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TMI Blog2017 (10) TMI 1605X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for interest accrued on non performing assets. 4. The Ld. AR in this respect filed the copies of Tribunal orders in the case of Jalandhar Central Co-operative Bank Ltd. and Kapurthala Central Co-operative Bank Ltd. The Ld. AR also invited our attention to an order dated 03.01.2017 passed by Chandigarh Bench of the Tribunal in the case of Ludhiana Central Co-operative Bank Ltd. wherein again same issue was decided in favour of assessee. The Ld. AR also invited our attention to an order of Hon'ble Gujarat High Court in the case of Pr. C.I.T., Rajkot Vs. Jivan Commercial Co-operative Bank Ltd. wherein the Hon'ble High Court vide its order dated August 23, 2017 has dismissed the appeal of revenue under same facts and circumstances. 5. The Ld. DR fairly agreed that the issue was squarely covered in favour of assessee, however he maintained that while allowing appeal of the assessee, the Ld. CIT(A) has ignored the decision of Hon'ble Supreme Court in the case of State Bank of Travancore Vs. C.I.T., Kerala 158 ITR 102. 6. We have heard the rival parties and have gone though the material placed on record. We find that the issue involved in these appeals, is regarding non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee for the assessment year 1981-82. It is the case of the assessee that in respect of loans 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 realized 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 realized. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine. 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 9t h 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow the same. Insofar as income recognition is concerned, clause 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 nonperforming 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 nonperforming 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 RBI Guidelines, cannot recognize 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 she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " under the IT Act. The inconsistency between these Directions and the Companies Act is only in the matter of income recognition and presentation o f 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 o f Section 45-Q o f 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 recognized accounting principles a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riding effect over the income recognition principle 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 render ing 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppear to have been pointed out to the 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 pr inciple 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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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