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TMI Blog2015 (4) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... td. V. D.C.I.T. though in the later decision, the decision of the Honourable Supreme Court in the case of Southern Technologies Ltd. relied upon by him in a wrongful manner was duly considered and distinguished and thereby causing great hardship and injustice to the appellant and, therefore, the appellant be awarded such cost/compensation as may appear to be just to the Honourable members. 2. The only effective ground is against the confirmation of addition of Rs. 1,72,73,000/- being interest on N.P.A. accounts not credited to P&L account. 3. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 28/02/2013, thereby the Assessing Officer (AO in short) made addition on accrued interest on NPAs amounting to Rs. 1,72,73,000/-. Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions of the assessee dismissed the appeal. Now, the assessee is further in appeal before us. 4. The ld.counsel for the assessee submitted that the issue is squarely covered in favour of the assessee by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 577) is applicable on the facts of the present case. 5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has decided this issue in paras-3.2 to 3.11 of his order, by observing as under:- "3.2 I have carefully considered the facts of the case in the light of submissions made by the appellant , the arguments taken by the assessing officer and the material available on records. The arguments taken by the appellant indicate that the addition made by the Id A O is being challenged on following grounds:- > That provision of sec 43D are not applicable in its case for disclosing any interest on accrual basis on NPAs. > That Hon'ble jurisdictional Tribunal in the case of Karnavati Co Op Bank has held that no interest on accrual basis on NPAs can be taxed even in cases of unscheduled banks. > That it is mandatory upon appellant not to charge interest on accrual basis in view of RB1 Guidelines. > That following the theory of real income, taxability of any notional income like accrued interest on NPAs would not arise. > That credit of income disclosed as interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction or purchase of houses in India for residential purposes; and (iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989 given under section 30 and section 31 of the National Housing Bank Act, 1987 (53 of 1987); (c) "public financial institution" shall have the meaning assigned to it in section 4A95 of the Companies Act, 1956 (1 of 1956); (d) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36; (e) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (f) "State industrial investment corporation" means a Government company within the meaning of section 61796 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects.] Expln. (ii) of clause ( viia) of section 36 "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the law, he must be taxed, however great the hardship may appear to the judicial mind to be'. It is further seen that in several other judgements as in the cases quoted at 40 ITR 142(SC), 72 ITR 286(SC), 222 ITR 831 (Guj) etc. it has been held time and again that once the provisions of a statute are clear, no meanings or intentions are required to be attached therein and that they have be followed in the letter and spirit. It has been held that an interpretation of law is to be attempted only when the statute suffers from any ambiguity. Under the circumstances, the argument that provisions of section 43D are applicable in appellants case squarely fails as the law explicitly prohibits benefit of section 43D to ineligible entities. Needless to say in eligible entities here would mean those tax payers who do not fall within the clear ambit of that section. 3.5 Coming to the argument that Hon'ble jurisdictional Tribunal in the case of Karnavati Co Op Bank has laid down that provisions of sec 43D are applicable in the case of unscheduled banks has been examined and it' is noted that the appellant has misinterpreted and inadequately appreciated the observation of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough which it can be ascertained that the assessee falls under any of the category as prescribed in Explanation to section 43D of the Act. Because of this reason, we hereby direct the assessee to obtain the requisite certificate from the concerned authority clearly mentioning the status of the assessee-bank, and place the same before the AO......" From a plain reading of the above, it clearly transpires that the Hon'ble Tribunal has appreciated the argument that provisions of section 43D would not be applicable to the appellant if it is not a scheduled bank. Consequently, the argument of the appellant for not offering interest income on accrual basis fails on this account. 3.7 Coming to the next argument of the appellant that interest on NPAs has not been offered on accrual basis in view of mandatory RBI guidelines, it is seen that the issue is now evenly settled in favour of revenue by the decision of Hon'ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577 dt 11-1-2010 In the cited case the appellant had taken an argument that interest on NPAs was not charged in view of mandatory RBI guidelines. Hon'ble Supreme Court have held that RBI guidelines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presented on the "Liabilities side" of the Balance Sheet under the head "Current Liabilities and Provisions" as a Disclosure Norm and not as accounting or computation of income norm under the Income-tax Act. At this stage, we may clarify that the entire thrust of RBI Directions. 