Income Tax Appellate Tribunal - Chandigarh
Dcit, Ludhiana vs The Ludhiana Central Co-Op Bank Ltd., ... on 5 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.526/Chd/2013
(Assessment Year : 2009-10)
The D.C.I.T., Vs. The Ludhiana Central
Circel-VI, Ludhiana Co-op. Bank Ltd.,
Ludhiana. Near Sadar Police Station,
Civil Lines, Ludhiana.
PAN: AAAJT1911B
(Appellant) (Respondent)
Appellant by : Shri Manoj Mishra, DR
Respondent by : Shri Manish Gupta
Date of hearing : 11.08.2016
Date of Pronouncement : 03.01.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
This appeal has been filed by the Revenue against the order of learned Commissioner of Income Tax (Appeals)-I, Ludhiana dated 28.2.2013 for assessment year 2009-10.
2. At the outset, it may be stated that the present appeal was earlier heard and order passed dated 25.02.2014, dismissing the appeal of the Revenue. Subsequently, the Revenue filed a Miscellaneous Application No.32/Chd/2014 which was allowed by Tribunal vide its order dated 05.06.2015 and the earlier 2 order dated 25.02.2014 was recalled for the purpose of re- adjudicating the issue relating to interest earned on non performing assets/loans, raised through ground No.1 in Revenue's appeal. In pursuance to the same, the present appeal was heard by us.
3. The only ground in the Revenue's appeal which needs to be adjudicated upon reads as follows :
"1. The Ld. CIT(A) has erred in allowing relief of addition made by the AO on account of interest accrued on non performing assets by ignoring the decision of the Hon'ble Supreme Court in the case of State Bank of Travamcore (158 ITR
102). Further, the Ld. CIT(A) has wrongly relied upon the finding of Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. which is a Non Banking Financial Corporation, whereas the Assessee under consideration is a Co-operative Society registered under Punjab State Co-
operative Societies Act. Moreover, the decision of Ld. CIT(A) is perverse as the Assessee is following mercantile system of accounting."
4. The issue raised in the present ground pertains to deletion of addition of Rs.3,02,82,000/- made by bringing to tax the interest on loans categorized as NPA on accrual basis as against receipt basis claimed by the assessee.
5. Brief facts relating to the same are that, before the Assessing Officer, the assessee submitted that the interest due on Non Performing Assests, hereinafter referred to as NPA's, had been accounted for by the 3 assessee on actual receipt basis following the directives of the Apex Bank i.e. the Reserve Bank of India. The Assessing Officer, however, rejected the contention of the assessee stating that since it was following the mercantile system of accounting, the income could not be accounted for on receipt basis. The Assessing Officer relied upon the decision of the Hon'ble Apex Court in the case of State Bank of Travancore Vs. CIT, 158 ITR 102 (SC), wherein it was held that the interest on sticky loans was assessable to tax and provisions of section 145 of the Income Tax Act, 1961 (in short 'the Act') for determining the income had to be applied. The Assessing Officer further held that the RBI directions could not override the provisions of the Act since they both operate in the separate fields and further relied upon the decision of the Apex Court in the case of M/s Southern Technologies Ltd. Vs. JCIT, Coimbatore dated 11.01.2010 in this regard. The Assessing Officer also referred to the decision of the I.T.A.T. in the case of JCIT Vs. India Equipment Leasing Ltd., 111 ITJ (Chennai) 250, wherein it was held that section 43D of the Act was inserted to improve viability of banks, public financial institution, etc. so as to provide that interest on sticky loans shall be charged to tax on receipt basis , did not apply to cooperative banks. The Assessing Officer, therefore, treated the interest earned on NPAs amounting to Rs.3,02,82,000/- as income of the assessee for the year.
