TaxTMI 
TaxTMI 
2018 (9) TMI 2175
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....re Fund contribution for cadre employees as statutorily provided u/s 55(1) of Cooperative Societies Act, 1960 read with Jila Sahakari Kendriya Bank Karamchari Service Rules (Niyojan, Nibandhan and Karya Isthiti), 1982. The addition may kindly be deleted. 3. At the outset, Ld. Counsel for the assessee submitted that Ground No. 1 is general in nature and needs no separate adjudication. The facts giving rise to the present appeal are that case of the assessee was picked up for scrutiny assessment and the assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter called as 'the Act') was framed vide order dated 18.2.2013. While framing the assessment, the A.O. made addition by disallowing the provisions for overdue interest amounting to Rs. 3,24,30,000/-, expenditure claimed as cadre expenses of Rs. 25,73,378/- and the expenditure provision for bonus of Rs. 3,64,039/-. Against this, the assessee preferred an appeal before the Ld. CIT(A), who after considering the submissions, partly allowed the appeal, thereby the Ld. CIT(A) sustained the addition in respect of provision for overdue interest and the cadre expenses. However, bonus expenses were deleted. Now the assessee is in pre....
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....ered by the Hon'ble Gujarat High Court in Pro CIT vs Kutch District Central Cooperative Bank Ltd in (2018) 94 taxmann.com 298 (Guj.).In that case assessee had created "Reserve for Overdue Interest" following the RBI Norms dated 22.06.1996 (referred supra). It was held that the interest on such overdue interest does not constitute income at all u/s. 5 of the Income-tax Act and does not fall within the scope of taxability of income. This judgment was delivered after consideration the decisions various High Courts in favour of assessee. The judgments in favour of assessee as quoted therein are as under: a. CIT vs Vasisth Chay Vyapar Ltd. 330 ITR 440 (Del.) b. CIT vs Deogiri Nagar Sahakari Bank Ltd. 379 ITR 24 (Bom.) c. Pro CIT vs Shri Mahila Sewa Sahakari Bank Ltd. 395 ITR 324 (Guj.) Further, it is a pertinent fact that the SLP against the judgment of Gujarat High Court in Pro CIT vs Kutch District Central Co-op. Bank (supra) has been dismissed by the Hon'ble Supreme Court as reported as CIT vs Jamnagar District Co-operative Bank Ltd. (2018) 94 taxmann.com 300 (SC). The appellant relies on the judgments as above and prays that the g....
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.... the authorities below. The Ld. CIT(A) sustained addition on the ground that the same is uncertained contingent liability, therefore, is not allowable. The Ld. CIT(A) rejected the submission of the assessee on the ground that the RBI directions are only disclosure norms. Their primary object is precedence, transparency and disclosure. They have nothing to do with computation of total taxable income under the Income Tax Act or accounting treatment. Ld. Counsel has relied upon the judgement of Hon'ble Gujarat High Court, wherein the Hon'ble Gujarat High Court under the identical facts considering the submissions observed as under: 11. From the rival submissions advanced by the learned counsel for the respective parties, it is evident that there is no dispute that the RBI Guidelines are applicable to the assessee. It is the case of the assessee that in view of the RBI Guidelines, it cannot charge interest on accrual basis and that following the theory of real income, taxability of any notional income like accrued interest on NPAs would not arise. It has also been contended that even otherwise in view of the CBDT Circular bearing F No. 201/21/84- ITA-II, dated 09.10.19....
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....banks, financial institutions and money lenders, who kept their accounts on mercantile system, maintained a suspense account in which the unrealized interest was entered, the Same should not be included in the assessee's taxable income, if the Income Tax Officer was satisfied, that there was little probability of the loans being repaid. In State Bank of Travancore IS case (supra) the assessee a subsidiary of the State Bank of India, used to maintain accounts on mercantile system making entries on accrual basis. The assessee adopted the calendar year as its previous year and the calendar years 1964, 1965 and 1966 were respectively the relevant previous years for Assessment Years 1965-66, 1966-67 and 1967-68 to which the question related. In the course of its banking business the assessee charged interest on advances considered doubtful of recovery otherwise called sticky advances by debiting the concerned parties but instead of carrying it to its "Profit and Loss Account" credited the same to a separate account styled 'Interest "suspense account" as the principal amounts of these sticky advances themselves had become, not bad or irrecoverable but extremely doubtful of recove....
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....ead "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 there from, the computation shall be made in such manner and on such basis as the Income Tax Officer may determine. In the present case the method employed is entirely for a proper determination of income." 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....
