TMI Blog2016 (8) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... ritisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which provides for enforcement of security interest of banks and financial institutions and has observed that in the instant case, no material has been brought on record by the assessee to prove its efforts made in a bid to recover such debts which are classified as NPA and other categories. The Assessing Officer has also entered into a discussion as regards the quality of management, etc., without even examining as to whether or not there was any probability of interest being received on the NPAs. Commissioner (Appeals) has placed reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (2010 (1) TMI 5 - SUPREME COURT OF INDIA ) and held that there is no merit in the contention of the assessee that under commercial accounting, interest on NPAs cannot be charged. On the question of applicability of the CBDT Circular dated 9.10.1984, the Commissioner (Appeals) held that the same would not be applicable for the reason that the provisions of section 43D of the Act are clear and cannot be overridden through delegated legislation viz. circulars and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show interest income on non-performing assets (NPA) as according to the assessee such interest was not realisable. 5.1 The Assessing Officer was of the opinion that interest on the NPA had accrued to the assessee, even if it was not actually realised, as it was following the mercantile system of accounting and accordingly added a sum of ₹ 1,72,73,000/- to the total income of the assessee. The assessee carried the matter in appeal before the Commissioner (Appeals), who upheld the order passed by the Assessing Officer. The assessee challenged the order of the Commissioner (Appeals) before the Tribunal, which allowed the appeal by deleting the interest. Being aggrieved, the revenue is in appeal. 6. Mr. M.R. Bhatt, Senior Advocate, learned counsel for the appellant, submitted that under section 5 read with section 28 of the Income Tax Act, the liability attaches to profits which have been either received by the assessee or have accrued to him during the year of account and that income accrues when it falls dues, that is, becomes legally recoverable irrespective of whether actually received or not and accrued income is that income which the assessee has a right to receive. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. It was submitted that there will be accrual of income if the right to receive money exists. In this regard reference was made to the decision of the Supreme Court in the case of Raja Mohan Raja Bahadur v. Commissioner of Income-Tax, U.P., (1967) 66 ITR 378, wherein the court observed that the Income Tax Act does not contain much guidance as to cases in which tax is to be levied on income received, and cases in which tax is to be levied on income accrued or arisen. If accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not realised income embedded in the receipt is deemed to arise or accrue. Where the accounts are maintained on cash basis, receipt of money or money s worth and not the accrual of the right to receive is the determining factor. 6.2 Reliance was also placed upon the decision of the Supreme Court in the case of Indermani Jatia v. Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, therefore, the consistent view adopted by the Supreme Court is that when the assessee follows the mercantile system of accounting, the liability arises the moment the right to receive accrues. It was submitted that in the facts of the present case, as the NPAs have not been written off, the right to receive interest thereon accrues to the assessee in the assessment year under consideration, and hence, the Assessing Officer was wholly justified in holding that the assessee is liable to pay tax on the interest on NPA. 6.3 Reference was made to the decision of the Supreme Court in the case of State Bank of Travancore, Trivandrum v. Commissioner of Income-Tax, Kerala, (1986) 158 ITR 102, wherein the court was of the view that the concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deductions under section 36(2) of the Act but still enters the same with a diminished hope of recovery in the suspense account. The court held that the concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 43D of the Act, which clearly demarcates the classes of assessees entitled to the benefit of sticky loans, the circular stands impliedly overruled and that assuming that the 1984 circular applies, foundation would have to be laid for applicability thereof, whereas in the facts of the present case, no such foundation has been laid. It was submitted that in view of the decision of the Supreme Court in State Bank of Travancore v. Commissioner of Income-Tax (supra), the real income concept does not come into the picture and the actual receipt cannot be taken into consideration. 6.5 Strong reliance was placed upon the decision of the Supreme Court in Southern Technologies Limited v. Joint Commissioner of Income-Tax, Coimbatore, (2010) 320 ITR 577, wherein the court has held that the RBI Directions, 1998 have nothing to do with the accounting treatment or taxability of income under the Income Tax Act, 1961 and the two, viz., the Income Tax Act, 1961 and the RBI Directions, 1998 operate in different fields. It was submitted that as per the said decision, so far as the liability to income tax is concerned, it is governed by the provisions of the Income Tax Act and the RBI Directions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines for the purpose of contending that the assessee is estopped from treating the investment as stock-in-trade. The court, placing reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (supra) held that a method of accounting adopted by the tax-payer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. The court held that for the purpose of the Income Tax Act, if the assessee had consistently been treating the value of investment