TMI Blog2016 (9) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... edabad identically dated 16/11/2015 for Assessment Years (AYs) 2007-08, 2009-10 2011-12. Since common issues (except quantum) and facts are involved in these appeals, these are being disposed of by way of this consolidated order for the sake of convenience. We thus proceed with the facts with the Assessee s appeal in ITA No.173/Ahd/2016 for AY 2007-08 as a lead case. 2. The relevant facts as culled out from the materials on record are as under:- 2.1. Assessee is Bank who electronically filed its return of income for AY 2007-08 declaring total loss of Rs.(-)10,26,419/-. The case was selected for scrutiny and thereafter assessment was framed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) vide order dated 29.12.2015 and the addition on account of accrued interest on NPA advance amounting to ₹ 85,36,517/- was made by the Assessing Officer (AO). Aggrieved by the order of the AO, assessee carried the matter before the ld.CIT(A), who vide order dated 12/08/2010 (in Appeal No.CIT(A)-XVI/DCIT.Cir.11/182/09-10), confirmed the addition on account of interest accrued on NPA. Thereafter, assessee carried the matter before the Hon ble Tribunal who vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt but had not taken any further action for recovery of the outstanding dues. He therefore held that the amount of ₹ 1,16,77,000/- being accrued interest on NPAs should be considered as income and accordingly made its addition. Aggrieved by the order of AO, assessee carried the matter before the ld.CIT(A) who decided the issue in favour of assessee by holding as under:- Decision: 3.3. I have considered the facts of the case and submission made by the appellant. In this case original assessment u/s.143(3) was made on 29.12.2009 after making addition of ₹ 85,36,517/- on account of accrued interest on non-performing assets. The CIT(A) has confirmed this said addition. The ITAT vide its order dated 25.1.2011 has restored the matter to the file of CIT(A). The CIT(A) has passed order on 24.1.2013 upholding the addition by enhancing it to ₹ 1,16,77,000/-. The Hon'ble ITAT has restored the matter to the file of A.O. vide its order dated 21.06.2013 with a direction to obtain the certificate about the status of bank and ascertain the status of each party. The relevant portion of the order of the ITAT is reproduced as under:- With these brief back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrual of interest is a matter of act to be decided separately for each case on the basis of examination of the facts and circumstances. Respectfully following this decision of the Hon 'ble Madras High Court, we are also of considered opinion that the accrual of interest is a matter of fact, to be decided on the basis of examination of the status of each party. We, therefore, restore this issue back to the stage of the AO to be decided de novo in the light of the guidelines issued by the Hon'ble Madras High Court, needless to say after providing adequate opportunity of hearing to the assessee. Resultantly, the grounds raised by the assessee may be treated as allowed for statistical purpose. 3.4. In the set-aside proceedings, the Assessing Officer has passed assessment order dated 20.2.2015 and made addition of ₹ 1,16,77,000/- on account of accrued interest on non-performing assets. The Assessing Officer has made addition on the ground that the appellant being a scheduled bank, the provision of Section 43D were not applicable, the real income theory was not applicable in view of mercantile method of accounting and the uncertainty of income was not establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has relied upon. The appellant also stated that the interest was said to have accrued only when right to receive is established. In the case of NPA, the recovery of principal amount itself was in doubt. Therefore, interest on such doubtful amount cannot be said to have been accrued as per the provisions of section 145 of I. T. Act. It has also relied upon the judgment of Bombay High Court in the' case of State Bank of India (supra), ITAT, Ahmedabad in the case of Mahila Seva Sahakari Bank Ltd. and Sardarganj Mercantile Co-op, Bank Ltd. (supra). Further, reliance was also placed on the recent judgment of Hon'ble Bombay High Court in the case of CIT Vs. Devgiri Nagrik Sahakari Bank Ltd. in ITA No. 53 of 2014 dated 22/01/2015. The appellant has also relied upon on the judgemnet in the case of Pragati Co-Op. Bank Ltd. (ITA No.872/Ahd/2012) dated 21.08.2015. Reliance is also placed on the judgement in the case of Urban Co-Op. Bank Ltd. (ITA No.471 of 2013 dated 30.06.2014) of Hon'ble Karnataka High Court. 3.8. Having considered the facts and submissions, it is undisputed that the appellant bank has categorized the NPA out of its loans and advances as per the norms pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.10. Subsequently, the Hon'ble ITAT 'B' Bench, Ahmedabad in the case of Sardarganj Mercantile Co-op. Bank Ltd. Vs. ACIT in ITA No. 2426/Ahd/2012 dt. 15/02/2013 having considered the UCO Bank decision, RBI guidelines has decided the issue in favour of the appellant bank by stating that no interest on the NPA is chargeable to tax. The Hon'ble ITAT has observed that the provisions of section 43D is not applicable as the appellant has not credited the interest in P L Account but shown in the asset and liabilities side in the balance sheet directly and also not received actually. Relevant portion of the decision is reproduced as under. 4. Now the assessee is before us. Ld. Counsel for the appellant contended that the assessee is a Cooperative bank engaged in carrying on banking business. During A. Y. 2009-10, the assessee passed book entry for interest of ₹ 1,58,897/-on NPA account by debiting to time barred interest receivable account and crediting to provision for time barred interest. Both the accounts are reflected in the balance sheet on the assets side and liability side. No such interest is credited to P L account as income. He further relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er:- 5.1. However, we find that under the identical facts, the Coordinate Bench of this Tribunal in the case of ACIT vs. Solapur Siddheshwar Sahakari Bank Ltd. in ITA NOS.222Q 221/PN/2013 for AYs 2009-10 2010-11 (supra) has examined the issue thoroughly by holding as under:- 4. The learned CIT(A) disagreed with the Assessing Officer, and thus the Revenue is in appeal before us. 