TMI Blog2022 (8) TMI 1346X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the provisions of Sec. 43D and judicial findings as supra we consider that norms for categorization of bad and doubtful debts had to be prescribed considering the guidelines issued by the RBI. CIT(A) is not justified in substituting the limit for recognizing of interest on account of NPA to 180 days from 90 days in view of the clear provisions of Sec. 43D(a) that in the case of public financial institutions or schedule 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 and doubtful debt as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts. Therefore, both the ground of appeals of the assessee are allowed. Revision u/s 263 - interest expenditure u/s 36(1)(iii) - HELD THAT:- As merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different dates as discussed therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income at Rs.87,24,41,88,318/-. Subsequently, the case was reopened u/s 147 of the Act and noticed u/s 148 was issued on 31.03.2017. During the course of reassessment the A.O noticed that as Section 43D r.w. Rule 6EA interest is not to be offered for taxation with respect to advances which have become non-performing assets for a period of 180 days or more, however, the assessee has recognized such interest on the non performing assets for a period of 90 days or more as per guidelines of RBI. On query the assessee explained that as per provision of Sec. 43D of the Act income by way of interest in relation to such categories of bad and doubtful debt as may be prescribed in the guidelines issued by RBI shall be chargeable to tax in the year in which it is credited by the public financial institution or schedule bank to its profit and loss account for the year or in the year in which it is actually received whichever is earlier. It is further stated that the bank on the guidelines laid down by the RBI regarding identification, classification and provisioning of non-performing assets derecognizes the interest if the accounts are over due for a period of more than 90 days. This me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elines issued by the RBI in relation to such debts The appellant mainly seeks to contend that what would prevail is RBI guidelines in relation to section 430 of the Act and not the Rule CEA of the Rules. In regard to such contention of the appellant, it is stated that the provisions of section 430 stipulates that 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. Therefore, what can be seen from the provisions of section 43D of the Act is that the income by way of interest has to be considered as may be prescribed and such stipulation has been prescribed in Rule 6EA of I.T. Rules, 1962 for the said purposes. It is to be understood that the rule may be prescribed having regard to the guidelines issued by the Reserve Bank of India and such stipulation in section 43D only warrants the authorities to prescribe the rules in view and in reference to the guidelines issued by the Reserve Bank of India. It therefore has to be understood that while the guidelines issued by the Reserve Bank of India are essential point for recognition, havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section 43D was introduced by Finance Act, 1991 with a view to improve the viability of the banks, public financial institutions, and as per that section the interest on sticky loans has to be charged only in the year in which interest is actually received or charged to profit and loss account, whichever is earlier. As per that section, the category of bad and doubtful debts [sticky loans] was to be prescribed in the IT Rules having regard to the guidelines issued by the RBI in relation to such debts. In 1992, the Rule 6EA was framed wherein the norms for six months was provided In that year as per the RBI guidelines, the norms for categorizing NPA were more than 6 months la 1991, the specified period was two years. In 1994, it was 1.5 years, from 1995 till 31.03.2004, it remained 6 months. Thus, it is very clear that the norms of 6 months provided in Rule 6EA was not equal to the period provided in RBI guidelines from when the rule was framed till 2004. The section 43D provided from the norms by framing the rules in view of the RBI guidelines but does not mean that the norms were to be adopted Admittedly, the norms as per RBI guidelines have been further reduced to ninety da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances resulting into difficulties in enforcing and realizing of the securities have been proven on facts. If that would have been the situation, then such debts could not be included for the purposes of (a) to (d) and resultantly should have been taken to section 36(1)(vii)/(via) of the Act. In view of the facts and circumstances of the case and discussion hereinabove, the contentions and submissions of the assessee are not found to be acceptable and are therefore, rejected. Ground No.2 of the appeal is accordingly, dismissed. 5. During the course of appellate proceedings before us the ld. counsel vehemently contended that it is mandatory for the banks to follow the guidelines issued by the RBI and further submitted that assessee bank had not recognized the interest income in respect of advance which were overdue for more than 3 months in the profit and loss account in accordance with RBI guidelines applicable to the bank. The ld. Counsel has also submitted that assessee bank has to follow system of accounting and prepare account as mandated by RBI guidelines. She has also submitted that Rules 6EA was in conformity with the RBI guidelines at the time of introduction, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs as on 31.3.2010. The loan account becoming overdue and becoming sticky was never disputed. The next issue is whether the prudential norms of RBI for income recognition would override the provisions of the IT Act. This issue has been addressed by the Hon'ble Supreme Court in the case of Southern Technologies Ltd supra in the context of allowability of deduction towards 'Provision for NPA. We find that the same decision clearly stated that the interest income on NPA accounts should not be recognized on accrual basis which is in line with RBI prudential norms for income recognition. This fine distinction has been duly considered in the decision of the Hon'ble Delhi High Court in the case of CIT vs Vasisth Chay Vyapar Ltd supra. When the account becoming NPA is not disputed by the revenue, the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances and respectfully following the decisions of Hon'ble Delhi High Court in 330 