for more than two decades as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the depreciation on the ground that in the balance-sheet, it is shown as investment in terms of the RBI Guidelines. The court held that the RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to a particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of accounts. It is not decisive or conclusive in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the resolution of the company. In view of the resolution, such amount had become payable to the assessee by the company at the end of the accounting year. What was deferred on account of the pending litigation was not the accrual of right but the date of payment. The court held that since the resolution created a right in favour of the assessee to receive the extra remuneration at the agreed rate, the assessee acquired the right to receive that income by virtue of the resolution and not by virtue of the judgment which held the resolution to be valid. The court, accordingly, did not find any force in the contention that until the suit is finally decided by the court, no right is said to have accrued to the assessee. Reference was made to the decision of the Supreme Court in the case of KCP Limited v. Commissioner, Bangalore, (2000) 245 ITR 421, wherein, during the assessment year 1972-73, the appellant company collected an amount of ₹ 14,96,130/- in excess of the levy price of sugar fixed by the Government for that year. The court held that the excess amount of ₹ 14,96,130/- was realised by the appellant company in the ordinary manner of its business activities and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those provisions which must be applied or followed. There is no room nor would it be permissible for the court to import the concept of real income so as whittle down, qualify or defeat the provisions of the Act and the rules. 6.12 Next it was submitted that the assessee being a cooperative bank does not fall under any of the categories specified under section 43D of the Act which provides for payment of tax on interest on bad debts or doubtful debts only in the year of receipt and, therefore, is not entitled to the benefit of section 43D of the Act, and hence, is liable to pay tax on the interest income accrued to it under the mercantile system of accounting, whether or not it has been actually received. It was contended that when the legislature has made a specific provision for specific entities, the same would cover only those entities; therefore, section 43D of the Act would not be attracted in the present case. It was submitted that when a specific provision in the nature of section 43D of the Act has been made, and entities like the assessee are excluded from the purview thereof, the assessee cannot indirectly claim benefit which would amount to a benefit similar to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g consistently followed by the assessee was in conformity with the accounting standards which, inter alia, provide that interest on NPA is not to be treated as income unless the same is actually received. It was submitted that in view of the provisions of section 145(1) of the Act and sections 209 and 211 of the Companies Act, the assessee was obliged to conform to the mandatory accounting methods and that the system of accounting followed by the assessee was in conformity with the accounting standards. It was submitted that the Supreme Court in Southern Technologies Limited (supra) has clearly recognised the theory of real income and held that notwithstanding that the assessee may be following the mercantile system of accounting, it can be taxed on real income and not accrued interest, which is hypothetical income. Strong reliance was placed upon the decision of the Delhi High Court in the case of Commissioner of Income Tax v. Vasisth Chay Vyapar Ltd., (2011) 330 ITR 440, wherein the court has held that where interest was not received on NPA, it could not be treated to have accrued in favour of the assessee or the real income in the hands of the assessee. It was pointed out that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut, if in his account, it is clearly stated that though a particular income is due to him but it is not possible to recover the same, then it cannot be said to have accrued and the said amount cannot be brought to tax. The court found the contention of the revenue that in case of non-performing assets, even if they do not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally, to be without any basis. Reliance was placed upon the decision of the Madras High Court in Commissioner of Income-Tax v. Coimbatore Lakshmi Inv. and Finance Co. Ltd., (2011) 331 ITR 229 (Mad), for the proposition that if no income is recognised at all from an asset, there is no question of applying the principle of accrual. The principle of accrual of income comes into play only when the income is recognised. In the facts of the said case, the assessee had classified its assets on the basis of the notification issued by the Reserve Bank of India. From the non-performing assets, the assessee had not recognised any income and was justified in not recognising the income as such. The court held that once that was the case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of Section 119 to ensure a uniform and proper administration and application of the Income Tax Act. 7.4 Reference was made to the decision of the Supreme Court in United Commercial Bank v. Commissioner of Income-Tax (supra), to point out that the court has held that the majority decision in the State Bank of Travancore v. Commissioner of Income-Tax (supra) cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. The court observed thus:- 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 suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Commissioner of Income Tax, Aurangabad v. M/s. Deogiri Nagari Sahakari Bank Ltd., Aurangabad rendered on 22nd January, 2015 in ITA No.53/2014 and allied matters was cited wherein the controversy