TMI Blog2018 (11) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... aim the benefit which would amount to a benefit similar to that under section 43D of the Act, therefore, does not merit acceptance. Tribunal while relying upon the various pronouncements had decided the issue regarding taxability of interest on NPA's in favour of the assessee as being taxable in the year of receipt. The Tribunal had upheld the deletion made by the CIT(A) on account of addition regarding interest accrued on NPA. No illegality or perversity could be demonstrated by learned counsel for the revenue in the aforesaid findings recorded by the Tribunal. - Decided against revenue - ITA-349-2017 - - - Dated:- 24-9-2018 - MR AJAY KUMAR MITTAL AND MR AVNEESH JHINGAN, JJ. For The Appellant : Mr. Rajesh Katoch, Sr. Standing Counsel And Mr. Vivek Sethi, Sr. Standing Counsel For The Respondent : Mr. Varun Mittal, Advocate for Mr. Vikas Mohan Gupta, Advocate And Mr. Aman Parti, Advocate and Mr. Munish Kapila, Advocate ORDER AJAY KUMAR MITTAL, J. 1. This order shall dispose of a bunch of four appeals bearing ITA Nos.349, 395, 449 and 450 of 2017 as according to learned counsel for the parties, similar issues are involved therein. 2. ITA-349 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognition of interest on NPA (Non performing Assets) accounts on receipt basis by the assessee shows that hybrid system of accounting is being followed by the assessee which is no longer permissible with effect from 1.4.1997? 3. In ITA Nos. 395, 449 and 450 of 2017, the following substantial questions of law have been raised:- ( i) Whether on the facts and in the circumstances of the case the ITAT was correct in ignoring the fact that Section 43D of the Income-Tax Act, 1961 would not apply to a Co-operative Bank? ( ii) Whether on the facts and in the circumstances of the case the ITAT was justified in law in holding that Section 45Q of RBI Act, 1934 is applicable in the case of the assessee, when Section 45H of the RBI Act, 1934 excludes its application to cooperative banks? ( iii) Whether on the facts and in the circumstances of the case the ITAT has erred in law in confirming the decision of Ld. CIT(A) who had wrongly relied upon the finding of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. [ITA Nos. 552, 565 of 2005, ITA No. 1191 of 2007, ITA Nos. 139, 466, 537 of 2008 and ITA No. 408 of 2003 date of decision 29.11.2010] whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion for specific entities, the same would cover only those entities and, therefore, Section 43D of the Act would not be attracted in the present case. 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. Reliance was placed upon the judgment of the Apex Court in Southern Technologies Limited v. Joint Commissioner of Income-Tax, Coimbatore (2010) 320 ITR 527. 7. On the other hand, learned counsel for the assessee submitted that the income accrued to the assessee is exigible to tax and the income which accrues should be real income and not hypothetical income. When an account is treated as NPA, there is hardly any likelihood of receipt of interest thereon. It was further submitted that the mercantile system of accounting can be relevant only to determine the point of time at which taxability is attracted and cannot be relied upon to determine whether the income has in fact resulted or materialized in favour of the assessee. According to the learned counsel, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration in these appeals is whether interest on non-performing assets in the hands of the assessee- Cooperative Banks is taxable on accrual basis or not, keeping in view the guidelines of the Reserve Bank of India. 11. We proceed to examine various relevant statutory provisions essential for effective adjudication of the present controversy. 12. The legislative history of Section 43D of the Act may be noticed. Section 43D of the Act was inserted w.e.f 1.4.1991 by Finance (No.2) Act 1991. It provides for payment of tax on interest on bad debts or doubtful debts only in the year of receipt. It reads thus:- 43D. Special provision in case of income of public financial institutions, etc. - Notwithstanding anything to the contrary contained in any other provision of this Act, in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall be chargeable to tax in the previous year in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment corporations, the Income Tax Act has been amended by inserting a new Section 43D so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or is credited to the Profits and Loss Account , whichever is earlier. The category of bad and doubtful debt in respect of which the interest will qualify for this exemption, will be prescribed by the central Board of Direct Taxes, keeping in view the guidelines issued by the Reserve Bank of India in relation to such debts. 22.3 This amendment will take effect from the Ist day of April 1992 and will accordingly apply in relation to the assessment year 1992-93 and subsequent years. 14. Finance Act, 1999 effective from 01.4.2000 substituted originally enacted Section 43D of the Act with the following:- 43D. Special provision in case of income of public financial institutions, public companies etc. - Notwithstanding anything to the contrary contained in any other provision of this Act,- ( a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed which has been explained in the departmental Circular No.779 dated 14th September 1999 as under:- 25. Extension of provisions of Section 43D to the housing finance companies 25.1 Under the existing provisions of Section 43D of the Income Tax Act, in the case of a public financial institution or a scheduled bank or a State Financial Corporation or a State Industrial Investment Corporation, income by way of interest in relation to such categories of bad or doubtful debts, as may be prescribed having regard to the guidelines issued by the Reserve Bank of India, is chargeable to tax in the previous year in which it is credited to the profit and loss account or as the case may be, in which it is actually received, whichever is earlier. 25.2. With a view to improve the viability of housing finance companies and to provide a boost to the housing sector, the Finance Act, 1999 amends Section 43D so as to extend its provisions to a public company whose main object is carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes and which is registered in accordance with the Housing Finance Companies (NHB) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e overdue for 6 months or more; ( 5) unexplained delays by the borrower in submission of quarterly or half-yearly operating statements or stock statements or balance sheets and other information required by the bank; ( 6) slow movement or stagnation of stocks observed during inspections; ( 7) low or negligible level of activity observed during inspections or suspension or closure of the business; ( 8) persistent delay in compliance with vital requirements like execution of documents, producing additional security when required or non-compliance with such requirements; ( 9) diversion of funds to sister units or acquiring capitalassets not relevant to the business or large personal withdrawals by the borrowers; ( 10) intentional non-adherence to project schedules leading to sub-stantial cost escalations and requirement of additional term-finance; ( 11) the pressure on the liquidity leading to nonpayment of wages to workers or statutory dues or rents of office and factory premises; ( 12) the current liabilities exceeding current assets; ( 13) any grave irregularities observed by the auditors of the borrowers which remain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the State Industrial Investment Corporation to its profit and loss account for that year or as the case may be in which it is actually received by that institution or bank or Corporation whichever is earlier. In other words, Section 43D of the Act is akin to Section 43B of the Act. The Supreme Court in Southern Technologies Limited vs. Joint CIT (2010) 320 ITR 577 (SC) elaborated the scope and reason for enacting the said provision. It was held that interest from bad and doubtful debts in the case of bank and financial institutions is difficult and onerous to recover and taxing such income on accrual basis reduces the liquidity of the Bank/financial institution without generation of any income. Thus, Section 43D of the Act was inserted with the said purpose to mitigate the circumstances of taxing income accrued from bad and doubtful debts except in the year of receipt or in the year in which it is credited to the profit and loss account, whichever is earlier. 18. Next, it would be essential to refer to relevant provisions of the 1934 Act. Chapter III-B Provisions relating to Non-Banking Institutions Receiving deposits and Financial Institutions: Section 45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es generally or to a class of non banking financial companies or to any non-banking financial company in particular as to- ( a) the purpose for which advances or other fund based or nonfund based accommodation may not be made; and ( b) the maximum amount of advances of other financial accommodation or investment in shares and other securities which, having regard to the paid-up capital, deposits of the non-banking financial company and other relevant considerations, may be made by that non-banking financial company to any person or a company or to a group of companies. Section 45Q postulates that Chapter III-B of the Act shall have overriding effect over other laws in the following terms:- 45Q - Chapter IIIB to override other laws 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. Reserve Bank of India has classified all assets on which there is either a default in payment of interest or in repayment of the principal sum for more than the specified period as NPA. 19. The Gujarat High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 (in short, the RBI Directions, 1998). 