Assessment–Additions to income–Accrued interest on bad and doubtful debts/NPA’s.

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Assessment --Additions to income--Accrued interest on bad and doubtful debts/NPA's

Assessment–Additions to income–Accrued interest on bad and doubtful debts/NPA’s.


Dy. CIT v. Saurashtra Co-op. Bank Ltd.

Decision:    In assessee’s favour.

Assessment–Additions to income–Accrued interest on bad and doubtful debts/NPA’s

Facts:

AO made addition on account of accrued interest on bad and doubtful debts/NPAs on the ground that assessee being a scheduled bank, the provisions of section 43D were not applicable. AO further observed that since the NPAs had not been written off by assessee bank and it had the right to recover the principal amount as well as the interest thereupon on accrual basis as per the mercantile system of accounting followed by it. Thus, the interest income ought to have been recognized as income assessable for the year under consideration. Thus, AO had made the addition of such notional interest income. Assessee contended that interest on NPA had not accrued at all for the reason that the recovery of the principal amount itself was in doubt, when the NPA account was doubtful and sticky as per the categorization prescribed by the RBI, then the interest was not required to be provided at all in the P & L Account.

Held:

Following the decision in case of PCIT v. Shri Mahila Seva Sahakari Bank Ltd. (2017) 395 ITR 324 (Guj), it was upheld that once the assessee bank had not recognized any income as per RBI guidelines issued under section 45Q of the Reserve Bank of India Act, 1934, provisions of Chapter III thereof would have an overriding effect over all other laws including the Income Tax Act, 1961. Therefore, addition made by AO was to be deleted.

The copy of the judgment is as under:

IN THE ITAT AHMEDABAD BENCH

S. S. GODARA, J.M. & AMARJIT SINGH, A.M.

Dy. CIT v. Saurashtra Co-op. Bank Ltd.

ITA No. 690/Ahd/2016

31 January, 2018

Revenue by: Mudit Nagpal, Sr. D.R.

Assessee by: S. N. Soparkar, A.R.

ORDER

S. S. Godara, J.M.

This Revenue’s appeal for assessment year 2012-13, arises against the Commissioner (Appeals)-5, Ahmedabad’s order dated 12-1-2016, in Case No. CIT(A)-5/DCIT Cir.5(3)/131/2014-15, reversing assessing officer’s action disallowing/adding an amount of Rs. 83,45,400 on account of accrued interest on bad and doubtful debts/NPAs, in proceedings under section 143(3) of the Income Tax Act, 1961, hereinafter ‘the Act’.

2. We come to the above sole substantive issue of addition on account of accrued interest on bad and doubtful debts/NPAs. The assessing officer concluded in assessment order dated 11-2-2015 that section 43D of the Act read with rule 6EA would not apply in case of the assessee bank as it is not a scheduled bank as classified to this effect by the Reserve Bank of India. He was of the opinion that section 43D covers only scheduled bank. He further concluded that the assessee had also not been able to establish the clear-cut cause of uncertainty towards realization of outstanding dues in question including principle and interest amount. All this reasoning resulted in the impugned addition of Rs. 83,45,900 being made in assessee’s hands. The Commissioner (Appeals) deletes the impugned addition by observing as under :–

“Decision:

3.5. I have considered the facts of the case and submission made by the appellant. In this case assessment under section 143(3) was made on 11-3-2015 after making addition of Rs. 83,45,400 on account of accrued interest on nonperforming assets. The assessing officer has made addition on the ground that the appellant being a scheduled bank, the provision of section 43D were not applicable, the real income theory was not applicable in view of mercantile method of accounting and the uncertainty of income was not established.

3.6. The assessing officer has made the addition in the nature of accrued interest on bad and doubtful debts (NPA) on the ground that such interest was accrued as per the provisions of section 145 of the Income Tax Act as the appellant was following the mercantile system of accounting.