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.... 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. Javeri v. K.K. Sen, [1965] 56 ITR 198or the subsequent decision in K.P. Varghese v. ITO, [1981] 4 SCC 172 also do not appear to have been pointed out to the Court. Since the latter circular of 9-10-1984 was not pointed out to the Court, the Court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could .not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second Judge has not dealt ....
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....Court to the contrary in State Bank of Travancore v. CIT the principle was reintroduced by the Central Board of Direct Taxes by another circular dated 9-10-1984. The 1984 circular clarified that up to Assessment Years 1978-79 the taxability of interest on doubtful debts credited to the suspense account would be decided in the light of the Board's earlier circular dated 6-10-1952 as the said circular was withdrawn only in June 1978. With effect from 1979-80 the new procedure prescribed under the 1984 circular would apply. The procedure prescribed is not relevant for our purposes. But it is clear that the circular issued in 1978 was effectively set aside and rendered ineffective. 7. The Court in UCO Bank case was of the view that these circulars dated 6-10-1952 and 9-10-1984 were binding on the authorities under section 119(1) of the Act. The Court was also of the view that the Judges in State Bank of Travancore did not have the occasion to consider the 1984 circular and proceeded on the assumption that the 1978 circular was in force. The Court did not agree with the conclusion expressed by the majority in State Bank of Travancore and said: "The relevant circulars of CBD....
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....ns] reducing its profits, contending it to be a write-off. In the alternative, the assessee submitted that consequent upon the RBI Directions, 1998 there has been diminution in the value of its assets for which the assessee was entitled to deduction under section 37 as a trading loss. This led to matters going in appeal(s). Following the judgment of the Gujarat High Court in Vithaldas H. Dhanjibhai v. CIT [19811130 ITR 95/6 Taxman 105, ITAT held that since the assessee had debited the said sum of Rs. 81,68,516 to the P&L account it was entitled to claim deduction as a write-off under section 36(1)(vii) which view was not accepted by the High Court, hence, civil appeal(s) came to be filed before the Supreme Court by the NBFCs. The court, on an analysis of the RBI Directions, 1998 observed thus: 'Analysis of Para 9 of the RBI Directions, 1998 34. Vide' Para 9, RBI has mandated that every NBFC shall disclose in its balance sheet the provision without netting them from the income or from the value of the assets and that the provision shall be distinctly indicated under the separate heads of account as: (i) provisions for bad and doubtful debts, and (ii) provis....
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....bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before 1-4-1989, even a provision could be treated as a write-off. However, after 1-4-1989, a distinct dichotomy is brought in by way of the said Explanation to Section 36(1)(vii). Consequently, after 1-4-1989, a mere provision for bad debt would not be entitled to deduction under Section 36(1)(vii). 37. To understand the above dichotomy, one must understand "how to write-off'. If an assessee debits an amount of doubtful debt to the P&L account and credits the asset account like sundry debtor's account, it would constitute a write-off of an actual debt. However, if an assessee debits "provision for doubtful debt" to the P&L account and makes a corresponding credit to the "current liabilities and provisions" on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after 1-4-1989. 38. We have examined the P&L account of First Leasing Company of India Ltd. for the year ending 31- 3-2003. On examination of Schedule J to the P&L account which refers to opera....
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....In such cases, interest is charged and debited to the account of the borrower as "income" is recognised under accrual system. However, it is not so recognised under the 1998 Directions and, therefore, in the matter of its presentation under the said Directions, there would be an add back but not under the IT Act necessarily. It is important to note that collectibility is different from accrual. Hence, in each case, the assessee has to prove, as has happened in this case with regard to the sum of Rs 20,34,605, that interest is not recognised or taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept the claim of the assessee under the IT Act or not to accept it in which case there will be add back even under real income theory as explained herein below. 47. Prior to the RBI Directions, 1998, advances were stated net of provisions for NPAs/bad and doubtful debts. They were shown at net figure (advances less provisions for NPAs) and the amount of provision for NPA was shown in the notes to the accounts only. Such presentation of NPA provision warranted disclosure. Therefore, Para 9( 1) of the RBI Directions, 1998 stipulates....
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....mely, a regular write-off and a prudential write-off. (See Advanced Accounts by Shukla, Grewal and Gupta, Ch. 26, p. 26.50.) If one keeps these concepts in mind, it is very clear that the 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 expense to be decided by the AO in the assessment proceedings. 55. The point to be noted is that the IT Act is a tax on "real income" i.e. the profits arrived at on commercial principles subject to the provisions of the IT Act. Therefore, if by Explanation to Section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written-off then, one has to take into account the said Explanation in computation of total income under the IT Act failing which one cannot ascertain the real profits. This is where the concept of "add back" comes in. In our view, a provision for NPA debited to P&L account under the 1998 Directions is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the IT Act. ....