1998 is on , presentation of NPA provision in the Balance Sheet of an NBFC. Presentation/disclosure is different from computation/taxability of the provision for NPA. The nature of expenditure under the Income-tax Act cannot be conclusively determined by the manner in which accounts are presented in terms of 1998 Directions. There are cases where on facts courts have taken the view that the so-called provision is in effect a write off. Therefore, in our view, RBI Directions, 1998, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the Income-tax Act. Some companies, for example, treat write offs or expenses, or liabilities as contingent liabilities. For example, there are companies which do not recognize mark-to-market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P&L Account in terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysed. It is seen that principal reliance has been placed upon the decision in the case of Godhara Electricity 225 ITR 746 dt 3/9/97 . Without prejudice to the fact that facts of Godhra electricity and current appeal are clearly distinguished it is noted that we now leave the benefit of a direct and incidentally subsequent decision of Hon'ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577 dt 11-1-2010. After comprehensively analyzing various facets of income viz a viz method of accounting and also provisions of IT Act particularly concerning NPA's, Hon'ble Apex Court has thus held as under :-" ".....On the issue of real income theory Theory of "Real Income" 34. An interesting argument was advanced before us to say that a provision for NPA, under commercial accounting, is not an "income" hence the same cannot be added back as is sought to be done by the Department. In this connection, reliance was placed on "Real Income Theory". 35. We find no merit in the above contention. In the case of Poona Electric Supply Co. Ltd. v. ClT[1965] 57 ITR 521, this is what the Supreme Court had to say : ". . . Income-tax is a tax on the real income, i.e., the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed by the Act. Therefore, even applying the theory of Real Income, a debit which is expressly disallowed by Explanation to section 36(1)(vii), if claimed, has got to be added back to the total income of the assessee because the C3id Act seeks to tax the "real income" which is income computed according to ordinary commercial principles but subject to the provisions of the Income-tax Act. Under section 36(1)(vii) read with the Explanation, a "write off" is a condition for allowance. If 'Yea/profit" is to be computed one needs to take into account the concept of "write off" Jn contradistinction to the "provision for doubtful debt"..,.." An examination of the above decision clearly postulates that Hon'ble Apex Court has held that there is no merit on the contention that under commercial accounting interest on NPAs cannot be charged. Following its own decision in the case of Puna Electricity supply Co 57 UTR 121 of Hon'ble Bombay High Court in the case of Bombay Suburban Ele. Supply Ltd 103 ITR 384 it was held that "....Income tax Act in the tax of real income i.e. the profits arrived at on commercial principles subject to the provisions of the I T Act....." In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce upon the A O. it is a trite law that a circular issued prior to introduction of parent statute would have no relevance or binding force upon the A O. Consequently, the argument of the appellant that the A O is bound by the CBDT Circular fails. 3.11 In view of the discussions made in the preceding paragraphs, it is held that the addition of Rs. 1,72,73,000/- made by the A O on account of accrued interest on NPAs is based upon correct understanding of the contemporary statutory provisions and judicial citations and do not requires any further interference. The appellant on its part has not been able to effectively demonstrate with any cogent evidence that the addition was unwarranted Consequently, the addition of Rs. 1,72,73,000/- made by the A O on account of accrued interest on NPAs is confirmed and the ground of appeal No., 1 raised is dismissed. 4.0 In the result, the appeal is dismissed." 5.1. However, we find that under the identical facts, the Coordinate Bench of this Tribunal in the case of ACIT vs. Solapur Siddheshwar Sahakari Bank Ltd. in ITA Nos.2220&221/PN/2013 for AYs 2009-10 & 2010-11 (supra) has examined the issue thoroughly by holding as under:- "4. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned income has accrued to the 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 Vyapar Ltd. (supra) wherein after considering the decision of the Hon'ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onable 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Prudent/a 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 fie 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive 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 assesses 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-a-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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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." 5. Since it was a common point between the parties 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), 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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