3.7. It has been observed by the assessing officer that the appellant bank has shown the NPA under the head of ‘Loans and Advances’ and the bank has not shown the interest thereupon in the P & L Account. The assessing officer further observed that although the appellant was following the mercantile system of accounting in general, but so far as interest on NPA is concerned, it has booked the income on receipt basis only. The assessing officer further observed that since the NPAs have not been written off by the appellant bank and it had the right to recover the principal amount as well as the interest thereupon on accrual basis as per the mercantile system of accounting followed by it. Thus, the interest income ought to have been recognized as income assessable for the year under consideration. Thus, the assessing officer has made the addition of such notional interest income. The assessing officer also observed that the norms and procedure laid down by the RBI were in order to regulate effective conduct of the business and to control the mandatory aspects of the company. Hence, those operates in the different field and these RBI directions do not override the provisions of Income Tax Act, since the Income Tax Act is an independent code in itself. He also relied upon the judgment of Hon’ble Supreme Court in the case of State Bank of Travancore v. CIT (supra).

3.8. On the other side, the appellant has claimed that the interest on the NPA has not accrued at all for the reason that the recovery of the principal amount itself was in doubt, when the NPA account was doubtful and sticky as per the categorization prescribed by the RBI then the interest is not required to be provided at all in the P & L Account. It also relied upon the RBI Circular of 2-7-2012. As per the circular, the appellant bank was not required to make provision of interest on NPA account. This circular was in conformity with the Supreme Court judgment in the case of UCO Bank. The appellant relied upon the judgment of Hon’ble Supreme Court in the case of UCO Bank v. ACIT (1999) 237 ITR 889 (SC) which was after the judgment in the case of State Bank of Travencore on which the assessing officer has relied upon. The appellant also stated that the interest was said to have accrued only when right to receive is established. In the case of NPA, the recovery of principal amount itself was in doubt. Therefore, interest on such doubtful amount cannot be said to have been accrued as per the provisions of section 145 of Income  Tax Act. It has also relied upon the judgment of Bombay High Court in the case of State Bank of India (supra), ITAT, Ahmedabad in the case of Manila Seva Sahakari Bank Ltd. and Sardarganj Mercantile Co-op, Bank Ltd. (supra). Further, reliance was also placed on the recent judgment of Hon’ble Bombay High Court in the case of CIT v. Devgiri Nagrik Sahakari Bank Ltd. in ITA No. 53 of 2014, dt. 22-1-2015.The appellant has also relied upon on the judgment in the case of Pragati Co-Op. Bank Ltd. (ITA No. 872/Ahd/2012, dt. 21-8-2015). Reliance is also placed on the judgment in the case of Urban Co-Op. Bank Ltd. (ITA No. 471 of 2013, dt. 30-6-2014) of Hon’ble Kamataka High Court.

3.9. Having considered the facts and submissions, it is undisputed that the appellant bank has categorized the NPA out of its loans and advances as per the norms prescribed in the RBI Circular which is mandatory to be done. It is needless to mention that such sticky loans have been treated as NPA only for the reason that the repayments of the principal and interest thereupon was not being paid by the borrowers to the appellant bank. Thus, it cannot be said that the interest pertaining to those NPAs would certainly be realized from such defaulting customers. On such NPAs, even the recovery of dues was doubtful and hi such circumstances, it would not be justified if the notional interest is worked out upon such NPAs and the appellant bank is paid the taxes thereupon. In this regard, the concept of real income theory also comes to the rescue of the appellant.

3.10. Considering the various decisions and judgments including the earlier judgment given in the case of State Bank of Travancore on which assessing officer relied upon, the Hon’ble Apex Court in the case of UCO Bank v. CIT (1999) 237 ITR 889 (SC) has observed that the notional interest upon the sticky loans cannot be taxed. For ready reference, the head notes of the judgment is reproduced as under. —

“Section 5, read with section 119 and 145, of the Income Tax Act, 1961 – Income -Accrual of- assessment year 1981-82 – Whether in view of CBDT circular, dated 9-10-1984, interest on a loan whose recovery is doubtful and which has not been recovered by assessee-bank for last three years but has been kept in a suspense account and has not been brought to profit and loss account of assessee, cannot be included in income of assessee – Held yes – Whether CBDT circular dated 9-10- 1984 is in conflict with provisions of section 145 – Held no.

Section 119 of the Income Tax Act, 1961 – Central Board of Direct Taxes – Power to issue circulars etc. – Whether, since Board has considered it necessary to lay down a general test for deciding what is a doubtful debt in circular dated 9-10-1984 and directed that all ITOs should treat such amounts as not forming part of income of assessee until realized, this direction by way of a circular cannot be considered as travelling beyond powers of Board under section 119 and such a circular is binding under section 119 – Held, yes.

