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2015 (4) TMI 672 - ITAT AHMEDABAD

2015 (4) TMI 672 - ITAT AHMEDABAD - TMI - Accrual of interest - Addition being interest on N.P.A. accounts not credited to P&L account - whether provisions of section 43D would not be applicable to the appellant if it is not a scheduled bank? - Co-operative Bank not being a scheduled bank - assessee submitted that as per the RBI guidelines, the interest accrued on Non-performing Assets (NPA) cannot be subjected to tax - assessee also submitted that on the principles of “income recognition” as pe .....

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urt has held in the case of Southern Technologies Ltd (2010 (1) TMI 5 - SUPREME COURT OF INDIA), 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. .....

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IT vs. Sakthi Finance Ltd. [2013 (3) TMI 266 - MADRAS HIGH COURT] in respect of application of the judgement of the Hon’ble Apex Court rendered in the case of Southern Technology Ltd.(supra) on income recognition norms prescribed by R.B.I. - AO directed to delete the addition. - Decied in favour of assessee. - I.T.A. No. 62/Ahd/2014 - Dated:- 27-3-2015 - Shri N.S. Saini And Shri Kul Bharat JJ. For the Appellant : Shri R.C. Shah, AR For the Respondent : Shri M.K. Singh, Sr.DR 27/03/2015 ORDER Per .....

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of the case and judicial decisions, the addition of ₹ 17273000 be deleted. 2. That the C.I.T.(Appeals), while confirming the addition of ₹ 172.73 lacs, erred in not following the decisions of the Honourable I.T.A.T., Ahmedabad itself in the cases of Sardarganju Mercantile Coop. Bank Ltd. V. A.C.I.T. and Karnavati Co-op.Bank Ltd. 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 wro .....

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sessment 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 ₹ 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 .....

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ng force. He submitted that as per the RBI guidelines, the interest accrued on Non-performing Assets (NPA) cannot be subjected to tax. He has also placed reliance on the decision of the Coordinate Bench (ITAT B Bench Pune) rendered in the case of Asst.CIT vs. Solapur Siddheshwar Sahakari Bank Ltd. in ITA Nos.2220 and 2221/PN/2013 for AYs 2009-10 & 2010-11, order dated 31/10/2014. He drew our attention towards para-10 of the said decision of the Coordiante Bench of Pune. Further, the ld.couns .....

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e submitted that the facts are identical to the facts in the case of Sardarganj Mercantile Co-op.Bank Ltd. vs. ACIT(supra). He further relied on the decision of the Coordinate Bench (ITAT B Bench Chandigarh) rendered in the case of Asst.CIT vs. Punjab State Co-op.Bank Ltd. reported at (2013) 34 taxmann.com 128 (Chandigarh - Trib.), order dated 06/03/2013. The ld.counsel for the assessee also submitted that on the principles of income recognition as per guidelines of the RBI, the interest income .....

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e 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 b .....

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income, taxability of any notional income like accrued interest on NPAs would not arise. > That credit of income disclosed as interest income in subsequent years be allowed against addition made in the current year. > That CBDT Circular bearing F No. 201/21/84-ITA-II dated 9-10-1984 is applicable in its case wherein it has been held that interest on accrual basis will not be taxed if not received for three years even though credited to 'interest suspense account'. 3.3 The issue re .....

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ublic companies, etc. 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts; (b) in the case of a public compan .....

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may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. Explanation.-For the purposes of this section,- (a) "National Housing Bank" means the National Housing Bank established under section 3 of the National Housing Bank Act, 1987 (53 of 1987); (b) "public company" means a company,- (i) which is a public company within the meaning of section 394 of the Companies Act, 1956(1 of 1956); (ii) whose main object is carry .....

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he 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 .....

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of the Banking Companies (Acquisition and Transfer of Undertakinns) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) 77[***];] 3.4 A perusal of the above statute indicates that section 43D rws Expln. (ii) of clause (viia) of section 36 prescribes exemption from disclosure of interest income on accrual basis only to those entities which are covered by the said section. The AO has clearly brought evidence on r .....

