TMI Blog2014 (12) TMI 1061X X X X Extracts X X X X X X X X Extracts X X X X ..... has been added to the total income. The assessee bank is following the mercantile system of accounting - However, with regard to the recognition of income on NPAs, it has applied the RBI guidelines which say that such income is not to be recognized on accrual basis but is to be recognized as income only when it is actually received - The RBI guidelines also prescribe the manner in which the interest in relation to NPAs is to be shown in the Annual financial statements - In terms of the Master Circular on Income Recognition, Asset Classification, Provisioning & Other Related Matters issued by the RBI on 4th July, 2004 in chapter 4 of ‘Income Recognition’, the accrued interest in relation to NPAs should be computed and shown separately, though not accounted as income of the bank for the relevant period - with a view to ensuring uniformity in accounting the accrued interest in respect of both the performing and non-performing assets, the RBI guidelines inter-alia, prescribe that interest accrued in respect of NPAs should not be debited to borrowal accounts but shown separately under ‘Interest Receivable Account’ on the ‘Property and Assets’ side of the Balance-Sheet and correspond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee bank, and the yearly credit of interest @ 3% on the balance to the credit of Fund, is not a charge against the Profit & Loss Account - the order of the CIT(A) is upheld – Decided against assessee. - ITA No.495/PN/2012 - - - Dated:- 29-9-2014 - SHRI SHAILENDRA KUMAR YADAV AND SHRI G.S. PANNU, JJ. For The Assessee : Mr. Sunil Ganoo Mr. S. N. P uranik For The Department : Mr. A. K. Modi ORDER PER G. S. PANNU, AM The captioned appeal by the assessee is directed against an order of the Commissioner of Income Tax (Appeals)-III, Pune dated 28.10.2011 which, in turn, has arisen from an order dated 20.12.2010 passed by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961 (in short the Act ), pertaining to the assessment year 2008-09. 2. In this appeal, assessee has raised the following Grounds of Appeal :- 1. CIT (A) has erred in confirming the addition of ₹ 47,01,85,366/- in respect of interest on NPA A/cs same may please be deleted. 2. CIT (A) has erred in confirming rejection of method of Accounting of NPA interest, it may be held that method followed by Assessee is mercantile correctly recognizing NPA interest income on reali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognition, Asset Classification, Provisioning and other related matters. In terms of such Prudential Norms of RBI, assessee asserts that it did not recognize interest income on account of NPAs i.e. the loans/advances to customers which have been classified as NPAs following the Prudential Norms of RBI. The pertinent dispute in the Grounds of Appeal No.1 to 3 relates to non-recognition of income of ₹ 47,01,85,366/- in respect of advances/loans to customers, which have been classified as NPAs. 5. The controversy with respect to non-recognition of income on accrual basis relatable to the NPAs is no longer res integra but the same has already been adjudicated in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order dated 31.10.2013 and also other subsequent decisions of the Pune Bench of the Tribunal. Apart therefrom, the Hon ble Bombay High Court in the case of CIT vs. M/s KEC Holdings Limited vide Income Tax Appeal No.221 of 2012 dated 11.06.2014 has also approved the proposition that the interest income on NPAs is not recognizable on accrual basis. The aforesaid matrix is not challenged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectively. Similarly, on the Liabilities side of the Balance-Sheet an entry of ₹ 82,81,68,339/- styled as Overdue Interest Reserve appears. It has been explained that the term Reserve has been mistakenly used and in-fact the said amount reflects a contra entry for Interest Receivable on NPAs, which is appearing on the Assets side on the Balance-Sheet under the heading Interest Receivable , with sub-headings On Society Loans and On Individual Loans . 8. Due to the aforesaid depiction in financial statements, the case of the Revenue is that the interest on NPAs have been credited in the Profit Loss Account and thus its accrual has been accepted by the assessee; and that the contra entry by way of debit in the Profit Loss Account is to be understood as a mere Provision and, since a Provision is not an allowable deduction, the amount of ₹ 47,01,85,366/- has been added to the total income. 9. The claim of the assessee is that it is incorrect to say that it has created a Reserve/Provision in respect of the Overdue Interest on NPAs. It is explained that instead of netting of the interest on loans, the bank has shown the gross interest on credit side of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been treated as Interest accrued in the books of account of the bank for the relevant year. 5. The bank most respectfully submits that instead of netting of the interest on loans, the bank has shown the gross interest on credit side of the Profit and Loss Account and simultaneously shown on debit side of the Profit and Loss Account the amount of interest on N.P.A. which is in accordance with the Accounting Standard [AS] 9 issued by the I.C.A.I. 6. The bank most respectfully submits that as on 31/03/2008 it had 214 branches. At the time of preparation of consolidated Profit and Loss Account and Balance Sheet as on 31/03/2008 [the copies of which are filed before the various tax authorities] solely with a view to make a disclosure of Gross Interest that would have been received by the bank, the interest on N.P.A. is disclosed on credit side of the Profit and Loss Account and a contra entry is made on debit side under the head Interest Paid. This accounting treatment does not by any logic convert the interest on N.P.A. in to interest accrued within the meaning of the provisions of the I.T. Act 1961 or cannot be called as recognition of income by the bank. 7. The interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me on NPAs, it has applied the RBI guidelines which say that such income is not to be recognized on accrual basis but is to be recognized as income only when it is actually received. The RBI guidelines also prescribe the manner in which the interest in relation to NPAs is to be shown in the Annual financial statements. In terms of the Master Circular on Income Recognition, Asset Classification, Provisioning Other Related Matters issued by the RBI on 4th July, 2004 in chapter 4 of Income Recognition in para 4.5.1 it is advised that the accrued interest in relation to NPAs should be computed and shown separately, though not accounted as income of the bank for the relevant period. Further, in para 4.5.3, with a view to ensuring uniformity in accounting the accrued interest in respect of both the performing and non-performing assets, the RBI guidelines inter-alia, prescribe that interest accrued in respect of NPAs should not be debited to borrowal accounts but shown separately under Interest Receivable Account on the Property and Assets side of the Balance-Sheet and corresponding amount shown under the Overdue Interest Reserve Account on the Capital and Liabilities side of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent net profit or loss in the manner prescribed. Such manner in relation to the calculation of net profits has been prescribed in Rule 49-A of the Maharashtra Co-operative Societies Rules, 1961. Rule 49-A prescribes that a society shall calculate the net profits by deducting from the gross profits for the year the Items (i) to (xvi) prescribed therein. For our purpose, it would suffice to examine Item (i) of the amounts deductible, which reads as under :- (i) all interest accrued and accruing on amounts of overdue loans (except in overdue amounts of loans against fixed deposit, gold, etc. 15. The aforesaid would show that while constructing its Profit Loss Account to arrive at its net Profit or Loss, a Co-operative Society is required to show interest accrued/accruing on amounts of Overdue Loans separately. This is precisely what has been done by the assessee in the present case. The aforesaid requirement of the manner of construction of Profit Loss Account, prescribed under the Rules of the Maharashtra Co-operative Societies Act, 1960, has prompted the assessee to draw up its Profit Loss Account in the manner we have noted above qua the interest on NPAs. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. Therefore, in our view, the lower authorities have misguided themselves in rejecting the claim of the assessee for non-recognition of interest income on NPAs. 16. In view of the aforesaid, we set-aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of ₹ 47,01,85,366/-. Thus, on Grounds of Appeal No.1 and 2 assessee succeeds. The Ground of Appeal No.3 is only an alternative Ground raised, in case assessee does not succeed on Grounds of Appeal No.1 and 2. Since assessee has succeeded on Grounds of Appeal No.1 and 2, Ground of Appeal No.3 is dismissed as infructuous. 17. In Ground of Appeal No.4, assessee has challenged the addition of ₹ 52,24,988/- and ₹ 13,97,158/- on account of interest on Agricultural Stabilization Fund and on Corpus Fund respectively. At the time of hearing, the learned counsel has submitted that assessee bank does not wish to press the addition of ₹ 13,97,158/- relating to interest on Corpus Fund. Accordingly, the same is dismissed as Not Pressed . 18. The surviving dispute is of ₹ 52,24,988/- which represents interest on Agricultural Stabilization Fund, the relevant facts therof are as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in circumstances in which total or partial failure of crops resulting from natural calamity renders the repayment of such short term loans or installments of medium term loans impossible without dislocation of the credit structure and without hardship to individual agriculturalists. The principles and procedures set out below shall govern the establishment and utilization of the stabilization fund at various levels. 6.3.2 The resources for the establishment of the fund clearly indicate that the fund was created out of appropriation of profits of the appellant bank and therefore, even the credit of interest @ 3% on the balance at the beginning of the year is also an appropriation of profit to meet the exigencies as mentioned in the aims and objects of the fund and the interest cannot be a charge to the profit loss account. The claim of the appellant that the fund was utilized for its business purposes and therefore* the interest is business expenditure cannot be accepted. It is only an appropriation of profit towards a specific purpose and the same does not constitute business expenditure of the appellant. The same is the position with the interest on Corpus fund, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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