ITR 440 and various other decisions refered to supra, we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces which remained over due for more than 6 months. The RBI has revised the guideline from time to time and made changes in the period of overdue of advances for categorization of NPA. During the year under consideration the RBI has reduced the period to 90 days for categorization of interest on sticky loan as NPA, however, similar changes was not made to Rule 6EA. After considering the provisions of Sec. 43D and judicial findings as supra we consider that norms for categorization of bad and doubtful debts had to be prescribed considering the guidelines issued by the RBI. Therefore, the ld. CIT(A) is not justified in substituting the limit for recognizing of interest on account of NPA to 180 days from 90 days in view of the clear provisions of Sec. 43D(a) that in the case of public financial institutions or schedule 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 and doubtful debt as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts. Therefore, both the ground of appeals of the assessee are allowed. ITA No. 3864/Mum/2019 (Revenue A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. DAG06RRB August 9, 2006 233,00,00,000 August 9, 2016 233,00,00,000 2. DJA07RB1 January 15, 2007 18,00,00,000 April 30, 2017 18,00,00,000 3. DJA08RB1 October 1, 2008 500,00,00,000 April 30, 2018 500,00,00,000 4. DSP06RRB September 13, 2006 550,00,00,000 September 13, 2016 500,00,00,000 1301,00,00,000 1301,00,00,000 On query the assessee explained that these bonds have been issued to various insurance companies, mutual fund provident fund and individuals. It is also explained that these bonds were in the nature of debentures and have superior claim over equity and cumulative preference shares of the bank. They have fixed the interest rate and interest is paid out of distributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he call option for such bonds as per applicable guidelines. The Appellant also claimed that the interest paid to the bond holders unlike dividend income was not exempt as per provision of the Act and the bondholders accordingly had offered the interest receipts as their income. The Appellant claimed that as per RBI Guidelines, the Perpetual Bond were treated as Tier I capital subject to certain conditions The investors do not get the right to redeem the bonds at any given point of time Only the issuing company can buy back the bonds from the investors Therefore, even if subsequently borrower buys back these bonds, it will not alter the nature and character of these bonds because it is the borrower and not the lender who has every right in such bonds to redeem it Further, in the appellant's case, monies borrowed by issuance of IPDIs have been disclosed in Schedule 4 of the balance sheet as Borrowings and the interest paid on the said bonds is debited to the Profit and Loss Account of the year by the appellant. The IPDI holders/lenders are not entitled to participate in the management of the affairs of the appellant and neither are they entitled to the share in the profits of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital, provided by the Government. On the question of whether the interest paid by the Petitioner can be regarded as deductible under section 36(1)(ii) of the IT Act, on facts, the High Court held that (a) the capital was not borrowed by the Petitioner, but was only provided by the Government, (b) there was no obligation on the Petitioner to repay the capital provided by the Government as per provisions of the Road Transport Corporation Act, 1950, and (c) hence, the interest paid on the capital, though termed as interest, would not be allowable as deduction under section 36(1)(ii) of the IT Act. The facts of aforesaid case are distinguishable as the assessee has borrowed money and it cannot be treated as provided by lenders. Further even though the terms of the IPDIs are perpetual in nature, as per the terms of the issue, all IPDIs are redeemed either at the first available opportunity or within a short while thereafter. This is mainly because if the Appellant fails to redeem the IPDIs at regular intervals, the subsequent issues of IPDIs would not be subscribed by the investors. Thus, in actual practice, the IPDIs are not perpetual as the intent is always to repay the sums borrowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld. D.R. in his argument was placed. By referring this case the ld. Counsel contended that fact of the case of the assessee are distinguishable from the facts of the case of Pepsu Road Transport Corporation. She stated that in the case of Pepsu Road Transport Corporation, it was the statutory requirement that the corporation shall pay interest on the capital borrowed from the central state Government at such rates as may be fixed by the Government. In that case the capital of the corporation was to be provided by the Central State Government whereas in the case of the assessee there was no such statutory requirement and assessee has issued debt instruments without any compulsory requirement of contribution. The ld. Counsel has also referred decision of ITAT, Cochin in the case of Kerala Road Transport Corporation Vs. ITO 34 TTJ 101. 10. Heard both the sides and perused the material on record. The A.O has disallowed the claim of interest made u/s 36(1)(iii) by treating the perpetual bond as equity in nature. In support of his finding the A.O has placed reliance on the observation of the Pr. CIT made in the order u/s 263 in the case of the assessee for A.Y. 2013-14. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le from the case of the assessee. In that case the capital was not borrowed but the same was provided by the Government as per the provisions of the Road Transport Corporation Act, 1950 whereas in the case of the assessee bank it had borrowed the money from the lenders. Similarly the fact of the case of Bank of India Vs. ACIT vide 122 taxman.com 247 (Mum ITAT) are also distinguishable from the case of the assessee. In that case the revenue had not discussed about the terms on which perpetual bond were issued. Therefore, the issue was remained back to the ld. CIT(A) for fresh adjudication. We have also perused the decision of Kerala Road Transport Corporation Vs. ITO 34 TTJ 101 Cochin, ITAT, wherein held that payment of interest was not made to the corporation but it was the payment made to the third parties. In the light of the above facts and circumstances merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different da ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
