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2017 (1) TMI 778 - ITAT CHANDIGARH

2017 (1) TMI 778 - ITAT CHANDIGARH - TMI - Assessment of income - Interest on loans categorized as NPA - accrual basis or receipt basis - Held that:- No infirmity in the order of the CIT(A),holding the interest on NPA's as taxable in the year of receipt , so as to warrant interference - Held that:- The undisputed facts in the present case are that the assessee is a cooperative bank registered under the Punjab State Government Cooperative Act. Undeniably, the assessee is following the mercantile .....

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idelines and as per the guidelines prescribed by Punjab State Cooperative Limited, the apex bank of the assessee, is also 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 rel .....

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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 Revenue. Subsequently, the Revenue filed a Miscellaneous Application No.32/Chd/2014 which was allowed by Tribunal vide its order dated 05.06.2015 and the earlier order dated 25.02.2014 was recalled for the purpose o .....

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the case of State Bank of Travamcore (158 ITR 102). Further, the Ld. CIT(A) has wrongly relied upon the finding of Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. which is a Non Banking Financial Corporation, whereas the Assessee under consideration is a Co-operative Society registered under Punjab State Co- operative Societies Act. Moreover, the decision of Ld. CIT(A) is perverse as the Assessee is following mercantile system of accounting." 4. The issue raised in the .....

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. the Reserve Bank of India. The Assessing Officer, however, rejected the contention of the assessee stating that since it was following the mercantile system of accounting, the income could not be accounted for on receipt basis. The Assessing Officer relied upon the decision of the Hon'ble Apex Court in the case of State Bank of Travancore Vs. CIT, 158 ITR 102 (SC), wherein it was held that the interest on sticky loans was assessable to tax and provisions of section 145 of the Income Tax Ac .....

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sing 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) whe .....

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d not accrued in view of the precarious financial position of the borrower, even though the assessee was following mercantile system of accounting. The assessee relied upon the decision of the Delhi High Court in the case of CIT Vs. Vasisth Chay Vyapar Ltd.(2010-TIOL-781-HC-DEL-IT) dated 29.11.2010 in this regard. The assessee further relied upon the decision of the Delhi High Court in the case of DIT Vs. Brahamputra Capital Financial Services Ltd. dated 18.5.2011, wherein upholding the principl .....

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Ltd. (supra). The relevant findings of the CIT (Appeals) at para 8 of his order is as under : "8. I have considered the basis of addition made by the AO and the arguments of the AR on the issue. The only reason for the AO to make the addition is by treating the interest due on NPA as the income of the year in which the said interest had accrued and it is on the basis of assessee's method of accounting that the same has been considered as income. It is however to be appreciated that the .....

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rds drafted by the Institute of Chartered Accountants of India. It is also to be appreciated that section 45Q of the RBI Act starts with the non- obstante clause to the effect that the provisions of this chapter shall have effect notwithstanding anything inconsistent therewith contained 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 .....

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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, the assessee had t .....

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uthern Technologies Ltd. (supra). The Ld. DR also contended that the provisions of section 43D of the Act cannot be applied to the present case, entitling the assessee to account for the interest income of NPA accounts on receipt basis, since the said provisions did not apply to cooperative banks. 9. The learned counsel for the assessee, on the other hand, relied upon the order of the CIT (Appeals) and further stated that the arguments raised by the Revenue had been rebutted by the Ld. CIT (Appe .....

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the Accounting Standard-9 relating to Revenue Recognition prescribed by the Institute of Chartered Accountants of India, as per which, revenue was to be recognised, only when there was no uncertainty about the collection of revenue. The learned counsel for the assessee stated that since the accounts themselves had been categorized as NPA meaning thereby that recovery of the loan itself was in doubt, there was no certainty of recovery of interest and, therefore, following the principles of accou .....

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reme 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-à-vis .....

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ow as also the documents placed before us. 11. The issue in dispute in the present appeal is the year in which the interest on non-performing assets, NPA's, is to be accounted for as income in the books of the assessee. 12. The undisputed facts in the present case are that the assessee is a cooperative bank registered under the Punjab State Government Cooperative Act. Undeniably, the assessee is following the mercantile system of accounting and as per its Revenue Recognition policy for the i .....

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ative Limited, the apex bank of the assessee, is also not disputed. 13. 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 .....

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Act. The relevant findings of the Apex Court are as follows : "We have 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 and has not been brought to the profit and loss account of the assessee, can be included in the income of the assessee for the assessment year 1981-82. It is the case of the assessee that in respect of loans which are advanced by it to va .....

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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 accoun .....

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revenue, and distributed as profit. On the other hand, this treatment does not record the actual state of the loan account, and in the case of banks and other concerns whose business it is to advance money, it is usual to find the interest is regularly charged up, but when its recovery is doubtful, the amount thereof is either fully provided against or taken to the credit of an Interest Suspense Account and carried forward and not treated as profit until actually received." Similarly, refe .....

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nt. This treatment accords with the principle that no item should be treated as income unless it has been received or there is a reasonable certainty that it will be realised. (Vide State Bank of Tranvacore v. CIT [supra]) The assessee's method of accounting, therefore, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice. Under Section 145 of the Income-tax Act, 1961, income chargeable .....

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In the present case the method employed is entirely for a proper 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 actua .....

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neral 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 under Section 119 of the Income Tax Act. Such a circular is binding under Section 119. The circular of 9th of October, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as .....

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by the Apex Court in Mercantile Bank Ltd., Vs. CIT, Bombay City-III (2006) 5 SSC 221. 17. Further the issue of taxability of interest on NPA accounts on receipt basis by Cooperative Banks has been dealt with by various High Courts, wherein it was held that the assessee was bound by RBI guidelines to account for such interest on receipt basis and by virtue of the provisions of section 45Q of the RBI Act, the RBI guidelines had an overriding effect over other Acts including the Income Tax Act, 196 .....

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20 to 23 of its order as follows : 20. Section 45Q finds place in Chapter IIIB of the RBI Act. Thus, the provisions of Chapter IIIB of the RBI Act have an overriding effect qua other enactments to the extent the same are inconsistent with the provisions contained therein. In order to reflect a bank's actual financial health in its balance sheet, the Reserve Bank has introduced prudential norms for income recognition, asset classification and provisioning for advances portfolio of the co-oper .....

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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 Su .....

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presentation of financial statements under Schedule VI to the Companies Act; (ii) in not recognising the "income" under the mercantile system of accounting and its insistence to follow cash system with respect to assets classified as NPA as per its norms; (iii) in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful of recovery under the norms of the accounting standards issued by the Institute of Chartered Accountants of India. Th .....

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case of provisions. [Emphasis supplied]" 22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36(1)(vii) or section 37 of the Act, then in the computation of income, the RBI Guidelines would have no role to play, and hence, an add back. Insofar as income recognition is concerned, the Supreme Court has held thus: "Applicability of Section 145 57. At the outset, we may state that in essence the RBI Direc .....

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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 .....

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erned, 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 .....

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uld have no role to play. Hence, the Assessing Officer has to follow the RBI Directions. 19. Further relying upon the decision of the Delhi High Court in the case of CIT Vs. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440, the Court held that the AO has to follow RBI directions on Revenue Recognition, and held as follows "25. The distinction drawn by the Delhi High Court is that while the accounting policies of adopted by the NBFC cannot determine the taxable income. However, insofar as income .....

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M/s. Vasisth Chay Vyapar Limited 330 ITR 440 (Delhi). In this case, the revenue relied upon the decision of the Hon'ble Supreme 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 .....

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ow 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 .....

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Apex Court in the case of K.P.Varghese Vs. ITO (1981) 131 ITR 597 (SC). The relevant extracts of the decision in UCO Bank Limited are reproduced hereunder : "There are, however, two decisions of this Court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in The State Bank of Travancore v. Commissioner of Income- Tax, Kerala (1986 (158) ITR 102) decided by a Bench of three Judges of this court by a majority of two to one .....

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;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 9th of October, 1984 by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of 9th of October, 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 .....

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countancy recognised and followed, and feasibility". The Court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The Court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this Court in Navnitlal C. Javeri v. K.K. Sen (Supra), or the subsequent decision in K.P. Varghese v. Income Tax Officer (supra) a .....

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