Income Tax Appellate Tribunal - Chandigarh
Deputy Commissioner Of Income Tax, ... vs The Kangra Central Co- Operative Bank ... on 31 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH 'A', CHANDIGARH
BEFORE MS.DIVA SINGH, JUDICIAL MEMBER
AND MS.ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA Nos.323 & 324/Chd/2016
(A.Ys : 2012-13 & 2013-14)
DCIT, Circle, Vs. The Kangra Central
Palampur, Co-operative Bank Ltd.
Palampur. Civil Lines,
Dharmshala (H.P.)
P A N : AAAJT 0749 B
(Appellant) (Respondent)
Appellant by : Dr. Gulshan Raj, DR
Respondent by : Shri Ashwani Kumar, AR
Date of hearing : 09.01.2018
Date of Pronouncement : 31.01.2018
ORDER
PER: ANNAPURNA GUPTA, A.M.:
Both the ca p t i on e d a p p e a ls r e la t e to the s a me a s s e s s e e a nd h av e b e e n f i l ed b y t h e R e v e n u e ag a i n s t separate orders of the Ld. C o m m i s s i o n er of Income Ta x ( A p p e a l s ) , P a la m p u r ( h e r e in af t e r r e f e r r ed to as ' CI T( A p p e a l s ) ' ) da t e d 2 3 . 1 2 . 2 0 1 5 .
2. I t w a s c o m m o n g r o u n d b e t w e en b o t h t h e p a r t ie s that the issue involved in bo t h the a p p e a ls was c o m m o n . Th e y w e r e t h e r e fo r e h e a r d t o g e t he r a n d a r e b e i n g d i sp o s e d of f b y w a y o f t h i s c o m m o n o rd e r .
3. Th e s o l e i s s u e in t h e p r es e n t ap p e a l s p er t a i n s t o the t a x a b i li t y of interest on loans c a t e g or iz e d as N P A ' s / s t ic k y l oa n s w h e t h er on accrual b a si s as c o n t e n d e d b y t h e R e v e n u e o r o n r e c e i p t b a s i s a s cl a i m ed b y t h e a s s s e s s ee .
24. Brief facts r e l ev a n t to the c as e are that t he a s s e s s e e i s a C o - o p e r a t i ve S o c i e ty , h a v i n g o p e r at io n s a s a n o n Sc h e d u le d B a n k . D u r i ng as s e s s m e n t p r o cee d i n g s for the i m p u g ne d a s s e s s m e nt year s, the A ss e s s i n g Officer n o te d that the a s s es s e e had s h o wn non p e r f o r m i n g a s s et s ( h e r e i n af t e r re fe r r e d t o a s N P A ' s ) o n w h i c h n o i n t er e st i n c o m e h a d b ee n c r e d i t e d/ r e c og n i z e d, t h o u g h t h e a s s es s e e w a s f o l l o win g m e r c a n t i l e s y s t e m o f a c c o u n t i ng . O n b e i n g c o n f r o n t e d w i t h t h e s a m e , t h e a s s e s s e e c o n t e n d e d t h a t i n t e r e st o n N P A ' s w as b e i n g a c c o u n t e d f o r on r e c e i p t b a s i s c o n s i s t e nt l y i n th e p a s t a l s o f o ll o w i n g th e A c c o u nt i n g S t a n d a r d - 9 r e l at i n g to Revenue recognition prescribed by the i n s t i tu t e of C h a r t e r e d A c c ou n t a n t s of I n d i a , w h i c h re q u i r e d in c o m e t o b e r e c o g n iz e d o n l y o n b e c o m in g c e r t a i n . I t w a s a l s o c o n t e n d e d t h a t th e m e t h o d f o l l o w e d b y t h e a s s es se e w a s i n c o n s on a n c e w it h t h e g u i d e li n e s i s s u e d b y t he Re s e r v e B a n k o f I n d ia fr o m t i m e t o tim e . R e l i a nc e wa s a l s o placed on v a r io u s courts' d ec i s i o n s . Th e A s s e s s i ng O f f i c e r a f t er c o n s i d e r i n g t h e a s se s s e e ' s r e p l y h e ld t h a t it was r e q u i r ed to account fo r interest on sticky l o a n s / N P A' s on accrual ba s i s since it f o l l ow e d t he m e r c a n t i le s y s te m o f a c c o u n t i n g . Th e A s s e s s i n g O f f i c e r, t h e r e f o r e, c o m p ut e d t h e i n t e r e s t o n t h e N P A ' s a n d a d d e d t h e s a m e t o t h e in c o m e o f t h e a sse s s e e .
