TMI Blog2015 (9) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... This appeal filed by the Revenue is directed against the order dated 01-01-2014 of the CIT(A)-III, Pune relating to Assessment Year 2009-10. 2. Facts of the case, in brief, are that the assessee is a Cooperative Society carrying on the business of Banking and is covered under the Banking Regulation Act, 1949. It filed its return of income on 29-09-2009 declaring total income of ₹ 45,82,770/-. During the course of assessment proceedings, the AO noted that interest receivable on loans categorized as NPA was not accounted for as income of the year but the same was directly taken to the balance sheet and represented by contra entries. On being confronted by the AO as to why such interest receivable should not be considered as income of the assessee for the year under consideration, it was argued by the assessee that as per the directions of the RBI, on the concept of income recognition, interest on overdue loan account was credited to the profit and loss account only on actual realisation though the assessee has been following mercantile system of accounting. It was argued that there was drafting lacuna in section 43D by not including cooperative banks in its ambit after d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss account. He accordingly directed the AO to delete the addition made by him on account of interest receivable on NPAs on accrual basis. 6. Aggrieved with such order of the CIT(A) the Revenue is appeal before us with the following grounds : 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 ₹ 26,59,026/- made by the A.O. on account of interest receivables on sticky advances. 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 circumstances of the case and in law, the Hon'ble CIT(A) erred in appreciating 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g laid down by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC). The relevant discussion in the order of 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 ofsection 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 Cooperative 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 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 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 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 Revenue recognition and also extracted following relevant portion from the said accounting standard: 9. Effect of uncertainties on Revenue Recognition 9.1 Recognition of revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthern 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 indication that the Court has held that Reserve Bank of India Act does 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 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 los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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- -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. 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 cannot determine the taxable income. It is well settled that the 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 concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 Vyapar Ltd. (supra) has taken a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee as it is not a scheduled Bank but a Co-operative Bank. In the opinion of the Assessing officer, considering the provisions of section 43-D of the Income Tax Act, non scheduled Co-operative banks are specifically excluded from the special provisions of the 43-D of the Income Tax Act, regarding interest on sticky advances. The Assessing officer has also held that CBDT circular No. F-201/81/84 ITA-II dated 09.10.1984 is applicable only to banking companies and not to non-scheduled banks and co operative banks. 4. Being aggrieved by the same, the assessee/above co-operative Banks preferred appeals separately before the CIT(A). The CIT(A) vide his orders in all the appeals has directed to delete the additions on the interest of sticky advances, on the NPA made by the Assessing officer. 5. Being aggrieved by the order of CIT(A), the Revenue preferred separate appeals in each case before the Income Tax Appellate Tribunal, Pune Bench A , Pune. The learned I. T. A. T. has confirmed the decision of the CIT(A) and dismissed the appeals of the Revenue. Thus, Revenue has filed the aforesaid appeals challenging the legality and correctness of the order passed by the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax Appellate Tribunal has referred the case of M/s. Vasisth Chay Vyapar Limited 330 ITR 440 (Delhi). In this case, the revenue relied upon the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. supra. The learned Income Tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of M/s Southern Technologies Limited supra. The assessee herein being a Cooperative Bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the Co-operative banks. The Hon'ble Supreme Court in the case of Southern Technologies Limited supra held that, provisions of Section 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. 10. The Honourable Apex Court in the case of Uco Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Assessing Officer's should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as traveling beyond the powers of the Board under section 119 of the Income Tax Act. Such a circular is binding under section 119. The Circular of 9-10-1984, therefore, provides a test for recognizing whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a sticky loan, the notional interest which is transferred to a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income Tax Act. 11. The learned counsel for respondent has placed reliance in a case of Mercantile Bank Ltd., Bombay Vs. The Commissioner of Income Tax, Bombay City-Ill reported in (2006) 5 SCC 221, where similar question was raised before the Apex Court, The question was whether the assessee is liable to be taxed under Income Tax Act, 1961 in respect of the interest on doubtful advances credited to the interest suspense account. In this case, the Uco Bank's Case (supra) was also referred and the Hon'ble Apex Court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent Co-operative banks, as understood by Section 43 C of the Income Tax Act on the Scheduled Bank. 12. Learned counsel for the appellants/revenue placed reliance on the judgment in the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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