TMI Blog2013 (1) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the RBI directions also state that income from NPAs will not be recognized merely on the basis of accrual and it should be recognized only when actually received, i.e., on cash basis. Where no income has resulted, no income can be said to have accrued, just because the mercantile system of accounting is being followed. Following decision of CIT v. Motor Credit Co. (P.) Ltd. [1980 (4) TMI 64 - MADRAS HIGH COURT] CBDT Circular No. 491 dated 30.06.1987 it has been held that interest income from NPAs should be recognised only on actual receipt. Interest on sticky advances is to be allowed if the assessee is following the mercantile system of accounting and has changed the method of accounting to cash basis for recognizing the interest on sticky loans. Though this Circular is applicable to State Finance Corporations, it applies equally to NBFCs too - issue in favour of the assessee. Provision for doubtful debts - Held that:- This matter stands concluded against the assessee and in favour of the department as decided in Southern Technologies Ltd. v. Jt. CIT [2010 (1) TMI 5 - SUPREME COURT OF INDIA] holding that provision for non-performing assets debited to the Profit Loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the year as per the provision of Sec.145 of the IT Act. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in law and on facts in deleting addition of Rs. 5706000/- on account of Provision for Doubtful debts for Non-Performing assets made by the A.O. ignoring that such provision are unascertained liabilities and contingent in nature and the assessee company failed to show that the liability in respect of expenditure was ascertained and had actually arisen and incurred in the relevant year." 2. Apropos the issue relating to de-recognized interest, the facts, being common in all the appeals in which this issue has been raised, are being culled from ITA No.100/Del/2010. 3. The issue is as to whether the assessee is entitled to de-recognised interest on accrual basis on non-performing assets. 4. The Assessing Officer observed that as per the Notes on Accounts of the assessee, it had been mentioned that the interest on loans to rural producers was the net of rebates for on time repayment and interest de-recognised. The assessee was asked to show cause as to why the interest de-recognised be not added to the assessee's income. In response, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of the loans; that it is these mandatory directions issued by the RBI that the assessee company has followed to the word; that then, the assessee company was also acting under the Accounting Standards issued by the ICAI; that it is well settled that if the Accounting Standards as applicable to the method of valuation of closing stock are to be followed, the same should be applicable for income recognition on non-performing assets also, in the case of NBFCs like the assessee company; that it is undisputed that the directives issued by the RBI override all other laws; that it is the consistently followed accounting policy of the assessee company, in tune with the RBI requirements, that once the assets are identified as NPAs, interest recognition thereon is stopped; that this is so, because the direction of the RBI is to the effect that when the principal is not likely to be recovered, where a default had occurred, accounting interest was out of question; that the Prudential Norms and Directions of the RBI, concerning NBFCs lay down that the income from NPAs will not be recognized merely on the basis of accrual and since an asset becomes an NPA when it ceases to yield income, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he NPAs, since the directions of the RBI are to the effect that income of NBFCs should not be over stated by them recognizing the interest on NPAs once identified. Thus, where the accrual basis of accounting for recognizing the income is being followed by NBFCs, the RBI directions are to the effect that income on the NPAs should be stopped from being accounted as income thereon and that it shall be accounted as income only as and when realized. 10. Further, Section 45-S of the RBI Act has made the aforesaid RBI directions mandatory, overriding all existing laws, leaving no choice with NBFCs like the assessee company. 11. Moreover, as also recognized in Uniflex Industries (P.) Ltd. v. ITO [2007] 15 SOT 246 (Luck.), Accounting Standard-II issued by the ICAI has been made mandatory in the case of companies. According to AS-II(5), inventories should be valued at "lower of cost and net realizable value", leaving no choice in the matter with the assessee company. 12. Apropos interest de-recognition of NPAs, in accordance with the RBI directions, once the NPAs are identified as such, interest recognition thereon is stopped. This is so, for when the principal is not likely to be reco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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