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 case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No.350/PN/2013 dated 31.10.2013. In the said precedent, the Tribunal considered the judgement of the Hon'ble Delhi High Court in the case ofM/s Vasisth Chay Vyapar Ltd., 330 ITR 440 (Del) as -well as the judgement of the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances; and, following the proposition that in the absence of any judgement of the Jurisdictional High Court, there being contrary judgement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxed only on receipt basis. The Tribunal observed that the question of taxability of interest on NPAs classified by RBI, was considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) wherein after considering the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in 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 Vasisth Chay Vyapar Ltd, the assessee therein was a non banking financial company and it was also bound by the Prudential norms d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 of the period in which it is properly recognized . 8.2 The Delhi High Court also considered the decision rendered in the following cases; i) CITvs. Elgi Finance Ltd., 293ITR 357 (Mad) ii) CITvs. KKMInvestments (Cal) - SLP dismissed by Supreme Court (310 ITR 4) Hi) CIT vs. Motor Credit Co (P) Ltd., 127 ITR 572 (Mad) iv) UCO Bank vs. CIT 237 ITR 889 (SC) v) CIT vs. Shoorji Valiabhdas Co 46 (TR 144 (SC) vi) Godhra Electricity Co. Ltd., Vs. CIT 225 ITR 746 vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del) viii) CIT vs. Richer Ltd., ITANo.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in terms of the Prudent/a Norms, even, though the same deviated from mercantile system of accounting and/or section 45 (sic. 145) of the Income Tax Act. It can be said, therefore, that the Apex Court approved the 'real income' theory which is engrained in fie Prudential Norms for recognition of revenue by NBFC . 9. The Hon'ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz., a) Income 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- -vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant: What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not accrued . The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rban Bank Ltd. (supra) and accordingly the order of the CIT(A) is liable to the affirmed. We hold so. 14. In the result, the appeal of the Revenue is dismissed. 5. Since it was a common point between the parties that the facts and circumstances in the present case are identical to those considered by us in the case of The Omerga Janta Sahakari Bank Ltd. (supra), 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. 6. In the result, both the appeals of the Revenue are dismissed. 5.2. We also find that the Coordinate Bench of this Tribunal in the case of Sardarganj Mercantile Co-op.Bank Ltd. vs. ACIT (supra) has deleted addition by observing as under:- 5. We have heard the rival contentions and perused the material on record. The appellant is making the provision of interest as per the guidelines issued by the R.B.I. However, same has not been credited in the p l account as it was notional had not received actually by it. Section 43 is also not applicable a assessee has not credited in the p l account but shown in the assets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Cooperative 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 as 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 corporative 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 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 the Act and which are binding on the authorities in the administration of the Act, it is beneficial power given to the Board for proper administr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, 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, 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 interest amounts in a suspense account and does not bring 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Commissioner of Income Tax, Bombay City III 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 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 Cooperative banks, as understood by Section 43 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 Tax, Coimbatore reported in 2010 (2) SCC 548. However, this judgment pertains to non Banking financial companies. Uco Bank case (supra) and Mercantile Bank (supra) case squarely applies to the facts of the present case and issues involved. We therefore, do not find it necessary to interfere in the judgment of the Appellate Tribunal. We hold that no substantial question of law arises in these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f recovery. Internationally income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. 3.15. Further, following the theory of real income, question of taxability of any notional income like accrued interest on NPA would not arise, more particularly when the recovery of the principal loan amount is doubtful. Even the Hon'ble Supreme Court in the case of UCO Bank, distinguishing the judgment of State Bank of Travancore has held that the circulars issued earlier were not applicable in view of section 43D substituted w.e.f. 01/04/2000 and the said section requires to follow RBI guidelines and to tax interest on NPA Account only when realized. Further, the Hon'ble Bombay High Court in the case of CIT Vs. Devgiri Nagrik Sahakari Bank Ltd. (supra) has treated the Cooperative Banks as scheduled banks. In para - 11 of the judgment, they have observed as under:- Furthermore, the respondent Co-operative Banks as understood by section 43D of the Act are the scheduled banks. 3.16. The Assessing Officer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcantile Co-op. Bank Ltd. besides recent judgment of Hon'ble Bombay High Court in the case of Devgiri Nagri Sahakari Bank Ltd. and decisions of various other authorities, the addition made by the AO is found unjustified, and hence, the same is deleted. 3. Aggrieved by the order of ld.CIT()A, now the Revenue is in appeal before us. 3.1. Before us, the ld.Sr.DR supported the order of the AO. On the other hand, ld.AR reiterated the submissions made before the AO and supported the order of the ld.CIT(A). He further submitted that on identical facts, the Coordinate Bench of this Tribunal (ITAT B Bench Ahmedabad) in ITA No.872/Ahd/2012 for AY 2008-09 in the case of ACIT vs. The Pragati Co-op.Bank Ltd., order dated 21/08/2015 decided the issue in favour of assessee. He placed the copy of the aforesaid decision. He therefore submitted that in view of the aforesaid facts, the appeal of the Revenue needs to be dismissed. 4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present case is with respect to accruing the income on NPA accounts. We find that the ld.CIT(A) by a well ..... X X X X Extracts X X X X X X X X Extracts X X X X
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