TMI Blog2017 (1) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... o not disputed. We find that the issue of accounting for interest on sticky loans/NPA's, has been dealt with in a number of decisions both by the Apex Court and various High Courts and Tribunals also, wherein after applying the "Real Income Theory", the prescribed Accounting Standard issued by ICAI on Revenue Recognition, AS-9, the accounting practise of the asseessee relating to interest on sticky loans and the RBI guidelines relating to accounting for interest on NPA's, it was held that such income was taxable in the year of receipt only, when its realisation becomes reasonably certain. - Decided in favour of assessee - ITA No. 526/Chd/2013 - - - Dated:- 3-1-2017 - Shri Sanjay Garg, Judicial Member And Ms. Annapurna Gupta, Accountant Member Appellant by : Shri Manoj Mishra, DR Respondent by : Shri Manish Gupta ORDER Per Annapurna Gupta, A. M. This appeal has been filed by the Revenue against the order of learned Commissioner of Income Tax (Appeals)-I, Ludhiana dated 28.2.2013 for assessment year 2009-10. 2. At the outset, it may be stated that the present appeal was earlier heard and order passed dated 25.02.2014, dismissing the appeal of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since they both operate in the separate fields and further relied upon the decision of the Apex Court in the case of M/s Southern Technologies Ltd. Vs. JCIT, Coimbatore dated 11.01.2010 in this regard. The Assessing Officer also referred to the decision of the I.T.A.T. in the case of JCIT Vs. India Equipment Leasing Ltd., 111 ITJ (Chennai) 250, wherein it was held that section 43D of the Act was inserted to improve viability of banks, public financial institution, etc. so as to provide that interest on sticky loans shall be charged to tax on receipt basis , did not apply to cooperative banks. The Assessing Officer, therefore, treated the interest earned on NPAs amounting to ₹ 3,02,82,000/- as income of the assessee for the year. 6. The matter was carried in appeal before the Ld. CIT (Appeals) where the assessee argued that the addition made was unwarranted since the assessee had accounted for the interest on NPA accounts on receipt basis following the prudential norms of RBI. The assessee stated that this system of accounting of income on NPA Accounts was as per the Accounting policy adopted by the assessee which was being consistently followed. The assessee thereafter st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in any other law for the time being in force or any instrument having effect by virtue of any such law. It is also noted that the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. has held that when NBFC classified an asset as a Non Performing Asset in accordance with the directions issued by the Reserve Bank of India (RBI), it was legitimate to infer that the interest income thereupon had not accrued in view of the precarious financial position of the borrower, even though the tax payer was following the mercantile system of accounting. It is seen that the Hon'ble Delhi High Court also discussed and distinguished the decision of Hon'ble Apex Court in the case of State Bank of Travancore vs CIT 158 ITR 102(SC). In the circumstances, I do not agree with the Assessing Officer's view on the issue and therefore the addition made is directed to be deleted. 7. Aggrieved by the same, the Revenue has come up in appeal before us. 8. Before us, the Ld. DR relied upon the order of the Assessing Officer and stated that since the assessee was following the mercantile system of accounting and further in view of the provisions of section 145 of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same has been overruled by the Hon'ble Apex Court in the case of UCO Bank, Calcutta Vs. CIT, West Bengal (1999) 4 Supreme Court Cases 599 and also in the case of Mercantile Bank Ltd. Vs. CIT, Bombay City-III vide judgment dated 010.5.2006. The Ld. counsel for the assessee further stated that even the Karnataka High Court in the case of CIT Vs. Canfin Homes Ltd. (2012) 347 ITR 382 had discussed and distinguished the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore (supra). The Ld. counsel for the assessee submitted that the aspect of mercantile system of accounting vis- -vis interest on sticky loans was considered in a number of decisions i.e. a) CIT Vs. Vasisth Chay Vyapar Ltd. 330 ITR 440(Del) b) Pr. CIT-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd., Tax Appeal No.531 of 2015 dt.05-08-16 (Guj) c) CIT Vs. M/s Deogiri Nagari Sahakari Bank Ltd. Others, 379 ITR 24(Bom) and d) CIT Vs. Shri Siddeshwar Cooperative Bank Ltd. Others.ITA No.200002/2015 ,dt.22-06-16 (Kar) 10. We have heard the contentions of both the parties, perused the orders of the authorities below as also the documents placed before us. 11. The issue in dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are advanced by it to various customers, recovery of some loans is very doubtful. It is doubtful whether even the interest on the loans advanced will be recovered from the customer. In such cases, the interest calculated on the loan amount is credited in a suspense account. This amount is not brought to the profit and loss account of the assessee-bank because these are amounts which are not likely to be realised by the bank. Hence they do not form a part of the real income of the bank. If and when any such amount or a part of it is recovered, it is included in that assessment year in the total income of the assessee for the purpose of payment of income-tax. The method 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 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. In Spicer and Pegler's Practical Auditing the relevant passage occurring at page 186-18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination of income. (emphasis supplied by us) 15. Further the Apex Court also referred to the CBDT Circular dated 9th October 1984 stating that interest on loans on which there has been no recovery for 3 years will be subjected to tax on receipt basis, and held as follows : The question whether interest earned, on what have come to be known as sticky loans, can be considered as income or not until actual realization, is a question which may arise before several income tax officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such accrual of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all income tax officers 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 travelling beyond the powers of the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause 4.1.1 of the circular 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 RBIGuidelines, 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 deviation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple 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. 21. Further relying upon the decision of the Apex Court in the case of UCO Bank, Calcutta and Mercantile Bank Ltd. (supra) it allowed the assessee's appeal. 22. It is evident from the above that the issue regarding taxability of interest on NPA's is settled in favour of the assessee as being taxable in the year of receipt. 23. The grievance of the Revenue that the Hon'ble Supreme Court's decision in the case of State Bank of Travancore (supra) applies to the present case, we find is misplaced, since as pointed out above by the Ld. counsel of the assessee, it has been overruled by the Apex Court itself in the case of UCO Bank Limited (supra) wherein it was pointed out by the Apex Court that while rendering the judgment in the case of State Bank of Travancore (supra), the circular dated 9.10.1984 had not been brought to the notice of the Court, nor the subsequent decision of the Apex Court in the case of K.P.Varghese Vs. ITO (1981) 131 ITR 597 (SC). The relevant extracts of the decision in UCO B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court. Since the later circular of 9.10.1984 was not pointed out to the Court, the Court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. 24. Therefore, the contention of the Revenue that the decision in the case of State Bank of Travancore (supra) applies to the assessee's case is dismissed. 25. The argument of the learned D.R. that the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) would not apply to the assessee's case since the assessee is a cooperative society while in the case of Vasisth Chay Vyapar Ltd. (supra), the assessee was a NBFC, is also dismissed since the principle enunciated by the Delhi High Court in Vasisth Chay Vyapar Ltd. (supra) has been followed in the case of Shri Mahila Sewa Sahakari Bank Ltd. (supra) by the Hon'ble Gujarat High Court and various other decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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