before the court was relating to deletion of additions on account of interest on sticky loans. The court held that the judgment of the Supreme Court in Southern Technologies Limited (supra) pertains to non-banking financial companies whereas UCO Bank and Mercantile Bank (supra) squarely applies to the facts of that case and issues involved. Reliance was placed upon the decision of the Supreme Court in the case of Keshavlal Khemchand and Sons Private Limited and Others v. Union of India and Others, (2015) 4 SCC 770, wherein the court held thus:- 40. Regulation of the monetary system and banking business is one of the fundamental responsibilities of any modern State and essential for the economic and political stability of the State. The vast increase of commerce both national and the international made easy by the tremendous developments of technology, renders such regulation a very complicated matter with complex variables. The span of each variable could vary from minutes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the appellant submitted that insofar as the decision of the Supreme Court in the case of Commissioner of Income-Tax v. Excel Industries Limited (supra) is concerned, the same in fact goes against the assessee inasmuch as, the Supreme Court has held that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. It was submitted that in the facts of the present case, there is a liability on the part of the other party to pay the interest on the NPA. Under the circumstances, the interest thereon has accrued to the assessee and the assessee is liable to pay tax thereon. 9. This court has considered the submissions advanced by the learned counsel for the respective parties and has perused the orders passed by the authorities below as well as the decisions on which reliance has been placed by the learned counsel for the respective parties. 10. The facts as emerging from the record are that assessee filed return of income for assessment year 2010-11 on 30. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, an addition of ₹ 1,72,73,000/- came to be made to the total income of the assessee being the undisclosed income in form of accrued interest on non-performing assets. 10.2 The Commissioner (Appeals) placed reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (supra) and held that there is no merit in the contention of the assessee that under commercial accounting, interest on NPAs cannot be charged. On the question of applicability of the CBDT Circular dated 9.10.1984, the Commissioner (Appeals) held that the same would not be applicable for the reason that the provisions of section 43D of the Act are clear and cannot be overridden through delegated legislation viz. circulars and notifications. The Commissioner (Appeals) was further of the opinion that the statutory provisions were brought on the Act much later than the said circular (which was issued in 1984) and therefore the said circular would not have any effect or binding force upon the Assessing Officer. He, accordingly, upheld the addition of ₹ 1,72,73,000/- made by the Assessing Officer on account of accrued interest on NPAs. 10.3 The Tribunal, in its imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 RBI Directions 1998 in view of Section 45Q of the RBI 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 assessees 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 assessees as it is applicable to the companies registered under the Companies Act. The Hon ble Supreme Court in Southern Technologies Ltd. (supra), that the provision of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 has been discussed. As noted hereinabove the Delhi High Court in Vasisth Chay Vyapar Ltd. (supra) has interpreted the said decision in favour of the assessee by placing reliance upon the observations made in paragraph 40 of the decision, whereas the Madras High Court in Sakthi Finance Limited (supra) has interpreted the said decision against the assessee. 14. Before adverting to the above decisions, it may be germane to refer to the historical background in respect of the controversy in issue. It appears that right from August, 1924 the distinction between an irrecoverable loan and a sticky loan was recognised by the Central Board of Revenue as also by the Reserve Bank of India in their diverse circulars in the case of banks, financial institutions and money lenders regularly following the mercantile system of accounting and instructions had been issued not to treat the unrealized interest on such sticky loans as income by carrying it to Profit and Loss Account so that the figure of distributable profits should not get inflated and preferably to credit the same to a special account such as Interest Suspense Account and if the banks, financial institutions and money len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 15. In UCO Bank, Calcutta v. CIT (supra) the Supreme Court was called upon to consider whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account, can be included in the income of the assessee for the assessment year 1981-82. The court observed that: 5. The method of accounting which is followed by the assessee Bank is the 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 realised. 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. Xxxx 6. The assessee s method of accounting, therefore, transferring the (sic interest on) doubtful debt to an interest suspense account and not treating it as profit until actually received is in accordance with accounting practice. 