Circulars and Notifications – CBDT Circular No. 41(V-6), dt. 6-10-1952, CBDT Circular dated 30-6-1995, CBDT Circular No. 1186, dt. 20-6-1978 and CBDT Circular No. F 201/21/84/TTA-II, dt. 9-10- 1984.

3.11. Subsequently, the Hon’ble IT AT ‘B’ Bench, Ahmedabad in the case of Sardarganj Mercantile Co-op. Bank Ltd. v. ACIT in ITA No. 2426/Ahd/2012, dt. 15-2-2013 having considered the UCO Bank decision, RBI guidelines has decided the issue in favour of the appellant bank by stating that no interest on the NPA is chargeable to tax. The Hon’ble ITAT has observed that the provisions of section 43D is not applicable as the appellant has not credited the interest in P & L Account but shown in the asset and liabilities side in the balance sheet directly and also not received actually. Relevant portion of the decision is reproduced as under :–

“4. Now the assessee is before us. Learned Counsel for the appellant contended that the assessee is a Cooperative bank engaged in carrying on banking business. During assessment year 2009-10, the assessee passed book entry for interest of Rs. 1,58,897on NPA account by debiting to time barred interest receivable account and crediting to provision for time barred interest. Both the accounts are reflected in the balance sheet on the assets side and liability side. NO such interest is credited to P&L account as income. He further relied RBI Master Circular updated 30-6-2007, -wherein it was policy as per the RBI guideline income from non performing assets is not recognized 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. He farther has drawn our attention on the page no.5 of the paper book which is balance sheet for assessment year 2009-10 which shows that the appellant had shown this interest provision NPA in asset side and liability side and not credited in the P&L account. The appellant further argued that UCO Bank v. CIT, (1999) 237 ITR 889 (SC), wherein it was held that the question whether interest earned 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 officer 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 P & L A/c. of the company is not treated as income. He further argued that in case of CIT v. State Bank of India 262 ITR 662-668, which Gein Hon’ble Bombay High Court has answered in favour or assessee and against the Revenue. Therefore, he requested to delete the addition. At the outset, learned. Sr. D.R. relied upon the order of the Commissioner (Appeals) and assessing officer.

5. We have heard the rival contentions and perused the material on record. The appellant is making the provision of interest as per the guidelines issued by the R.B.I. However, same has not been credited in the P&L account as it was notional had not received actually by it. Section 43 is also not applicable as assessee has not credited in the P&L account but shown in the assets and liability side in the balance sheet directly and also not received actually. Thus, we have considered view that the Commissioner (Appeals) was not justifying in confirming the addition. Accordingly, the assessee’s appeal is allowed.”

3.12. Thereafter, the Hon’ble ITAT ‘C’ Bench, Ahmedabad in the case of Shri Manila Seva Sahakari Bank Ltd. v. ACIT (OSD) Circle-10, in ITA No. 62/Ahd/2014, dt. 27-3-2015, after considering the judgment of UCO Bank, other ITAT decisions and RBI guidelines has also decided this issue in favour of the appellant bank. The relevant portion of the decision is reproduced as under :–

“5.1. However, we find that under the identical facts, the Coordinate Bench of this Tribunal in the case of ACIT v. Solapur Siddheshwar Sahakari Bank Ltd. in ITA Nos. 2220&221/PN/2013, for assessment years 2009-10 & 2010-11 (supra) has examined the issue thoroughly by holding as under :–

4. The learned Commissioner (Appeals) disagreed with the assessing officer, and thus the Revenue is in appeal before us. At the time of hearing, it was a common point between the parties that an identical controversy has been considered by the Pune Bench of the Tribunal in the case of ACIT v. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No. 350/PN/2013, dt. 31-10-2013. In the said precedent, the tribunal considered the judgement of the Hon’ble Delhi High Court in the case of Ms Vasisth Chay Vyapar Ltd., (2011) 330 ITR 440 (Del) as well as the judgement of the Hon’ble Madras High Court in the case of CIT v. Sakthi Finance Ltd., (2013) 352 ITR 102 (Madras), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances; and, following the proposition that in the absence of any judgment of the Jurisdictional High Court, there being contrary judgments of the non-jurisdictional High Courts, a decision which was favourable to the assessee was to be followed in view of the reasoning laid down by the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd., (1973) 88 ITR 192 (SCCG) and, thus the Tribunal decided the issue in favour of the assessee. The relevant discussion in the order of the Tribunal dated 31-10-2013 (supra) is reproduced as under :–

“8. We have carefully considered the rival submissions. In so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Ostensibly, assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a ‘scheduled bank’ included in second schedule of RBI so as to fall within the scope of section 43D of the Act. Notably, section 43D of the Act prescribes that interest income on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consideration.

9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd.(supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Cooperative Bank operating under a license issued by RBI but was not a ‘scheduled bank’ so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The assessee, on the other hand, contended that having regard to the guidelines issued by RBI regarding accounting of interest on NPAs, no interest income accrued in respect of NPAs and that the same was to be taxed only on receipt basis. The Tribunal observed that the question of taxability of interest on NPAs classified by RBI, was considered by the Hon’ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) wherein after considering the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd.(supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd.(supra) is worthy of notice :–

“8, We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon’ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd.(supra); wherein the Hon’ble Delhi High Court took into account the decision rendered by the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (supra). In the case of M/s Vasisth Chay Vyapar Ltd., the assessee therein was a non banking financial company and it was also bound by the “Prudential norms directions” issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The assessing officer, however, added the said interest as the income of the assessee by holding that it had “accrued” to the assessee even it was not realized as the assessee was following mercantile system of accounting. The learned Commissioner (Appeals) affirmed the order of the assessing officer. However, the ITAT deleted the aforesaid income. Hence the revenue preferred appeal before the Hon’ble Delhi High Court.

8.1 After hearing the rival submissions, the Hon’ble Delhi High Court took note of section 45Q of Reserve Bank of India Act which reads as under :–

“Chapter IHB to override other laws.

45Q. 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”. The High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon’ble High Court also considered accounting standard “AS-9” on “Revenue recognition” and also extracted following relevant portion from the said accounting standard:

9. Effect of uncertainties on Revenue Recognition

9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection -will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments.

9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, It is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

9.5 When recognition of revenue is postponed due to the-effect of uncertainties, it is considered as revenue of the period in which it is properly recognized”.

8.2 The Delhi High Court also considered the decision rendered in the following cases; (i) Commissioner (Appeals) v. Elgi Finance Ltd., (2007) 293 ITR 357 (Mad) (ii) CIT v. KKM Investments (Cal) – SLP dismissed by Supreme Court (310 ITR 4)(iii) CIT v. Motor Credit Co (P) Ltd., (1981) 127 ITR 572 (Mad) (iv) UCO Bank v. CIT (1999) 237 ITR 889 (SC) (v) CIT v. Shoorji Valiabhdas & Co. (1962) 46 ITR 144 (SC) (vi) Godhra Electricity Co. Ltd., v. CIT (1997) 225 ITR 746 (SC) (vii) CIT v. Goyal MG Gases (P) Ltd., (2008) 303 ITR 159 (Delhi)  (viii) CIT v. Eicher Ltd., [ITA No. 431/2009, dt. 15-7-2009 (Del)]

8.3 After considering the Accounting Standard 9 and the various case law listed above, the Hon’ble Delhi High Court held that the interest on NPA advance cannot be treated as “accrued” to the assesses,

8.4. Before the Delhi High Court, the revenue took support of the ‘decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (supra). The Delhi High Court considered the said decision of Hon’ble Apex Court and explained the same as under :–

“We have already held that even under the Income Tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirety on the judgment of the Supreme Court in the case of Southern Technology(supra). No doubt, in first blush, reading of the judgment gives an indication that the Court has held that Reserve Bank of India 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 ITA No. 62/Ahd/2014 Shri Manila Sewa Sahkari Bank Ltd. v. ACIT (OSD) assessment year – 2010-11-19 – 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 deducibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far 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. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to “Income Recognition” and held that income had to be recognized in terms of the Prudent/a Norms, even, though the same deviated from mercantile system of accounting and/or section 45 (sic. 145) of the Income Tax Act. It can be said, therefore, that the Apex Court approved the ‘real income’ theory which is engrained in fie Prudential Norms for recognition of revenue by NBFC”.

9. The Hon’ble Supreme Court in the case of M/s Southern Technologies Ltd. (supra) dissected the matter into two parts viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon’ble Supreme Court held that section 145 of the Income Tax Act has no role to play and the assessing officer has to follow Reserve Bank of India directions 1998, since by virtue of45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-a-vis income recognition principles in the Companies Act, 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon’ble Supreme Court are extracted below :–

“Applicability of section 145.

40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect “true and correct” profits. By virtue of section 45Q, an overriding effect is given to the Directions 1998 vis-a-vis “Income Recognition” principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the Income Tax Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the ‘permissible deductions” or “their exclusion” under the Income Tax Act. The inconsistency between these Directions and Companies Act is only 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 assessing officer comes to the conclusion that such change would result in understatement of profits. However, here is the case where the assessing officer has to follow the Reserve Bank of India Directions 1998 in view of section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, section 145 of the Income Tax Act has no role to play in the present dispute”.

10. Turning to the facts of the case before us, the assesses herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assesses as it is applicable to the companies registered under the Companies Act. The Hon’ble Supreme Court has held in the case of Southern Technologies Ltd. (supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act Hence section 45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the assessing officer has to follow the Reserve Bank of India directions 1998, as held by the Hon’ble Supreme Court.

10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon’ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd.(supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon’ble Delhi High Court in the above cited case are relevant :–

“What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”. The said decision of the Hon’ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order.”

10. Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the Commissioner (Appeals). In deleting the impugned addition relating to interest income in respect of NPAs.

11. So, however, the learned Departmental Representative has submitted that the Hon’ble Madras High Court in the case of CIT v. Sakthi Finance Ltd., (2013) 352 ITR 102 (Madras) has differed with the judgement of the Hon’ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd.(supra) on a similar issue, i.e. relating to interest income on NPAs. The learned Departmental Representative further pointed out that the Hon’ble Madras High Court followed the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis. We have carefully considered the submissions put-forth by the learned Departmental Representative based on the judgment of the Hon’ble Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon’ble Madras High Court related to non-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Hon’ble Madras High Court took the view that the judgement of the Hon’ble Supreme Court in the case of Southern Technologies Ltd.(supra) also applied to the Income Recognition Norms provided by RBI and therefore it held the interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI’s guidelines. But the Hon’ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon’ble Delhi High Court and the Hon’ble Madras High Court as noted by the Hon’ble Madras High Court in its order.

12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgment of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC).

13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in the case of The Durga Cooperative Urban Bank Ltd. (supra) and accordingly the order of the Commissioner (Appeals) is liable to the affirmed. We hold so.

14. In the result, the appeal of the Revenue is dismissed.”

5. Since it was a common point between the parties that the facts and circumstances in the present case are identical to those considered by us in the case of The Omerga Janta Sahakari Bank Ltd. (supra), following the said precedent the present claim of the assessee deserves to be upheld. Thus, the order of the Commissioner (Appeals) is hereby affirmed and the Revenue has to fail on this aspect.

6. In the result, both the appeals of the Revenue are dismissed. “

5.2. We also find that the Coordinate Bench of this Tribunal in the case ofSardarganj Mercantile Co-op. Bank Ltd. v. ACIT (supra) has deleted addition by observing as under :–

“5. We have heard the rival contentions and perused the material on record. The appellant is making the provision of interest as per the guidelines issued by the R.B.I. However, same has not been credited in the P&L account as it was notional had not received actually by it. Section 43 is also not applicable a assessee has not credited in the P&L account but shown in the assets and liability side in the balance sheet directly and also not received actually. Thus, we have considered view that the Commissioner (Appeals) was not justifying in confirming the addition. Accordingly, the assessee’s appeal is allowed.

6. In the result, the assessee’s appeal is allowed.”

5.3 The Hon’ble Coordinate Bench has noted that there is a divergent view between the Hon’ble Delhi High Court in the case of M/s. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 Q(Delhi and the Hon’ble Madras High Court in the case of CIT v. Sakthi Finance Ltd. (2013) 352 ITR 102 (Mad.), in respect of application of the judgment of the Hon’ble Apex Court rendered in the case of Southern Technology Ltd. (supra) on income recognition norms prescribed by R.B.I. The Hon’ble Coordinate Bench in view of the fact that there were divergent views of Hon’ble Delhi High Court and Hon’ble Madras High Court, applied the ratio of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). In the present case also, there is no judgment by the Hon’ble Jurisdictional High Court, therefore for the same reasoning, we decide this issue in favour of the assessee and the assessing officer is hereby directed to delete the addition. Thus, ground of assessee’s appeal is allowed.”

