VRINDAVAN SERVICES P.LTD, MUMBAI V. DCIT CEN CIR 46, MUMBAI

ITA 10/MUM/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 0359 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2008-2009
• Appeal Filed On: 01-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S PADMAJA
• Keywords: Earning of tax free income; Bad and doubtful debts
• Section: 143(3); 14A; 145; 12; 10; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM ITA NO S . 10 , 11, 12 & 15 /MUM/ 2015 (ASSESSMENT YEAR S : 2008 - 09 , 2009 - 10, 2011 - 12 & 2010 - 11 ) M/S. VRINDAVAN SERVICES PVT. LTD. JSW CENTER, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI - 400 051 VS. DY. CIT, CENTRAL CIRCLE - 46, MUMBAI PAN/GIR NO. AAACV 8987 C ( ASSESSEE ) : ( REVENUE ) ITA NO S . 23 2 & 23 3 /MUM/ 2015 (ASSESSMENT YEAR S : 200 8 - 09 & 200 9 - 10 ) DY. CIT, CENTRAL CIRCLE - 46, MUMBAI VS. M/S. VRINDAVAN SERVICES PVT. LTD. JSW CENTER, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI - 400 051 PAN/GIR NO. AAACV 8987 C ( REVENUE ) : ( ASSESSEE ) ASSESSEE BY : SHRI RAKESH JOSHI RE VENUE BY : SHRI S. PADMAJA DATE OF HEARING : 05.09.2018 DATE OF PRONOUNCEMENT : 22.11 .2018 O R D E R PER SHAMIM YAHYA, A. M.: THESE A RE FOUR APPEALS BY THE ASSESSEE AND TWO CROSS APPEALS BY THE R EVENUE ARISING OUT OF RESPECTIVE ORDERS OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS) , MUMBAI (LD.CIT(A) FOR SHORT) FOR THE CONCERNED ASSESSMENT YEARS (A.Y. FOR SHORT) . 2. SINCE THE ISSUES ARE COMMON AND THE APPEALS WERE HEARD TOGETHER THESE ARE BEING DISPOSED OF BY THIS COMMON ORDER. ASSESSEE'S APPEAL : 3. T HE ONLY ISSUE PRESSED IN ASSESSEE'S AP PEAL IS A COMMON ISSUE AS TO WHETHER THE LD. CIT(A) WAS CORRECT IN HOLDING THAT DISALLOWANCE U /S.14 A IS ALSO TO BE MADE IN COMPUTING THE BOOK PROFIT U /S. 115 JB . 2 M/S. VRINDAVAN SERVICES PVT. LTD. 4. UPON HEARING BOTH THE COUNSEL AND PERUSING THE RECORDS WE FIND THAT THIS ISSUE HAS ALREADY B EEN DEALT WITH BY THE S PECIAL B ENCH OF THE T RIBUNAL IN THE CASE OF VIREET INVESTMENT PVT. LTD. AND ANR. (2017) 165 ITD 0027 (DELHI) ((SB)) . I N THE SAID CASE THE S PECIAL B ENCH HAS HELD THAT DISALLOWANCE U /S. 14A CANNOT BE MADE IN COMPUTING BOOK PROFIT U /S. 115 JB. HOWEVER , THE S PECIAL B ENCH HAS THE REMITTED THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO MAKE THE DISALLOWANCE FOR EARNING THE EXEMPT INCOME IN ACCORDANCE WITH E XPLANATION TO SECTION 115JB. IN ACCORDANCE WITH THE ABOVE RULING OF THE SPECIAL B ENCH WE REMIT THIS ISSUE THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL CONSIDER THE ISSUE IN ACCORDANCE WITH THE DIRECTION OF THE ITAT SPECIAL BENCH AS ABOVE. BOTH THE COUNSEL FAIRLY AGREED TO THIS PROPOSITION. REVENUES APPEAL : 5. O NE C OMMON ISSUE RAISED IS WHETHER THE L D. CIT(A) W AS CORRECT IN GRANT ING RELIEF THE DISALLOWANCE U /S.14A. 6. S INCE THE FACTS ARE COMMON WE ARE REFERRING TO FACTS AND FIGURES FROM A.Y. 2009 - 10. 