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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 ..... xplain 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 case of Vasisth Chay Vyapar Ltd [ 2010 (11) TMI 88 - DELHI HIGH COURT] was affirmed by the Hon ble Supreme Court in the [ 2018 (3) TMI 56 - SUPREME COURT]. In the light of the above discussion, the substantial question of law framed in this case has to be necessarily answered in favour of the assessee and against the Revenue. - TAX CASE APPEAL NO.446 OF 2018 - - - Dated:- 27-7-2020 - HONOURABLE MR. JUSTICE T.S. SIVAGNANAM AND HONOURABLE MRS. JUSTICE V. BHAVANI SUBBAROYAN For Appellant : Ms. S. Premalatha, JSC for Mr. M. Swaminathan, SSC For Respondent : Mr. A.S. Sriraman Judgment was delivered by T.S. SIVAGNANAM, J We have heard Ms. S. Premalatha, learned Junior Standing Counsel appearing on behalf of Mr. M. Swaminathan, learned Senior Standing Counsel appearing for the Revenue and Mr. A.S. Sriraman, learned counsel appearing for the respondent assessee. 2. This appeal by the Revenue under Section 260A of the Income Tax Act, 1951 (for short, the Act) is directed against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by order dated 30.12.2011. 7. Aggrieved by the said order of assessment dated 30.12.2011, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Trichy [hereinafter called the CIT(A)]. We find that the CIT(A) did not give independent reasons, but verbatim extracted the findings rendered by the Assessing Officer and conveyed his approval by order dated 26.2.2013. As against the same, the assessee carried the matter on appeal to the Tribunal, which, by the impugned order, allowed the appeal filed by the assessee. Aggrieved by that, the Revenue is before us. 8. The issue before us is no longer res integra and has been decided in various decisions of other Hon ble High Courts, some of which were affirmed by the Hon ble Supreme Court. Though there are several decisions, it may be sufficient to refer to the decision of the Punjab Haryana High Court in the case of PCIT, Ludhiyana Vs. Ludhiyana Central Cooperative Bank [reported in (2018) 99 Taxmann.com 81] wherein an identical question came up for consideration. In the said decision, after taking note of the decisions on the issue and the findings rendered by the Assessing Officer in the case on hand, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon ble Supreme Court in the case of State Bank of Travancore Vs. CIT [reported in (1986) 24 Taxmann 337] wherein it had been held that the concept of real income theory had to be applied. In fact, in the decision of the Punjab Haryana High Court in the case of Ludhiyana Central Cooperative Bank, the very same contention was considered and answered against the Revenue in the following terms : 28. The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same can not be defeated by any theory of real income. Reference may be made to Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC). 29. Three decisions, two of the Madras High Court and one of the Punjab and Haryana High Court, which shall presently be noticed, were pressed into service on behalf of the assessee to suggest that the concept of real income can be so applied as to make, where the chances of realisation of accrued income are less, it non est. 10. In the decision of the Hon ble Supreme Court in the case of CIT Vs. Jamnagar District Cooperative Bank Ltd. [re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on NPA cannot be justified on the real income theory. The decision in Shri Mahila Sewa Sahakari Bank Ltd (supra) was subjected to challenge before the Supreme Court in Principal CIT v. Mahila Sahakari Bank Ltd. [Civil Appeal No.8977/2017, by the Revenue, which was dismissed on 13-12-2017]. 13. Similarly, the decision in Vasisth Chay Vyapar Ltd (supra) wherein it was held the assess being an NBFC was governed by the provisions of the RBI Act. In such a case, interest income could not be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI Act and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these Norms, the ICDs had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, interest could not be treated to have been accrued in favour of the assessee was also upheld by Supreme Court in CIT v. Vasisth Chay Vyapar Ltd., [2018] 90 taxmann.com 365/253 Taxman 401/[2019] 410 ITR 244. 14. Recently a Division Bench of High Court of Bombay in Pr. CIT v. Solapur District Central Co-op. Bank Ltd. [2019] 102 taxmann.com 440/261 Taxman 476 in seis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court. Thus, the Supreme Court can be seen to have approved me decision of the Gujarat High Court in case of Shri Mahila Sewa Sahakari Bank Ltd., (supra). We, therefore, do not see any reason to entertain these Appeals, since no question of law can be stated to have arisen. 15. The issue in the case at hand is also not different as was in the case of Shri Mahila Sewa Sahakari Bank Ltd (supra). The appellant-assessee acting under the directives of the Reserve Bank of India with regard to prudential norms set out, taxing interest on NPA, therefore, cannot be justified on the real income theory. 