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TMI Blog2017 (10) TMI 1605X X X X Extracts X X X X X X X X Extracts X X X X ..... par Ltd. (supra) has been followed in the case of Shri Mahila Sewa Sahakari Bank Ltd. [ 2016 (8) TMI 377 - GUJARAT HIGH 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. Argument of the D.R. that the assessee is following the mercantile system of accounting is also dismissed since this aspect has been dealt with by 20 various High Courts referred to above wherein they have categorically held that even following the mercantile system of accounting the interest on NPA account cannot be said to have accrued in the impugned year since the recovery of the same was impossible and even otherwise for the purpose of Income Recognition the RBI Directions, 1998, had to be followed in view of section 45Q of the RBI Act. 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. - Decided against revenue. - I.T.A Nos. 222 & 223/(Asr)/2017 - - - Dated:- 4-10-2017 - SH. T. S. KAPOOR, ACCOUNTANT MEMBER AND SH. N.K. CHOUDHRY, JUDICIAL MEMBER For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Central Co-operative Bank Ltd., the Amritsar Bench has again dismissed the appeals filed by revenue on similar issue. The Hon'ble Chandigarh Bench vide its order dated 03.01.2017 in ITA No. 526/Chd/2013 has also dismissed the appeal filed by revenue under same facts and circumstances. While dismissing the appeal, the Hon'ble Tribunal has discussed the case law of Hon'ble Supreme Court in the case of State Bank of Travancore and has held that it has been overruled by the Apex Court itself in the case of UCO Bank Ltd. (supra) and therefore the grievance of the revenue is not justified. For the sake of completeness the decision of the Hon'ble Chandigarh Bench of Tribunal in the case of Ludhiana Central Co-operative Bank Ltd. The findings of Hon'ble Tribunal as contained from para 13 are reproduced below: 13. We find that the issue of accounting for interest on sticky loans/NPA s, has been dealt with in a number of decisions both by the Apex Court and various High Courts and Tribunals also, wherein after applying the Real Income Theory , the prescribed Accounting Standard issued by ICAI on Revenue Recognition, AS-9, the accounting practice of the assessee rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 thereof 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 Account. To the extent the interest is received in cash, the Interest Suspense Account should be transferred to Interest account; the remaining amount should be closed by transfer to the Loan account. This treatment accords with the 11 principle that no item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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. 16. This view was reaffirmed in a later judgment by the Apex Court in Mercantile Bank Ltd., Vs. CIT, Bombay City-III (2006) 5 SSC 221. 17. 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 RBI guidelines had an overriding effect over other Acts including the Income Tax Act, 1961. 18. The Gujarat High Court in the case of Pr.CIT-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd. (Tax Appeal No.531 of 2015 dated 5.8.2016 ,relying upon the decision of the apex cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act; (ii) in not recognizing the income under the mercantile system o f accounting and its insistence to follow cash system with respect to assets classified as 14 NPA as per its norms; (iii) in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful o f recovery under the norms of the accounting standards issued by the Institute o f Chartered Accountants of India. These deviations prevail over certain provisions of the Companies Act, 1956 to protect the depositors in the context o f income recognition and presentation o f the assets and provisions created against them. Thus, the P L account prepared by NBFC in terms o f the RBI Directions, 1998 does not recognize 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 o f provisions. [Emphasis supplied] 22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36(1)(vii) or section 37 of the Act, then in the computation of income, the RBI Guidelines would have no role to pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting 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. 19. 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 of the Income Tax Act, 1961 has no role to play. 20. The Bombay High Court in the case of CIT Vs. Deogiri Nagari Sahakarii Bank Ltd. Others, 379 ITR 241 reiterated the above proposition by holding at para 9 of its order as follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 the circular of 9th of October, 1984, does not appear to have been pointed out to the Court. What was submitted before the Court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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