7. B RIEF FACTS ARE THAT THE ASSESSEE COMPANY IS AN INVESTMENT COMPANY BELONGING TO JSW GROUP. SEARCH/ SURVEY ACTIONS WERE CONDUCTED ON 16.03.2011 IN THE CASE OF VARIOUS JSW GROUP COMPANIES. SUBSEQUENTLY THE ASSESSEE 'S CASE WAS SUBJECTED TO SEARCH ASSESSMENT U/S 153C RWS 143(3) OF THE ACT FOR PERIOD AY 2005 - 06 TO 2011 - 12. FOR AY 2009 - 10, THE ASSESSEE FILED RETURN OF INCOME U/S.139 OF THE ACT ON 24.09.2009 DECLARING TOTAL INCOME OF RS.7,44,25,350/ - UNDER NORMAL P ROVISIONS AND BOOK PROFITS U/S.115 JB OF THE INCOME TAX ACT, 1961 OF RS. 28,45/10,77 1 / - . IN THE COMPUTATION OF INCOME, ASSESSEE HAD MADE DISALLOWANCE U/S. 14A OF RS 4,99,70,601/ - . SUBSEQUE NTLY, IN RESPONSE TO NOTICE 3 M/S. VRINDAVAN SERVICES PVT. LTD. U/S. 153C ASSESSEE FILE D RETURN OF INCOME ON 23.01.2012 DECLARING INCOME OF RS.9,09,67,430/ - UNDER NOR MAL PROVISIONS OF THE AC T AND BOOK PROFIT OF RS.28,44,18,923/ - FOR THE PURPOSE OF MAT U/S . 115JB. HOWEVER, IN THIS RETURN ASSESSEE MADE DISALLOWANCE OF RS 4,33 , 33,535 / - U/S. 14A . THE A O IN THE ASSESSMENT ORDER HAS MADE DISALLOWANCE U/S 14A OF RS . 4,99,70,601 / - RELYING UPON THE ORIGINAL RETURN AND COMPUTATION GIVEN IN FORM 3CD. ASSESSEE WA S IN APPEAL AGAINST THE ADDITIONAL DISALLOWANCE OF RS . 66,37,066 / - BEFORE THE LD. CIT(A) . 8. U PON THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2009 - 10, THE L D. CIT(A) G RANTED RE LIEF TO THE ASSESSEE AND HELD AS UNDER : 63 THE ORAL AND WRITTEN ARGUMENTS MADE BY THE ASSESSEE 'S AR HAVE BEEN CONSIDERED. IT IS THE CONTENTION OF THE APPELLANT THAT WHILE FILING THE ORIGINAL RETURN AS WELL AS RETURN IN RESPONSE TO NOTICE U/S 153C, IT HAS ALSO FOLLOWED RULE 8D TO COMPUTE DISALLOWANCE U/S 14A. THE DISPUTE IS WITH REGARDS TO DISALLOWANCE OF ADMINISTRATIVE EXPENSES UNDER THIRD LIMB OF RULE 8D/ I.E. 0.5% OF AVERAGE INVESTMENTS GENERATING EXEMPT INCOME. IN THE ORIGINAL RETURN/ APPELLANT HAD CAL CULATED DISALLOWANCE OF RS 69/13,015 / - UNDER THIS LIMB BEING 0.5% OF AVERAGE INVESTMENTS DURING THE YEAR. HOWEVER/ IN RETURN FILED U/S 153 C, THE DISALLO WANCE HAS BEEN RESTRICTED TO RS 2 , 75,948/ - BEING THE TOTAL ADMINISTRATIVE EXPENSES DEBITED TO P&L ACCOUNT. THE APPELLANT CLAIMS THAT THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES EVEN UNDER RULE 8D CANNOT EXCEED TOTAL EXPENDITURE DEBITED TO P&L ACCOUNT UNDER THIS HEAD. THE AO HAS NOT GIVEN ANY REASON TO REJECT THE CLAIM OF APPELLANT AND MERELY RETAINED THE DISALLOWANCE MADE IN ORIGINAL RETURN OF INCOME. I FIND THAT THE ISSUE IS COVERED BY DECISION OF IT AT DELHI BENCH IN THE CASE OF GILLETTE GROUP INDIA PVT. LTD. VS. ACIT (TTA NO.267/DEL/2012) AND JURISDICTIONAL MUMBAI IT AT IN THE CASE OF M/S. SEARCH ENVIRO LTD. VS. ACIT (TTA NO.3464/MUM/2011) AND ACIT VS IQBAL M CHAGALA HOLDING THAT DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D CANNOT EXCEED ACTUAL EXPENDITURE DEBITED TO P&L ACCOUNT. I AM RESPECTFULLY FOLLOWING THE JURISDICTIONAL MUMBAI ITA TS DIRECTIONS. 6 . 