16. In view whereof, the substantial question of law is answered in favour of the appellant-assessee. The order passed by the Assessing Officer, Appellate Authority and Tribunal are set aside. The deduction as claimed for on the uncharged interest on NPA is allowed to the extent above. In the aforementioned decision, the Court had taken into consideration that the assessee therein, as in the case of the assessee before us, was acting under the directives of the RBI with regard to prudential norms set out and therefore, taxing interest on NPA could not be charged on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are prudence, substance over form and materiality. 6. Clause 6 defines accrual for the purpose of paragraphs (1) to (5) in the said accounting standards. Accrual refers to the assumption, that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. Relying on this definition in the accounting standard, the revenue contends it is immaterial whether any revenue is actually received or not. If it is shown to accrued that is sufficient to charge the said income. In this context it is also necessary to take note of the guidelines dated 28-4-1995 issued by the National Housing Bank with reference to non-performing asset which is the subject-matter of these proceedings. It states the policy on income recognition to be objective should be based on record of recovery. Income from non-performing asset (NPA) may not be recognized merely on the basis of accrual. An asset becomes non-performing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beneficial interpretation of the provision in question. 8. Therefore, it is clear, if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realised immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the same, then it cannot said to have been accrued and the said amount cannot be brought to tax. In the Instant case we are concerned with a non-performing asset. As the definition of non-performing asset shows an asset becomes non-performing when it ceases to yield income. Non-performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non-performing asset, then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee herein had become NPA. It is also not in dispute that the assessee company being NBFC is bound by the aforesaid provisions. Therefore, under the aforesaid provisions, it was mandatory on the part of the assessee not to recognize the interest on the ICD as income having regard to the recognized accounting principles. The accounting principles which the assessee is indubitably bound to follow are AS-9. Relevant portion of the said accounting stand reads as under :- 9. Effect of Uncertainties on Revenue Recognition.- 9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ario it was legitimate move to infer that interest income thereupon has not accrued . We are in agreement with the submission of Mr. Vohra on this count, supported by various decisions of different High Courts including this court which has already been referred to above. (2) In the instant case, the assessee-company being NBFC is governed by the provisions of RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee. 18. As noted above, Mr. Sabharwal, argued 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 the RBI Act which was the accounting method that the assessee was supposed to follow. We have already held that even under the Income-tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing treatment or taxability of income under the Income-tax Act. The two, viz., Income-tax Act and the 1998 Directions operate in different fields. As stated above, under the mercantile system of accounting, interest/hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as income is recognized under accrual system. However, it is not so recognized under the 1998 Directions and, therefore, in the matter of its Presentation under the said Directions, there would be an add back but not under the Income-tax Act necessarily. It is important to note that collectability is different from accrual. Hence, in each case, the assessee has to prove, as has happened in this case with regard to the sum of ₹ 20,34,605, that interest is not recognized or taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept the claim of the assessee under the IT Act or not to accept it in which case there will be add back even under real income theory as explained hereinbelow. 38. The point to be noted is that the Income-tax Act is a tax on real income , i.e., the profits arrived at o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income-tax Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the permissible deductions or their exclusion under the Income-tax Act. The inconsistency between these Directions and Companies Act is only in the matter of Income Recognition and presentation of Financial Statements. The Accounting Policies adopted by an NBFC cannot determine the taxable income. It is well settled that the Accounting Policies followed by a company can be changed unless the Assessing Officer comes to the conclusion that such change would result in understatement of profits. However, here is the case where the Assessing Officer has to follow the RBI Directions 1998 in view of section 45Q of the RBI Act. Hence, as far as Income Recognition is concerned, s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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