21. Scope and applicability of RBI Directions 1998 issued under Section 45JA of 1934 Act requires consideration. RBI Directions 1998, are merely disclosure norms or norms regarding presentation of NPA provisions in the balance sheet of an NBFC. Under Section 45JA, power is given to RBI to enact a regulatory framework involving prescription of prudential norms for NBFCs which are taking deposits to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions is prudence, transparency and disclosure. Section 45JA comes under Chapter IIIB which deals with provisions relating to Financial Institutions, and to non-banking Institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification; provisioning, etc. The basis of the 1998 Directions is that anticipated losses must be taken into account but expected income need not be taken note of. Therefore, these Directions ensure cash liquidity for NBFCs which are now required to state true and correct profits, without projecting inflated profits. Therefore, in our view, RBI Directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies Limited s case (supra), RBI has mandated that every NBFC shall disclose in its Balance Sheet the Provision without netting them from the Income or from the value of the assets and that the provision shall be distinctly indicated under the separate heads of accounts as: - (i) provisions for bad and doubtful debts, and (ii) provisions for depreciation in investments in the Balance Sheet under Current Liabilities and Provisions and that such provision for each year shall be debited to P L Account so that a true and correct figure of Net Profit gets reflected in the financial accounts of the company. The effect of such Disclosure is to increase the current liabilities by showing the provision against the possible Loss on assets classified as NPA. As per sub-para 2 of Para 9, the provisions shall be distinctly indicated under separate heads of accounts on the Liability side of the balance sheet under the caption current liabilities and provisions . 23. Examining the applicability of Section 145 of the Act, at the outset, we may state that in essence RBI Directions 1998 are Prudential/ Provisioning Norms issued by RBI under Chapter IIIB of the 1934 Act. These Norms deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine 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. 25. It was concluded by the Apex Court in Southern Technologies Limited's case (supra) that the RBI directions have nothing to do with the accounting treatment or taxability of income under the Act and the two, viz. the Act and the RBI Directions, 1998 operate in different fields. The Supreme Court had clearly recognized 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. 26. Under the Act, the charge is on profits and gains, not on gross receipts (which however, has profits embedded in it). Therefore, subject to the requirements of the Act, profits to be assessed under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 case before the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying it to its Profit and Loss Account credited the same to a separate account styled Interest suspense account as the principal amounts of these sticky advances themselves had become, not bad or irrecoverable but extremely doubtful of recovery. However, in its returns the assessee disclosed such interest separately and claimed that the same was not taxable in its hands as income for the concerned years. The contention of the assessee was rejected at all levels principally on two grounds (a) since admittedly the assessee was following the mercantile system of accounting such interest had accrued to it at the end of each accounting year and (b) the assessee had itself shown the accrual of such interest by charging the same to the concerned parties by making debit entries in their accounts. The Supreme 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 the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The court observed that with a problem like the present one, it is better to adhere to the basic fundamentals of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the income of the assessee until it is actually recovered. 11 to 13 XX XX XX 14. 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 State Bank of Travancore v. CIT decided by a Bench of three Judges of this Court by a majority of two to one. This judgment directly deals with 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en. 30. In all fairness to learned counsel for the revenue, the contention that Section 43D of the Act itself recognises 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, requires to be discussed. In this regard, it may be noted that the benefit claimed by the assessee is not under any provision of the Act. The assessee being bound by the RBI Guidelines which are issued under the provisions of the 1934 Act has not shown the interest on NPA as income. By virtue of the provisions of section 45Q of the 1934 Act, the provisions of Chapter IIIB thereof have an overriding effect over other laws. Therefore, notwithstanding the provisions of section 43D of the Act, since the provisions of section 45Q of the 1934 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 interest on principa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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