TaxTMI 
TaxTMI 
2018 (11) TMI 442
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....claiming the following substantial questions of law:- (i) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT, Chandigarh is justified in deleting the addition of Rs. 3,02,82,000/- made by the AO on account of interest accrued on nonperforming assets by ignoring the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore Vs. Commissioner of Income Tax, reported in (1986) 158 ITR 102? (ii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT erred in applying Section 43D to a cooperative society i.e. the assessee which is not specifically mentioned in Section 43D? iii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT has erred in following the decision in the case of CIT vs. Punjab State Cooperative Bank Limited of Assessment years 2007-08, 2008-09 reported in 143 ITD 571 (Chd) applying Section 43D, as the Punjab State Cooperative Bank Limited is a Scheduled Bank whereas the Ludhiana Central Cooperative Bank Limited is not a scheduled Bank.?" Subsequently, vide order dated 14.11.2017 passed in CM No.23262 CII of 2017, the following amended substan....
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.... by ignoring the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore (158 ITR 102)? However, it may be noticed that the quantum of additions in ITA No.449 of 2017 and ITA No.450 of 2017 is different i.e. Rs. 2,03,76,956/- and Rs. 2,15,56,800/- respectively. 4. For brevity, the facts are being extracted from ITA-349-2017. 5. A few facts necessary for adjudication of the instant appeal as narrated therein may be noticed. The assessee filed its return of income on 30.9.2009 declaring an income of Rs. 4,15,03,450/-. The assessment was completed under Section 143(3) of the Act by the Assessing Officer vide order dated 30.11.2011 (Annexure A-1) at an income of Rs. 8,20,58,289/- with an addition of Rs. 3,02,82,000/- on account of interest due on Non-Performing Assets (NPA). Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity "the CIT(A)"]. The CIT (A) vide order dated 28.2.2013 (Annexure A-2) deleted the addition made by the Assessing Officer. Against the order, Annexure A-2, the revenue filed an appeal before the Tribunal who vide order dated 3.1.2017 (Annexure A-3) dismissed the appeal of the....
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....i High Court in Commissioner of Income Tax v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440, wherein it was held that where interest was not received on NPA, it could not be treated to have accrued in favour of the assessee or the real income in the hands of the assessee. Support was also drawn from the decisions of the Gujarat High Court in Principal Commissioner of Income Tax-5 vs. Shri Mahila Sewa Sahakari Bank Limited, (2017) 395 ITR 324 and Bombay High Court in The Commissioner of Income Tax, Aurangabad vs. M/s Deogiri Nagari Sahakari Bank Limited, Aurangabad, (2015) 379 ITR 24. Further, the learned counsel supported the order passed by the CIT(A) deleting the addition made by the Assessing Officer on account of interest due on NPA and affirmed by the Tribunal. Prayer for dismissal of the appeals was made. 8. Rebutting the arguments relating to provisions of 1934 Act and Directions/regulations formulated/issued thereunder, it was contended by learned counsel for the revenue that the RBI directions under the 1934 Act are prudential norms, but have nothing to do with the computation or taxability of the provision of the NPA under the Act. Though the RBI directions deviate from ....
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....ion,- (a) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (b) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of subsection (1) of section 36; (c) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (d) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and approved by the Central Government under clause (viii) of subsection (1) of section 36.". 13. The Circular No.621 dated 19th December, 1991 issued by the department elaborated its scope in the following portion:- "Chargeabiity of income from bad or doubtful debts in the case of financial institutions and banks - 22. The Reserve Bank of India has classified advances given by banks into eight categories called Health Codes 1 to 8. Sti....
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....e guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may actually received by that institution or bank or corporation or company, whichever is earlier. Explanation.-For the purposes of this section,- (a) "National Housing Bank" means the National Housing Bank established under section 3 of the National Housing Bank Act, 1987 (53 of 1987); (b) "public company" means a company,- (i) which is a public company within the meaning of section of the Companies Act, 1956 (1 of 1956); (ii) whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; and (iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989 given under section 30 and section 31 of the National Housing Bank Act, 1987 (53 of 1987);....
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....n to such debts, shall be chargeable to tax in the previous year in which it is credited by the company to its profit and loss account or as the case may be in which it is actually received by that company, whichever is earlier. 25.3. This amendment will take effect from the Ist day of April 2000 and will accordingly apply in relation to the assessment year 2000-2001 and subsequent years. (Section 28)." 16. Rule 6EA of the Income Tax Rules, 1962 (in short, "the Rules") relates to special provisions regarding interest on bad and doubtful debts of financial Institutions, banks etc. It was inserted in the Rules by the Income Tax (Tenth Amendment) Rules, 1992 with effect from 01.04.1992 prescribing the banks/financial institutions/corporations to which provisions of Section 43D of the Act would be applicable. It is quoted below:- "Special provision regarding interest on bad and doubtful debts of financial institutions, banks, etc. 6EA. The provisions of section 43D shall apply in the case of every public financial institution, scheduled bank, State financial corporation and State industrial investment corporation where its income by way of interest pertain....