5. Th e m a t t e r w a s c a r r i e d i n a p pe a l b e f o re t h e ld .
C I T( A p p e al s ) wh o a l l o we d t he a s s e s s ee ' s ap p e a ls following the decision of the I.T.A.T., Pune Bench in the 3 c a s e o f A CI T v s . U s m a n a b a d J a n ta S a h k a r i B a n k L t d . in I TA No. 79 5 / PN / 2 0 1 1 d at e d 3 1 . 0 8 . 2 01 2 an d the d e c i s i o n o f t h e I . T. A . T . C h a n d i g a r h B e n c h i n t h e ca s e o f A CI T v s . P u n j a b S t a t e C o o pe r a t i ve B a n k L t d . [2 0 13 ] 1 4 3 I TD 0 5 7 1 , h o ld i ng t h a t t h e p r o vi si o n s o f S e c t io n 43 D o f t h e I n c om e Ta x A c t , 1 9 61 w h i ch a l l o w e d i n t e r es t o n b a d and d o u b tf u l de b t s as pr e s c r ib e d in t he g u id e l i n es i s s u e d by t h e RB I , t o b e a c co u nt e d f o r o n r ec e i pt b a s i s in case of Public F i n a n ci a l I n s t it u t i o ns , public companies etc., to be applicable in the case of the assessee also.
6. A g g r i e v e d b y t h e s a m e , t h e R ev e n u e h a s c o m e u p in a p p e a l be f o r e u s, r a i s in g t he f ol lo w i n g id e n t i ca l g r o u n d i n b o t h t h e a p pe a l s :
"1. O n th e f ac ts an d in th e c ir c u ms t an c e s , th e l d . C IT ( A ) h as e r r e d in d e l e tin g th e ad d i tio n s of R s . 2 3, 6 5 , 2 6, 60 0 / - mad e b y th e A O on ac c o u n t of in te r e s t in c o me n o t d e c l ar e d b y th e as s e s s e e on N P A ' s /s tic k y l o an s o n ac c r u al b as is a s th e as s e s s e e b an k h as been f ol l o win g M e r c an til e S ys te m of ac c o u n tin g r e g u lar l y. "
7. During the c o ur s e of hearing before us, l d.
Counsel of t he a s s e s s ee at th e o u t s et d r ew ou r a t t e n t i o n t o t h e f a c t t h a t t h e I . T. A . T. , C h a n d i g a r h Bench had d e a lt w i t h i d e n t i ca l i s s u e i n t h e c as e o f Th e D C I T v s . Th e L u d h i a n a C e n tr a l C o - o p . B a n k L t d . , i n I TA N o 5 2 6 /C h d / 2 0 1 3 da t e d 0 3 . 0 1 . 2 0 17 , h o l d i n g that i n t e r e st on sticky l o a n s/ N P A ' s was to be s u b j e c t e d t o t a x o n re c e i p t b a s is . C o p y o f t h e s a i d order was placed before us.
48. Th e ld. DR fairly agreed that the issue w as c o v e r e d in f a v o ur o f t h e a s s e s s ee b y t h e d e c i s i o n of t h e I TA T C h a n d i g a r h B e n c h in th e c a s e o f L u dhi a n a C e n t r a l C o o p e r ati v e B a n k L t d .( s up r a ) .
