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TMI Blog2018 (11) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... of law:- (i) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT, Chandigarh is justified in deleting the addition of Rs. 3,02,82,000/- made by the AO on account of interest accrued on nonperforming assets by ignoring the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore Vs. Commissioner of Income Tax, reported in (1986) 158 ITR 102? (ii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT erred in applying Section 43D to a cooperative society i.e. the assessee which is not specifically mentioned in Section 43D? iii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT has erred in following the decision in the case of CIT vs. Punjab State Cooperative Bank Limited of Assessment years 2007-08, 2008-09 reported in 143 ITD 571 (Chd) applying Section 43D, as the Punjab State Cooperative Bank Limited is a Scheduled Bank whereas the Ludhiana Central Cooperative Bank Limited is not a scheduled Bank.?" Subsequently, vide order dated 14.11.2017 passed in CM No.23262 CII of 2017, the following amended substantial questions of law were taken on record:- "i) Whether on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 102)? However, it may be noticed that the quantum of additions in ITA No.449 of 2017 and ITA No.450 of 2017 is different i.e. Rs. 2,03,76,956/- and Rs. 2,15,56,800/- respectively. 4. For brevity, the facts are being extracted from ITA-349-2017. 5. A few facts necessary for adjudication of the instant appeal as narrated therein may be noticed. The assessee filed its return of income on 30.9.2009 declaring an income of Rs. 4,15,03,450/-. The assessment was completed under Section 143(3) of the Act by the Assessing Officer vide order dated 30.11.2011 (Annexure A-1) at an income of Rs. 8,20,58,289/- with an addition of Rs. 3,02,82,000/- on account of interest due on Non-Performing Assets (NPA). Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity "the CIT(A)"]. The CIT (A) vide order dated 28.2.2013 (Annexure A-2) deleted the addition made by the Assessing Officer. Against the order, Annexure A-2, the revenue filed an appeal before the Tribunal who vide order dated 3.1.2017 (Annexure A-3) dismissed the appeal of the revenue upholding the deletion made by the CIT(A) on account of addition of Rs. 3,02,82,000/- regarding int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that where interest was not received on NPA, it could not be treated to have accrued in favour of the assessee or the real income in the hands of the assessee. Support was also drawn from the decisions of the Gujarat High Court in Principal Commissioner of Income Tax-5 vs. Shri Mahila Sewa Sahakari Bank Limited, (2017) 395 ITR 324 and Bombay High Court in The Commissioner of Income Tax, Aurangabad vs. M/s Deogiri Nagari Sahakari Bank Limited, Aurangabad, (2015) 379 ITR 24. Further, the learned counsel supported the order passed by the CIT(A) deleting the addition made by the Assessing Officer on account of interest due on NPA and affirmed by the Tribunal. Prayer for dismissal of the appeals was made. 8. Rebutting the arguments relating to provisions of 1934 Act and Directions/regulations formulated/issued thereunder, it was contended by learned counsel for the revenue that the RBI directions under the 1934 Act are prudential norms, but have nothing to do with the computation or taxability of the provision of the NPA under the Act. Though the RBI directions deviate from the accounting practice as provided by the Companies Act, 1956 but they do not override the provisions of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (b) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of subsection (1) of section 36; (c) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (d) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and approved by the Central Government under clause (viii) of subsection (1) of section 36.". 13. The Circular No.621 dated 19th December, 1991 issued by the department elaborated its scope in the following portion:- "Chargeabiity of income from bad or doubtful debts in the case of financial institutions and banks - 22. The Reserve Bank of India has classified advances given by banks into eight categories called Health Codes 1 to 8. Sticky advances which are doubtful of realization fall under Health Codes 4 to 8. The banks and financial institutions normally credit interest from such sticky advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may actually received by that institution or bank or corporation or company, whichever is earlier. Explanation.-For the purposes of this section,- (a) "National Housing Bank" means the National Housing Bank established under section 3 of the National Housing Bank Act, 1987 (53 of 1987); (b) "public company" means a company,- (i) which is a public company within the meaning of section of the Companies Act, 1956 (1 of 1956); (ii) whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; and (iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989 given under section 30 and section 31 of the National Housing Bank Act, 1987 (53 of 1987); (c) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (d) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of April 2000 and will accordingly apply in relation to the assessment year 2000-2001 and subsequent years. (Section 28)." 16. Rule 6EA of the Income Tax Rules, 1962 (in short, "the Rules") relates to special provisions regarding interest on bad and doubtful debts of financial Institutions, banks etc. It was inserted in the Rules by the Income Tax (Tenth Amendment) Rules, 1992 with effect from 01.04.1992 prescribing the banks/financial institutions/corporations to which provisions of Section 43D of the Act would be applicable. It is quoted below:- "Special provision regarding interest on bad and doubtful debts of financial institutions, banks, etc. 6EA. The provisions of section 43D shall apply in the case of every public financial institution, scheduled bank, State financial corporation and State industrial investment corporation where its income by way of interest pertains to the following categories of bad and doubtful debts, namely:- (a) (i) Non-viable or sticky advances, i.e., where irregularities of the nature specified in sub-clause (ii) are noticed in the accounts of the borrowers for a period of six months and more and there are no minimum prospects of regularisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less than 3 months and refund in respect of unpaid bills is not for the coming immediately (b) Advances recalled, i.e., where the repayment is highly doubtful and revival of the unit is not considered worthwhile and a decision has been taken to recall the advances. (c) Suit-filed accounts, i.e., where legal action or recovery proceedings have been initiated and suits are pending for recovery of advances. (d) Decreed debts, i.e., where suits have been filed and decree obtained and such decree is pending for execution. (e) Debts recoverability whereof has become doubtful on account of shortfalls in value of security, difficulty in enforcing and realising the securities, or inability or unwillingness of the borrower to repay the banks dues, partly or wholly, and such debts have not been included in preceding clauses (a) to (d)." 