank Ltd., Vs. CIT, Bombay City-III (2006) 5 SSC 221. 17. Further the issue of taxability of interest on NPA accounts on receipt basis by Cooperative Banks has been dealt with by various High Courts, wherein it was held that the assessee was bound by RBI guidelines to account for such interest on receipt basis and by virtue of the provisions of section 45Q of the RBI Act, the RBI guidelines had an overriding effect over other Acts including the Income Tax Act, 1961. 18. The Gujarat High Court in the case of Pr.CIT-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd. (Tax Appeal No.531 of 2015 dated 5.8.2016 .relying upon the decision of the apex court in Southern Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cognising 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 Institute of Chartered Accountants of India. These deviations prevail over certain provisions of the Companies Act, 1956 to protect the depositors in the context of income recognition and presentation of the assets and provisions created against them. Thus, the P&L account prepared by NBFC in terms of the RBI Directions, 1998 does not recognise "income from NPA" and, therefore, directs a provision to be made in that regard and hence an "add back". It is important to note that "add back" is there only in the case of provisions. [Emphasis supplied]" 22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36fl)(vii) or section 37 of the Act, then in the computation of income, the RBI Guidelines would have no role to play, and hence, an add back. Insofar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. Further relying upon the decision of the Delhi High Court in the case of CIT Vs. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440, the Court held that the AO has to follow RBI directions on Revenue Recognition, and held as follows "25. The distinction drawn by the Delhi High Court is that while the accounting policies of adopted by the NBFC cannot determine the taxable income. However, insofar as income recognition is concerned, the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act. That insofar 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 Vs. Deogiri Nagari Sahakarii Bank Ltd. & Others, 379 ITR 241 reiterated the above proposition by holding at para 9 of its order as follows : "9. The Income Tax Appellate Tribunal has referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come- Tax, Kerala (1986 (158) TTR 102) derided 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 referred to the circular of 6th of October, 1952 and its withdrawal by the second circular of 20th of June, 1978. The majority appears to have proceeded on the basis that by the second circular of 20th June, 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 subsequent circular of 9th of October, 1984 by which the assessment year 1979-80 the banking companies were given the benefit of the circular of 9th of October, 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 devi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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