TaxTMI 
TaxTMI 
2015 (9) TMI 795
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....ation, it was argued by the assessee that as per the directions of the RBI, on the concept of income recognition, interest on overdue loan account was credited to the profit and loss account only on actual realisation though the assessee has been following mercantile system of accounting. It was argued that there was drafting lacuna in section 43D by not including cooperative banks in its ambit after deduction u/s.80P to cooperative banks was withdrawn. It was argued that the directions of the RBI, being apex body, were mandatory on the assessee and the same have been consistently followed by the assessee as well as other cooperative banks. The Circular No. F.201/81/84/TA-II dated 09-10-1984 issued by CBDT was also brought to the notice of the AO which clarifies the taxability of interest on the NPAs. 3. However, the AO was not satisfied with the arguments of the assessee. He observed from the various details furnished before him that the NPAs categorized by the assessee also included substandard doubtful assets suggesting that the interest thereon has not been remained unrecoverable for the last 3 consecutive previous years. According to the AO, the assessee contravened the pro....
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.... the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in appreciating the provisions of section 145 of the I. T. Act, 1961, in its correct perspective. 4. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred while delivering the judgment has allowed the appeal of the assessee bank by placing reliance on its own decision in the ACIT, Circle-3, Nanded Vs. Osmanabad Janata Sahakari Bank Ltd. in ITA No. 795/PN/2011 vide order dated 31/08/2012. However, the above decision has not been accepted by the Department and an appeal u/s. 260A has been filed by the CIT, Aurangabad with the Hon'ble High Court of Bombay Bench at Aurangabad, vide lodging No. 1613/2013 dated 15/01/2013. 5. The order of the CIT(A) be vacated and that of AO be restored. 6. The appellant craves to add, alter, amend, substitute or delete any of the grounds urged herein above as and when found necessary." 7. The Ld. Departmental Representative heavily relied on the order of the AO 8. The Ld. Counsel for the assessee on the other hand while supporting the order of the CIT(A) submitted that the issue stands decided in favour of the ass....
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....ncome on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consideration. 9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Co-operative Bank operating under a license issued by RBI but was not a 'scheduled bank' so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The....
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.... effect by virtue of any such law". The High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon'ble High Court also considered accounting standard "AS-9" on "Revenue recognition" and also extracted following relevant portion from the said accounting standard: 9. Effect of uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection. 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments. 9....
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....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 Supreme Court, the assessee a NBFC debited Rs. 81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of Section 36(1) (vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible under section 36(i)(vii) of the Act. The Assessing Officer, however, did not bring to tax Rs. 20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it wa....
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....he matter of Income Recognition and presentation of 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 Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute". 10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle unde....
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....o non-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Hon'ble Madras High Court took the view that the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) also applied to the Income Recognition Norms provided by RBI and therefore it held the interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI's guidelines. But the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon'ble Delhi High Court and the Hon'ble Madras High Court as noted by the Hon'ble Madras High Court in its order. 12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products....
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....e his orders in all the appeals has directed to delete the additions on the interest of sticky advances, on the NPA made by the Assessing officer. 5. Being aggrieved by the order of CIT(A), the Revenue preferred separate appeals in each case before the Income Tax Appellate Tribunal, Pune Bench "A", Pune. The learned I. T. A. T. has confirmed the decision of the CIT(A) and dismissed the appeals of the Revenue. Thus, Revenue has filed the aforesaid appeals challenging the legality and correctness of the order passed by the Income Tax Appellate Tribunal. 6. The learned counsel Mr. Alok Sharma, appearing for the appellants/Revenue submits that, the assessee in all these cases are the co-operative Banks and not a Scheduled Bank, therefore, special provisions of Section 43-D of the Income Tax will not be applicable to them. Learned counsel further submits that, in view of the provisions of Section 145 of the Income Tax Act, the assesseee/Co-operative banks have to follow either Mercantile system of accounting or Cash system. They cannot have mix system of account. The learned counsel also submits that, the RBI directions under the RBI Act are prudential norms, but have nothing to d....
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.... Supreme Court in the case of Southern Technologies Limited supra held that, provisions of Section 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding 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. 10. The Honourable Apex Court in the case of Uco Bank case (supra) had an occasion to consider the nature of CBDT circular and Hon'ble Apex Court has thus held that Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Further a similar issue was raised about interest accrued on a 'sticky' loan which was ....
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....of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a "sticky" loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the P&L a/c goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 14....