TMI Blog2014 (12) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... n the principle amount itself had become doubtful to recover - In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”- thus, there was no infirmity with the decision of the CIT(A) in holding that the interest income relatable on NPA advances did not accrue to the assessee – Decided against revenue. Addition of interest on securities purchased – Securities paid to the seller of the securities and corresponds to the period prior to the date of purchase by the assessee bank – Held that:- In CIT vs. HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] has held that the ‘broken period interest’ is allowable as a deduction – there was no justification to uphold the stand of the income-tax authorities. Following the judgement of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd. – the order of the CIT(A) is upheld – Decided in favour of assessee. Claim of employee’s contribution to PF disallowed – Held that:- Following the decision in CIT vs. Ghatge Patil Transports Ltd. [2014 (10) TMI 402 - BOMBAY HIGH COURT] - It has been held that the payment of employees contribution to the Provident Fund was also subject to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to have held that the provisions of section 43D are only applicable to Financial Institutions and a Scheduled Bank. Thus, the assessee being a non-scheduled bank could not take the benefit of section 43D of the Act. Therefore, the Learned CIT(A) on this count itself ought to have dismissed the appeal of the assessee, confirming the addition made by the A.O. 4) On the facts and in the circumstances of the case, the Learned CIT(A) erred in appreciating the provisions of section 145 of the I.T. Act, 1961 in its correct perspective. The Learned CIT(A) ought to have held that the provisions of section 145 permits the assessee to either follow Mercantile system of accounting or Cash system of accounting. The assessee is not permitted to use the Mixed or Hybrid system of accounting. Thus, on this count itself the Learned CIT(A) should have upheld the addition made by the AO on account of interest on NPA. 5) The Learned CIT(A) ought to have appreciated that the Hon'ble Supreme Court in Southern Technologies Limited Vs. JCIT 320 ITR 577 (SC) has held that the RBI directions under RBI Act are prudential norms but have nothing to do with computation of taxability of provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest relating to Non-Performing Assets (NPAs) i.e. advances to customers which have been classified as NPAs in terms of the RBI guidelines. The Assessing Officer was of the opinion that interest income even in relation to such NPAs was liable to be included in this year s total income, having regard to the mercantile system of accounting followed by the assessee. According to the Assessing Officer, provisions of section 43D of the Act, which prescribe that interest income relatable to NPAs classified as per the RBI guidelines shall be charged to tax in the year in which it is credited or received by the assessee, whichever is earlier, was not applicable to the assessee, since the assessee was not a scheduled bank or any other entity prescribed in section 43D of the Act. Thus, as per the Assessing Officer, interest income on NPA advances accrued to the assessee and accordingly, he brought to tax such interest income of ₹ 26,11,750/- for assessment year 2009-10, which is the subjectmatter of dispute before us. 6. In response to an appeal preferred by the assessee, the CIT(A) disagreed with the Assessing Officer and deleted the addition. Against the aforesaid deletion by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f The Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Co-operative Bank operating under a license issued by RBI but was not a scheduled bank so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The assessee, on the other hand, contended that having regard to the guidelines issued by RBI regarding accounting of interest on NPAs, no interest income accrued in respect of NPAs and that the same was to be taxed only on receipt basis. The Tribunal observed that the question of taxability of interest on NPAs classified by RBI, was considered by the Hon ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) wherein after considering the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 collectability 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ductibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to Income Recognition and held that income had to be recognized in terms 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis- -vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. 10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant: What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). 13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in the case of The Durga Cooperative Urban Bank Ltd. (supra) and accordingly the order of the CIT(A) is liable to the affirmed. We hold so. 14. In the result, the appeal of the Revenue is dismissed. 8. It was also a common point between the parties before us that the facts and circumstances in the present case are identical to those considered by us in the case of The Omerga Janta Sahakari Bank Ltd. (supra) and, thus following the said precedent the present claim of the assessee deserves to be upheld. Thus, the order of the CIT(A) is hereby affirmed and the Revenue has to fail on this aspect. 