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TMI Blog2020 (8) TMI 822X X X X Extracts X X X X X X X X Extracts X X X X ..... al was right in holding that overdue interest on non performing assets is not taxable on accrual basis by referring to the guideline of the Reserve Bank of India which had nothing to do with the computation of taxability of the provisions of nonperforming assets under the Income Tax Act, 1961?" 4. The assessee is a cooperative bank having its head quarters in Trichy. For the assessment year under consideration namely 2007-08, the assessee filed their return of income dated 12.11.2007 admitting NIL income. The assessment was completed after scrutiny. The Commissioner of Income Tax, in exercise of his power under Section 263 of the Act, set aside the assessment vide his order dated 02.3.2011 on the ground that it was erroneous and prejudicial to the interest of the Revenue. 5. Subsequently, a notice dated 29.8.2011 under Section 143(2) of the Act was issued and the assessee appeared through their representative and furnished the details called for. One of the issues was with regard to the claim for deduction on loans and advances, which the assessee claimed that they were not entitled for deduction by providing for bad and doubtful debts. For the queries raised by the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and entities like the assessee are excluded from the purview thereof, the assessee cannot indirectly claim benefit which would amount to a benefit similar to that under section 43D of the Act, requires to be discussed. In this regard, it may be noted that the benefit claimed by the assessee is not under any provision of the Act. The assessee being bound by the RBI Guidelines which are issued under the provisions of the 1934 Act has not shown the interest on NPA as income. By virtue of the provisions of section 45Q of the 1934 Act, the provisions of Chapter IIIB thereof have an overriding effect over other laws. Therefore, notwithstanding the provisions of section 43D of the Act, since the provisions of section 45Q of the 1934 Act have an overriding effect vis-à-vis income recognition principles in the Companies Act, the Assessing Officer is bound to follow the RBI Directions so far as income recognition is concerned. The interest 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n identical question was considered by the Division Bench of the Gujarat High Court and after taking note of the decisions in the case of (i) CIT Vs. Vasisth Chay Vyapar Ltd. [reported in (2011) 330 ITR 440 (Delhi)], (ii) CIT Vs. Deogiri Nagar Sahakari Bank Ltd. [reported in (2015) 379 ITR 24 (Bombay)] and (iii) PCIT-5 Vs. Shri Mahila Sewan Sahakari Bank Ltd. [reported in (2016) 72 Taxmann.com 117 (Gujarat)], the Court answered the substantial question of law in favour of the assessee. In fact, in the said decision, the Court also pointed out that the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. Vs. JCIT [reported in 320 ITR 577] was also taken note of in the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd. 12. In fact, before us, the learned Junior Standing Counsel appearing for the Revenue has referred to the decision in the case of Southern Technologies Ltd., and this decision is an answer to the said submission. 13. A similar question was decided in favour of the assessee in the decision of the Madhya Pradesh in the case of Bhind District Cooperative Central Bank Ltd. Vs. ITD [reported in (2019) 109 Taxmann. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to examine an identical situation. The Court held that, the Cooperative Banks were acting under the directives of the Reserve Bank of India with regard to the prudential norms set out. The Court was of the opinion that, taxing interest on NPA cannot be justified on the real income theory. The decision of the Gujarat High Court in Shri Mahila Sewa Sahakari Bank Ltd., (supra) was carried in Appeal by the Revenue to the Supreme Court and such appeal was dismissed. Later on, similar issue came up before Gujarat High Court in case of Pr. CIT v. Sarangpur Cooperative Bank Ltd. 406 ITR 302, the Court followed the earlier decision in case of Shri Mahila Sewa Sahakari Bank Ltd., (supra) and dismissed the Revenue's appeal. Once again, the issue was carried to the Supreme Court by the Revenue. The Appeal was dismissed by an order dated 28th April, 2018. 6. Identical issue was also examined by the Punjab & Haryana High Court in case of Pr. CIT v. Ludhiana Central Coop. Bank Ltd. 410 ITR 72. The decision of the Gujarat High Court in Shri Mahila Sewa Sahakari Bank Ltd., (supra) was cited before the Court. The Court noted that appeal against such judgment of the High Court, was dismissed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms : "4. In order to appreciate this contention, it is necessary to look into the said section as it stands today. '145. Method of accounting.-(1) Income chargeable under the head "Profits and gains of business or profession" or 'Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified, under sub-section (2), have not been regularly followed by the assessee the Assessing Officer may make an assessment in the manner provided in section 144.' 