AI Drafter 
TaxTMI 
TaxTMI 
2018 (2) TMI 263
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....lassified to this effect by the Reserve Bank of India. He was of the opinion that Section 43D covers only scheduled bank. He further concluded that the assessee had also not been able to establish the clear-cut cause of uncertainty towards realization of outstanding dues in question including principle and interest amount. All this reasoning resulted in the impugned addition of Rs. 83,45,900/- being made in assessee's hands. The CIT(A) deletes the impugned addition by observing as under: "Decision: 3.5. I have considered the facts of the case and submission made by the appellant. In this case assessment u/s.!43(3) was made on 11.03.2015 after making addition of Rs. 83,45,400/- on account of accrued interest on nonperforming 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. 3.6. 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 ....
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....pal amount itself was in doubt. Therefore, interest on such doubtful amount cannot be said to have been accrued as per the provisions of section 145 of I. T. Act. It has also relied upon the judgment of Bombay High Court in the case of State Bank of India (supra), ITAT, Ahmedabad in the case of Manila Seva Sahakari Bank Ltd. and Sardarganj Mercantile Co-op, Bank Ltd. (supra). Further, reliance was also placed on the recent judgment of Hon'ble Bombay High Court in the case of CIT Vs. Devgiri 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 Kamataka High Court. 3.9. 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 pri....
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.... considered the UCO Bank decision, RBI guidelines has decided the issue in favour of the appellant bank by stating that no interest on the NPA is chargeable to tax. The Hon'ble ITAT has observed that the provisions of section 43D is not applicable as the appellant has not credited the interest in P & L Account but shown in the asset and liabilities side in the balance sheet directly and also not received actually. Relevant portion of the decision is reproduced as under. "4. Now the assessee is before us. Ld. 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 ofRs.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 i....
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.... 2010-11 (supra) has examined the issue thoroughly by holding as under:- 4. The learned CIT(A) disagreed with the Assessing Officer, and thus the Revenue is in appeal before us. At the time of hearing, it was a common point between the parties that an identical controversy has been considered by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No.350/PN/2013 dated 31.10.2013. In the said precedent, the tribunal considered the judgement of the Hon'ble Delhi High Court in the case of Ms 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.....
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.... after considering the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) is worthy of notice: - "8, We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case ofM/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 ....
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....sonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the-effect of uncertainties, it is considered as revenue of the period in which it is properly recognized". 8.2 The Delhi High Court also considered the decision rendered in the following cases; i) CIT(A) vs. Elgi Finance Ltd., 293ITR 357 (Mad) ii) CITvs. KKMInvestments (Cal) - SLP dismissed by Supreme Court (310 ITR 4) Hi) CIT vs. Motor Credit Co (P) 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) CITvs. Goyal MG Gases (P) Ltd., 303 ITR 159 (Del) viii) CITvs. EicherLtd., ITA No.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 Technologi....
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....rained in fie Prudential Norms for recognition of revenue by NBFC". 9. The Hon'ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-a-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....
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....h 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." 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 (....
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.... us in the case of The Omerga Janta Sahakari Bank Ltd. (supra), following the said precedent the present claim of the assessee deserves to be upheld. Thus, the order of the CIT(A) is hereby affirmed and the Revenue has to fail on this aspect. 6. In the result, both the appeals of the Revenue are dismissed. " 5.2. We also find that the Coordinate Bench of this Tribunal in the case of Sardarganj Mercantile Co-op.Bank Ltd. vs. ACIT (supra) has deleted addition by observing as under:- "5. We have heard the rival contentions and 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'b....
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....iding 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 corporative 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 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 t....
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....laim 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, 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 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 ....
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....s case (supra) was also refered and the Hon 'ble Apex Court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent Cooperative banks, as understood by Section 43 of the Income Tax Act on the Scheduled Bank. 12. Learned counsel for the appellants/revenue placed reliance on the judgment in the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, Coimbatore reported in 2010 (2) SCC 548. However, this judgment pertains to non Banking financial companies, Uco Bank case (supra) and Mercantile Bank (supra) case squarely applies to the fads 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 ....
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....cularly when the recovery of the principal loan amount is doubtful. Even the Hon'ble Supreme Court in the case of UCO Bank, distinguishing the judgment of State Bank of Travancore has held that the circulars issued earlier were not applicable in view of section 43D substituted w.e.f. 01/04/2000 and the said section requires to follow RBI guidelines and to tax interest on NPA Account only when realized. Further, the Hon'ble Bombay High Court in the case of CIT Vs. Devgiri Nagrik Sahakari Bank Ltd. (supra) has treated the Cooperative Banks as scheduled 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." 3.17 In view of the aforesaid discussion, the appellant bank is not liable to be taxed on the notional interest on the NPAs based upon the accrual accounting theory and respectfully following the judgments of Hon'ble Supreme Court in the case of UCO Bank and jurisdictional IT AT in the case of Shri Mahila Seva Sahakari Bank Ltd. and Sardargunj Mercantile Co-op. Bank Ltd. besides recent judgment of Hon'ble Bombay High Court in the case of De....