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section 36 would not be applicable in its case. It is a settled principle of law laid down by honourable Apex Court and reiterated by several high Courts that if the provisions of law are un ambiguous and clear then no interpretation is to be applied. Hon'ble Apex Court in the case of Smt Tarulata Shyamv vs GIT (1977) 108 ITR 345 observed that 'to us there appears no justification to depart from the normal rule of construction according to which the intention of legislature is primarily .....

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2) 255 ITR 147 and also in the case of Prakashnath Khanna vs CIT (2004) 266 ITR 1 (SC) Hon'ble Apex Court observed that 'once it is shown that the case of the assessee comes within the latter 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 stat .....

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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'ble Tribunal in the said case. It is pertinent to point out at this stage the observations of the Hon .....

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hence the provisions of section 43-D are to be applied." A perusal of the above clearly shows that Hon'ble Tribunal has not laid down any ratio regarding application of provision of sec 43D in respect of unscheduled banks. What the Hon'ble Tribunal actually observed in the cited case was that in the absence of any contrary material, being made available for kind consideration of Hon'ble Tribunal, in that case it was a presumption that the appellant in that case i.e. Karnavati Co .....

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hallenged by the appellant before the Hon'ble Tribunal. In its order bearing ITA No 529 & 530/Ahd/2013 dated 21-6-2013 hon;ble Tribunal has in para-5 of their impugned order have observed that what is fundamental to this controversy is the status of the appellant as to whether it is a scheduled bank or not. Thus the Hon'ble Tribunal has remitted the issue back to the file of the A O with following remarks :- ".....With these brief backgrounds, we have heard both the sides. Altho .....

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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 ac .....

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hat RBI guidelines have nothing to do with the taxability of an income otherwise permissible under the I T Act. Thus, the Hon'ble Court has held as under :- "....31. RBI Directions, 1998 have been issued under section 45JA of RBI Act. Under that section, power is given to RBI to enact a regulatory framework involving prescription of prudential norms for NBFCs which are deposit taking to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions .....

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ions ensure cash liquidity for NBFCs which are now required to state true and correct profits, without projecting inflated profits. Therefore, in our view, RBI . Directions, 1998 deal only with presentation of NPA provisions in the Balance Sheet of an NBFC. It has nothing to do with the computation or taxability of the provisions for NPA under the Income-tax Act. 32. Prior to RBI Directions, 1998, Advances were stated net of provisions for NPAs/bad and doubtful debts. They were shown at net figu .....

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ad "Current Liabilities and Provisions" and not as a deduction from "Sundry Debtors/ Advances". Therefore, RBI has taken a position as a matter of disclosure, with which we agree, that if an NBFC deducts a provision for NPA from "sundry debtors/loans and advances", it would amount to netting from the value of assets which would constitute breach of Para 9 of RBI Directions, 1998. Consequently, NPA provisions should be presented on the "Liabilities side" of .....

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ned 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 .....

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ch losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the Income-tax Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions, 1998 an .....

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t, one has to go by the facts of the case (including the nature of transaction), as stated above. One must keep in mind another aspect. Reduction in NPA takes place in two ways, namely, by recoveries and by write off. However, by making a provision for NPA, there will be no reduction in NPA. Similarly, a write off is also of two types, namely, a regular write off and a prudential write off. [See Advances Accounts by Shukla, Grewal, Gupta, Chapter 26, Page 26.50] If one keeps these concepts in mi .....

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the interest on NPAs not being taxable in view of the real income theory have also been 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 .....

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e 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 profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There .....

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1961. The real profits can be ascertained only by making the permissible deduction. . . ". [Emphasis supplied] (p. 391) 37. The point to be noted is that the Income-tax Act is a tax on "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the Incometax Act. Therefore, if by Explanation to section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the .....

