TaxTMI 
TaxTMI 
2013 (1) TMI 368
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....rred in law and on facts by deleting addition of Rs. 14,97,811/- [Rs. 48,97,167/- in ITA No.102/Del/2010, Rs. 46,94,000/- in ITA No.2308/Del/2011 & Rs. 15,36,328 in ITA No.5642/Del/2011] on account of de-recognized interest on accrual basis on Non-Performing assets (NPA) made by the A.O. ignoring that the assessee company has been regularly maintaining its accounts on mercantile system and was bound to offer interest de-recognised on accrual basis on NPA as income of the year as per the provision of Sec.145 of the IT Act." 1.1 In ITA No.101/Del/2010, the department has taken the following ground of appeal:- "On the facts and in the circumstances of the case, the Ld. CIT(A) erred in law and on facts in deleting addition of Rs. 44,40,00....
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....sue has been raised, are being culled from ITA No.100/Del/2010. 3. The issue is as to whether the assessee is entitled to de-recognised interest on accrual basis on non-performing assets. 4. The Assessing Officer observed that as per the Notes on Accounts of the assessee, it had been mentioned that the interest on loans to rural producers was the net of rebates for on time repayment and interest de-recognised. The assessee was asked to show cause as to why the interest de-recognised be not added to the assessee's income. In response, the assessee submitted, inter alia, that it was a Non-Banking Finance Company (NBFC) as per the directions of Reserve Bank of India and had to follow the directions of RBI; that as such, it had been follo....
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....l basis on NPAs; that while doing so, the Ld. CIT(A) has gone wrong in ignoring the fact that the assessee company has been regularly maintaining its accounts on the mercantile system of accounting and that it was bound to offer interest de-recognised on accrual basis on NPAs, as it is income as per the provisions of Section 145 of the Act. 6. The ld. counsel for the assessee, on the other hand, has placed strong reliance on the impugned order, contending that the Ld. CIT(A) has correctly deleted the addition wrongly made; that as per the directions issued by the RBI, every company registered as an NBFC shall mandatorily follow certain guidelines, which include determination of NPAs, based on the age of the loans; that it is these mandat....
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....the material on record with regard thereto. It is patent on record that the assessee company, incorporated under the Companies Act, 1956, is a registered Non-Banking Finance Company. It is engaged in the business of providing micro-finance services, i.e., providing mainly collateral free loans to the poor in the rural areas with a view to eradicate poverty in India, increase livelihood and employment opportunities in agricultural and non-farm sectors. The company was established in 1995. It secured a licence from the RBI u/s 45-I of the RBI Act, to carry on the business of non-banking finance, including micro-finance services. There exist Prudential Norms, issued by the RBI. The assessee, being a licensed NBFC, it had to follow the directiv....
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....us, where the accrual basis of accounting for recognizing the income is being followed by NBFCs, the RBI directions are to the effect that income on the NPAs should be stopped from being accounted as income thereon and that it shall be accounted as income only as and when realized. 10. Further, Section 45-S of the RBI Act has made the aforesaid RBI directions mandatory, overriding all existing laws, leaving no choice with NBFCs like the assessee company. 11. Moreover, as also recognized in Uniflex Industries (P.) Ltd. v. ITO [2007] 15 SOT 246 (Luck.), Accounting Standard-II issued by the ICAI has been made mandatory in the case of companies. According to AS-II(5), inventories should be valued at "lower of cost and net realizable value....
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....sp; Ted Co Investment and Financial Services (P.) Ltd. v. Dy. CIT [2003] 87 ITD 298 (Delhi) (vi) T.C.I. Finance Ltd. v. Asstt. CIT [2004] 91 ITD 573 (Hyd.) (vii) United Bank of India v. Dy. CIT [1999] 68 ITD 332 (Cal.) 14. Not only this, CBDT Circular No. 491 dated 30.06.1987 provides that interest on sticky advances is to be allowed if the assessee is following the mercantile system of accounting and has changed the method of accounting to cash basis for recognizing the interest on sticky loans. Though this Circular is applicable to State Finance Corporations, it applies equally to NBFCs too. 15. All the above facts were duly taken into consideration by the Ld. CIT(A) while deciding this issue in favour of the asses....