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6. The matter was carried in appeal before the Ld. CIT (Appeals) where the assessee argued that the addition made was unwarranted since the assessee had accounted for the interest on NPA accounts on receipt basis following the prudential norms of RBI. The assessee stated that this system of accounting of income on NPA Accounts was as per the Accounting policy adopted by the assessee which was being consistently followed. The assessee thereafter stated that since it had followed RBI directions it was legitimate to infer that the interest income on NPA accounts had not accrued in view of the precarious financial position of the borrower, even though the assessee was following mercantile system of accounting. The assessee relied upon the decision of the Delhi High Court in the case of CIT Vs. Vasisth Chay Vyapar Ltd.(2010-TIOL-781-HC-DEL-IT) dated 29.11.2010 in this regard. The assessee further relied upon the decision of the Delhi High Court in the case of DIT Vs. Brahamputra Capital Financial Services Ltd. dated 18.5.2011, wherein upholding the principles of real income theory, the High Court has held that since principal amount of loan had become doubtful, no accrual of interest could be said to have occurred and, therefore, interest in such circumstances cannot be said to have accrued to the assessee. The Ld. CIT (Appeals) after going through the assessee's submissions deleted the addition concurring with the submissions made by the assessee and further by following the decision of the Delhi High Court in the 5 case of Vasisth Chay Vyapar Ltd. (supra). The relevant findings of the CIT (Appeals) at para 8 of his order is as under :
"8. I have considered the basis of addition made by the AO and the arguments of the AR on the issue. The only reason for the AO to make the addition is by treating the interest due on NPA as the income of the year in which the said interest had accrued and it is on the basis of assessee's method of accounting that the same has been considered as income. It is however to be appreciated that the assessee has very specifically put it on record that its method of accounting is mercantile except with respect to interest pertaining to NPA. The said position has been accepted by the department in the earlier years as well. Further the method of accounting in respect of interest due on NPA is strictly as per the RBI guidelines which have to be mandatorily followed by the appellant. It is also noted that the said method of accounting adopted by the assessee is also as per the Accounting Standards drafted by the Institute of Chartered Accountants of India. It is also to be appreciated that section 45Q of the RBI Act starts with the non- obstante clause to the effect that the provisions of this chapter shall have effect notwithstanding 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. It is also noted that the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. has held that when NBFC classified an asset as a Non Performing Asset in accordance with the directions issued by the Reserve Bank of India (RBI), it was legitimate to infer that the interest income thereupon had not accrued in view of the precarious financial position of the borrower, even though the tax payer was following the mercantile system of accounting. It is seen that the Hon'ble Delhi High Court also discussed and distinguished the decision of Hon'ble Apex Court in the case of State Bank of Travancore vs CIT 158 ITR 102(SC). In the circumstances, I do not agree with the Assessing Officer's view on the issue and therefore the addition made is directed to be deleted."
7. Aggrieved by the same, the Revenue has come up in appeal before us.
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8. Before us, the Ld. DR relied upon the order of the Assessing Officer and stated that since the assessee was following the mercantile system of accounting and further in view of the provisions of section 145 of the Act, the assessee had to account for the interest income on accrual basis. The Ld. DR stated that the decision of the Apex Court in the case of State Bank of Travancore (supra) squarely applied to the present case, wherein it was categorically held that the interest on NPA accounts could not be accounted for on receipt basis but on accrual basis. Further, the Ld. DR contended that the directives of the RBI could not override the provisions of the Act and relied upon the decision of the Apex Court in the case of M/s Southern Technologies Ltd. (supra). The Ld. DR also contended that the provisions of section 43D of the Act cannot be applied to the present case, entitling the assessee to account for the interest income of NPA accounts on receipt basis, since the said provisions did not apply to cooperative banks.
9. The learned counsel for the assessee, on the other hand, relied upon the order of the CIT (Appeals) and further stated that the arguments raised by the Revenue had been rebutted by the Ld. CIT (Appeals) in his order. The learned counsel for the assessee further filed written submissions of its arguments before us dated 11.8.2016 wherein it had stated that the assessee had been accounting for the interest on NPA accounts on receipt 7 basis following guidelines of the RBI applicable to the assessee cooperative bank which was adopted as part of its significant accounting policy from year to year. The learned counsel for the assessee further stated that the impugned income was in consonance with the Accounting Standard-9 relating to Revenue Recognition prescribed by the Institute of Chartered Accountants of India, as per which, revenue was to be recognised, only when there was no uncertainty about the collection of revenue. The learned counsel for the assessee stated that since the accounts themselves had been categorized as NPA meaning thereby that recovery of the loan itself was in doubt, there was no certainty of recovery of interest and, therefore, following the principles of accounting for income prescribed in AS-9, the assessee had correctly accounted for the same in the year of receipt. The learned counsel for the assessee in his submissions, further stated that the reliance placed by the Revenue on the decision of the State Bank of Travancore (supra), for stating that interest on NPAs had to be accounted for on accrual basis, is misplaced since the same has been overruled by the Hon'ble Apex Court in the case of UCO Bank, Calcutta Vs. CIT, West Bengal (1999) 4 Supreme Court Cases 599 and also in the case of Mercantile Bank Ltd. Vs. CIT, Bombay City-III vide judgment dated 010.5.2006. The Ld. counsel for the assessee further stated that even the Karnataka High Court in the case of CIT Vs. Canfin Homes Ltd. (2012) 347 ITR 382 had discussed and distinguished the 8 judgment of Hon'ble Supreme Court in the case of State Bank of Travancore (supra). The Ld. counsel for the assessee submitted that the aspect of mercantile system of accounting vis-à-vis interest on sticky loans was considered in a number of decisions i.e.