3.13. Recently, Hon’ble Bombay High Court in the case of CIT v. M/s. Deogiri Nagari Sahakari Bank Ltd. in Income Tax Appeal No. 53 of 2014 and others, dt. 22-1-2015 has dismissed the Revenue Appeals on the identical issue with the following observations :–

“8. Learned counsel for respondent submits that, learned Tribunal has rightly dismissed the appeals of the revenue by confirming the order passed by the Commissioner (Appeals). There is no substantial question of law involved in these appeals and thus all the appeals are liable to be dismissed.

9. The Income Tax Appellate Tribunal has referred the case of M/s. Vasisth Chay Vyapar Limited (2011) 330 ITR 440 (Delhi). In this case, the revenue re lied upon the decision of the Hon’ble Supreme Court 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 45 Q of Reserve Bank of India Act has as 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 corporative banks,. Hence, the assessing officer has to follow the Reserve Bank of India directions 1998, as held by the Hon’ble Supreme Court.

10. The Hon’ble Apex Court in the case of Uco Bank case (supra) had an occasion to consider the nature of CBDT circular and Hon’ble Apex Court has thus held that Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of the Act and which are binding on the authorities in the administration of the Act, it is beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws be correctly applied. Further a similar issue was raised about interest accrued on a ‘sticky’ loan which was not recovered by the assessee bank for the last three years and transferred to the suspense account, would or would not be included in the income of the assessee for the particular assessment year. Hon’ble Apex Court has observed that: “The method of accounting which is followed by the assessee bank is Mercantile system of accounting. However, the assessee considers income byway of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only -when it is realized, 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. The assessee’s method of accounting, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice up to assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will 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. The new procedure under the Circular of 9-10-1984 will be applicable for and from the assessment year, 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the CBDT’s Circular of 6-10-1952 would be applicable; while from the assessment year 1979-80, the CBDT’s Circular of 9- 10-1984 is made applicable. In the present case, the assessment was made on the basis of the CBDT’s Circular on 9-10-1984, since the assessment pertains to the assessment year 1981-82 to which the Circular of 9-10-1984 is applicable. If, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all assessing officer’s 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 traveling 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 9-10- 1984, therefore, provides a test for recognizing 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 doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a “sticky” loan, notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the P&L a/c goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The Circular of 9-10-1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or “sticky” loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. There is no inconsistency or contradiction between the circular so issued and section 145 of the Income Tax Act, In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income Tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income Tax Act. As such, the Bombay High Court circular would be binding on the department. The relevant circulars of CBDT cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income Tax Act. “

11. The learned counsel for respondent has placed reliance in a case of Mercantile Bank Ltd., Bombay v. The Commissioner of Income Tax, Bombay City HI (2006) 5 SCC 221, where similar question was raised before the Apex Court. The question was whether the assessee is liable to be taxed under Income Tax Act, 1961 in respect of the interest on doubtful advances credited to the interest on doubtful advances credited to the interest suspense account. In this case, the Uco Bank’s case (supra) was also refered and the Hon’ble Apex Court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent Cooperative banks, as understood by section 43 of the Income Tax Act on the Scheduled Bank.

12. Learned counsel for the appellants/revenue placed reliance on the judgment in the case of Southern Technologies Ltd. v. Joint Commissioner of Income Tax, Coimbatore 2010 (2) SCC 548. However, this judgment pertains to non Banking financial companies, Uco Bank case (supra) and Mercantile Bank(supra) case squarely applies to the fads of the present case and issues involved. We therefore, do not find it necessary to interfere in the judgment of the Appellate Tribunal. We hold that no substantial question of law arises in these appeals.

13. So far as Income Tax Appeal Nos. 53/2014 and 54/2014 are concerned, the issue was also raised in the appeals before the Tribunal with regard to the addition made by the assessing officer representing the forfeited dividend. The learned Tribunal has rightly dealt with this issue and observed that, unclaimed dividend in question amounts to excess provisions for dividend made by the assessee on an earlier occasion which has been reversed by the assessee in the year under consideration and transferred to a reserve account. The provisions of dividend made earlier was not a charge action profits but it was appropriation of the profits available post taxation. We find no error in the aforesaid observations. Furthermore, in the appeals as mentioned above, the Revenue has only challenged the deletion of the additions on account of the interest on stick advances.