5. A reading of the aforesaid provision makes it very clear that section 145(1) is subject to the provisions of sub-section (2). Sub-section (2) provides that the Central Government may notify in the Official ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In fact this question arose for consideration before the Apex Court in the case of State Bank of Travancore v. CIT [1996] 158 ITR 102 / 24 Taxman 337 where it has been held that, the concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act. 7. Again the Apex Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 / 104 Taxman 547 held that, 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally is without any basis. In that view of the matter, the second substantial question framed is answered against, the revenue and in favour of the assessee. 9. For the aforesaid reasons we do not see any merit in the appeal. Accordingly, the appeals is dismissed." In the aforementioned decision, the Court aptly pointed out that the contention of the Revenue that in respect of the non performing assets, even though it does not yield any income, as the assessee adopted a mercantile system of accounting, he has to pay tax on the Revenue, which accrued notionally, was without any basis. 15. In the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd., the following was the substantial question of law, which was answered : "Whether the ITAT erred in law and on merits by deleting the additions of income made as interest earned/acquired on the loan advanced to M/s Shaw Wallace by considering the interest as doubtful and unrealisable?" The Court, after taking note of all the decisions on the point, including the decisions referred to by the Revenue namely Southern Technologies Ltd., held as hereunder : "15. We have considered the respective submissions in thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized." 17. In this scenario, we have to examine the strength in the submission of learned counsel 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 Wallace since the assessment year 1996-97 as it had become NPAs in accordance with the prudential norms which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect. In the case before the Supreme Court, the assessee a NBFC debited Rs. 81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of section 36(1)(vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(1)(vii) of the Act. The Assessing Officer, however, did not bring to tax Rs. 20,34,605 as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the RBI Act, their Lordships of the Apex Court observed that insofar as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense and, therefore, there would be add back to that extent in the computation of total income under the IT Act. 39. One of the contentions raised on behalf of NBFC before us was that in this case there is no scope for "add back" of the Provision against NPA to the taxable income of the assessee. We find no merit in this contention. Under the IT Act, the charge is on Profits and Gains, not on gross receipts (which, however, has Profits embedded in it). Therefore, subject to the requirements of the Income-tax Act, profits to be assessed under the Income-tax Act have got to be Real Profits which have to be computed on ordinary principles of commercial accounting. In other words, profits have got to be computed after deducting Losses/Expenses incurred for business, even though such losses/expenses may not be admissible under sections 30 to 43D of the Income-tax Act, unless such Losses/Expenses are expressly or by necessary implication disallowed by the Act. Therefore, even applying the theory of Real Income, a debit which is expressly disallowed by Explanation to section 36(1)(vii), if claimed, has got to be added back to the total income of the assessee because the said Act seeks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is read in manner we have read, it becomes easy to reconcile the ratio of Southern Technologies Ltd. (supra) with Custodian appointed under the Special Court Act, 1992 (supra). 20. Thus viewed from any angle, the decision of the Tribunal appears to be correct in law. The question of law is thus decided against the revenue and in favour of the assessee. As a result, all these appeals are dismissed." 16. The Revenue, in the said case, raised identical contentions as raised before us stating that the case of the assessee was to be dealt with for the purpose of taxability as per the provisions of the Act and not as per the provisions of the RBI Act, which was the accounting method that the assessee was supposed to follow. The contention was rejected on the ground that even under the Act, interest income had not accrued. The Court further noted that the submission of the Revenue was entirely based on the judgment of the Hon'ble Supreme Court in the case of Southern Technologies Ltd., and proceeded to explain as to what was the decision and the effect of the said decision with regard to the assessee/cooperative bank in the paragraph quoted above. The above mentioned decision in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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