9. In view of the above, we f i nd no r e a so n to i n t e r f e r e i n t h e o r d e r of t h e l d . C I T ( A ) . Th e I . T.A . T. C h a n d i g a rh B e n c h h a s , w e f in d , i n t h e c a se o f Ludhiana C en t r a l Co - o p . Bank Lt d . , ( S u p r a ) , c a t e g o ri ca l l y held that in the case of a s s e s s e e s , b e i n g C o - o p e r a ti v e B an k s , t h e i n te r e s t o n s t i c k y l o a ns / NP A ' s h a s t o b e b r o u g h t t o t ax o n receipt ba s i s . The I . T. A . T. , while r e n de r i n g t h is j u d g m e n t , h a s no t e d t h a t i n a n u m b e r o f d e c i s i on s o f H i g h c o u r t s a n d t h e a p e x c o u r t , it h a s b e e n h e l d t h a t i n t e r e s t o n s t i c k y l o a ns i s t o b e a c c ou n t e d f or o n r e c e i p t b a s i s f o l lo w i n g t h e " R ea l I n co m e th e o r y " , t h e p r e s c r i b ed A c c ou n t i n g S t a n d a r d A S - 9 i s su e d b y t he I n st i t u t e o f C h ar t e r e d A c c o u n tan t s O f I n d i a, t h e R BI guidelines relating to a c c o u n ti n g for interest on N P A ' s a n d t h e ac c o u n t i n g p r ac t ic e o f t h e a s s e s se e s . F u r t h e r i t h a s t a k e n n ot e o f t h e d e c is i o n of t he G u j a r a t H i g h Co u r t i n t h e c a s e o f P r . CI T - 5 vs . S h r i M a h i l a S ew a S ah k a r i B a n k L t d . w h i c h h e ld t ha t s o far as i n c om e r e c o g n i t io n was c o n c e rn e d the A s s e s s i n g O f f i c e r h a d t o f o l l o w t h e R BI D i r ec ti o n s , 1 9 9 8 , i n v i ew o f S e c t i on 4 5 Q o f t h e RBI Ac t , wh i c h p r o v i d e d t h a t t h e p o l i c y o f i n co m e r e c o g n i t i o n h a s t o be objective and based on the record of recovery and 5 t h a t i nc o m e f r om n o n p e r f o rm i ng a s s e ts i s n o t to b e r e c o g n i z ed on accrual basis but only when it is a c t u a l l y r e c e i v e d. F u r t h e r t a k i n g n o t e o f t h e d e c i si o n o f t h e Ho n ' b l e Bo m b a y H i gh C o ur t i n t he c a s e o f C I T v s . D e o g i r i N a gar i S a h a k a r i B a nk L t d . & O t h e r s , 3 7 9 I TR 2 4 1 , t h e I . T. A . T. h e l d t h a t t he i s s u e o f t a x a b il i t y o f i n t er e s t o n N P A ' s wa s se t t le d i n f a v o ur o f t he a s s e s s e e a s b e i ng t a x a b l e i n t h e y e a r o f r e c e i p t . Th e r e l e v a n t f in d i n g s o f t h e I T A T a t p a r a 1 3 - 2 7 o f t h e o r d e r i s a s u n de r:
"13. We f ind that the issue of accounting f or interest on sticky loans/NPA 's, has been dealt w i t h i n a n u mb e r o f d e c i s i o n s b o t h b y t h e A p e x Court and various High Courts and T ribunals a l s o , wh e r e i n a f te r a p p l y i n g t h e " R e a l I n c o me Theory", the prescribed Accounting Standard issued by ICAI on Revenue Recognition, AS -9, the accounting practise of the asseess ee relating to interest on sticky loans and the RBI guidelines relating to accounting f or interest on NPA 's, it w a s h e l d t h a t s u c h i n c o me wa s t a x a b l e i n t h e y e a r o f r e c e i p t o n l y , wh e n i t s r e a l i s a t i o n b e c o me s reasonably certain.
14. The Apex Court in the c ase of UCO B a n k , C a l c u t t a V s . C IT , W e s t B e n g a l ( 1 9 9 9 ) 4 S u p r e me C o u r t C a s e s 5 9 9 a p p r o v e d t h e r e c e i p t b a s i s o f a c c o u n t i n g f o r i n t e r e s t o n l o a n s wh o s e r e c o v e r y wa s d o u b tf u l , h o l d i n g t h e s a me t o b e i n a c c o r d a n c e wi t h a c c o u n t i n g p r a c t i c e a n d i n c o n f o r m i t y wi t h t h e me t h o d p r e s c r i b e d u n d e r section 145 of the Act. The relevant f indings of t h e A p e x C o u r t a r e a s f o l l o ws :
"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 6 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 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 7 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 ref erred to the CBDT Circular dated 9 th October 1984 stating t h a t i n t e r e s t o n l o a n s o n wh i c h t h e r e h a s b e e n n o r e c o v e r y f o r 3 y e a r s wi l l b e s u b j e c t e d t o t a x o n r e c e i p t b a s i s , a n d h e l d a s f o l l o ws :
"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."
16. T h i s v i e w wa s r e af f ir me d i n a l a t e r j u d g me n t b y t h e A p e x C o u r t i n M e r c a n t i l e B a n k L t d . , V s . C IT , B o m b a y C i t y - I I I ( 2 0 0 6 ) 5 S S C 2 2 1 .
17. Further the issue of taxability of interest on NPA accounts on re ceipt basis by C o o p e r a t i v e B a n k s h a s b e e n d e a l t wi t h b y v a r i o u s H i g h C o u r t s , wh e r e i n i t wa s h e l d t h a t t h e a s s e s s e e wa s b o u n d b y R B I g u i d e l i n e s t o account f or such interest on receipt basis and by virtue of the provisions of section 45Q of the RBI Act, the RBI guidelines had an overriding e f f e c t o v e r o t h e r A c t s i n c l u d i n g t h e I n c o me T a x Act, 1961.
18. The Gujarat High Court in the case of P r . C IT - 5 V s . S h r i M a h i l a S e wa S a h a k a r i B a n k Ltd. (T ax Appeal No.531 of 2015 dated 5.8.2016 8 ,relying upon the decision of the apex court in Southern Technologies Limited vs J C IT , C o i m b a t o r e , ( 2 0 1 0 ) 3 2 0 IT R 5 7 7 , h e l d t h a t s o f ar a s I n c o me R e c o g n i t i o n wa s c o n c e r n e d e v e n t h e AO had to f ollo w the RBI Directions,1998 in vie w of section 45Q of the RBI Act and section 145 of the Income T ax Act had no role to play in the same. T he Hon 'ble Court held at para 20 to 2 3 o f i t s o r d e r a s f o l l o ws :
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 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 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 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 9 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 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 o f recovery under the norms o f the accounting standards issued by the Institute o f 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, 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 10 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. 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 f ollo w RBI directions on R e v e n u e R e c o g n i t i o n , a n d h e l d a s f o l l o ws :
"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. T h e B o mb a y H i g h C o u r t i n t h e c a s e o f CIT Vs. Deogiri Nagari Sahakarii Bank Ltd. & O t h e r s , 3 7 9 IT R 2 4 1 r e i t e r a t e d t h e a b o v e 11 proposition by holding at para 9 of its order as f o l l o ws :
"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 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 a n d M e r c a n t i l e B a n k L t d . ( s u p r a ) i t a l l o we d t h e assessee's appeal.
