TMI Blog2015 (1) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... TA Nos.286 & 287/PN/2014 - - - Dated:- 29-1-2015 - Shri G.S. Pannu And Ms Sushma Chowla, JJ. Appellant by : Shri B. C. Malakar Respondent by : Shri Miheer Limaye ORDER G. S. Pannu, The captioned appeals by the Revenue are directed against two separate orders of the Commissioner of Income Tax (Appeals)-V, Pune, even dated 26.11.2013 which, in turn, have arisen from two separate orders dated 29.12.2011 and 27.12.2012 passed by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961 (in short the Act ) pertaining to the assessment years 2009-10 and 2010-11, respectively. 2. In both the appeals, the solitary issue relates to an addition of ₹ 11,18,203/- in assessment year 2009-10 and ₹ 10,33,570/- in assessment year 2010-11 made by the Assessing Officer on account of interest income on Non- Performing Assets (in short NPAs ). 3. Briefly put, the controversy can be summarized as follows. The assessee is a co-operative society engaged in the business of banking in terms of a license issued by Reserve Bank of India (RBI). Therefore, assessee is governed by the Circulars and Guidelines issued by the RBI, inparticular relating to Prude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Notably, section 43D of the Act prescribes that interest income on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consideration. 9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Co-operative Bank operating under a license issued by RBI but was not a scheduled bank so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y instrument having effect by virtue of any such law . The High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon'ble High Court also considered accounting standard AS-9 on Revenue recognition and also extracted following relevant portion from the said accounting standard: 9. Effect of uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments. 9.3 When the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that the proposition advanced by Mr.Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited ₹ 81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of Section 36(1) (vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(i)(vii) of the Act. The Assessing Officer, however, did not bring to tax ₹ 20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India 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 assessee 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 assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis- -vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook the view that the judgement of the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) also applied to the Income Recognition Norms provided by RBI and therefore it held the interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI s guidelines. But the Hon ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon ble Delhi High Court and the Hon ble Madras High Court as noted by the Hon ble Madras High Court in its order. 12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). 13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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