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TMI Blog2018 (11) TMI 1716X X X X Extracts X X X X X X X X Extracts X X X X ..... value of investment only those investment should be considered which have yielded exempt income. As regards the limit to the disallowance to the extent of expenditure debited is concerned, the same is also covered by the decision of the Iqbal M Chagala [ 2014 (7) TMI 1111 - ITAT MUMBAI] . Accordingly, we modify the order of the ld. CIT(A) in this regard and direct the A.O. to give effect to the case laws as mentioned above in the computation. Accrual of income - Addition being interest on non-performing asset received from - HELD THAT:- Assessee has claimed that it is an NBFC (Non Banking Finance Company). It has not accounted for interest on loan given to Portfolio Fashions Pvt Ltd as it has become a NPA (Non Performing asset) and the assessee following the RBI guidelines on prudential norms for income recognition on NPA has not accounted for the interest as the loan has become the NPA. A.O. has rejected the same by doubting the assessee s claim of being an NBFC and further holding that in view of the mercantile system of accounting and the loan appearing in the balance sheet of the assessee it was incumbent upon the assessee to account for the interest on accrual basis. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal: 5. One common issue raised is whether the ld. CIT(A) was correct in granting relief the disallowance u/s.14A. 6. Since the facts are common we are referring to facts and figures from A.Y. 2009- 10. 7. Brief facts are that the assessee company is an investment company belonging to JSW Group. Search/ Survey Actions were conducted on 16.03.2011 in the case of various JSW Group Companies. Subsequently the assessee's case was subjected to search assessment u/s 153C rws 143(3) of the Act for period AY 2005-06 to 2011-12. For AY 2009-10, the assessee filed return of income u/s.139 of the Act on 24.09.2009 declaring total Income of ₹ 7,44,25,350/- under Normal Provisions and Book Profits u/s.115JB of the Income Tax Act, 1961 of ₹ 28,45/10,771/-. In the computation of income, assessee had made disallowance u/s.14A of ₹ 4,99,70,601/-. Subsequently, in response to notice u/s.153C assessee filed return of income on 23.01.2012 declaring income of ₹ 9,09,67,430/- under normal provisions of the Act and Book Profit of ₹ 28,44,18,923/- for the purpose of MAT u/s. 115JB. However, in this return assessee made disallowance of ₹ 4,33,33,535/- u/s. 14A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order the AO had applied Rule 8D after rejecting appellants contention and made disallowance of ₹ 6,67,36,468/- out of interest expenses applying Rule 8D(ii) in addition to demat expenses of ₹ 42,250/-disallowed by appellant thereby making total disallowance u/s. 14A of ₹ 6,67,78,718/-. The disallowance under Rule 8D(ii) and 8D(iii) has been computed with reference to average exempt income generating assets worth ₹ 164,42,43,832/-. It is also noticed that the disallowance of interest included a sum of ₹ 26,02,513/- being interest attributable to interest free advances made by appellant. In the return filed in response to notice u/s 153C, admittedly, appellant has accepted Revenue's contention regarding applicability of Rule 8D and itself disallowed sum of ₹ 4,04,70,096/-. It is the contention of appellant that while considering interest expenses for disallowance under Rule 80(ii), the net interest of ₹ 6,51,56,736/- should be taken after reducing interest income of ₹ 2,50,27,681/- from gross interest expenses of ₹ 9,01,84,417/- as taken by AO. Further the average value of assets should exclude other assets such as hou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 117,48,13,953/- which should be adopted for computation of disallowance.: 7.4 Regarding the other contention regarding limiting disallowance under third limb of rule 8D, i.e. 0.5% of average investment generating exempt income to actual administrative expense debited to P&L Account, it is noticed that in the original assessment order which has been followed by AO in subsequent order, no disallowance has been made under this head. Appellant has disallowed a sum of ₹ 9,17,015/- being the total of administrative expenses debited to profit and loss account. The issue is not disputed as the AO has neither rejected appellants stand nor made any disallowance. 7.5 AO is directed to recompute the disallowance u/s14A applying Rule 8D as above and grounds of appeal are disposed off accordingly as partly allowed., 9. Against the above order, the Revenue is in appeal before us. 10. We have heard both the counsel and perused the records. We find that as regards the disallowance under Rule 8D(2)(iii) is concerned, the Special Bench in the case of Vireet Investment Pvt. Ltd. (supra) has held that for calculation of the average value of investment only those investment should be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of non-banking financial institution in support of its claim that it is indeed a Non-Banking Finance Company registered with Reserve Bank of India since 1.04.2004 and hence at the relevant time bound by directions of RBI. 9.3 It is the argument of appellant that as per prevailing RBI guidelines in respect of NBFCs, interest income in respect of NPAs was to be recognized only upon actual realisation. Appellant has further claimed that the loan in the name of Portfolio Fashions Pvt Ltd had become NPA during FY 2007-08 in so far as interest had become past due for more than six months and hence it had to stop recognition of any interest income in respect of said NPA as per RBI guidelines which were binding despite following accrual system of accounting. Therefore it recognised the sum of ₹ 49,10,3497-, being interest pertaining to period FY 2007-08, in its books in FY 2008-09 upon realisation of the same and offered to tax in AY 2009-10. It also submitted that the relevant TDS credit has also been claimed in AY 2009-10 upon the relevant income being offered to tax. 9.4 I have perused the relevant guidelines issued by RBI in this regard as Non- Banking Financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a registered NBFC, no interest income was to be recognised in its accounts in respect of loan to Portfolio Fashions which had become NPA due to interest becoming past due six months during FY 2007-08. Appellant claims that the interest income has been recognised in FY 2008-09 pertaining to AY 2009-10 upon receipt of same as issue of preference shares on 30.03.2009 and offered to tax in AY 2009-10. However, the next issue is whether, RBI guidelines override provisions of section of Income Tax Act in so far as accrual of income on NPAs is concerned as it does not allow mixed system of accounting. I find that the issue is now settled in favour of appellant by the decision of Hon'ble Supreme Court in the case of Southern Technologies Limited vs JCIT 320 ITR 577. While holding that "provision for NPAs" as per RBI guidelines cannot be allowed as admissible deduction in view of specific provisions of section 36(l)(vii) in respect of bad debts, as regards to applicability of section 145 to recognition of income/ Hon'ble Court held that AO has to follow RBI Directions in view of binding nature of section 45Q of the RBI Act The observations of Hon'ble Court are reproduces bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income recognition on NPA has not accounted for the interest as the loan has become the NPA. The A.O. has rejected the same by doubting the assessee's claim of being an NBFC and further holding that in view of the mercantile system of accounting and the loan appearing in the balance sheet of the assessee it was incumbent upon the assessee to account for the interest on accrual basis. We find that as against the above the ld. CIT(A) has given a finding that the assessee is duly registered with RBI as an NBFC. Furthermore, it has now been accepted by the higher courts that RBI guidelines on prudential norms of income recognition on NPA have to be accepted. This view is supported by the observation of the Hon'ble Apex Court in the case of Southern Technologies Limited (supra) quoted by the ld. CIT(A). Once this view is accepted, the assessee being an NBFC was not required to account for interest on accrual basis on loans which have became NPA. This view also gets supported by the Hon'ble Delhi High Court decision in the case of Vashisht Chay Vyapar Limited (supra). Hence, we do not find any infirmity in the order of the ld. CIT(A). Accordingly, we uphold the same. 16. In the res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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