a) CIT Vs. Vasisth Chay Vyapar Ltd. 330 ITR 440(Del)
b) Pr. CIT-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd., Tax Appeal No.531 of 2015 dt.05-08-16 (Guj)
c) CIT Vs. M/s Deogiri Nagari Sahakari Bank Ltd. & Others, 379 ITR 24(Bom) and
d) CIT Vs. Shri Siddeshwar Cooperative Bank Ltd. & Others.ITA No.200002/2015 ,dt.22-06-16 (Kar)
10. We have heard the contentions of both the parties, perused the orders of the authorities below as also the documents placed before us.
11. The issue in dispute in the present appeal is the year in which the interest on non-performing assets, NPA's, is to be accounted for as income in the books of the assessee.
12. The undisputed facts in the present case are that the assessee is a cooperative bank registered under the Punjab State Government Cooperative Act. Undeniably, the assessee is following the mercantile system of accounting and as per its Revenue Recognition policy for 9 the impugned year, the income and expenditure were to be accounted for on accrual basis, except interest income from non-performing assets, NPA's, which was to be accounted for on receipt basis. It is also not disputed that this accounting policy, for interest earned on NPAs, was being followed consistently by the assessee in the past also. Further the fact that the assessee has been accounting for this interest as per the RBI guidelines and as per the guidelines prescribed by Punjab State Cooperative Limited, the apex bank of the assessee, is also not disputed.
13. We find that the issue of accounting for interest on sticky loans/NPA's, has been dealt with in a number of 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 RBI 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 10 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 assessee for the assessment year 1981-82. It is the case of the assessee that in respect of loans which are advanced by it to various customers, recovery of some loans is very doubtful. It is doubtful whether even the interest on the loans advanced will be recovered from the 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 mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not 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 assessee-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 page 186-187 has been reproduced in the minority judgment of this Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala [(1986) 158 ITR 102 at p.i2o]. It is as follows:
"Where interest has not been paid, it is sometimes left out of account altogether. This prevents the possibility of irrecoverable interest being credited to revenue, and distributed as profit. On the other hand, this treatment does not record the actual state of the loan account, and in the case of banks and other concerns whose business it is to advance money, it is usual to find the interest is regularly charged up, but when its recovery is doubtful, the amount thereof is either fully provided against or taken to the credit of an Interest Suspense Account and carried forward and not treated as profit until actually received."
Similarly, referring to interest on doubtful debts, Shukla and Grewal on Advanced Accounts, Ninth Edition at page 1089 state as follows:
"Interest on doubtful debts should be debited to the loan account concerned but should not be credited to interest account. Instead, it should be credited 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 11 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 Income-tax Officer may determine. In the present case the method employed is entirely for a proper determination of income."
(emphasis supplied by us)
15. Further the Apex Court also referred to the CBDT Circular dated 9th October 1984 stating that interest on loans on which there has been no recovery for 3 years will be subjected to tax on receipt basis, and held as follows :
"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 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 realized, 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 119. The circular of 9th of October, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered."12
16. This view was reaffirmed in a later judgment by the Apex Court in Mercantile Bank Ltd., Vs. CIT, Bombay City-III (2006) 5 SSC 221.
17. Further the issue of taxability of interest on NPA accounts on receipt basis by Cooperative Banks has been dealt with by various High Courts, wherein it was held that the assessee was bound by RBI guidelines to account for such interest on receipt basis and by virtue of the provisions of section 45Q of the RBI Act, the RBI guidelines had an overriding effect over other Acts including the Income Tax Act, 1961.
18. 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 :
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 13 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 co-operative 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 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 RBIGuidelines, 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 Limited (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 o f presentation o f financial statements under Schedule VI to the Companies Act;
(ii) in not recognising the "income" under the mercantile system o f accounting and its insistence to follow cash system with respect to assets classified as 14 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 o f India. These deviations prevail over certain provisions o f the
Companies Act, 1956 to protect the depositors in the context o f income recognition and presentation o f the assets and provisions created against them. Thus, the P&L account prepared by NBFC in terms o f the RBI Directions, 1998 does not recognise "income from NPA" and, therefore, directs a provision to be made in that regard and hence an "add back".
