TMI Blog2011 (3) TMI 1552X X X X Extracts X X X X X X X X Extracts X X X X ..... society is generating income by carrying on banking business by providing credit facility to its Members. The assessee society enjoyed exemption under section 80P of the Act up to the assessment year 2006-07. Consequent to the amendment made to Section 80P, the profit of assessee society from banking business became taxable. Accordingly the assessee filed its return of income for the year under consideration on 31.10.2007 declaring a total income of ₹ 1.61 crore. During the course of scrutiny proceedings, the Assessing Officer noticed that the assessee did not include the interest of ₹ 18,26,306/-, being the relatable to the NPA advances. When questioned, the assessee submitted its reply as under: Reserve Bank of India has prescribed Prudential Norms in respect of income recognition Asset Classification, Provisioning and other related matters and thereby issued guidelines regarding accounting of accrued interest on borrowal accounts which are treated as non-performing advances. The copy of the circular issued by Reserve Bank of India is enclosed herewith for your perusal. Accordingly, accrued interest in respect of non-performing advances was debited to interest Rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned CIT (A) reexamined the issue in the light of contentions made by the assessee and took the view that the interest on NPA did not accrue to the assessee and hence the addition made by the Assessing Officer is not sustainable. Accordingly he deleted the impugned addition with the following observations: 4. The only issue for adjudication in this appeal is the issue of accrual of interest on NPAs. This issue has been a subject matter of appeal before the Hon'ble ITAT, Hyderabad Division Bench in the case of TCI Finance Ltd Vs. ACIT (2004) 91 ITD 573 (Hyd). The Hon'ble Tribunal, after going through guidelines issued by the Reserve Bank of India and the accountings standards notified by the Central Government in pursuance of Sec.145 of the Act observed that non-recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting. Once there is a doubt regarding the realisibility of the principal amount itself, it cannot be said that the interest on such amount accrued to the assessee even under the mercantile system of accounting. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Reserve Bank of India. Accordingly, it claimed the said provision on NPA assets as a deduction under section 36(1) (vii) of the Act. The Assessing Officer rejected the said claim as the said claim was found to be not in accordance with the Income Tax Act. The Hon'ble Supreme Court approved the decision of the Assessing Officer. It is pertinent to note that in that case, no addition was made in respect of the interest relatable to NPA. Accordingly he submitted that the decision of Hon'ble Apex court rendered in the case of M/s Southern Technologies Ltd is not applicable to the facts of the instant case and only the decision rendered by Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd, (Supra) is squarely applicable. 8. We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd (Supra); wherein the Hon'ble Delhi High Court took into account the decision rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). In the case of M/s Vasisth Chay Vyapar Ltd, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake 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 consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized . 8.2 The Delhi High Court also considered the decision rendered in the following cases: i) CIT vs. Elgi Finance Ltd., 293 ITR 357 (Mad) ii) CIT vs. KKM Investments (Cal) SLP dismissed by Supreme Court (310 ITR 4) iii) CIT vs. Motor Credit Co (P) Ltd., 127 ITR 572 (Mad) iv) UCO Bank vs. CIT 237 ITR 889 (SC) v) CIT vs. Shoorji Vallabhdas Co 46 ITR 144 (SC) vi) Godhra Electricity Co. Ltd., Vs.CIT 225 ITR 746 vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del) viii) CIT vs. Eicher Ltd., ITA No.431/2009 dated 15.7.2009 (Del) 8.3 After considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 45 (sic. 145) of the Income Tax Act. It can be said, therefore, that the Apex Court approved the real income theory which is engrained in the Prudential Norms for recognition of revenue by NBFC . 9. The Hon'ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis- -vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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