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ere is no scope for "add back" of the Provision against NPA to the taxable income of the assessee. We find no merit in this contention. Under the Income-tax Act, the charge is on Profits and Gains, not on gross receipts (which, however, has Profits embedded in it). Therefore, subject to the requirements of the Income-tax Act, profits to be assessed under the Income-tax Act have got to be Real Profits which have to be computed on ordinary principles of commercial accounting. In other wo .....

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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 dec .....

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T Act....." In view of the above ratio laid down by Hon'ble Apex Court and in respectful compliance to V.ie same it is held that the decisions relied upon by the appellant bank possibly do not come to its rescue. It is worthwhile to mention that the above decision of Hon'ble apex takes precedence over other decisions including its own decision in the case of Godhra electricity as the same is latest and direct on the issue at hand. 3.9 A perusal of the submissions made by the appella .....

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ame has not been raised by way of any grounds of appeal, which have been reproduced supra at para-2.1 above. As far as disclosure of income in a return of income and any modification in respect of such disclosed income in a return of income is concerned, it is seen that the procedure for the same is prescribed u/s. 139 of the Act. There is no provision under the Act, of the type requested by the appellant, to allow deduction of income of a particular year against any other income. Consequently, .....

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arent legislation cannot be override through the delegated legislation vij circulars and notifications. The provisions of section 43D are clear and therefore the same cannot be overridden by a circular. Without prejudice it is seen that the statutory provisions were brought to act much later then the said circular (which was issued in 1984) and therefore the said Circular in any case would not have any effect or binding force upon the A O. it is a trite law that a circular issued prior to introd .....

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ppellant on its part has not been able to effectively demonstrate with any cogent evidence that the addition was unwarranted Consequently, the addition of ₹ 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 .....

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precedent, the Tribunal considered the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd., 330 ITR 440 (Del) as well as the judgement of the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances; and, following the proposition that in the absence of any judgement of the Jurisdictional High Court .....

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ubmissions. In so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Ostensibly, assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a 'scheduled bank' included in second schedule of RBI so as to fall within the scope of section 43D of the Act. Notably, section 43D of th .....

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ded on general principles as to whether 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 t .....

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f 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 following discussion by the Visakhapatnam Bench of the Tribunal in th .....

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th Chay Vyapar Ltd, the assessee therein was a non banking financial company and it was also bound by the "Prudential norms directions" issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The Assessing Officer, however, added the said interest as the income of the assessee by holding that it had "accrued" to the assessee even it was not realized as th .....

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ding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law". The High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon'ble High Court also considered accounting standard "AS-9" on "Revenue recognition" and also extracted following relevant portion from the said accounting standard: 9. Effect of .....

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es, 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 rat .....

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nue 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., 293ITR 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 Valiabhdas & Co 46 (TR 144 (SC) vi) Godhra Electricity Co. Ltd., Vs. CIT 225 ITR 746 vii) CIT vs. Goyal M G G .....

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nsidered the said decision of Hon'ble Apex Court and explained the same as under: "We have already held that even under the Income Tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirety on the judgment of the Supreme Court in the case of Southern Technology (Supra). No doubt, in first blush, reading of the judgment gives an indication that the Court has held that Reserve Bank of India Act does not override the provisions of the income Tax .....

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ssing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(i)(vii) 'of the Act. The Assessing Officer, however, did not bring to tax ₹ 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 analyzin .....

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nd 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) I .....

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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 observations of the Hon'ble Supreme Court are extracted below: "Applicability of Section 145 40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of the RBI A .....

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irections 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the 'permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of Income Recognition and presentation of Financial Statements. The Accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the Accounting Policies followed by a company can be change .....

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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 .....

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not 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 interest income thereupon has not "accrued". The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any in .....

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esentative has submitted that the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras) has differed with the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) on a similar issue, i.e. relating to interest income on NPAs. The learned Departmental Representative further pointed out that the Hon'ble Madras High Court followed the decision of the Hon'ble Supreme Court in the case of Southe .....

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the view that the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) also applied to the Income Recognition Norms provided by RBI and therefore it held the .interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI's guidelines. But the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms .....

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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 circumstanc .....

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