It is important to note that "add back" is there only in the case o f 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 o f 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 III-B o f the RBI Act, 1934. These norms deal essentially with income recognition. They force the NBFCs to disclose the amount o f NPA in their financial accounts. They force the NBFCs to reflect "true and correct"
profits. By virtue o f 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, 15 1998 and the IT Act operate in different areas. These RBI Directions, 1998 have nothing to do with computation o f taxable income. These Directions cannot overrule the "permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and the Companies Act is only in the matter o f income recognition and presentation o f 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 o f profits. However, here is the case where the AO has to follow the RBI Directions, 1998 in view o f Section 45-Q o f the RBI Act. Hence, as far as income recognition is concerned, Section 145 o f 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 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. 16
Hence, the Assessing Officer has to follow the RBI Directions.
19. Further relying upon the decision of the Delhi High Court in the case of CIT Vs. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440, the Court held that the AO has to follow RBI directions on Revenue Recognition, and held as follows "25. The distinction drawn by the Delhi High Court is that while the accounting policies of adopted by the NBFC cannot determine the taxable income. However, insofar as income recognition is concerned, the Assessing Officer has to follow the RBI Directions, 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."
20. 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 assessee 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 17 India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court."
21. Further relying upon the decision of the Apex Court in the case of UCO Bank, Calcutta and Mercantile Bank Ltd. (supra) it allowed the assessee's appeal.
22. It is evident from the above that the issue regarding taxability of interest on NPA's is settled in favour of the assessee as being taxable in the year of receipt.
23. The grievance of the Revenue that the Hon'ble Supreme Court's decision in the case of State Bank of Travancore (supra) applies to the present case, we find is misplaced, since as pointed out above by the Ld. counsel of the assessee, it has been overruled by the Apex Court itself in the case of UCO Bank Limited (supra) wherein it was pointed out by the Apex Court that while rendering the judgment in the case of State Bank of Travancore (supra), the circular dated 9.10.1984 had not been brought to the notice of the Court, nor the subsequent decision of the Apex Court in the case of K.P.Varghese Vs. ITO (1981) 131 ITR 597 (SC). The relevant extracts of the decision in UCO Bank Limited are reproduced hereunder : 18
"There are, however, two decisions of this Court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in The State Bank of Travancore v. Commissioner of Income- Tax, Kerala (1986 (158) ITR 102) decided by a Bench of three Judges of this court by a majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of 6th of October, 1952 and its withdrawal by the second circular of 20th of June, 1978. The majority appears to have proceeded on the basis that by the second circular of 20th of June, 1978 the Central Board had directed that interest in the suspense account on "sticky"
advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The 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 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 Navnitlal C. Javeri v. K.K. Sen (Supra), or the subsequent decision in K.P. Varghese v. 19
Income Tax Officer (supra) also do not appear to have been pointed out to the Court. Since the later 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 with this question at all but has decided the matter on the basis of other provisions of law. "
24. Therefore, the contention of the Revenue that the decision in the case of State Bank of Travancore (supra) applies to the assessee's case is dismissed.
25. The argument of the learned D.R. that the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) would not apply to the assessee's case since the assessee is a cooperative society while in the case of Vasisth Chay Vyapar Ltd. (supra), the assessee was a NBFC, is also dismissed since the principle enunciated by the Delhi High Court in Vasisth Chay Vyapar Ltd. (supra) has been followed in the case of Shri Mahila Sewa Sahakari Bank Ltd. (supra) by the Hon'ble Gujarat High Court and various other decisions cited by the assessee before us ,and the assessee in all those cases being a cooperative bank, the decision rendered therein squarely applies to the case of the assessee.
26. The argument of the learned D.R. that the assessee is following the mercantile system of accounting is also dismissed since this aspect has been dealt with by 20 various High Courts referred to above wherein they have categorically held that even following the mercantile system of accounting the interest on NPA account cannot be said to have accrued in the impugned year since the recovery of the same was impossible and even otherwise for the purpose of Income Recognition the RBI Directions, 1998, had to be followed in view of section 45Q of the RBI Act.
27. In the light of the above discussion we find no infirmity in the order of the CIT(A),holding the interest on NPA's as taxable in the year of receipt , so as to warrant interference.
28. In the result the appeal of the Revenue is dismissed .
Order pronounced in the open court.
Sd/- Sd/-
(SANJAY GARG) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 3 r d January, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh