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TMI Blog2010 (11) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was not realizable. The Assessing Officer, however, added the interest as income of the assessee holding that it had "accrued" to the assessee even if it was not actually realized as the assessee was following the mercantile system of accounting. The Commissioner of Income-tax (Appeals) affirmed the order of the Assessing Officer. However, the Income-tax Appellate Tribunal has deleted the aforesaid interest income. 3. In this backdrop, the question raised is as to whether the Income-tax Appellate Tribunal erred in law and on the merits by deleting the additions of income made as interest earned/acquired on the loan advanced to M/s. Shaw Wallace by considering the interest as doubtful and unrealizable. 4. Now the facts in detail. 5. The lower authorities held that the provisions of the Reserve Bank of India Act, 1934 read with the NBFCs Prudential Norms (Reserve Bank) Directions, 1998 could not override the provisions of the Income-tax Act, 1961 where under the amount of interest was, according to the lower authorities, taxable under the accrual system of accounting. This stand of the assessee was not accepted by the Assessing Officer or the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Uttaranchal High Court in the case of CIT v. Nainital Bank Ltd. [2009] 309 ITR 335 and the Madras High Court in the case of CIT v. Elgi Finance Ltd. [2007] 293 ITR 357. 8. Placing heavy reliance upon Elgi Finance Ltd. [2007] 293 ITR 357 his submission was that almost identical controversy was considered in the said decision. In that case the assessee-company was engaged in the business of leasing, finance and hire purchase. On the ground that in the profit and loss account of the previous year and in the memo of the total income prepared for income-tax purpose for the year in question, the assessee had not admitted the interest accrued on a transaction in respect of hire purchase, leasing, bill discounting, short-term loan etc., the Assessing Officer proposed to bring the accrued interest on those terms to tax as income of the assessee relating to that assessment year. The assessee explained that as it was an NBFC, those assets were to be treated as non-performing assets in terms of the guidelines issued by the RBI and income pertaining thereto was not to be considered as income. The Assessing Officer did not accept the submission and held that as the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial crisis and there were winding up petitions pending against the said company in the court. 10. He argued that income chargeable under the head "Profits and gains of business or profession" has to be determined as per the method of accounting consistently followed by an assessee. 11. Predicated on the provisions of section 145(1) of the Income-tax Act as well as sections 209 and 211 of the Companies Act, his submission was that as per these provisions, it was incumbent upon the assessee to conform the mandatory accounting methods and following those standards, the system of accounting consistently followed by the assessee was in conformity with those accounting standards which, inter alia, provided not to treat interest on ICD due from Shaw Wallace, in view of uncertainty of ultimate collection of interest due to the tight and precarious financial position of the borrowers. He specifically referred to the Accounting Standard-9 (AS-9) of the Institute of Chartered Accountants of India (ICAI) in this behalf. His further submission was that the courts have held that even under the accrual system of accounting it is illusory to take credit for interest where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the assessee has been placed and not with reference to the system of accounting . . .The mercantile system of accounting can be relevant only to determine the point of time at which tax liability is attracted and it cannot be relied on to determine whether income has, in fact, resulted or materialized in favour of the assessee merely because the assessee has been maintaining his accounts on the basis of mercantile system of accounting, the interest income on the outstanding in the two firms cannot be held to have accrued at the end of the accounting year. Viewed against the background of commercial and business realities of the situation in which the assessee was placed, the Tribunal came to the conclusion that it would be very unrealistic on the part of the assessee to take credit for a highly illusory interest. The Tribunal was fully justified in arriving at this conclusion." 14. In this case too, the Supreme Court has dismissed the Revenue's special leave petition vide SLP (Civil) No. 2806 of 1981 (149 ITR (St.) 93). 15. He argued that the courts have also recognized the theory of "real income" and held that notwithstanding that an assessee may be following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 recognized at the time of sale or rendering of service even though payments are made by installments. 9.3 When the uncertainty relating to collect ability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. 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. 21. 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 entirely on the judgment of the Supreme Court in the case of Southern Technology [2010] 320 ITR 577. No doubt, in first blush, reading of the judgment gives an indication that the court has held that the RBI Act does not override the provisions of the Income-tax Act. However, when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the apex court contained in that very judgment, we find that the proposition advanced by Mr. Sabharwal may not be entirely correct. In the case before the Supreme Court, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Income-tax Act necessarily. It is important to note that collect ability is different from accrual. Hence, in each case, the asses-see has to prove, as has happened in this case with regard to the sum of Rs. 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 Income-tax Act or not to accept it in which case there will be add back even under the real income theory as explained herein below . . . 38. The point to be noted is that the Income-tax Act is a tax on `real income', i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. Therefore, if by the Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the said Explanation in computation of total income under the Income-tax Act failing which one cannot ascertain the real profits. This is where the concept of `add back' comes in. In our view, a provision for NPA debited to profit and loss account under the 1998 Directions is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese 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, section 145 of the Income-tax Act has no role to play in the present dispute." 22. We have also noticed the other line of cases wherein the Supreme Court itself has held that when there is a provision in other enactment which contains a non obstinate clause, that would override the provisions of the Income-tax Act. TRO v. Custodian, Special Court Act, 1992 [2007] 293 ITR 369 (SC) is one such case apart from other cases of different High Courts. When the judgment of the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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