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2015 (9) TMI 795 - ITAT PUNE

2015 (9) TMI 795 - ITAT PUNE - TMI - Addition on account of interest receivables on sticky advances - CIT(A) deleted the addition - whether the assessee being a non scheduled bank could not take the benefit of section 43D of the Income Tax Act, 1961? - Held that:- As decided in Lokmangal Co-op Bank Ltd. case [2014 (12) TMI 345 - ITAT PUNE] Pune Bench of the Tribunal in the case of Osmanabad Janata Sahari Bank Ltd (2015 (3) TMI 886 - ITAT PUNE) has decided an identical issue in favour of the asse .....

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Shri Ravikant Gupta For The Revenue : Shri P.M. Shingte ORDER PER R.K. PANDA, AM : 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 cou .....

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erdue 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lacuna in section 43D by not including cooperative banks in its ambit after deduction u/s.80P to cooperative banks was withdrawn. It was argued that the directions of the RBI, being apex body, were mandatory on the assessee and the same have been consistently followed by the assessee as well as othe .....

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previous years. According to the AO, the assessee contravened the provisions of section 43D and therefore interest on sticky advances was liable to be considered as income for the year under consideration. Accordingly, the AO brought to tax such interest quantified at ₹ 26,59,026/- being income of the year. 4. Before CIT(A) it was argued that as per the decision of Hon ble Supreme Court in the case of UCO Bank Vs. CIT reported in 237 ITR 889 the guidelines issued by CBDT in the Circular No .....

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d the addition. While doing so, he held that the provisions of section 43D are applicable in case of the assessee unless accrued interest was routed through the profit and loss account and therefore the same is to be taxed only to the extent actually recovered. He noted from the balance sheet and profit and loss account for the impugned assessment year that the interest receivable on NPAs has been directly taken to interest receivable account on the asset side of the balance sheet and correspond .....

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ed 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 .....

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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. 7. The Ld. Departmental Representative heavily relied on the order of the AO 8. The Ld. Couns .....

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f the said order. 9. We have considered the rival arguments made by both the sides. We find an identical issue had come up before the Pune Bench of the Tribunal in the case of Lokmangal Co-op Bank Ltd. vide ITA No.1540/PN/2014 order dated 28-11-2014 for A.Y. 2009- 10 and bunch of other appeals wherein the Tribunal has observed as under : 7. At the time of hearing, it was a common point between the parties that an identical controversy has been considered by the Pune Bench of the Tribunal in the .....

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NPA advances. In the absence of any judgement of the Jurisdictional High Court, a view which was favourable to the assessee was followed by the Tribunal and the issue was decided in favour of the assessee 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). 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 su .....

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t 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 decided .....

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ct. 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 question of ta .....

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se 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 Vasisth C .....

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sessee 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 notwithstandin .....

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certainties 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 such cases, .....

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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 as revenue .....

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es (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 considered .....

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ever, 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 Of .....

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ons 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 held that .....

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ion 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. In so f .....

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4. 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. These D .....

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d 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 dispute that it .....

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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 on NPA assets can .....

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firmity 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 Departmental Repr .....

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rn 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 .....

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prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon'ble Delhi High Court and the Hon'ble Madras High Court as noted by the Hon'ble Madras High Court in its order. 12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the .....

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cumstances in the present case are identical to those considered by us in the case of The Omerga Janta Sahakari Bank Ltd. (supra) and, thus following the said precedent the present claim of the assessee deserves to be upheld. Thus, the order of the CIT(A) is hereby affirmed and the Revenue has to fail on this aspect. 9. In the result, appeal of the Revenue vide ITA No.1540/PN/2014 for assessment year 2009-10 is dismissed. 10. We find the Hon ble Bombay High Court, Aurangabad Bench has similarly .....

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ment year as mentioned in the aforesaid table about deletion of the additions on account of interest on sticky advances. In all these cases, the Assessing officer, during the assessment proceeding has observed that the provisions of Section 43 (D) of The Income Tax Act cannot be applied 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 a .....

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ete 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 Income Tax App .....

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annot have mix system of account. The learned counsel also submits that, the RBI directions under the RBI Act are prudential norms, but have nothing to do with the computation or taxability of the provision of the NPA under the IT Act. Learned counsel further submits that though the RBI directions deviate from the accounting practice as provided by the Companies Act, but they do not override the provisions of the IT Act and they are operating in different fields. The learned counsel for appellan .....

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red to be confirmed. Learned counsel for the appellants submits that, the Tribunal ought to have allowed the appeal by relying on the judgment in the matter of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, Coimbtore Reported in 2010 (2) SCC 548. 7. The learned counsel for respondent/Co-operative banks submit that, the issues involved in the above appeals are no more res-integra in view of the decision rendered by the Hon'ble Supreme Court in the case of Uco Bank, Calcutta .....

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he 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 applicabl .....

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n'ble Supreme Court. 10. The Honourable Apex Court in the case of Uco Bank case (supra) had an occasion to consider the nature of CBDT circular and Hon'ble Apex Court has thus held that Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Boa .....

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of accounting which is followed by the assessee-bank is Mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realized. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice. The assessee's method of accounting, transferring the doubtful debt to an int .....

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issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the CBDT's Circular of 6-10-1952 would be applicable; while from the assessment year 1979-80, the CBDT's Circular of 9-10-1984 is made applicable. In the present case, the assessment was made on the basis of the CBDT's Circular on 9- 10-1984, since the assessment pertains to the assessment year 1981- 82 to which the Circular of 9-10-1984 is applicable. If, the Board has consider .....

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erest 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 circular .....

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ing these amounts to the P&L a/c goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are unifo .....

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on-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. There is no inconsistency or contradiction between the circular so issued and section 145 of the Income Tax Act. In fact, the circular clarifies the way in which these amounts are to be t .....

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r can override or detract from the provisions of the Act; the question is whether the circular seeks 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 .....

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