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The Commissioner of Income Tax, Circle-1, Solapur Versus Arjun Co-Operative Bank Ltd

2015 (5) TMI 924 - ITAT PUNE

Interest on Non Performing Assets u/s.43D - CIT(A) deleted the addition - 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 assessment year - Decided against revenue. - ITA No.381/PN/2014 - Dated:- 29-4-2015 - Sushma Ch .....

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eting the addition of ₹ 36,81,987/- 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 benefit of section 43D of the Income Tax Act, 1961. 3. On the facts and in the circu .....

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he 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 necessary. 3. When the appeal was called for hearing, a letter issued by the Liquid .....

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7; 36,81,987/- by the Assessing Officer under section 43D of the Act. 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 total income of ₹ 30,110/-. The Assessing Officer noted that the assessee had credited the interest on accrual basis directly to the Profit & Loss Account and contention of the assessee that the bank was consistently following the accepted method of not-recognizing inte .....

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o the provision for NPAs claimed under section 36(1)(vii) of the Act. The Assessing Officer following the ratio laid down by the Hon'ble Supreme Court in Southern Technologies Ltd. Vs. JCIT reported in 320 ITR 577 (SC), held that the claim of the assessee for deduction of overdue interest of ₹ 36,81,987/- was disallowed and added to the income of assessee. 6. Before the CIT(A), the assessee pointed out that the said amount of ₹ 36,81,987/- was not debited to the Profit & Loss .....

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ed on series of decisions. The written submissions of the assessee are reproduced under para 3.1 at pages 3 to 11 of the appellate order. The CIT(A) after deliberating upon the issue, allowed the claim of assessee, in view of 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. 7. The Revenue is in appeal against the order of CIT(A). 8. The learned Authorized Represen .....

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Sah. Bank Ltd. (supra) and in ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No.350/PN/2013 dated 31.10.2013. 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 .....

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the Tribunal dated 31.10.2013 (supra) is reproduced as under :- "8. We have carefully considered the rival submissions. 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' inclu .....

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the present controversy cannot be adjudicated 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 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 .....

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respect of NPAs and tha t 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 of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since .....

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rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). In the case of M/s Vasisth 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 .....

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s under: "Chapter IIIB to override other laws. 45Q. The provisions of this Chapter shall have effect notwithstanding 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 "Re .....

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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 sal .....

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postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue 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., 293 ITR 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. Sho .....

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sion of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). The Delhi High Court considered 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 entirely 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 indica .....

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he profit and loss account, which was claimed as deduction in terms of Section 36(1) (vii) of the Act. The Assessing 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 account .....

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ons 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 .....

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he directions of Reserve Bank of India visà- vis income recognition principles in the Companies Act 1956. 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 th .....

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irections constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 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 .....

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. 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 B .....

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e. 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: "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 .....

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n deleting the impugned addition relating to interest income in respect of NPAs. 11. So, however, the learned Departmental Representative 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 .....

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on-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Hon'ble Madras High Court took 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 V .....

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