9. In the result, appeal of the Revenue vide ITA No.1540/PN/2014 for assessment year 2009-10 is dismissed. 10. At this stage, we may notice that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment securities from secondary market on 28.12.2008. Ostensibly, interest accruing on such securities upto 28.12.2008 was to the account of the seller and for the balance period i.e. from 29.12.2008 to 31.03.2009 it was the income of the assessee. Assessee received interest for the total period of six months, which amounted to ₹ 6,24,372/- and the interest pertaining to period upto 28.12.2008 was ₹ 3,13,855/-. Considering that the interest of ₹ 3,13,855/- belonged to the seller of securities, assessee had paid this amount to the seller at the time of purchase of securities. The said amount of ₹ 3,13,855/- was debited to Interest Receivable Account and on receipt of interest of ₹ 6,24,372/-, same was credited to the Interest Receivable Account, and the balance remaining in the said account i.e. ₹ 3,10,517- was credited to the Profit Loss Account as income . In the banking parlance, the payment of ₹ 3,13,855/- made by the assessee to the seller of securities on account of interest upto 28.12.2008 is commonly referred as broken period interest . The Assessing Officer differed with the assessee with respect to the treatment of broken p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to uphold the stand of the income-tax authorities. Following the judgement of the Hon ble Bombay High Court in the case of HDFC Bank Ltd. (supra), we hereby set-aside the order of the CIT(A) and direct the Assessing Officer to delete the impugned addition. 17. In the result, C.O.No.101/PN/2014 in the case of Lokmangal Co-op. Bank Ltd. is allowed. 18. Now, we may take-up C.O. No.102/PN/2014 which is in relation to appeal of the Revenue in the case of Lokmangal Co-op. Bank Ltd. vide ITA No.1541/PN/2014 for assessment year 2010-11. The said cross-objection arises from the order of the Commissioner of Income Tax (Appeals)-III, Pune dated 30.05.2014 which, in turn, has arisen from an order dated 30.12.2012 passed by the Assessing Officer u/s 143(3) of the Act. 19. In this cross-objection, assessee has raised the following Grounds of Appeal :- 1. CIT(A) has erred in not considering the decision of Pune ITAT in case of Omerga Janata Sahakari Bank Ltd., wherein Pune Bench has decided the issue in favour of Assessee, though Section 43D is not applicable being non-scheduled Bank. 2. CIT (A) has erred in confirming the Addition of ₹ 17,58,867/- Interest on Securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to the action of the CIT(A) in confirming the disallowance of ₹ 3,70,913/- representing amortization of premium paid on acquisition of Held to Maturity (HTM) securities. 26. In this context, brief facts are that before the CIT(A) assessee claimed deduction of ₹ 3,70,913/- on account of amortization of premium paid on Government Securities in the category of investments Held to Maturity (i.e. HTM). The said premium represented the excess of acquisition cost over the face value of the securities and the claim of the assessee was that the same was to be amortized over the remaining period of maturity of the securities. The claim of the assessee was based on the Master Circular dated 12.07.2006 issued by the Reserve Bank of India. The CIT(A) did not accept the plea of the assessee and sustained the disallowance of ₹ 3,70,913/-. Against such a decision of the CIT(A), assessee is in appeal by way of crossobjection before us. 27. It was a common point between the parties that the said issue is no longer res-integra and has been adjudicated in favour of the assessee by the Hon ble Bombay High Court in the case of HDFC Bank Ltd. (supra). The Hon ble Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. Representative submitted that the CIT(A) did not allow the plea of the assessee on the ground that employees contribution to the Provident Fund is liable to be treated as income of the assessee in term of section 2(24)(x) read with Explanation to section 36(1)(va) of the Act and therefore such an expense can only be allowed to be deducted if it has been paid within due date defined in Explanation below clause (va) of sub-section (1) of section 36 of the Act. In coming to such conclusion, the CIT(A) followed the judgement of the Hon ble Gujarat High Court in the case of Gujarat State Road Transport Corporation (Tax Appeal Nos.637/2013, 1711 2577/2009, 925, 949, 965, 1655, 2365, 2378 2644/2010 and 814/2011) dated 26.12.2013. 33. At the time of hearing, the Ld. Representative for the assessee submitted that subsequent to the decision of the CIT(A), the Hon ble Bombay High Court has considered an identical issue in the case of CIT vs. Ghatge Patil Transports Ltd., (2014) 368 ITR 749 (Bom). As per the Hon ble Bombay High Court, the payment of employees contribution to the Provident Fund was also subject to the provisions of section 43B of the Act and therefore the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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