TaxTMI 
TaxTMI 
2016 (9) TMI 54
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....ase was selected for scrutiny and thereafter assessment was framed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") vide order dated 29.12.2015 and the addition on account of accrued interest on NPA advance amounting to Rs. 85,36,517/- was made by the Assessing Officer (AO). Aggrieved by the order of the AO, assessee carried the matter before the ld.CIT(A), who vide order dated 12/08/2010 (in Appeal No.CIT(A)-XVI/DCIT.Cir.11/182/09-10), confirmed the addition on account of interest accrued on NPA. Thereafter, assessee carried the matter before the Hon'ble Tribunal who vide order dated 25/01/2011 in ITA No.2338/Ahd/2010 set aside the case to the file of ld.CIT(A) to redecide the issue as per the directions contained therein. Pursuant to the directions of the ITAT, ld.CIT(A) vide his order dated 24/01/2013 in Appeal Order No.CIT(A)XVI/DCIT/Cir.11/412/11-12 upheld the addition made by the AO and by further exercising powers u/s.251 of the Act enhanced the addition made by the AO on account of accrued interest on NPA from Rs. 85,36,517/- to Rs. 1,16,77,000/-. Aggrieved by the order of ld.CIT(A), assessee carried the matter before the Tribunal and the Tribu....
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.... non-performing assets. The CIT(A) has confirmed this said addition. The ITAT vide its order dated 25.1.2011 has restored the matter to the file of CIT(A). The CIT(A) has passed order on 24.1.2013 upholding the addition by enhancing it to Rs. 1,16,77,000/-. The Hon'ble ITAT has restored the matter to the file of A.O. vide its order dated 21.06.2013 with a direction to obtain the certificate about the status of bank and ascertain the status of each party. The relevant portion of the order of the ITAT is reproduced as under:- "With these brief backgrounds, we have heard both the sides. Although the assessee is before us for the second time, but still we feel that some of the areas of the dispute have remained unanswered. First question which is yet to be addressed is whether the assessee is a scheduled bank or not. In this regard, the assessee is expected to place on record the requisite evidence, through which it can be ascertained that the assessee falls under any of the category as prescribed in Explanation to section 43D of the Act. Because of this reason, we hereby direct the assessee to obtain the requisite certificate from the concerned authority clearly mentioning the s....
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.... assessee may be treated as allowed for statistical purpose. " 3.4. In the set-aside proceedings, the Assessing Officer has passed assessment order dated 20.2.2015 and made addition of Rs. 1,16,77,000/- on account of accrued interest on non-performing assets. The Assessing Officer has made addition on the ground that the appellant being a scheduled bank, the provision of Section 43D were not applicable, the real income theory was not applicable in view of mercantile method of accounting and the uncertainty of income was not established. 3.5. The AO has made the addition in the nature of accrued interest on bad and doubtful debts (NPA) on the ground that such interest was accrued as per the provisions of section 145 of the I. T. Act as the appellant was following the mercantile system of accounting. 3.6. It has been observed by the AO that the appellant bank has shown the NPA under the head of 'Loans and Advances' and the bank has not shown the interest thereupon in the P & L Account. The AO further observed that although the appellant was following the mercantile system of accounting in general, but so far as interest on NPA is concerned, it has booked the income on r....
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....i Nagrik Sahakari Bank Ltd. in ITA No. 53 of 2014 dated 22/01/2015. The appellant has also relied upon on the judgemnet in the case of Pragati Co-Op. Bank Ltd. (ITA No.872/Ahd/2012) dated 21.08.2015. Reliance is also placed on the judgement in the case of Urban Co-Op. Bank Ltd. (ITA No.471 of 2013 dated 30.06.2014) of Hon'ble Karnataka High Court. 3.8. Having considered the facts and submissions, it is undisputed that the appellant bank has categorized the NPA out of its loans and advances as per the norms prescribed in the RBI Circular which is mandatory to be done. It is needless to mention that such sticky loans have been treated as NPA only for the reason that the repayments of the principal and interest thereupon was not being paid by the borrowers to the appellant bank. Thus, it cannot be said that the interest pertaining to those NPAs would certainly be realized from such defaulting customers. On such NPAs, even the recovery of dues was doubtful and in such circumstances, it would not be justified if the notional interest is worked out upon such NPAs and the appellant bank is paid the taxes thereupon. In this regard, the concept of real income theory also comes to the ....
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....Counsel for the appellant contended that the assessee is a Cooperative bank engaged in carrying on banking business. During A. Y. 2009-10, the assessee passed book entry for interest of Rs. 1,58,897/-on NPA account by debiting to time barred interest receivable account and crediting to provision for time barred interest. Both the accounts are reflected in the balance sheet on the assets side and liability side. No such interest is credited to P&L account as income. He further relied RBI Master Circular updated 30.06.2007, wherein it was policy as per the RBI guideline income from non performing assets is not recognized 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. He further has drawn our attention on the page no. 5 of the paper book which is balance sheet for A. Y. 09-10 which shows that the appellant had shown this interest provision NPA in asset side and liability side and not credited in the P&L account. The appellant further argued that UCO Bank v. CIT, 237ITR 889, wherein it was held that the question whether interest earned what have come to be....
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....le Delhi High Court in the case ofM/s Vasisth Chay Vyapar Ltd., 330 ITR 440 (Del) as -well as the judgement of the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances; and, following the proposition that in the absence of any judgement of the Jurisdictional High Court, there being contrary judgements of the non-jurisdictional High Courts, a decision which was favourable to the assessee was to be followed in view of the reasoning laid down by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SCCG and, thus the Tribunal decided the issue in favour of the assessee. The relevant discussion in the order of the Tribunal dated 31.10.2013 (supra) is reproduced as under :- "8. We have carefully considered the rival submissions. In so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Ostensibly, assessee is a Cooperati....