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....y 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, 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.' On a close reading of the above decision it appears that in the facts of the said case, the assessee, after making provision for NPA had sought deduction of such amount under section 36(1) (vii) of the Act and alternatively claimed deduction under section 37 of the Act. Clearly, therefore, deduction was sought of an amount which was shown as income in the earlier years. In the present case, we are not concerned with any claim for deduction of provision made for NPA. It is the case of the assessee that in view of the income recognition norms laid down by the RBI, interest on NPA is not to be shown a....
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....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; (Il) in not recognising the "income" under the mercantile system of accounting and its insistence to follow cash system with respect to assets classified as NPA as per its norms; (III) in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful of recovery under the norms of the accounting standards issued by the Institute of Chartered Accountants of India. These deviations prevail over certain provisions of the Companies Act, 1956 to protect the depositors in the context of income recognition and presentation of the assets and provisions created against them. Thus, the P & L account prepared by NBFC in terms of the RBI Directions, 1998 does not recognise "income from NPA" and, therefore, directs a provision to be made in that regard and ....
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....ing 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 as income recognition is concerned, it would be the RBI Directions which would prevail in view of the provisions of section 45Q of the RBI Act and section 145 would have no role to play. Hence, the Assessing Officer has to follow the RBI Directions. 24. The Delhi High Court in Vasisth Chay Vyapar Ltd., (supra), has in the context of a similar issue arising in the case of a non-banking financial company has held thus: "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 ....
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....n 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 NPA was not in the nature of expenditure or loss 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 insofar 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 therefore under the Act. T....
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....of an account as a NPA would not by itself be sufficient to' say that there is uncertainty as regards realizability of income or interest income thereon. Accrual of interest is a matter of fact to' be decided separately for each case On the basis of examination of the facts and circumstances. The same would require an assessment of the relevant facts and circumstances of each case. Only by assessment of facts and circumstances, the Authority could arrive at a decision whether there is uncertainity of the interest accrued on NPA. Only when there is uncertainity of realizability of income or interest income then it is not chargeable to' tax. The system of accounting followed only recognises it bringing the income to' books. The adopted accounting policy i.e., recognising income on NPA accounts only subject to' realisation does not serve as a standard category." 27. For the reasons stated hereinabove, this court is in agreement with the view taken by the Delhi High Court. 28. In the light of the view adopted by the court, it is not necessary to' enter into any detailed discussion as regards the applicability or otherwise of the CBDT Circular t....
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....rinciples in the Companies Act, the Assessing Officer is bound to' follow the RBI Directions SO' far as income recognition is concerned. The contention that the assessee cannot indirectly claim the benefit which would amount to' a benefit similar to' that under section 43D of the Act, therefore, does not merit acceptance. 30. As can be seen from the assessment order, before the Assessing Officer the assessee had inter alia submitted that interest on NPA was not charged as- mandatorily stipulated under Income Recognition and Asset Classification norms of the Reserve Bank of India. It has also been submitted that the CBDT circular bearing F. No. 201/21/84-ITA-II, dated 9.10.1984 issued under section 119 of the Act for all banking and non-banking financial companies stating that if the interest has not been received for three years, the same will not be taxed as an income even on accrual basis even if interest has been credited to "Interest Suspense Account" would be applicable in its case. The Assessing Officer brushed aside the submission based upon the circular of 1984, on the ground that the same is applicable only to banking companies and not to co-operat....
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....4, the Commissioner (Appeals) held that the same would not be applicable for the reason that the provisions of section 43D of the Act are clear and cannot be overridden through delegated legislation viz. circulars and notifications. The Commissioner (Appeals) was further of the opinion that the statutory provisions were brought on the Act much later than the said circular (which was issued in 1984) and therefore the said circular would not have any effect or binding force upon the Assessing Officer. The view adopted by the Assessing Officer and the Commissioner (Appeals) is clearly contrary to the view expressed by this court hereinabove. The Tribunal was therefore, wholly justified in setting aside the order passed by the Commissioner (Appeals) confirming the assessment order." 7. Respectfully following the same, we hereby direct the assessing officer to delete the addition. 8. Ground No. 3 is against sustaining the cadre expenses. Ld. Counsel for the assessee reiterated the submissions as made in the written submissions. 9. On the contrary, Ld. D.R. opposed the submissions. 10. We have heard the rival submissions, perused the materials available on record and gone thr....