TMI Blog2012 (9) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... r on the facts and circumstances of the case the CIT(A) is correct in deciding that assessee can offer his interest received from bad and doubtful debts (NPA) on actual basis as per RBI guidelines even though assessee is following mercantile systems of accounting. In spite of that, provision of section 43D is not applicable to the assessee. 3. The facts reveal from the record are as under. The assessee is a Co-operative Bank carrying on the business of banking. The provisions of the Banking Regulation Act, 1949 are applicable to the assessee Bank. So far as the issue before us is concerned, it was noticed by the A.O that the assessee has not recognized the income in respect of bad and doubtful assets. In the opinion of the A.O, a Co-operative and a Nonscheduled Bank has to recognize the interest as the income on assets classified as Bad and Doubtful under the RBI guidelines, on accrual basis. The A.O has observed that the assessee has been consistently following the method of accounting by recognizing interest income at the time of credit on actual receipt. The A.O referred to Sec. 43D and observed that the said provision does not allow the option to Non Scheduled Bank or a Co- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 held 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 the case of Karnavati Cooperative Bank Ltd. (supra), the Tribunal has considered the provisions of section 43D and its application to the non-scheduled banks. The reasons given by the Tribunal in the case of Karnavati Cooperative Bank Ltd. (supra) for holding that interest on the sticky advances/NPA advances cannot be brought to tax by following the decision in the case of UCO Bank (supra), which is as under: 15.1. On careful analysis of this section our first observation is that Section 43D 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y lenders and banks, the Central Board of Direct Taxes has issued a Circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee s taxable income, provided the Income tax Officer is satisfied that recovery is practically improbable. The CBDT u/s.119 of the 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. Gautam vs. Union of India 108 CTR 304 (SC) 110 CTR 179 (SC); Navnitlal C.Zaveri 56 ITR 198(SC) and K.P.Varghese 131 ITR 597 (SC). In the land-mark decision, the Hon'ble Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC) has therefore held, first, that a beneficial circular is not to be treated as inconsistent with the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 it was held as under: As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to whittle down the statutory language which is other-wise unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest 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 legislation, another construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheduled banks, public financial institutions, etc. The 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 sufficient for recognition of income on cash basis for the purposes of income-tax. The income of such assessees was determined as per circular dated 9-10-1984. Because of this reason, section 43Dwas inserted in the statute. RBI Guidelines in case of NBFC are for the purpose of control and supervision with respect to public interest and viability of the NBFC. The Guidelines never intended for taking the interest income accrued as per section 5 out of the scope of the Act. If the contention of assessee was accepted, it would amount to insertion of 'NBFC' in section 43D, that too by a Guideline issued for different purposes by an authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal before us the question is accrual of interest income on sticky loan but in this cited decision the question before he Apex court was about the admissibility of provision made in respect of doubtful debts. ( vi ) Concept of real income approved in the case of banking business: Before us, the theory of real income has also been argued and in support a decision of Hon'ble Court pronounced in the case 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 company engaged in the business of lease, finance and hire purchase and that the principle of accrual comes into play without income was recognized and that the assessee had classified its assets on the basis of notification issued by R.B.I. and found that certain assets came under th ..... 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