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The Commissioner of Income Tax, Circle-1, Solapur Versus Janata Sahakari Bank Ltd.

2015 (5) TMI 610 - ITAT PUNE

Interest on Non Performing Assets u/s.43D - CIT(A) deleted the addition - whether assessee being a non scheduled bank could not take the benefit of section 43D? - Held that:- In view of the ratio laid down in ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (2015 (3) TMI 886 - ITAT PUNE) and in ACIT vs. The Omerga Janta Sahakari Bank Ltd. (2014 (12) TMI 355 - ITAT PUNE ) we uphold the order of CIT(A) in holding that the interest on NPAs is not taxable in the hands of the assessee for the captioned asse .....

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e circumstances of the case and in law, the Hon'ble CIT(A) has erred in deleting the addition of ₹ 25,83,045/- made by the A.O, on account of interest on Non Performing Assets u/s.43D of the Income Tax Act, 1961. 2. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in holding that the provisions of section 43D are applicable to Financial Institutions and a Scheduled Bank. Thus, the assessee being a non scheduled bank could not take the benef .....

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hakari Bank Ltd. in ITA No. 795/PN/2011 vide order dated 31/08/2012. However, the above decision has not been accepted by the Department and an appeal u/s. 260A has been filed by the CIT, Aurangabad with the Hon'ble High Court of Bombay Bench at Aurangabad, vide lodging No. 1613/2013 dated 15/01/2013. 5. The order of the CIT(A) be vacated and that of AO be restored. 6. The appellant craves to add, alter, amend, substitute or delete any of the grounds urged herein above as and when found nece .....

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t were applicable to non-scheduled banks since the said provisions were applicable to Financial Institutions and Scheduled Banks. 5. Briefly, the facts of the case are that the assessee was engaged in the banking business governed under Banking Regulations, 1949 and had declared income from the said business and also income from investments. The Assessing Officer noted from the details of the interest received on advances credited to the Profit & Loss Account and the statement of NPA prepare .....

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e norms prescribed by RBI that the said income should be recognized only as and when the same is received, which system of accounting was regularly followed by the assessee. The Assessing Officer rejecting the contention of the assessee observed that since the assessee was following mercantile system of accounting, the accrued interest on such NPAs / sticky loans should be offered to tax. Reliance was placed on the CBDT's Circular No.201/81/84/ITA-II, dated 09.10.1984 for the proposition tha .....

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y the Assessing Officer and the Assessing Officer held the assessee to have contravened the provisions of section 43D of the Act and the interest on such sticky loans was held to be income of the assessee for the year under consideration. 6. The CIT(A), in turn relying on the ratio laid down by the Pune Bench of the Tribunal in ACIT Vs. Osmanabad Janta Sah. Bank Ltd., in ITA No.795/PN/2011, relating to assessment year 2007-08, order dated 31.08.2012, held that the income from NPAs should not be .....

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not included in the interest shown as received in the Profit & Loss Account, the Assessing Officer was directed to delete the addition made on account of interest receivable on NPAs amounting to ₹ 25,83,045/-. 7. The Revenue is in appeal against the order of CIT(A). 8. We find that the issue is squarely covered in favour of the assessee by the ratio laid down by the Pune Bench of the Tribunal in ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (supra) and in ACIT vs. The Omerga Janta Sahakari .....

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of any judgement of the Jurisdictional High Court, there being contrary judgements of the non-jurisdictional High Courts, a decision which was favourable to the assessee was to be followed in view of the reasoning laid down by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) and, thus the Tribunal decided the issue in favour of the assessee. The relevant discussion in the order of the Tribunal dated 31.10.2013 (supra) is reproduced as under:-. .....

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section 43D of the Act. Notably, section 43D of the Act prescribes that interest income on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of s .....

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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 receip .....

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n by the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) is worthy of notice:- "8. We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd (Supra); wherein the Hon'ble Delhi High Court took into account the decision rendered by the Hon'ble Supreme Court in the case of Southern .....

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ot; to the assessee even it was not realized as the assessee was following mercantile system of accounting. The learned CIT (A) affirmed the order of the Assessing Officer. However, the ITAT deleted the aforesaid income. Hence the revenue preferred appeal before the Hon'ble Delhi High Court. 8.1 After hearing the rival submissions, the Hon'ble Delhi High Court took note of sec.45Q of Reserve Bank of India Act which reads as under: "Chapter IIIB to override other laws. 45Q. The provi .....

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ion from the said accounting standard: 9. Effect of uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue 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 .....

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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 th .....

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. Ltd., Vs.CIT 225 ITR 746 vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del) viii) CIT vs. Eicher Ltd., ITA No.431/2009 dated 15.7.2009 (Del) 8.3 After considering the Accounting Standard 9 and the various case law listed above, the Hon'ble Delhi High Court held that the interest on NPA advance cannot be t reated as "accrued" to the assessee. 8.4 Before the Delhi High Court, the revenue took support of the decision of the Hon'ble Supreme Court in the case of Southern Tec .....

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not override the provisions of the Income Tax Act. However, when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the Apex Court contained in that very judgment, we find that the proposition advanced by Mr.Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited ₹ 81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in ter .....

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lity 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 r .....

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cted 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 Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-à-vis income re .....

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ms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis-à-vis "Income Recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions .....

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Accounting Policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute". 10. Turning to the facts of the case before us, the assessee herein .....

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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 V .....

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e to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order." 10. Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in r .....

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ecision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis. We have carefully considered the submissions put-forth by the learned Departmental Representative based on the judgement of the Hon'ble Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon'ble Madras High Court related to non-recognition of interest income on NPAs by the assessee followi .....

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