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TMI Blog2014 (12) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... ense issued by Reserve Bank of India (RBI), a copy of such license dated 09.09.1996 is placed at page 1 of the Paper Book filed before us. The assessee being a Co-operative Bank operating under license from RBI, is governed by Circulars of RBI relating to Prudential Norms, Income Recognition, Asset Classification, Provisioning and other related matters. In terms of such Prudential Norms of RBI, assessee did not account for interest income relatable to NPAs i.e. advances to customers which have been classified as NPAs in terms of the Prudential Norms of RBI. The Assessing Officer was of the opinion that interest income even in relation to such NPAs was liable to be included on accrual basis having regard to the mercantile system of accounting followed by the assessee. As per the Assessing Officer, the provisions of section 43D of the Act which provides that interest income relatable to NPAs classified as per the RBI guidelines shall be charged to tax in the year in which it is accounted for by the assessee or on receipt, whichever is earlier, was not applicable to the assessee, since the assessee was not a 'scheduled bank'. Notably, section 43D prescribes that in case of public fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration, as it cannot be said to have accrued to the assessee. 5. Apart from the aforesaid, the CITA(A) has relied upon the decision of the Pune Bench of the Tribunal in the case of Western Maharashtra Development Corporation Ltd. vs. DCIT, (2008) 114 TTJ 54 (Pune) and also the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd., 330 ITR 440 (Del) to hold that interest income on NPAs was not taxable on accrued basis. The CIT(A) has also referred to and relied upon the decision of the Pune Bench of the Tribunal in the case of Osmanabad Janta Sah. Bank Ltd. vs. ACIT, ITA No.795/PN/2011 dated 31.08.2012 wherein following the decision of the Visakhapatnam Bench of the Tribunal in the case of DCIT vs. The Durga Cooperative Urban Bank Ltd. in ITA No. 511/Vizag/2010 dated 10.03.2011 on a similar controversy, it has been held that interest income relatable to NPAs is not taxable on accrual basis. 6. For all the above reasons, the CIT(A) deleted the addition of Rs. 19,24,030/- made by the Assessing Officer. Against the aforesaid decision, Revenue is in appeal before us. 7. Before us, the learned Departmental Representative has placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to t6h e assessee during the year under consideration. 9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of 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 Vya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a measurable and that at the time of sale 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 instalments. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tible under section 36(i)(vii) of the Act. The Assessing Officer, however, did not bring to tax Rs. 20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility 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 Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt dispute". 10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued 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-à-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 reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by RBI. Ostensibly, there is divergence of opinion between the Hon'ble Delhi High Court and the Hon'ble Madras High Court as noted by the Hon'ble Madras High Court in its order. 12. In so far as, present case is concerned there is no judgment of 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 afores1a1id 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. 15. In the cross-objection preferred by the assessee, it is sought to be made out that the Assessing Officer erred in making an addition of Rs. 19,24,030/- on account of interest on NPAs, whereas the correct amount of interest on NPAs relatable to the year under consideration was only Rs. 7,06,084/-. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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