TaxTMI 
TaxTMI 
2014 (4) TMI 1179
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....e or accrued on the NPAs amounting to Rs. 1,43,16,571/- has not been credited or offered for taxation by the assessee in the profit and loss account but was directly credited to the balance sheet as 'overdue interest reserve' and debited on asset side as 'overdue interest receivable' . The assessing officer therefore asked the assessee to explain as to why the accrued interest on NPAs should not be added back to income. The assessee explained that it is following the RBI norms regarding disclosure of income. The bank makes provisions for doubtful assets, NPAs and loss assets, and these categories are separated by the period for which particular loan has been serviced. If the installment on a loan has not been received for specified number of quarters, it is considered as NPA. Since there is a possibility that the a debt can go bad, the RBI guidelines allow the bank to appropriate part of its profit by making a provision in respect of such assets which will be utilized in case the debt turns bad. 2.2 Rejecting the various explanations given by the assessee and following CBDT Guidelines vide Instruction No.17/2008 dated 26-11- 2008 the Assessing Officer made addition....
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....t. The conditions include clauses regarding payment of installments and as per these clauses the lender credits its books and debits the account of borrower. The interest accrues as per the terms agreed between the lender and borrower. Now as a prudence, to take care of unforeseen circumstances of a loan turning bad, RBI prescribes guidelines for creating provision out of the profit of the banks and financial institutions which are regulated by the RBI Act, Banking Regulations Act and Prudential guidelines issued by the RBI which are mandatory on the banks and financial institutions. But these guidelines may or may not supercede the provisions of IT Act in computing income of an assessee on which tax has to be paid. Unless otherwise provided in the IT Act, the interest income should accrue as per the agreement between lender and borrower. Now, in the case of Vasisth Chay Vyapar Ltd., which was a nonbanking financial institution bound by prudential norms directions issued by the RBI for income recognition and asset classification, the Hon'ble Delhi High Court took note of section 45Q of the RBI Act which reads as under : "Chapter IIIB to override other laws. 45Q. The provisions ....
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....ations Act, 1949] or 3[a corresponding new bank as defined in clause (da) of section 5 of that Act or a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Acts, 1959] or 4[a Regional Rural Bank or a cooperative bank] or a primary agricultural credit society or a primary credit society]: Provided that for the purpose of this Chapter, the 5lTam.il Nadu Industrial Investment Corporation Limited] shall not be deemed to be a banking company. ' 45Q. The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." 7. Thus, the very first section of Chapter IIIB, i.e. section 45H clarified that provisions of Chapter IIIB will not apply to a cooperative bank. Since Chapter IIIB is not applicable to co-operative banks, therefore sections 45Q which is part of Chapter IIIB will not be applicable to co-operative banks and in respect of co-operative banks the Chapter IIIB will not override the IT Act. The decision of Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (supra) will have no application in the ....
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....us decisions cited before us. We find an identical issue had come up before the Tribunal in the case of The Omerga Janta Sahakari Bank Ltd. (Supra). We find the Tribunal has decided the issue in favour of the assessee and dismissed the appeal filed by the Revenue by observing 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 Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a 'scheduled bank' included in second schedule of RBI so as to fall within the scope of section 43D of the Act. Notably, section 43D of the Act prescribes that interest income 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....
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....ets 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 ITAT 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.45Q of Reserve Bank of India Act which reads as under: "Chapter IIIB to override other laws. 45Q. The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having 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 Rec....
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....urt 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 entirely 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 we examine the issue involved therein minutely and deeply in the context in which that had arisen 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 ex....
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....ognition. 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-à-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 taxable income. These Directions cannot overrule the 'permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act is only in the 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 Recognitio....
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....gh 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 Representative based on the judgement of the Hon'ble Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon'ble Madras High Court related to 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 Technologie....
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....ssee and classified under HTM category at Rs. 11,54,019/-. 10. Before the CIT(A) it was submitted that assessee is a cooperative Bank registered under Maharashtra Cooperative Societies Act, 1960. Reserve Bank of India issues directives and circulars from time to time as regards interest rates, loans and advances, investment of funds, NPA etc. All the banks have to classify the securities as per RBI's prudential norms under HTM, AFS & HFT so as to manage the portfolio efficiently and with the minimization of the risk. As per the prudential norms, bank has made provision for amortization of premium on investment in Govt. Securities held in HTM category. It was contended that guidelines issued by the RBI are binding on banks and those guidelines are issued under the RBI Act, 1934.which supersedes all other Act by virtue of section 45Q of RBI Act. 11. However, the CIT(A) also was not convinced with the arguments advanced by the assessee and upheld the addition made by the Assessing Officer by observing as under : "10. I have considered the submission and gone through the assessment order. The contention of the appellant that RBI guideline supercede all other laws is not correct....
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....sessee by the decision of the ITAT, Mumbai Bench, Mumbai in the case of ACIT, Central Circle 233, Mumbai Vs. Bank of Rajasthan Ltd., ITA No. 2246 to 2250/MUM/2009 order dated 22-12- 2010. In the said decision, the Tribunal has referred to subsequent decision of the Hon'ble Supreme Court in the case of UCO Bank, 240 ITR 355. The operative part of the finding of the Co-operative Bench in the case of Bank of Rajasthan Ltd. (supra) is as under: 17. In the case of the Bank all investments are stock in trade as held by Hon'ble Supreme Court in the case of UCO Bank reported at 240 ITR 355. There is no investment in the nature of investment on which the expenditure/loss can be treated in the nature of capital expenditure. The securities are categorized as per the norms of the RBI. As per the "Significant Accounting Policies" given in schedule 17 attached with the Balance Sheet every year, the fact that all investments are stock in trade has been clarified in the case of the Assessee. It does not mean the securities kept in category of HTM cannot be sold before the maturity. The HTM has been sold in subsequent year and Income/loss treated as business income/loss and not as capital....
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....e (AFS). Investments classified under HTM category need not be marked to marked and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining to maturity. In the case of HFT and AFS securities forming stock in trade of the bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims." 21. Since the claim of the assessee is as per RBI guidelines and CBDT has also issued directions to allow premium to be amortized remaining with the maturity, therefore, the Assessing Officer is directed to allow the claim of the assessee amounting to Rs. 65,51,826/-. 4. We further find that this issue stands covered in favour of the assessee by the decision of the ITAT, Pune in the case of Latur Urban Coop. Bank Limited, Latur Vs. Dy. CIT, Circle-3, Nanded, ITA Nos. 778 & 792/PN/2011 order dated 31-08-2012. In the said case the Tribunal has held that all the securities held by the Bank form part of the stock-intrade respective of the classificat....
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....ubsequent decision in the case of United Commercial Bank Vs. CIT 240 ITR 355 (SC), the issue of valuation of stock-in-trade of securities held by the Bank was referred to the Hon'ble Supreme Court and it is held that it is open to the assessee to value it at the cost or market value whichever is lower and method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the Department authority. The Law is well settled that all the securities held by the Bank are part of the stock-in-trade irrespective of the fact how the classification is made. In the light of the above discussion and following the decision in the case of Bank of Rajasthan Ltd. (supra) and the Latur Urban Co-op. Bank Limited (supra), we, allow the appeal filed by the assessee and delete the addition made by the Assessing Officer." 12.1 Respectfully following the decision of the Coordinate Bench of the Tribunal and in absence of any contrary material brought to our notice by the Ld. Departmental Representative, we set-aside the order of the CIT(A) on this issue and direct the Assessing Officer to delete the addition of Rs. 11,54,019/- made on account of amortization of premium on ....