TaxTMI 
TaxTMI 
2018 (5) TMI 935
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....or on receipt basis as claimed by the assessee. 4. Brief facts relevant to the case are that the assessee is a co-operative society, having operations as a non-scheduled bank. During the assessment proceedings for the impugned assessment years, the Assessing Officer noted that the assessee had shown non performing assets (hereinafter referred to as "NPA's") on which no interest income had been credited/recognised, though the assessee was following the mercantile system of accounting. On being confronted with the same, the assessee contended that interest on non-performing assets was being accounted for on receipt basis consistently in the past also following the Accounting Standard 9 relating to revenue recognition prescribed by the Institute of Chartered Accountants of India, which required income to be recognised only on becoming certain. It was also contended that the method followed by the assessee was in consonance with the guidelines issued by the Reserve Bank of India from time to time. Reliance was also placed on various courts' decisions. The Assessing Officer after considering the assessee's reply held that it was required to account for interest on sticky ....
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....the learned Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal, Chandigarh Bench has, we find, in the case of Ludhiana Central Co-op. Bank Ltd. (supra) categorically held that in the case of assessees, being co-operative banks, the interest on sticky loans/non-performing assets has to be brought to tax on receipt basis. The Income-tax Appellate Tribunal, while rendering this judgment, has noted that in a number of decisions of High Courts and the apex court, it has been held that interest on sticky loans is to be accounted for on receipt basis following the "real income theory", the prescribed Accounting Standard AS 9 issued by the Institute of Chartered Accountants of India, the Reserve Bank of India guidelines relating to accounting for interest on non-performing assets and the accounting practice of the assessees. Further it has taken note of the decision of the Gujarat High Court in the case of Principal CIT v. Shri Mahila Sewa Sahakari Bank Ltd. [2017] 395 ITR 324 (Guj) which held that so far as income recognition was concerned the Assessing Officer had to follow the Reserve Bank of India Directions, 1998, in view of section 45Q of the Reserve Bank of Indi....
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.... customer. In such cases, the interest calculated on the loan amount is credited in a suspense account. This amount is not brought to the profit and loss account of the assessee-bank because these are amounts which are not likely to be realised by the bank. Hence they do not form a part of the real income of the bank. If and when any such amount or a part of it is recovered, it is included in that assessment year in the total income of the assessee for the purpose of payment of Income-tax. The method of accounting which is followed by the assessee-bank is the mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans asnot 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 asses see-bank. This method of accounting adopted by the assessee is in accordance with accounting practice. In Spicer and Pegler's Practical Auditing the relevant passage occurring at pages 186-187 has been reproduced in the minority judgment of this court in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) at page 120. It is as follows: "Where inte....
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....r dated October 9, 1984 stating that interest on loans on which there has been no recovery for three years will be subjected to tax on receipt basis, and held as follows (page 896 of 237 ITR) : 'The question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realisation, is a question which may arise before several Income-tax Officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 11....
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....e banks. The guidelines provided there under are mandatory and it is incumbent upon all co-operative banks to follow the same. In so far as income recognition is concerned, clause 4.1.1 of the circular provides that the policy of income recog nition has to be objective and based on the record of recovery. Income from non performing assets (NPA) is not recognised 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. Thus, in view of the mandate of the Reserve Bank of India Guidelines the assessee cannot recognise income from non-performing assets on accrual basis but can book such income only when it is actually received. Thus, this is a case where at the threshold, the assessee, in view of the Reserve Bank of India Guidelines, cannot recognise income from non-performing asset on accrual basis. This is, therefore, a case pertaining to recog nition of income and not computation of the income of the assessee. 21. The Supreme Court in Southern Technologies Ltd. v. Joint CIT [2010] 320 ITR 577 (SC) has held that the 1998 Directions are only disclosure nor....
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....e recognition. They force the non-banking financial companies to disclose the amount of non-performing asset in their financial accounts. They force the non-banking financial companies to reflect "true and correct" profits. By virtue of section 45Q, an overriding effect is given to the Reserve Bank of India Directions, 1998 vis-a-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Reserve Bank of India Directions, 1998 and the Income-tax Act operate in different areas. These Reserve Bank of India Directions, 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the "permissible deductions" or "their exclusion" under the Income-tax Act. The inconsistency between these Directions and the Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by an non- banking financial company cannot determine the taxable income. It is well settled that the accounting policies followed by a company can be changed unless the Assessing Officer comes to the conclusion that such change would result in understatement o....
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....e case of CIT v. Deogiri Nagari Sahakari Bank Ltd. [2015] 379 ITR 24 (Bom) reiterated the above proposition by holding at paragraph 9 of its order as follows (page 27 of 379 ITR) : '9. The Income-tax Appellate Tribunal has referred the case of CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Delhi). In this case, the Revenue relied upon the decision of the hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra). The learned Income-tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of Southern Technologies Limited supra. The assessee herein being a co-operative bank also governed by the Reserve Bank of India and thus the direc tions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the co-operative banks. The hon'ble Supreme Court in the case of Southern Technologies Limited (supra) held that the provisions of section 45Q of the Reserve Bank of India Act has an overriding effect vis-a-vis the income recognition principle under the Companies Act. Hence, section 45Q of the Reserve Bank of India Act shall have overriding effect over the ....
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....the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged "in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility". The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this court in Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC), or the subsequent decision in K. P. Varghese v. ITO (supra) also do n....