22. It is evident f rom the above that the issue regarding taxability of interest on NPA 's is settled in f avour 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 p r e s e n t c a s e , we f i n d i s m i s p l a c e d , s i n c e a s 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 (sup ra) wh e r e i n i t wa s p o i n t e d o u t b y t h e A p e x C o u r t t h a t wh i l e r e n d e r i n g t h e j u d g me n t i n t h e c a s e o f S t a t e 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 C o u r t i n t h e c a s e o f K . P . V a r g h e s e V s . IT O ( 1 9 8 1 ) 1 3 1 IT R 5 9 7 ( S C ) . The relevant extracts of the decision in UCO Bank Limited are reproduced hereunder :
12"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. 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 13 question at all but has decided the matter on the basis of other provisions of law. "
24. Theref ore, the contention of the Revenue that the decision in t he case of State Bank of Travancore (supra) applies to the assessee's case is dismissed.
25. T h e a r g u me n t o f t h e l e a r n e d D . R .
that the decision of the Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) wo u l d n o t a p p l y t o t h e a s s e s s e e ' s c a s e s i n c e t h e a s s e s s e e i s a c o o p e r a t i v e s o c i e t y wh i l e i n the case of Vasisth Chay Vyapar Ltd. (supra), t h e a s s e s s e e wa s a N B F C , i s a l s o d i s m i s s e d since the principle enunciated by the Delhi High Court in Vasisth Chay Vyapar Ltd. ( s u p r a ) h a s b e e n f o l l o we d i n t h e c a s e o f S h r i M a h i l a S e wa S a h a k a r i B a n k L t d . ( s u p r a ) b y the Hon'ble Gujarat High Court and various other decisions cited by the assessee bef ore us ,and the assessee in all those cases being a cooperative bank, the decision rendered therein squarely appl ies to the case of the assessee.
26. T h e a r g u me n t o f t h e l e a r n e d D . R .
t h a t t h e a s s e s s e e i s f o l l o wi n g t h e me r c a n t i l e system of accounting is also dismissed since t h i s a s p e c t h a s b e e n d e a l t wi t h b y v a r i o u s H i g h C o u r t s r e f e r r e d t o a b o v e wh e r e i n t h e y h a v e c a t e g o r i c a l l y h e l d t h a t e v e n f o l l o wi n g t h e mercantile system of accounting the interest on NPA account cannot be said to have accrued in the impugned year since the recovery of the s a me wa s i m p o s s i b l e a n d e v e n o t h e r wi s e f o r t h e p u r p o s e o f I n c o me R e c o g n i t i o n t h e R B I D i r e c t i o n s , 1 9 9 8 , h a d t o b e f o l l o we d i n v i e w o f section 45Q of the RBI Act.
27. In the light of the above discussion we f i n d n o i n f ir m i t y i n t h e o r d e r o f t h e CIT(A),holding the interest on NPA 's as taxable i n t h e y e a r o f r e c e i p t , s o a s t o wa r r a n t interf erence.
10. Th e i s s u e i n v o l v e d i n t h e p r e s e nt a p p e a l s b e i ng identical to that decided by the I.T.A.T. in the case of Th e L u d h i a n a Ce n t r a l Co - o p . B an k L t d . ,( S u p r a) , t h e d e c i s i o n r e n de r e d t h e r e i n wo u l d s q u a r e l y a p p ly to t h e 14 present c a s e s, f o l l o w i ng w h ic h we ho l d that the i n t e r e s t o n s t ic k y l o a n s / N P A ' s h a s t o b e t a x e d o n r e c e i p t b a s is . W e , t h e r e f o r e, u p ho l d t h e o r d e r o f t h e C I T( A ) a nd d i s mis s t h e g ro u n d ra is e d b y t he R e v enu e .
11. In the result, both the appeals of the Revenue are dismissed.
O r d e r p r o n o u n c ed i n t h e o p e n cou r t .
Sd/- Sd/-
(DIVA SINGH) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 31 s t January, 2018
Aks/
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh