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TMI Blog2021 (11) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... income if interest thereon is overdue for more than 6 months. On perusal of the above provisions, it is revealed that the above provisions of section 45Q of the Act or the overriding provisions and therefore these should be given to the preference of the income tax Act. In other words, the assessee was bound to follow the directions issued by the RBI. Accordingly, in our considered view such income cannot be recognized in the books of accounts as alleged by the AO. At the time of hearing, the ld. DR has not brought anything on record contrary suggesting the provisions of section 45Q of the RBI Act are not applicable to the present case. We also note that in the case of Pr. CIT vs. Shri Mahila Sewa Sahakari Bank Ltd. [ 2016 (8) TMI 377 - GUJARAT HIGH COURT] has held that the assessee being a Bank has to follow the guidelines issued by the RBI which has overriding effect over the provisions of Income Tax Act - though the income of the assessee has accrued under the mercantile system of accounting but the same cannot be charged to tax for the reason that the RBI being regulatory authority prohibits to recognize such income in the books of accounts. Hence, we do not find any rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember For the Revenue : Shri O.M. Prakash Singh, C.I.T.D.R For the Assessee : Ms A.D. Vyas, A.R ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax(Appeals)-3, Rajkot, dated 08/07/2016 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as the Act ) relevant to the Assessment Year 2012-2013. 2. The 1st issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for ₹ 1,33,59,000/- representing the interest accrued on non-performing assets. 3. The assessee in the year under consideration has accounted a sum of ₹ 1,33,59,000/- as interest on the non-performing assets but the same was shown in the balance sheet instead of the profit and loss account. It was contended by the assessee during the assessment proceedings that the impugned amount of interest represents the interest accrued on the NPA which is not to be recognized as income as per the direction of the RBI until and unless it is realized. In other words, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment 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 regularisation of accounts, or where the accounts or information in relation to such accounts reflect usual signs of sickness, such as: 8.1 However, from the preceding discussion there is no clarity whether the impugned amount of interest was overdue for 6 months or not. The order of the authorities below is silent on this aspect. Therefore, we refrain ourselves from giving any finding thereon. 8.2 In other words, it was contended by the learned AR for the assessee that there were certain Debts which were classified as non-performing assets in pursuance to the directions of the RBI. Accordingly, the income on such debts was not recognised as income as directed by the RBI in its circular. The relevant extract of the circular reads as under: 3.1 Income Recognition Policy 3.1.1 The policy of income recognition has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overriding effect qua other enactments to the extent the same are inconsistent with the provisions contained therein. In order to reflect a bank's actual financial health in its balance sheet, the Reserve Bank has introduced prudential norms for income recognition, asset classification and provisioning for advances portfolio of the cooperative banks. The guidelines provided thereunder are mandatory and it is incumbent upon all co-operative 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 non-performing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true and correct profits. By virtue of Section 45-Q, an overriding effect is given to the RBI Directions, 1998 vis- vis income recognition principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 1998 and the IT Act operate in different areas. These RBI Directions, 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the permissible deductions or their exclusion under the IT Act. The inconsistency between these Directions and the 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 AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute. Thus, insofar as income recognition is concerned, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 insofar as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even the principal amount itself had become doubtful to recover. In this scenario 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 treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act, 1961 has not role to play. 8.8 In view of the above, though the income of the assessee has accrued under the mercantile system of accounting but the same cannot be charged to tax for the reason that the RBI being regulatory authority prohibits to recognize such income in the books of accounts. Hence, we do not find any reason to interfere in the finding of the learned CIT (A). Thus the ground of appeal of the revenue is dismissed. 