7. Under Section 145 of the Income Tax Act, 1961, income chargeable under the head profits and gains of business or profession or income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h interest on sticky advances which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of 6-10-1952 and its withdrawal by the second circular of 20-6-1978. The majority appears to have proceeded on the basis that by the second circular of 20-6-1978 the Central Board had directed that interest in the suspense account on sticky advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of 9-10-1984 by which, from Assessment Year 1979-80 the banking companies were given the benefit of the circular of 9-10-1984, does not appear to have been pointed out to the Court. What was submitted before the Court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the Court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teral a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five Judges in Navnit Lal C. Javeri v. K.K. Sen 17. We do not see any 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 treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to Section 145 of the Income Tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income Tax Authorities in a specific situation and, therefore, validly issued under Section 119 of the Income Tax Act. As such, the circular would be binding on the Department. 16. In Mercantile Bank Ltd. v. CIT (supra) the Supreme Court, after considering the above two decisions of the Supreme Court held thus: 6. Although the 1952 circular was withdrawn in June 1978 in view of the decision of the Kerala High Court to the contrary in State Bank of Travancore v. CIT the principle was reintroduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the shareholders, Reserve Bank of India (RBI) and Registrar of Companies (ROC) under the Companies Act, 1956. However, for the IT Act, a separate P L account was made out for the year ending 31st March and the balance sheet as on that date was prepared and submitted to the Assessing Officer for computing the total income under the IT Act, which was not for use of RBI or ROC. For the accounting year ending 31.3.1998, the assessee debited ₹ 81,68,516 as provision against NPA in the P L account on three counts viz. hirepurchase of ₹ 57,38,980, bill discounting of ₹ 12,79,500 and loans and advances of ₹ 31,84,701, in all totalling ₹ 1,02,03,121 from which the Assessing Officer allowed deduction of ₹ 20,34,605 on account of hire-purchase finance charges leaving a balance provision for NPA of ₹ 81,68,516. Before the Assessing Officer, the assessee claimed deduction in respect of ₹ 81,68,516 under section 36(1)(vii) being provision for NPA in terms of the RBI Directions, 1998 on the ground that the assessee had to debit the said amount to the P L account [in terms of Para 9(4) of the RBI Directions] reducing its profits, contending it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome as evolved by RBI after deducting the provision against NPA, however, as stated above, such treatment is confined to presentation/disclosure and has nothing to do with computation of taxable income under the IT Act. Scope of the Finance Act (No. 2) of 2001 w.e.f. 1- 4-1989 insofar as Section 36(1)(vii) is concerned 36. Prior to 1-4-1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the P L account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under Section 36(1)(vii). (See CIT v. Jwala Prasad Tiwari, (1953) 24 ITR 537 Bom. and Vithaldas H. Dhanjibhai Bardanwala, 1981 (130) ITR 95. Such state of law prevailed up to and including Assessment Year 1988-1989. However, by insertion (w.e.f. 1-4- 1989) of a new Explanation to Section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion for doubtful debts against the assets and only the net figure is allowed to be shown in the balance sheet, as a matter of disclosure. However, the said RBI Directions, 1998 mandate all NBFCs to show the said provisions separately on the liability side of balance sheet i.e. under the head current liabilities and provisions . The purpose of the said deviation is to inform the user of the balance sheet the particulars concerning quantum and quality of the diminution in the value of investment and particulars of doubtful and substandard assets. Similarly, the 1998 Directions do not recognise the income under the mercantile system and insist that NBFCs should follow cash system in regard to such incomes. 44. Before concluding on this point, we need to emphasise that the 1998 Directions have nothing to do with the accounting treatment or taxability of income under the IT Act. The two viz. the IT Act and the 1998 Directions operate in different fields. 45. As stated above, under the mercantile system of accounting, interest/hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as income is recognised un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are cases where on facts courts have taken the view that the so-called provision is in effect a write-off. Therefore, in our view, the RBI Directions, 1998, though deviate from the accounting practice as provided in the Companies Act, do not override the provisions of the IT Act. 50. The question still remains as to what is the nature of provision for NPA in terms of the RBI Directions, 1998. In our view, provision for NPA in terms of the RBI Directions, 1998 does not constitute expense on the basis of which deduction could be claimed by NBFCs under Section 36(1)(vii). Provision for NPAs is an expense for presentation under the 1998 Directions and in that sense it is notional. For claiming deduction under the IT Act, one has to go by the facts of the case (including the nature of transaction), as stated above. 51. One must keep in mind another aspect. Reduction in NPA takes place in two ways, namely, by recoveries and by write-off. However, by making a provision for NPA, there will be no reduction in NPA. Similarly, a write-off is also of two types, namely, a regular writeoff and a prudential write-off. (See Advanced Accounts by Shukla, Grewal and Gupta, Ch. 26, p. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be computed one needs to take into account the concept of write-off in contradistinction to the provision for doubtful debt . Applicability of Section 145 57. At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued by RBI under Chapter III-B of the RBI 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 45-Q, an overriding effect is given to the RBI Directions, 1998 vis- -vis income recognition principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 1998 and the IT Act operate in different areas. These RBI 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 the Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by an NBFC cannot determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular provides that the policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing assets on accrual basis. Thus, in view of the mandate of the RBI Guidelines the assessee cannot recognise income from non-performing assets on accrual basis but can book such income only when it is actually received. Thus, this is a case where at the threshold, the assessee, in view of the RBI Guidelines, cannot recognise income from NPA on accrual basis. This is, therefore, a case pertaining to recognition of income and not computation of the income of the assessee. 21. The Supreme Court in Southern Technologies Limited (supra) has held that the 1998 Directions are only disclosure norms and have nothing to do with computation of total income under the IT Act or with the accounting treatment. The 1998 Directions only lay down the manner of presentation of NPA provision in the balance sheet of an NBFC. The court has referred to the deviations between the RBI Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute. Thus, insofar as income recognition is concerned, the court has held that even the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and that as far as income recognition is concerned, section 145 of the Income Tax Act, has not role to play. 23. In the light of the above discussion what emerges is that while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition of income in terms of the recognised accounting principles and after such income is recognised, the computation thereof, in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income thereupon has not accrued . We are in agreement with the submission of Mr. Vohra on this count, supported by various decisions of different High Courts including this court which has already been referred to above. (2) In the instant case, the assessee company being NBFC is governed by the provisions of RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee. No doubt, in first blush, reading of the judgment gives an indication that the Court has held that RBI 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s different from accrual and in each and every case, the assessee has to prove that the income interest is not recognised or not taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept the claim of the assessee under the Income-tax Act or not to accept. In case of Southern Technologies Limited, (2010) 320 ITR 577, the Assessing Officer accepted the assessee's case towards non-recognition of interest for ₹ 20.34 lakhs as would be apparent from a reading of Paragraph No.31 of the Judgment of the Hon'ble Supreme Court in case of Southern Technologies Limited, (2010) 320 ITR 577. By a careful reading of the case of Southern Technologies Limited, (2010) 320 ITR 577, we are of the view that the assessee has to prove in each case that interest not recognised or not taken into account was in fact due to uncertainty in collection of interest and it is for the Assessing Officer to examine facts of each individual case. 18. Mere characterisation of an account as a NPA would not by itself be sufficient to say that there is uncertainty as regards realizability of income or interest income thereon. Accrual of interest is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f taxability of such interest and that when a specific provision in the nature of section 43D of the Act has been made, and entities like the assessee are excluded from the purview thereof, the assessee cannot indirectly claim benefit which would amount to a benefit similar to that under section 43D of the Act. In this regard, it may be noted that the benefit claimed by the assessee is not under any provision of the Income Tax Act, 1961. The assessee being bound by the RBI Guidelines which are issued under the provisions of the RBI Act has not shown the interest on NPA as income. By virtue of the provisions of section 45Q of the RBI Act, the provisions of Chapter IIIB thereof have an overriding effect over other laws including the Income Tax Act, 1961. Therefore, notwithstanding the provisions of section 43D of the Act, since the provisions of section 45Q of the RBI Act have an overriding effect vis- -vis income recognition principles in the Companies Act, the Assessing Officer is bound to follow the RBI Directions so far as income recognition is concerned. The contention that the assessee cannot indirectly claim the benefit which would amount to a benefit similar to that under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets and Enforcement of Security Interest Act, 2002, which provides for enforcement of security interest of banks and financial institutions and has observed that in the instant case, no material has been brought on record by the assessee to prove its efforts made in a bid to recover such debts which are classified as NPA and other categories. The Assessing Officer has also entered into a discussion as regards the quality of management, etc., without even examining as to whether or not there was any probability of interest being received on the NPAs. The Commissioner (Appeals) has placed reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (supra) and held that there is no merit in the contention of the assessee that under commercial accounting, interest on NPAs cannot be charged. On the question of applicability of the CBDT Circular dated 9.10.1984, the Commissioner (Appeals) held that the same would not be applicable for the reason that the provisions of section 43D of the Act are clear and cannot be overridden through delegated legislation viz. circulars and notifications. The Commissioner (Appeals) was further of the opinion that the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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