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2015 (7) TMI 38 - ITAT PUNE

2015 (7) TMI 38 - ITAT PUNE - TMI - Addition of interest receivable on NPAs/sticky loans / advances - CIT(A) deleted the addition - Held that:- The issue in the present appeal against the recognition of interest receivable on sticky loans/advances is identical to the issue in assessee's own case relating to assessment year 2010-11 [2015 (7) TMI 37 - ITAT PUNE] wherein find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest in .....

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of 45Q of Reserve Bank of India Act has an overriding effect vis--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.Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total in .....

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nd R. K. Panda, AM,JJ. For the Appellant : Smt Anuradha V Ravi For the Respondent : Shri Sunil Ganoo ORDER Per: Sushma Chowla: This appeal filed by the Revenue is against the order of CIT(A)-III, Pune dated 09.12.2013 relating to assessment year 2009-10 passed under section 143(3) of the Income-tax Act. 2. The Revenue has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in deleting the addition of ₹ 7 .....

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iating the provisions of section 145 of the I.T. Act, 1961, in its correct perspective. 4. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred while delivering the judgment has allowed the appeal of the assessee bank by placing reliance on its own decision in the ACIT, Circle -3f Nanded Vs. Osmanabad Janata Sahakari 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 .....

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y ratio laid down by Pune Bench of the Tribunal in assessee's own case relating to assessment year 2010-11. 4. 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 prepared under ICAI norms .....

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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 to the CBDT's Circular No.201/81/84/ITA-II, dated 09.10.1984 for the proposition that only when the .....

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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. 5. 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 assessed on merc .....

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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 ₹ 75,25,140/-. 6. The Revenue is in appeal against the order of CIT(A). 7. The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer. On the other hand, the learned Authorized Representative for the assessee placed reliance on the order of CIT(A). 8. We have hea .....

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nds squarely covered in favour of the assessee by the following decisions : "1. ACIT, Circle-3, Nanded Vs. Osmanabad Janta Sahakari Bank Ltd., in ITA No.795/PN/2011, dated 31-08-2012 2. ACIT, Circle-3, Nanded Vs. Omerga Janta Sahakari Bank Ltd., in ITA No.350/PN/2013 & CO No.61/PN/2013, dated 31-10-2013". 4.1 In the case of Osmanabad Janta Sahakari Bank Ltd. (Supra) the Tribunal held as under : "5. We heard the rival submissions of the parties and perused the record. We find t .....

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on of the Hon'ble High Court of Delhi in the case of Vashist Chay Vyapar Ltd. [330 ITR 440 (Del.)], in which the Hon'ble Delhi High Court has considered the decision in the case of Southern Technologies Ltd. [320 ITR 577 (SC)]. The Tribunal finally he ld that the interest income relatable to NPA advances did not accrue to the assessee. 6. An identical view has been taken by the ITAT, Ahmedabad Bench in the case of Karnavati Cooperative Bank Ltd. Vs. Dy.CIT [134 ITD 486 (Ahmedabad)]. In t .....

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D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of i .....

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ever is earlier is to be taken into account for the purpose of chargeability of income by way of interest. Simultaneously, it is noteworthy that this section is an overriding section because the opening word is "notwithstanding anything to the contrary contained in any other provisions of this Act". Therefore, in spite of anything contained in the Act, the provisions of this section shall override those provisions. Once the Statute has categorically made a law in respect of public fina .....

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is a cooperative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an explanation (d) r.w.s. 36(1)(viia) annexed to section 43-D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, we hereby hold that the assessee is covered by one of the entities, hence the provisions of section 43-D are to be applied. (iii) Applicability of CBDT Circular. Next issue is that whether a Circular having effect of rel .....

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he I.T.Act has power to issue Circulars in exercise of its statutory powers. If the Board consider it necessary to lay down certain Rules and then direct the sub-ordinate authorities, such directions are required to be followed and such Circular would be binding on the Department unless and until held as ultra vires by a court of law. The Board has powers to relax the severity or the strictness of law and the authorities are required to follow those instructions as held in the case of C.B. Gauta .....

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when actually received as prescribed by CBDT Circular. However, in the past an interesting turn had taken place by an order of the Hon'ble Kerala High Court in the case of State Bank of Travancore reported in 110 ITR 336 (Ker.), wherein it was held that the assessee, a banking company, did not credit in its account the interest that had accrued on "sticky advances" because the assessee felt that the interest could not to be realised. It credited the interest to a separate account .....

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ich Hon'ble two Judges were in the opinion that the interest on "sticky advances" was rightly treated as income which had accrued to the appellant. There was a descending note by one of the Hon'ble Judge and commented that whether an income on receipt basis or on accrual basis, it is the real income and not any hypothetical income which may have theoretically accrued, i.e. subject to tax under the Act. Nevertheless, that decision was not followed while deciding the appeal of UC .....