17. Section 43D of the Act as inserted by Finance (No.2) Act 1991 w.e.f 1.4.1991 and substituted by Finance Act, 1999 w.e.f 1.4.2000 opens with a non obstante clause, namely, "Notwithstanding anything to the contrary contained in any other provisions of this Act" thus, overriding the provisions of the Act. Section 43D of the Act provides that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary credit society: Provided that for the purposes of Tamil Nadu Industrial Investment Corporation Limited shall not be deemed to be a banking company." Section 45I relates to definitions in respect of expressions used in various provisions under Chapter III-B of the Act. Section 45JA empowers the RBI to determine policy and issue directions. It reads thus:- "45JA. Power of Bank to determine policy and issue directions (1) If the Bank is satisfied that, in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the nonbanking financial company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off balancesheet items and also relating to deployment of funds by a nonbanking financial compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for income recognition, asset classification and provisioning for advances portfolio of the co-operative banks. The guidelines provided thereunder are mandatory and it is incumbent upon all cooperative banks to follow the same. Insofar as income recognition is concerned, clause 4.1.1 of the circular 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 nonperforming 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." 20. Under Section 45JA of 1934 Act, Notification No. DFC.119/DG(SPT)-98 dated 31st January, 1998 has been i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer in the assessment proceedings. 22. The reasons for issuing RBI directions 1998 needs to be delved into. On 31.01.1998, RBI Directions 1998 introduced a new regulatory framework involving prescription of Disclosure norms for NBFCs to ensure that these NBFCs function on sound and healthy lines. Regulatory and supervisory attention was focussed on the deposit taking NBFCs so as to enable the RBI to discharge its responsibilities to protect the interest of the depositors. These NBFCs are subjected to prudential regulations on various aspects such as income recognition; asset classification and provisioning, etc. The basis of every business is that anticipated losses must be taken into account but expected income need not be taken note of. This is the basis of the RBI Directive of 1998 as it is closer to reality of cash liquidity that prevents NBFC from collapse. The RBI Directions 1998 deal with Presentation of NPA provision in the Balance Sheet of an NBFC. Before 1998, the Balance Sheet and P&L Account of an NBFC were required to be prepared in accordance with Parts I and II of Schedule VI as provided under Section 211 of the Companies Act, 1956 like any other com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell 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, in the present case, the Assessing Officer has to follow the RBI Directions 1998 in view of Section 45Q of the 1934 Act. Hence, as far as Income Recognition is concerned, Section 145 of the Act has no role to play in the present dispute. 24. The Supreme Court in Southern Technologies Limited's case (supra) laid down as under:- "57. At the outset, we may state that in essence RBI Directions 1998 are Prudential/ Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis-a-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of Income Tax Act and was, therefore, exigible to tax. Our answer is in the negative and we give the following reasons in support:- (1) First of all we would discuss the matter in the light of the provisions of Income Tax Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee. It is stated at the cost of repetition that admitted position is that the assessee had not received any interest on the said ICD placed with Shaw Wallce since the assessment year 1996-97 as it had become NPAs in accordance with the Prudential norms which was entered in the books of accounts. The assessee has further successfully demonstrated that even in the succeeding assessment years, no interest was received and the position remained the same until the assessment years 2006-07. Reason was adverse financial circumstances and the financial crunch faced by Shaw Wallace. So much so, it was facing winding up petitions which were filed by many creditors. These circumstances, led to an uncertainty in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfy the relevant conditions stipulated therefor 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 Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 145 of the Income Tax Act. It can be said, therefore, that the Apex Court approved the "real income theory which is engrained in the Prudential Norms for recognition of revenue by NBFC." The said decision was affirmed by the Supreme Court in C.A.No.5802 of 2012 dismissed on 13.12.2017. 28. Reference is now made to the judgment of State Bank of Travancore's case (supra) on the basis of which one of the substantial question of law has been claimed by the revenue. In State Bank of Travancore's case (supra) the assessee a subsidiary of the State Bank of India, used to maintain accounts on mercantile system making entries on accrual basis. The assessee adopted the calendar year as its previous year and the calendar years 1964, 1965 and 1966 were respectively the relevant previous years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 9- 10-1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances 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 recognised and followed and the feasibility". The Court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The Court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this Court in Navnit Lal C. Javeri v. K.K. Sen, (1965) 56 ITR 198 or the subsequent decision in K.P. Varghese v. ITO, (1981) 4 SCC 172 also do not appear to have been pointed out to the Court. Since the latter circular of 9-10-1984 was not pointed out to the Court, the Court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on principal loan amount which has been classified as NPA cannot be held to have "accrued" so as to tax them under the Act. The contention that the assessee cannot indirectly claim the benefit which would amount to a benefit similar to that under section 43D of the Act, therefore, does not merit acceptance. 31. The similar issue was considered in Shri Mahila Sewa Sahakari Bank Ltd.'s case (supra) in the case of Cooperative Banks by the Gujarat High Court where the issue was decided in favour of the assessee through a detailed judgment. Against the judgment of the Gujarat High Court, the Apex Court approving the said decision dismissed the C.A.No.8977 of 2017 filed by the revenue on 13.12.2017. It may further be noticed that the Parliament has amended Section 43D of the Act by Finance Act, 2017 effective from 1.4.2018 whereby specifically including "a cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank" in the said provision. 32. Adverting to the factual matrix, it may be noticed that the Tribunal while relying upon the various pronouncements had decided the issue regarding taxability of interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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