TaxTMI 
TaxTMI 
2021 (11) TMI 375
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....t and loss account. It was contended by the assessee during the assessment proceedings that the impugned amount of interest represents the interest accrued on the NPA which is not to be recognized as income as per the direction of the RBI until and unless it is realized. In other words, such income shall be shown in the profit and loss account in the year in which the same is realized. As per the assessee it was bound to comply with the guidelines issued by the RBI. 3.1 However the AO disagreed with the contention of the assessee on the reasoning that the assessee is following mercantile system of accounting which requires to account for the income on accrual basis. Under accrual system of accounting, the collection of the interest income is not necessary. 3.2 As per the AO the guidelines issued by the RBI is for the presentation of the financial position of the bank and it has nothing to do with the determination of taxable income of the assessee. Thus the provisions of the RBI cannot override the provisions specified under the income tax Act. In view of the above the AO treated the impugned amount of Rs. 1,33,59,000/- as income accrued and added to the total income of the a....
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....g assets in pursuance to the directions of the RBI. Accordingly, the income on such debts was not recognised as income as directed by the RBI in its circular. The relevant extract of the circular reads as under: 3.1 Income Recognition Policy 3.1.1 The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also. 8.3 The case of the AO is that the assessee is following mercantile system of accounting and therefore the interest on such NPA has accrued. Thus the same should be chargeable to tax. As per the AO circular issued by the RBI is for the presentation of the financial health of the bank and it has nothing to do with the determination of taxable income of the assessee. 8.4 Now the dispute before us revolves whether the assessee was bound to recognize the income on the assets classified as NPA under the provisions of the income tax Act after ig....
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.... Thus, in view of the mandate of the RBI 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 RBI Guidelines, cannot recognise income from NPA on accrual basis. This is, therefore, a case pertaining to recognition of income and not computation of the income of the assessee. 21. The Supreme Court in Southern Technologies Ltd. (supra) has held that the 1998 Directions are only disclosure norms and have nothing to do with computation of total income under the IT Act or with the accounting treatment. The 1998 Directions only lay down the manner of presentation of NPA provision in the balance sheet of an NBFC. The court has referred to the deviations between the RBI Directions and the Companies Act as follows: '42. Broadly, there are three deviations: (i) in the matter of presentation of financial statements under Schedule VI to the Companies Act; (ii) in not recognising the "income" under the mercantile system of accounting and its insistence to follow cash system with respect....
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....that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute." Thus, insofar as income recognition is concerned, the court has held that even the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and that as far as income recognition is concerned, section 145 of the Income-tax Act, has not role to play. 23. In the light of the above discussion what emerges is that while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition of income in terms of the recognised accounting principles and after such income is recognised, the computation thereof, in terms of the provisions of the Income-tax Act, 1961. Insofar as the computation of taxability is concerned, the same is solely governed by the provisions of the Income-tax Act and the accounting principles have no role to play. However, recognition of income stands on a different footing. Insofar a....
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.... In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee. No doubt, in first blush, reading of the judgment gives an indication that the Court has held that RBI 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 NP....
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....curities. As per the AO such amortization of premium expenses represent the capital expenditure. Accordingly, the AO disallowed the sum of Rs. 68,31,402/- and added to the total income of the assessee. 11. Aggrieved assessee preferred an appeal to the Ld. CIT(A), who has deleted the addition made by the AO after having reliance on the order of his predecessor for the Assessment Year 2008-09 in the own case of the assessee. 12. Being aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before us. 13. Both the Ld. DR and Ld. AR before us vehemently supported the order of the authorities below as favourable to them. 14. We have heard the rival contentions of both the parties and perused the materials available on record. The assessee in the present case is a regional rural bank and engaged in the business of banking activity. Being a bank the assessee has to follow the guidelines issued by the Reserve Bank of India from time to time. Accordingly, the assessee has to make certain investments in the government securities in accordance with the guidelines of the Reserve Bank of India in order to maintain the statutory liquidity ratio. Such investments in governme....
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....ies viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised 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 in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims. 14.3 From the above circular, it is revealed that the assessee is entitled to amortise the amount paid over and above the face value of the investments in the manner as discussed above. 14.4 Besides the above, we also note that the Hon'ble Gujarat High Court in the case of CIT vs. Rajkot Dist. Co-op Bank Ltd in tax appeal No. 56 of 2013, reported in 43 taxmann.com 161 vide order dated 10th February 2014 has held as under: 7. The instructions clearly provide for amortisation of premium paid on acquisition of securities when the same are acquired at the rate h....
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....n the case of M/s. Joint Investment Pvt. Ltd. 372 ITR (2015) 0694 has categorically held that:- (Quote)"9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs. 2,97,440/-as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO -an aspect is completely unnoticed by the CIT (A) and the IT AT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is whereas the entire tax exempt income is Rs. 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs. 52,56,197/-By no stretch of imagination can Section 14A or Rule 3D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income" This ....
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....lds India (P.) Ltd. ITA 725/2018 decided on 22nd October, 2018 cannot exceed the exempt income of that year. This decision follows the ratio and judgment of the Supreme Court in the case of Maxopp Investments Ltd. v. CI T[2018] 402 ITR 640/254 Taxman 325/91 taxmann.com 154 and the earlier judgments of the Delhi High Court in Cheminvest v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118 and CIT v. Holcim (P.) Ltd. [2015] 57 taxmann.com 28 (Delhi)." 20.3 In view of the above we are of the view that no further disallowances required to be made under section 14A read with Rule 8D of Income Tax Rule as the assessee suo moto have made disallowances to the extent of exempt income. Accordingly, we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed. 21. The last issue raised by the revenue in ground no.4 is that the Ld.CIT(A) erred in deleting the addition made by the AO for Rs. 1,99,635/- representing the depreciation of safes and fire resistant filling cabinet. 22. The AO during the assessment proceedings found that the assessee has claimed depreciation on the safes and the cabinets treating them as part o....