2015 (11) TMI 1626

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....fter examining the books of accounts and other information furnished, completed the assessment u/s 143(3) of the Act and determined total income at Rs. 3,72,77,956/- as against the returned income of Rs. 1,96,45,690/-, thereby made additions towards interest on Non- Performing Assets (NPAs), provision for education fund, provision for bad and doubtful debts, etc. 3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee challenged the additions made by the assessing officer on account of interest on NPAs. The CIT(A), after considering the explanations furnished by the assessee deleted the additions made by the assessing officer. Aggrieved  by the CIT(A)'s order, the revenue is in appeal before us and raised the following grounds: 1. The Id. CIT(A) erred both in law and in facts of the case. 2. The Id. CIT(A) is not correct in deleting the addition of interest on NPAs considering the provisions of section 43D of the I.T. Act, 1961. 3. The Id CIT(A) ought to have considered the Board's Instruction No.17 of 2008, d t . 2 6 1 1 1 / 2 0 0 8 wherein i t was s tated that banks have to follow the mercantile s....

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.... a co-operative bank bound to follow the guidelines issued by the RBI, has recognized the interest on NPAs on receipt basis. The A.R. further submitted that the assessee is following this system of accounting for recognition of interest on NPAs consistently from the past several years. Therefore, the A.O. is not correct in bringing to tax the  interest on NPAs on accrual basis. The A.R. further submitted that guidelines issued by the RBI are over ride the provisions of the Incometax Act. Therefore, the assessee is bound to follow the guidelines issued by the RBI rather than complying with the provisions of the Income-Tax Act. The A.R. further submitted that the issue involved in this appeal is squarely covered by the decision of ITAT, Visakhapatnam Bench in the case of DCIT Vs. Durga Co-operative Urban Bank Ltd., wherein under similar circumstances, the ITAT decided the issue in favour of the assessee. 6. We have heard both the parties and perused the materials available on record. The assessee is a co-operative bank, regularly following mixed system of accounting, wherein it is following cash system for recognizing interest on loans and advances and mercantile system of acco....

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....wed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Honible Supreme Court. 10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant: "What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not "accrued". The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not 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." 8. An identical issue came up for consideration before the ITAT Pune Bench in the case of Vaidyanath Urban Co-op. Bank Ltd....

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....ed 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 realised. 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. Up to the asst. yr. 1978-79, the CBDT's circular of 6th Oct., 1952 would be applicable; while from the asst. yr. 1979-80, the CBDT's circular of 9th Oct., 1984 is made applicable. In the present case, the assessment was made on the basis of the CBDT's circular of 9th Oct., 1984, since the assessment pertains to asst. yr. 1981-82 to which the circular of 9th Oct., 1984, is applicable. Under sub-s. (2) of s. 119, without prejudice to the generality of the Board's power set out in sub-s. (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases setting forth directions or instructions, not being....