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e I.T.Act and expressed an opinion that if the statute has used the terminology for the chargeability of interest on the basis when "credited" or "actually received", then in our opinion no ambiguity has been left by the Statute. If the statute is so clear that an interpretation can easily be made, then that exact meaning should be given to the language of the Section. For this legal proposition we place reliance on Keshavji Ravji and Company vs. CIT 183 ITR 01 (SC), wherein .....

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est the intention of the Legislature. When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in subsequent legislation in the same or similar context. To say that the court could not resort to the so-called "equitable construction" of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the .....

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f interest on "sticky loans" was decided in favour of the assessee and held that the question is to be answered in favour of the assessee following the decision of UCO Bank reported at 237 ITR 889(SC) :: 240 ITR 355 (SC). Likewise, in an another case of CIT vs. State Bank of India 262 ITR 662 (Bom.) again it was held that the amount credited to the interest suspense account was not taxable following the decision pronounced in the case of UCO Bank (supra). (V) Judgement in favour of Rev .....

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It said that for first three years the income may be taken on accrual basis and from 4th year onwards, the income in respect of doubtful debts was to be recognized on receipt basis. Since the income was to be assessed for first three years on accrual basis, provisions of section 43D were inserted in the Act. Circular No.621, dated 19-12-1991 gives the legislative intention stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc., .....

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provisions of section 43D as stood at relevant time contained an expression '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 RBI in relation to such debts'. This expression continues to exist in the newly substituted section 43D applicable with effect from 1-4-2000. This shows that the RBI Guidelines in respect of scheduled banks, public financial institutions etc., were not sufficie .....

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s accepted, it would amount to insertion of 'NBFC' in section 43D, that too by a Guideline issued for different purposes by an authority other than the Parliament In other words, the doctrine of 'Casus Omissus' will deem to have been applied which is contrary to law of land."Unquote. The basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of th .....

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e mentioned while discussing the arguments raised from the side of the Revenue. A decision in the case of Southern Technologies Ltd. vs. Jt. CIT 320 ITR 577 (SC) has been cited but the fundamental difference is that the issue before the Hon'ble Court was in respect of provision for NPA and debited to P&L Account by a NBFC. The said provision was undisputedly made by the said NBFC as per the prudential norms made by the Reserve Bank. Therefore we want to make it clear that the question fo .....

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)(vii) a provision for doubtful debt is kept out of the ambit of bad debt which is written off, then one has to take into account the Explanation in computing the total income under the Income-tax Act failing which one cannot ascertain the real profits. The provision for non-performing assets debited in the profit and loss account under the Reserve Bank Directions of 1998 is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under th .....

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ase of CIT vs. Godhra Electricity Co. 225 ITR 746 (SC). In short, the view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted. Now at present the situation is that the Hon'ble Madras High Court in the case of CIT vs. Elgi Finance Ltd. 293 ITR 357 (Mad.) has taken a view that the assessee is a co .....

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income. The Court had further expressed that there was no occasion to consider whether the principle of accrual would arise or not, nevertheless, the interest from such NPA would be taxed in the appropriate assessment year on the basis of actual receipt. It is worth to mention that for this decision, the Hon'ble Madras High Court has relied upon an another decision of the same High Court pronounced in the case of Jt.CIT vs. India Equipment Leasing Ltd. 293 ITR 350." 7. In the case befo .....

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accordingly the same is confirmed. In the result, the Revenue's ground is dismissed. 4.2 In the case of Omerga Janta Sahakari Bank Ltd., (Supra), identical issue has again considered by the Tribunal and held as under: "We find that the identical issue has been considered by the ITAT, A Bench, Pune in the case of The Omerga Janta Sahakari Bank Ltd., Osmanabad (supra). The operative part of the reasoning and finding in the said decision is as under: 8. We have carefully considered the riv .....

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f 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 section 43D of the Act, and it is liable to be .....

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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 questi .....

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n 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 Technologies Ltd (Supra). In the case of M/s .....

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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 provisions of this Chapter shall have effect notwi .....

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ect 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 to the extent of uncertainty involved. In su .....

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ty 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 the effect of uncertainties, it is considered a .....

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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 treated 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 Technologies Ltd (Supra). The Delhi High Court co .....

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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 terms of Section 36(1) (vii) of the Act. The Asse .....

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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 he .....

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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 recognition principles in the Companies Act 1956 .....

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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 1998 and the IT Act operate in different areas .....

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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 is a cooperative bank and it is not in disput .....

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. 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 o .....

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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 respect of NPAs. 11. So, however, the learned D .....

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e 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 following the RBI guidelines. The Hon'ble Madras .....

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