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TMI Blog2021 (7) TMI 404X X X X Extracts X X X X X X X X Extracts X X X X ..... l Cooperative Bank Ltd., Dharamshala (supra) we see no reason to interfere in the order of the Ld.CIT(A) who has deleted the addition so made following the said decision. Appeal of the Revenue is dismissed. - ITA No.290/Chd/2020 - - - Dated:- 8-6-2021 - Smt.Diva Singh, Judical Member And Smt.Annapurna Gupta, Accountant Member For the Assessee : Shri Vishal Mohan, Adv. For the Revenue : Shri Vishal Dahiya, CIT ORDER PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: The above appeal has been preferred by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals) [ in short the Ld. CIT(A)], Shimla dated 20. 02. 2020 relating to assessment year 2016 - 17, passed u/s 250 (6)) of the Income Tax Act, 1961 (hereinafter referred to as Act . 2. The solitary issue in the present appeal relates to addition made of interest on sticky loans/NPAs amounting to ₹ 3,29,01,484/- which stood deleted in first appeal by the Ld.CIT(A) following the decision of the Coordinate Bench of ITAT Chandigarh Bench on identical issue. The facts in brief, are that the assessee is a cooperative bank engaged in banking activities and covered under non- scheduled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years, the Assessing Officer noted that the assesses had shown non performing assets (hereinafter referred to as NPA's) on which no interest income had been credited/recognized, though the assesses was following mercantile system of accounting. On being confronted with the same, the assessee contended that interest on NPA's was being accounted for on receipt basis consistently in the past a/so following the Accounting Standard-9 relating to Revenue recognition prescribed by the institute of Chartered Accountants of India, which required income to be recognized only on becoming certain. It was also contended that the method followed by the assessee was in consonance with the guidelines issued by the Reserve Bank of India from time to time. Reliance was also placed on various courts' decisions. The Assessing Officer after considering the assessee's reply held that it was required to account for interest on sticky loans/NPA's on accrual basis since it followed the mercantile system of accounting. The Assessing Officer, therefore, computed the interest on the NPA's and added the same to the income of the assesses. 5. The matter was carried in appeal befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Institute of Chartered Accountants Of India, the RBI guidelines relating to accounting for interest on NPA's and the accounting practice of the assessees.. Further it has taken note of the decision of the Gujarat High Court in the case of Pr. CIT-5 vs. Shri Mahila Sewa Sahkari Bank Ltd. which held that so far as income recognition was concerned the Assessing Officer had to follow the RBI Directions, 1998, in view of Section 4SQ of the RBI Act, which provided that the policy of income recognition has to be objective and based on the record of recovery and that income from non performing assets is not to be recognized on accrual basis but only when it is actually received. Further taking note of the decision of the Hon'ble Bombay High Court in the case of CIT vs. Deogiri Nagari Sahakari Bank Ltd. Others, 379 ITR 241, the I. T. A. T held that the issue of taxability of interest on NPA's was settled in favour of the assesses as being taxable in the year of receipt. The relevant findings of the ITAT at para 13-27 of the order is as under: 13. We find that the issue of accounting for interest on sticky loans/NPA's, has been dealt with in a number of decisions bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s Practical Auditing the relevant passage occurring at page 186- 1B7 has been reproduced in the minority judgment of this Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala 1(1986) 158ITR102atp.i2o]. It is as follows: Where interest 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 hereof 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 Accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 9th of October, 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, at the end of three years, the amount of interest has in fact, been recovered by the bank or not. If it 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. This view was reaffirmed in a later judgment by the Apex Court in Mercantile Bank Ltd., Vs. CIT, Bombay City-Ill (2006) 5 SSC 221. 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 RBJ guidelines h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an NBFC. The court has referred to the deviations between the RBI Directions and the Companies Act as follows: 42. Broadly, there are three deviations: (i) in the matter of presentation of financial statements under Schedule VI to the Companies Act; in not recognising 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 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. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come is recognised, the computation thereof, in terms of the provisions of the Income Tax Act, 1961. Insofar as the computation of taxability is concerned, the same is solely governed by the provisions of the Income Tax Act and the accounting principles have no role to play. However, 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. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the decision in UCO Bank Limited are reproduced hereunder : There are, however, two decisions of this Court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in The State Bank of Travancore v. Commissioner of Income- Tax, Kerala (1986 (158) ITR 102) decided 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 of 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, from the assessment year 1979-80 the banking companies were given the benefit of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court and various other decisions cited by the assessee before us, and the assessee in all those cases being a cooperative bank, the decision rendered therein squarely applies to the case of the assessee. The argument of the learned D.R. that the assessee is following the mercantile system of accounting is also dismissed since this aspect has been dealt with by various High Courts referred to above wherein they have categorically held that even following the mercantile system of accounting the interest on NPA cannot be said to have accrued in the year since the recovery of the same was impossible and even otherwise for the purpose of Income Recognition the RB! Directions, 1998, had to be followed in view of section 45Q of the RBI Act. 27. In the light of the above discussion we find no infirmity in the order of the CIT(A),holding the interest on NPA 's as taxable in the year of receipt, so as to warrant interference. 10. The issue involved in the present appeals being identical to that decided by the I T.A.T. in the case of The Ludhiana Central Co-op. Bank Ltd.,(Supra), the decision rendered therein would squarely apply to the present cases, following which we hold th ..... 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