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TMI Blog2018 (1) TMI 1621X X X X Extracts X X X X X X X X Extracts X X X X ..... governed by the Banking Regulation Act, 1949 as applicable to co-operative Societies. The appellant is an urban cooperative bank. Regular books of account are maintained and are audited as per the provision of Gujarat Co-Operative Societies Act as also u/s.44AB of the Income-tax Act, 1961. It had filed its return of income on 26.07.2012 showing therein income of Rs. 2,59,94,100/-. The AO, vide order u/s.143(3) of the Act dated 11.03.2015 assessed the total income at Rs. 3,13,72,830/-, wherein he made the above additions/disallowances. 2.1 In this case, appellant made following submission: "(a) The AO vide para 3.1 of the Assessment order alleged that NPA's interest which was due as per mercantile system and as per provisions of section 145 of the Act should have been subjected to tax accrual basis. He further alleged that exemption of interest income in relation to the NPA is available only to the schedule banks and not to the Co-operative Bank. He thus vide para 3.6 of the assessment order held that accrued interest of Rs. 34,73,904/- is part of taxable income and accordingly added to the total income. (b) During the assessment proceedings in response to show cause notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. In this connection reliance is placed on the following decisions. * Hon'ble Supreme Court of India in the case of UCO Bank vs. CIT 237 ITR 889; * Hon'ble Supreme Court of India in the case of CIT vs. Shoorji Vallabhdas & Co. 46 ITR 144; * Hon'ble High Court of Calcutta in the case of ANZ Grindlays Bank Ltd. vs. CIT 250 ITR 125; (d) The appellant further submits that provisions of section 145 are subject to mandate of accounting standards I issued u/s.145(2) of the Act, which prescribes that accounting policies adopted by the appellant should be such so as to represent true and fair view of the affairs of the business in the financial statements. In the name of compliance with section 145(1) or other section, it is not open for anyone to force adoption of accounting policies which give a distorted picture. Further, the appellant is consistently following the method of recognizing interest on NPA only when it is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for interest income when principal, on which such interest is dependent, is itself in doubt. To take interest on such non-performing advances in the scope of taxable income is patently against the theory of real income. The Hon'ble Supreme Court of India in the case, of UCO Bank vs. CIT [supra] held that in view of CBDT circular, dated 9-10-1984, interest on a loan whose recovery is doubtful and which has not been recovered by assessee bank for years but has been kept in a suspense account and has not been brought to profit and loss account of assessee, cannot be included In income of assessee. Further reliance is also placed on the decision of the Hon'ble Supreme Court of India in the case of Mercantile Bank Ltd. vs. CIT [2006] 153 Taxman 97, wherein, the apex court held that in view of decision of Supreme Court in UCO Bank v. CIT assessee would not liable to be taxed in respect of interest on doubtful advances credited to interest suspense account. (g) Further without prejudice to the above, in view of the fact that bank has been following practice of recognizing interest on NPAs only actual realization basis and the department has accepted above, there seems no reason wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in the case of UCO Bank (supra), which is as under: "15.1 On careful analysis of this section our first observation is that Section 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that, an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The words "credited" and "actually received" has been highlighted hereinabove while reproducing the section in question. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is actually received. The Act says that the incidence of 'credit' or "actually received", whichever is earlier is to be taken into account for the purpose of chargeability of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C.B. Gautam v. Union of India 108 CTR 304 (SC) & 110 CTR 179 (SC); Navnitlal C. Zaveri 56 ITR 198 (SC) and K.P. Varghese 131 ITR 597 (SC). In the land-mark decision, the Hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 (SC) has therefore held, first, that a beneficial circular is not to be treated as inconsistent with the provisions of statute and binding on the authorities. Second, that in respect of interest on "sticky advances" interest income is to be taxed only when actually received as prescribed by CBDT Circular. However, in the past an interesting turn had taken place by an order of the Hon'ble Kerala High Court in the case of State Bank of Travancore reported in 110 ITR 336 (Ker.), wherein it was held that the assessee, a banking company, did not credit in its account the interest that had accrued on "sticky advances" because the assessee felt that the interest could not to be realized. It credited the interest to a separate account known as "interest suspense account". On reference, the Hon'ble Court has held that there was an accrual of income liable to income-tax and the assessee was not justified in not crediting the interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have been used in the same sense when used in subsequent legislation in the same or similar context. To say that the court could not resort to the so-called "equitable construction" of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to sub-serve the object of the legislation, another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes." We can therefore safely draw a conclusion that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. section 43-D has to be applied in its letter and spirit. It is pertinent to mention that later on, in the case of CIT v. Bank of America S.A. 262 ITR 504 (Bom) the question of interest on "sticky loans'' was decided in favour of the assessee and held that the question is to be answered in favour of the assessee following the decision of UCO Bank reported at 237 ITR 889(5C) :: 240 ITR 355 (SC). Likewise, in an another case of CIT v. State Bank of India 262 ITR 662 (Bom.) again it was held that the amount credited to the interest suspense acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervision with respect to public interest and viability of the NBFC. The Guidelines never intended for taking the interest income accrued as per section 5 out of the scope of the Act. If the contention of assessee was accepted, it would amount to insertion of NBFC in section 43D, that too by a Guideline issued for afferent purposes by an authority other than the Parliament. In other words, the doctrine of 'Casus Omissus' will deem to have been applied which is contrary to law of land. "Unquote the basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of the Respected Tribunal was that if the contention of the assessee was to be accepted, then it would amount to insertion of "NBFC" in section 43-D of the I.T. Act. As against that, as far as the assessee is concerned, it is an accepted fact that the assessee is a cooperative bank and not a non-banking financial company and this noteworthy distinction has already been appreciated by us in one of the paragraphs above. "There is one more decision of the Hon'ble Apex Court which is yet to be mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 357 (Mad.) has taken a view that the assessee is a company engaged in the business of lease, finance and hire purchase and that the principle of accrual comes into play without income was recognized and that the assessee had classified its assets on the basis of notification issued by R.B.I. and found that certain assets came under the category of NPA and that from such NPA the assessee had not recognized any income in consonance with the notification issued by RBI and AS-9 issued by ICAI and that the assessee was justified in not recognizing such income. The Court had further expressed that there was no occasion to consider whether the principle of accrual would arise or not, nevertheless, the interest from such NPA would be taxed in the appropriate assessment year on the basis of actual receipt. It is worth to mention that for this decision, the Hon'ble Madras High Court has relied upon an another decision of the same High Court pronounced in the case of Jt.CIT v. India Equipment Leasing Ltd. 293 ITR 350." 7. In the case before us, admittedly, assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit and Loss Account. Moreover, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance. Section 14A has not confirmed specific power to the AO to assume that a part of the expenditure must have necessarily been incurred to earn exempted income which he can estimate and disallow. The AO has no authority to estimate the expenditure which the appellant would have, in his opinion, incurred in relation to the exempted income. 7. Ld. AR cited our co-ordinate bench decision, ITAT held as follows: "A perusal of case filed reveals that the revenue's twin substantive grounds seek to revive addition of accrued interest on NPA account of Rs,44,65,000/- and Section 14A disallowance of Rs. 13,45,281/-; respectively. Both parties stated the outset that the same are covered by our findings on both the issues in preceding assessment years forming part of this very order. We appreciate this fair submission and decide both issues in assessee's favour. Revenue's appeal ITA No.542/Rjt/14 is rejected. These five Revenue's appeals ITA Nos. 540, 541, 558, 559 & 542/Rjt/2014 are dismissed and assessee's Cross Objection No.5/Rjt/2015 in ITA No.559/Rjt/2014 is allowed for statistical purposes Ordered accordingly." 8. Since in the past similar additions were deleted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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