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TMI Blog2018 (1) TMI 1683X X X X Extracts X X X X X X X X Extracts X X X X ..... a recognized system of accounting. 2. That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in law as well as on facts in deleting the addition of Rs. 34,00,000/- made by the A.O. on account of disallowance of Provision against Standard Assets. 1(a). That while deleting the above addition of Rs. 34,00,000/-Ld. CIT(A) has erred on facts as well as in law by ignoring the fact that this disallowance was made by the A.O. in the light of provisions of section 36(l)(viia) of the Income Tax Act, 1961 wherein only provisions in case of "bad and doubtful debts" has been mentioned as allowable whereas in assessee's case the provision pertains to "Standard Assets" 3. It is prayed that the order of the Ld.CIT(A) be set-aside and that of the Assessing Officer restored. 4. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off. 3. At the outset, the Ld. AR submitted that the issues involved in this case are squarely covered in favour of the assessee by the order of the Hon'ble Tribunal in ITA No. 652/Asr/2015, 604&605/Asr/2016 in the case of M/s Jalandhar Central Cooperative Bank Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticky 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 relating to interest on sticky loans and the RBI guidelines relating to accounting for interest on NPA's, it was held that such income was taxable in the year of receipt only, when its realization becomes reasonably certain. 14. The Apex Court in the case of UCO Bank, Calcutta Vs. CIT, West Bengal (1999) 4 Supreme Court Cases 599 approved the receipt basis of accounting for interest on loans whose recovery was doubtful, holding 10 the same to be in accordance with accounting practice and in conformity with the method prescribed under section 145 of the Act. The relevant findings of the Apex Court are as follows: "We have to consider whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account and has not been brought to the profit and loss account of the assessee, can be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 should be treated as income unless it has been received or there is a reasonable certainty that it will be realized. (Vide State Bank of Tranvacore v. CIT [supra]) The assessee's method of accounting, therefore, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice. Under Section 145 of the Income-tax Act, 1961, income chargeable under the head "profits and gains of business or profession or income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee; provided that in a case where the accounts are correct and complete but the method employed is such that in the opinion of the Income- tax Officer, the income cannot properly be deduced therefrom, the computation shall be made in such manner and on such basis as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 court in Southern Technologies Limited vs JCIT, Coimbatore,(2010) 320 ITR 577,held that so far as Income Recognition was concerned even the AO had to follow the RBI Directions,1998 in view of section 45Q of the RBI Act and section 145 of the Income Tax Act had no role to play in the same. The Hon'ble Court held at para 20 to 23 of its order as follows: "20. Section 45Q finds place in Chapter IIIB of the RBI Act. Thus, the provisions of Chapter IIIB of the RBI Act have an 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 13 norms for income recognition, asset classification and provisioning for advances portfolio of the co-operative banks. The guidelines provided thereunder are mandatory and it is incumbent upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions. [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 play, and hence, an add back. Insofar as income recognition is concerned, the Supreme Court has held thus: "Applicability of Section 145 57. At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued by RBI under Chapter III-B o f the RBI Act, 1934. These norms deal essentially with income recognition. They force the NBFCs to disclose the amount o f NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue o f Section 45-Q, an overriding effect is given to the RBI Directions, 1998 vis-a-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 15 1998 and the IT Act operate in different areas. These RBI Directions, 1998 have nothing to do with computation o f taxable income. These Directions cannot overrule the "permissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 follows : "9. The Income Tax Appellate Tribunal has referred the case of M/s. Vasisth Chay Vyapar Limited 330 ITR 440 (Delhi). In this case, the revenue relied upon the decision of the Hon'ble Supreme in the case of Southern Technologies Ltd. supra. The learned Income Tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of M/s Southern Technologies Limited supra. The assessee herein being a Cooperative Bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the Co-operative banks. The Hon'ble Supreme Court in the case of Southern Technologies Limited supra held that, provisions of Section 45Q of Reserve Bank of 17 India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, Section 45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 itself into law and this position should not have been deviated from. Negativing this contention, the Court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged "in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility". The Court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The Court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this Court in Navnitlal C. Javeri v. K.K. Sen (Supra), or the subsequent decision in K.P. Varghese v. 19 Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals filed by revenue are dismissed." In view of the above judicial precedents, ground no. 1 of revenue's appeal is dismissed. Now coming to ground no. 2 regarding provisions against the standard assets, we find that the same is also covered in favour of assessee by the order of the Hon'ble Tribunal in the case of Punjab Gramin Cooperative Bank. For the sake of completeness, the findings of the Hon'ble Tribunal are reproduced below: "12. We have heard the rival parties and have gone through the material placed on record. We find that the issue of provision for doubtful debts on standard assets is covered in favour of assessee by the order of the Tribunal dated 22.06.2016 for Assessment Year: 2008-09, wherein the appeal of the revenue was dismissed which was filed by Revenue on similar grounds. The relevant findings of the Tribunal as contained in para 8 onwards are reproduced below. 8. "We have heard the rival parties and have gone through the material on record. We find that the assessee had created a provision of Rs. 50,00,000/- which included a sum of Rs. 13,25,000/- as provisions for bad and doubtful debts and the balance amount of Rs. 36,75,000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains business or profession." From the above provisions it can be seen that deduction u/s 36(1) (viia) of the Act is allowed in respect of provisions for bad and doubtful debts. This section does not differentiate between provision on bad assets and provision on standard assets. This deduction exclusively allows deduction in respect of provision for bad and doubtful debts to the extent mentioned in the various clauses of sub-section (1) of section 36 of the Act. The deduction under section 36(1)(viia) of the Act is allowed only in respect of certain specific categories of assessee mentioned in the clause like banks, financial institutions, etc. who are in business of lending money. It is not allowed even to non-banking financial institutions since they are not included in this clause. It is seen that though section 36(1) (vii) states that deduction for provision is allowable in respect of provision for bad and doubtful debts, the computation of such deduction is made with reference to total income of the specified Banks ba ..... X X X X Extracts X X X X X X X X Extracts X X X X
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