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....f taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd (Supra); wherein the Hon'ble Delhi High Court took into account the decision rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). In the case of M/s Vasisth Chay Vyapar Ltd, the assessee therein was a non banking financial company and it was also bound by the "Prudential norms directions" issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The Assessing Officer, however, added the said interest as the income of the assessee by holding that it had "accrued" to the assessee even it was not realized as the assessee was following mercantile system of accounting. The learned CIT (A) affirmed the order of the Assessing Officer. However, the IT AT deleted the aforesaid income. Hence the revenue preferred appeal before the Hon 'ble Delhi High Court. 8.1 After hearing the rival submissions, the Hon'ble Delhi High Court took note of sec. 45 Q of Reserve Bank of India Act which reads as....
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....) Ltd., 127 ITR 572 (Mad) iv) UCO Bank vs. CIT 237 ITR 889 (SC) v) CIT vs. Shoorji Valiabhdas & Co 46 (TR 144 (SC) vi) Godhra Electricity Co. Ltd., Vs. CIT 225 ITR 746 vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del) viii) CIT vs. Richer Ltd., ITANo.431/2009 dated 15.7.2009 (Del) 8.3 After considering the Accounting Standard 9 and the various case law listed above, the Hon'ble Delhi High Court held that the interest on NPA advance cannot be treated as "accrued" to the assesses, 8.4. Before the Delhi High Court, the revenue took support of the 'decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). The Delhi High Court considered the said decision of Hon'ble Apex Court and explained the same as under: "We have already held that even under the Income Tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirety on the judgment of the Supreme Court in the case of Southern Technology (Supra). No doubt, in first blush, reading of the judgment gives an indication that the Court has held that Reserve Bank of India Act does not override the provisions of the income Tax Act. However, when....
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....f India Act, an overriding effect is given to the directions of Reserve Bank of India vis-à-vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon'ble Supreme Court are extracted below: "Applicability of Section 145. 40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis-a-vis "Income Recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxabl....
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....find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order." 10. Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. 11. So, however, the learned Departmental Representative has submitted that the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras) has differed with the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) on a similar issue, i.e. relating to interest income on NPAs. The learned Departmental Representative further pointed out that the Hon'ble Madras High Court followed the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis. We have carefully considered the submissions put-forth by the learned Departmental Repre....
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....nd perused the material on record. The appellant is making the provision of interest as per the guidelines issued by the R.B.I. However, same has not been credited in the p&l account as it was notional had not received actually by it. Section 43 is also not applicable a assessee has not credited in the p&l account but shown in the assets and liability side in the balance sheet directly and also not received actually. Thus, we have considered view that the CIT(A) was not justifying in confirming the addition. Accordingly, the assessee's appeal is allowed. 6. In the result, the assessee's appeal is allowed. " 5.3 The Hon'ble Coordinate Bench has noted that there is a divergent view between the Hon 'ble Delhi High Court in the case ofM/s. Vasisth Chay Vyapar Ltd. reported at 330 ITR 44 0(Delhi and the Hon 'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd. reported at (2013) 31 taxmann.com 305 (Mad.), in respect of application of the judgment of the Hon'ble Apex Court rendered in the case of Southern Technology Ltd. (supra) on income recognition norms prescribed by R.B.I. The Hon 'ble Coordinate Bench in view (of the fact that there were d....
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.... 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 the Act and which are binding on the authorities in the administration of the Act, it is 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 be correctly applied. Further a similar issue was raised about interest accrued on a 'sticky' loan which was not recovered by the assessee bank for the last three years and transferred to the suspense account, would or would not be included in the income of the assessee for the particular assessment year. Hon'ble Apex Court has observed that: "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. Th....
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....ived. 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 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The Circular of 9-10-1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years w....
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....ng financial companies. Uco Bank case (supra) and Mercantile Bank (supra) case squarely applies to the facts of the present case and issues involved. We therefore, do not find it necessary to interfere in the judgment of the Appellate Tribunal. We hold that no substantial question of law arises in these appeals. 13. So far as income Tax Appeal Nos. 53/2014 and 54/2014 are concerned, the issue was also raised in the appeals before the Tribunal with regard to the addition made by the Assessing Officer representing the forfeited dividend. The learned Tribunal has rightly dealt with this issue and observed that, unclaimed dividend in question amounts to excess provisions for dividend made by the Assessee on an earlier occasion which has been reversed by the Assessee in the year under consideration and transferred to a reserve account. The provisions of dividend made earlier was not a charge action profits but it was appropriation of the profits available post taxation. We find no error in the aforesaid observations. Furthermore, in the appeals as mentioned above, the Revenue has only challenged the deletion of the additions on account of the interest on stick advances. 3.13. On the....
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....heduled banks. In para - 11 of the judgment, they have observed as under:- "Furthermore, the respondent Co-operative Banks as understood by section 43D of the Act are the scheduled banks." 3.16. The Assessing Officer has observed that the assessee has not been able to effectively establish that there was uncertainty as regards realisability of outstanding dues i.e. principal amount and interest from the borrowers. The Assessing Officer has also observed that though the assessee has filed legal suits for recovery and has also obtained decree but could not be served due to non-availability of the borrowers. The AO has rejected the claim of the assessee on the ground that the assessee failed to effectively demonstrate with cogent evidences that the income has not been resulted or accrued to the assessee. 3.17. The appellant has contended that the appellant had furnished a chart showing complete particulars relating to the NPAs such as date of NPA, date of suite file, status of court proceedings, the position as to realization etc. It is further submitted that in most of the cases there is no realization of dues inspite of decree for last many years. The appellant has also conten....