TaxTMI 
TaxTMI 
2021 (7) TMI 404
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....d in Banking Regulation Act, 1949. The assessee is following the mercantile system of accounting. For the impugned year the assessee had filed its return of income declaring income of Rs. 6,83,55,320 /-. In the assessment framed u/s 143 (3) of the Act an addition was made to the total income of interest accrued on NPAs/sticky loans, amounting to Rs. 3,2,91, 484 /- which had not been accounted for by the assessee in its Profit & Loss Account for the year. The assessee had contended before the AO that this interest had not been shown following RBI guidelines, which claim was dismissed by the AO stating that since the assessee was following mercantile system of accounting the interest income on NPAs needed to be included in its total income. 3. The matter was carried in appeal before the CIT(A), who on noting that identical issue had been decided by the ITAT Chandigarh Bench in the case of Kangra Central Cooperative Bank Ltd., Dharamshala in ITA No.323 & 324 /Chd/2016 dated 09. 01.2018, in favour of the assessee, deleted the addition made by the AO. The relevant findings of the Ld. CIT(A) at para 5. 2 of his order are as under: 5.2 Ground No. 2 & 3: are inter related and h....
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....fore the Id. CIT (Appeals) who allowed the assesses 's appeals following the decision of the I.T.A.T, Pune Bench in the case of ACIT vs Usmanabad Janta Sahkari Bank Ltd. in ITA No. 795/PN/2011 dated 31.08.2012 and the decision of the I.T.A.T. Chandigarh Bench in the case of AC IT vs. Punjab State Cooperative Bank Ltd. [2013] 143 ITD 0571, holding that the provisions of Section 43D of the Income Tax Act, 1961 which allowed interest on bad and doubtful debts as prescribed in the guidelines issued by the RBI, to be accounted for on receipt basis in case of Public Financial institutions, public companies etc., to be applicable in the case of the assessee also Aggrieved by the same, the Revenue has come up in appeal before us, raising the following identical ground in both the appeals. "1. On the facts and in the circumstances, the Id. CIT(A) has erred in deleting the additions of Rs. 23,65.26,600/- made by the AO on account of interest income not declared by the assessee on NPA's/sticky loans on accrual basis as the assesses bank has been following Mercantile System of accounting regularly. 7. During the course of hearing before us, Id. Counsel of the assessee....
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.... decisions both by the Apex Court and various High Courts and Tribunals also, wherein after applying the "Real Income Theory", the prescribed Accounting Standard issued by ICAI on Revenue Recognition, AS-9, the accounting practise of the asseessee relating to interest on sticky loans and the RB! guidelines relating to accounting for interest on NPA's, it was held that such income was taxable in the year of receipt only, when its realisation becomes reasonably certain. 14. The Apex Court in the case of UCO Bank, Calcutta Vs. CIT, West Bengal (1999) 4 Supreme Court Cases 599 approved the receipt basis of accounting for interest on loans whose recovery was doubtful, holding the same to be in accordance with accounting practice and in conformity with the method prescribed under section 145 of the Act. The relevant findings of the Apex Court are as follows : " We have 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 and has not been brought to the profit and loss account of the assessee, can be included in the income of the assesse....
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....dited to Interest Suspense Account. To the extent the interest is received in cash, the Interest Suspense Account should be transferred to Interest account; the remaining amount should be closed by transfer to the Loan account. This treatment accords with the principle that no item should be treated as income unless it has been received or there is a reasonable certainty that it will be realised. (Vide State Bank of Tranvacore v. CIT [supra]) The assessee's method of accounting, therefore, transferring: the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice. Under Section 145 of the Income-tax Act, 1961, income chargeable under the head "profits and gains of business or profession or income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee; provided that in a case where the accounts are correct and complete but the method employed is such that in the opinion of the Income- tax Officer, the income cannot properly be deduced therefrom, the computation shall be made in such manner and on such basis as the I....
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....ns of section 45Q of the RBI Act, the RBJ guidelines had an overriding effect over other Acts including the Income Tax Act, 1961. The Gujarat High Court in the case of Pr.CIT-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd. (Tax Appeal No.531 of 2015 dated 5.8.2016, relying upon the decision of the apex court in Southern Technologies Limited vs JCIT, Coimbatore, (2010) 320 ITR 577,held that so far as Income Recognition was concerned even the AO had to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and section 145 of the Income Tax Act had no role to play in the same. The Hon'ble Court held at para 20 to 23 of its order as follows : 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 cooperative banks. The guidelines provided thereunder are mandatory ....
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....ack" is there only in the case of provisions. [Emphasis supplied]" 22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36(1)(vii) or section 37 of the Act, then in the computation of income, the RBI Guidelines would have no role to play, and hence, an add back. Insofar as income recognition is concerned, the Supreme Court has held thus: "Applicability of Section 145 57 At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued by RBI under Chapter lll-B of the RBI Act, 1934. These norms deal essentially with income recognition. 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 45-Q, an overriding effect is given to the RBI Directions, 1998 vis-a-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 1998 and the IT Act operate in different areas. These RBI Directions, 1998 have nothing to do with computation of taxable income. These Dir....
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....ons, 1998 in view of section 45Q of the RBI Act That insofar as income recognition is concerned, section 145 of the Income Tax Act, 1961 has no role to play." The Bombay High Court in the case of CIT Vs. Deogiri Nagari Sahakarii Bank Ltd- & Others, 379 ITR 241 reiterated the above proposition by holding at para 9 of its order as follows : "9. The Income Tax Appellate Tribunal has referred the case of M/s. Vasisth Chay Vyapar Limited 330 ITR 440 (Delhi). In this case, the revenue relied upon the decision of the Hon'ble Supreme 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 M/s Southern Technologies Limited supra. The assesses herein being a Cooperative Bank also governed by the Reserve Bank of India and thus the directions 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, provisions of Section 45Q of Reserve Bank of India Act has an overriding effect vis-a....
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.... subsequent circular of 9th of October, 1984 by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of 9th of October, 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 taw 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 C....
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....case of The Ludhiana Central Co-op. Bank Ltd.,(Supra), the decision rendered therein would squarely apply to the present cases, following which we hold that the interest on sticky loans/NPA's has to be taxed on receipt basis. We, therefore, uphold the order of the CIT(A) and dismiss the ground raised by the Revenue. 11. In the result, both the appeals of the Revenue are dismissed." 4. Aggrieved by the same, the Revenue has come up in appeal before us raising the following ground: 1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting an addition of Rs. 3,29,01,484/- which was subsequently enhanced at Rs. 4,22,04,069/- by the A.O. u/s 154 of the Act by holding that interest on sticky loans7NPAs is to be taxed on receipt basis whereas the assessee itself has stated that it is following mercantile system of accounting. 2. It is prayed that the order of the Ld CIT(A) be set-aside and that of the A.O. restored. 3. The Appellant craves leave to add any other ground of appeal which may arise at the time of hearing." 5. Before us, the Ld. DR relied upon the order of the AO contending that the interest on NPAs....