9. The second issue raised by the Revenue is that the Ld.CIT(A) erred in deleting the addition made by the AO on account of disallowance of amortization of Government Securities expenses being an expenditure of capital in nature. 10. The assessee in the year under consideration has amortized the premium paid by it on acquisition of the Government Securities. As per the AO such amortization of premium expenses represent the capital expenditure. Accordingly, the AO disallowed the sum of ₹ 68,31,402/- and added to the total income of the assessee. 11. Aggrieved assessee preferred an appeal to the Ld. CIT(A), who has deleted the addition made by the AO after having reliance on the order of his predecessor for the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of assessment of Banks carried out by C AG, it has been observed that while computing the income of banks under the head 'Profit and Gains of Business Profession', deductions of large amounts under different sections are being allowed by the Assessing Officers without proper verification, leading to substantial loss of revenue. It is, therefore, necessary that assessments in the cases of banks are completed with due care and after proper verification. In particular, deductions under the provisions referred to below should be allowed only after a thorough examination of the claim on facts and on law as per the provisions of the Income-tax Act, 1961: (vii) As per RBI guidelines dated 16th October, 2000, the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity. In the case of HFT and AFS securities forming stock-in-trade o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Interest Expenses ₹ 12,20,136/- 3. Administrative Expenses ₹ 1,00,000/- Total ₹ 13,20,136/- 16.2 However, the AO found that the assessee has only made the disallowance of ₹ 6,08,247/- accordingly the AO disallowed the balance amount of ₹ 7,11,889/- and added the same to the total income of the assessee. 17. Aggrieved assessee preferred an appeal to the Ld.CIT(A), who deleted the addition made by the AO by observing as under: 5.1 During the appellate proceedings, it has been argued implicitly that disallowance u/s.!4A cannot exceed the amount of actual tax exempt income and the decisions of the Mumbai Tribunal in the case of Daga Global Chemical ITA No.5592/Mum/2012 and Delhi High Court in the case of Joint Investment P. Ltd. ITA No. 117/2015 and decision of ITAT in the case of Karnavati Petrochem Pvt. Ltd. were relied upon. Hon'ble Delhi High Court in the case of M/s. Joint Investment Pvt. Ltd. 372 ITR (2015) 0694 has categorically held that:- (Quote) 9. In the present case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 6,08,247) after giving the benefit of the amount which was already disallowed by the assessee in the computation of income. In effect, the AO added a sum of ₹ 7,11,889/- to the total income of the assessee. 20.2 There is no dispute to the fact that the assessee has earned dividend income to the tune of ₹ 6,08,247/- only. However, it is also pertinent to note that the amount of disallowance under section 14A r.w.r. 8D cannot exceed the amount of exempted income as held by the Hon ble Delhi High Court in case of P.CIT vs. Craft Builders Construction (P.) Ltd. reported in (2019) 101 taxmann.com 167 further SPL filed by the revenue against such order was dismissed by the Hon ble Supreme Court in 112 taxmann.com 322 where the Hon ble High court held as under: 25. Total exempt income earned by the respondent-assessee in this year was ₹ 19 lakhs. In these circumstances, we are not required to consider the case of the Revenue that the disallowance should be enhanced from ₹ 75.89 crores to ₹ 144.52 crores. Upper disallowance as held in Pr. CIT v. McDonalds India (P.) Ltd. ITA 725/2018 decided on 22nd October, 2018 cannot exceed the exempt inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a tool of the appellant's business. The same cannot be said in respect of the Safe / Cabinets. Every business enterprise needs to have Safe/Cabinets to keep its documents and papers and bank is no exception to this general necessity. All papers cannot be treated as main assets of the appellant bank, only valuable papers like loan agreements, negotiable instruments etc. can be treated as important assets of the appellant. Appellant is letting it imagination run loo wide by claiming all the Safes and Cabinets as tool of the business eligible for the depreciation at higher rate available to the Plant Machinery. Virtually all business enterprises need Safes and Cabinets, Fire Resistant or otherwise for running their business and if one go by the logic of the appellant, then all of them will be entitled to treat these basically furniture items as Plant Machinery. I do not find any fault in AO's action. This ground of appeal is dismissed. 24. Being aggrieved by the order of the Ld.CIT(A), the revenue is in appeal before us. 25. Both the Ld.D.R and Ld.A.R before us vehemently supported the order of the authorities below as favorable to them. 26. We have heard the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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