3.14. On the identical issue, there are number of other decisions of various authorities in favour of the Co-operative banks stating that interest on NPA is not chargeable on accrual basis in the case of Co-operative banks. Few of such decisions are cited as under:-

— DCIT v. Surat National Co-Op. Bank Ltd [ITA No. 2793/Ahd/2012, dt. 23-8-2013 by Hon’ble ITAT ‘B’ Bench, Ahmedabad]

— ACIT v. The Omerga Janta Sahakari Bank Ltd. [ITA No. 350/PN/2013, dt. 31-10-2013 by Hon’ble ITAT ‘A’ Bench, Pune]

— ACIT v. Punjab State Co-op. Bank Ltd. [ITA No. 1112/Chd/2010 & ITA No. 776/Chd/2011, dt. 6-3-2013].

— Karnavati Co-op Bank Ltd. v. DCIT, (ITAT Ahmedabad) in [ITA No. 2939/Ahd/2010, dt. 30-11-2011]

3.15 In view of the aforesaid discussion, it is observed that for the notional interest Income on accrual basis on the NPAs, cannot be brought to tax. Further, the jurisdictional IT AT in the case of Karnavati Co-op. Bank Ltd. has held that no interest on accrual basis on NPAs can be taxed even in cases of unscheduled banks. It was also observed that as per the RBI guidelines dated 2-7-2012 of which relevant para is reproduced for ready reference as under also states that it was mandatory upon the appellant to not to charge the interest on accrual basis :–

“3. INCOME RECOGNITION

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 recognized 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.”

3.16. Further, following the theory of real income, question of taxability of any notional income like accrued interest on NPA would not arise, more particularly when the recovery of the principal loan amount is doubtful. Even the Hon’ble Supreme Court in the case of UCO Bank, distinguishing the judgment of State Bank of Travancore has held that the circulars issued earlier were not applicable in view of section 43D substituted with effect from 1-4-2000 and the said section requires to follow RBI guidelines and to tax interest on NPA Account only when realized. Further, the Hon’ble Bombay High Court in the case of CIT v. Devgiri Nagrik Sahakari Bank Ltd. (supra) has treated the Cooperative Banks as scheduled banks. In para – 11 of the judgment, they have observed as under.–

“Furthermore, the respondent Co-operative Banks as understood by section 43D of the Act are the scheduled banks.”

3.17 In view of the aforesaid discussion, the appellant bank is not liable to be taxed on the notional interest on the NPAs based upon the accrual accounting theory and respectfully following the judgments of Hon’ble Supreme Court in the case of UCO Bank and jurisdictional ITAT in the case of Shri Mahila Seva Sahakari Bank Ltd. and Sardargunj Mercantile Co-op. Bank Ltd. besides recent judgment of Hon’ble Bombay High Court in the case of Devgiri Nagri Sahakari Bank Ltd. and decisions of various other authorities, the addition made by the assessing officer is found unjustified, and hence, the same is deleted.”

3. Heard both the parties reiterating their respective stands. Case file perused. There is no dispute about the correctness of figures at least so far as the impugned sum of Rs. 83,45,400 qua accrued interest on bad and doubtful debts/NPAs is concerned. Learned Departmental Representative strongly supports assessing officer’s above findings that section 43D of the Act would not cover the assessee’s case as it is not a scheduled bank as per the market regulator the Reserve Bank of India’s classification. We find no merit in Revenue’s instant argument. Learned Authorized Representative quotes before us hon’ble jurisdictional high court’s recent judgment in PCIT v. Shri Mahila Seva Sahakari Bank Ltd. (2017) 395 ITR 324 (Guj) upholding this tribunal’s coordinate bench’s order (supra) that once the assessee bank had not recognized any income as per RBI guidelines issued under section 45Q of the Reserve Bank of India Act, 1934, provisions of Chapter III thereof would have an overriding effect over all other laws including the Income Tax Act, 1961. Hon’ble jurisdictional high court therefore has rejected Revenue’s twin identical arguments therein (supra) as adopted by the assessing officer whilst making the impugned addition in the instant case. We make it clear that the Revenue has not drawn any distinction on facts or law qua the above Hon’ble jurisdictional high court’s judgment. We therefore see no reason to interfere with the learned Commissioner (Appeals)’s order deleting the impugned addition.

4. This Revenue’s appeal is dismissed.

 


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