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.... sanctioned limit, for a temporary period; (2) instalments in respect of term-loans are overdue for less than 6 months or import bills under letters of credit or instalments under deferred payment carried are overdue for less than 3 months; (3) bills not exceeding 10% to 15% of the total outstandings in the bills purchased or discounted account of the borrower are overdue for payment for a period of less than 3 months and refund in respect of unpaid bills is not for the coming immediately (b) Advances recalled, i.e., where the repayment is highly doubtful and revival of the unit is not considered worthwhile and a decision has been taken to recall the advances. (c) Suit-filed accounts, i.e., where legal action or recovery proceedings have been initiated and suits are pending for recovery of advances. (d) Decreed debts, i.e., where suits have been filed and decree obtained and such decree is pending for execution. (e) Debts recoverability whereof has become doubtful on account of shortfalls in value of security, difficulty in enforcing and realising the securities, or inability or unwillingness of the borrower to repay the banks d....
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.... "45H. Chapter IIIB not to apply in certain cases. The provisions of this Chapter shall not apply to the State Bank or a banking company as defined in Section 5 of the Banking Regulation Act, 1949 or 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) Act, 1959 or a Regional Rural Bank or a co-operative bank or a primary agricultural credit society or a primary credit society: Provided that for the purposes of Tamil Nadu Industrial Investment Corporation Limited shall not be deemed to be a banking company." Section 45I relates to definitions in respect of expressions used in various provisions under Chapter III-B of the Act. Section 45JA empowers the RBI to determine policy and issue directions. It reads thus:- "45JA. Power of Bank to determine policy and issue directions (1) If the Bank is satisfied that, in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in manner detrimental to the interest of the depositors or in a manner prejudicial....
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....standing 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." 20. Section 45Q finds place in Chapter IIIB of the RBI Act. Thus, the provisions of Chapter IIIB of the RBI Act have an overriding effect qua other enactments to the extent the same are inconsistent with the provisions contained therein. In order to reflect a bank's actual financial health in its balance sheet, the Reserve Bank has introduced prudential norms for income recognition, asset classification and provisioning for advances portfolio of the co-operative banks. The guidelines provided thereunder are mandatory and it is incumbent upon all cooperative banks to follow the same. Insofar as income recognition is concerned, clause 4.1.1 of the circular provides that the policy of income recognition 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....
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....ure is different from computation/ taxability of the provision for NPA. The nature of expenditure under the Act cannot be conclusively determined by the manner in which accounts are presented in terms of 1998 Directions. If one keeps these concepts in mind, it is very clear that RBI Directions 1998 are merely prudential norms. They can also be called as disclosure norms or norms regarding presentation of NPA Provisions in the Balance Sheet. They do not touch upon the nature of income or expense which is to be decided by the Assessing Officer in the assessment proceedings. 22. The reasons for issuing RBI directions 1998 needs to be delved into. On 31.01.1998, RBI Directions 1998 introduced a new regulatory framework involving prescription of Disclosure norms for NBFCs to ensure that these NBFCs function on sound and healthy lines. Regulatory and supervisory attention was focussed on the deposit taking NBFCs so as to enable the RBI to discharge its responsibilities to protect the interest of the depositors. These NBFCs are subjected to prudential regulations on various aspects such as income recognition; asset classification and provisioning, etc. The basis of every business is th....
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....1956. These Directions constitute a code by itself. However, these Directions 1998 and the Act operate in different areas. These 1998 Directions have nothing to do with computation of taxable income. These Directions cannot overrule the "permissible deductions" or "their exclusion" under the 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, in the present case, the Assessing Officer has to follow the RBI Directions 1998 in view of Section 45Q of the 1934 Act. Hence, as far as Income Recognition is concerned, Section 145 of the Act has no role to play in the present dispute. 24. The Supreme Court in Southern Technologies Limited's case (supra) laid down as under:- "57. At the outset, we may state that in essence RBI Directions 1998 are Prudential/ Provisioning Norms issued by RBI under Chapter IIIB of th....
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....ssary implication disallowed by the Act. 27. The Delhi High Court in Vasisth Chay Vyapar Ltd.'s case (supra) has in the context of a similar issue arising in the case of a nonbanking financial company has held that where uncertainty prevailed in so far as recovery of interest and the principal amount of loan was concerned, it was legitimate to infer that interest on the principal amount had not "accrued". The relevant observations read as under:- "17. In this scenario, we have to examine the strength in the submission of learned counsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of Income Tax Act and was, therefore, exigible to tax. Our answer is in the negative and we give the following reasons in support:- (1) First of all we would discuss the matter in the light of the provisions of Income Tax Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee. It is stated at the cost of repetition that admitted position is that the assessee had not received any interest on the said ICD placed with Shaw Wallce....
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.... but more in the nature of a reserve, and thus not deductible under section 36(i)(vii) of the Act. The assessing officer, however, did not bring to tax Rs. 20,34,605 as income (being income accrued under the mercantile system of accounting). The dispute before the Apex court centered around deductibility of provision for NPA. After analyzing the provisions of the RBI Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefor under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to "Income Recognition" and held that income had to be recognized in terms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 145 of the Income Tax Act. It can be said, therefore, that the Apex Court approved the "real income theory which is engrained in the Prudential Norms for recognition of revenue by NBFC." The said decision was affirmed by the Su....
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....cular No.F.201/81/84/ITA II dated 09.10.1984, the Supreme Court in UCO Bank, Calcutta v. CIT (1999) 237 ITR 889 (SC) explained its earlier decision in State Bank of Travancore's case (supra). In UCO Bank's case (supra), the Supreme Court was called upon to consider whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account, can be included in the income of the assessee for the assessment year 1981-82. The Court observed that: "10. The question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realization, 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 deci....
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....e subsequent circular of 9-10- 1984 by which, from Assessment Year 1979-80 the banking companies were given the benefit of the circular of 9-10-1984, 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 the 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....