4 AO IS DIRECTED TO RECOMPUTE THE DISALLOWANCE U/SL4A APPLYING RULE 8D AND RESTRICTING THE DISALLOWANCE UNDER RULE 8D(III) TO THE ADMINISTRATIVE EXPENSES ACTUALLY CLAIMED IN P&L ACCOUNT. THE GROUND OF APPEAL IS ALLOWED. F OR A.Y. 2008 - 09 , THE LD. CIT(A) HELD AS UNDER : 7.3 THE FACTS OF CASE AND SUBMISSION OF APPELLANT'S AR HAVE BEEN CONSIDERED. IT IS 'NOTICED THAT AO HAS SI MPLY RETAINED DISALLOWANCE MADE U/S 14A IN THE ORIGINAL ASSESSMENT ORDER. IN THE ORIGINAL ASSESSMENT ORDER THE AO HAD AP PLIED RULE 8D 4 M/S. VRINDAVAN SERVICES PVT. LTD. AFTER REJECTING APPELLANTS CONTENTION AND MADE DISA LL OWANCE OF RS. 6,67,36,468 / - OUT OF INTEREST EXPENSES APPLYING RULE 8D(II) IN ADDITION TO DEMAT EXPENSES OF RS .42,250/ - DISALLOWED BY APPELLANT THEREBY MAK ING TOTAL DISALLOWANCE U/S. 14A OF RS.6 ,67,78,71 8 / - . THE DISALLOWANCE UNDER RULE 8D(II) AND 8D( III ) HAS BEEN COMPUTED WITH REFERENCE TO AVERAGE EXEMPT INCOME GENERATING ASSETS WORTH RS . 164,42,43,832 / - . IT IS ALS O NOTICED THAT THE DISALLOWANCE OF INTEREST INCLUDED A SUM OF RS.26,02,513/ - B EING INTEREST ATTRIBUTABLE TO INTEREST FREE ADVANCES MADE BY APPELLANT. IN THE RETURN FILED IN RESPONSE TO NOTICE U/S 153C, ADMITTEDLY, APPELLANT HAS ACCEPTED REVENUE'S CONTENTION REGARDING APPLICABILITY OF RULE 8D AND ITSELF D ISALLOWED SUM OF RS 4,04,70,0 96/ - . IT IS THE CONTENTION OF APPELLANT THAT WHILE CO NSIDERING INTEREST EXPENSES FOR DISALLOWANCE UNDER RULE 80( II ), THE NET INTEREST OF RS 6,51,56,736/ - S HOULD BE TAKEN AFTER REDUCING INTEREST INCOME OF RS . 2,50,27,681 / - FROM GROSS INTEREST EXP ENSES OF RS . 9,01,84,417/ - AS TAKEN BY AO. FURTHER THE AVERAGE VALUE OF ASSETS SHOULD EXCLUDE OTHER ASSETS SUCH AS HOUSE PROPERTY AND PAINTINGS WHICH ARE NOT CAPABLE OF GENERATING ANY EXEMPT INCOME. APPELLANT HAS NOT RAISED ANY DISPUTE REGARDING DISALLOWANCE OF INTERES T IN RESPECT OF INTEREST FREE ADVANCES. IT IS NOTICED FROM P&L ACCOUNT FOR FINANCIAL YEAR ENDING 31.03.2007 THAT APPELLANT HAS INCURRED INTEREST ON INTER CORPORATE DEPOSIT RS . 5,72,87,570 / - , INTEREST ON HOUSING LOAN RS. 1,57,68,861/ - AND INTEREST ON WORKING CAPITAL LOAN RS 3,28,96,847/ - . APPELLANT HAS ALSO EARNED INTEREST INCOME OF RS 2,50,27,681 / - . WHILE THERE IS NO QUARREL REGARDING INTEREST ON HOUSING LOAN WHICH IS TO BE EXCLUDED FROM COMPUTATION BEING DIRECT INTEREST EXPENDITURE ON HOUSING LOAN WHICH HAS BEEN SEPARATELY CONSIDERED FOR COMPUTATION OF INCOME FROM HOUSE PROPERTY, THE DISPUTE RAISED BY APPELLANT IS REGARDING THE BALANCE INTEREST WHICH AS PER APPELLANT SHOULD BE NETTED OFF AGAINST INTEREST INCOME. THE APPEL LANT HAS PRODUCED DECISIONS OF I TAT AH MEDABAD BENCH IN THE CASE OF ITO VS KARNAVATI PETROCHEM PVT LTD (ITA NO 2228/AHD/2012) DATED 5.07.2013 AND HAT KOLKATA BENCH IN THE CASE OF DCIT VS TRADE APARTMENT LTD (ITA NO 1277/KOL/2011) DATED 30.03.2012 WHEREIN IT HAS BEEN HELD THAT FOR CONSIDERATION OF DISALLOWANCE UNDER RULE 8D, INTEREST EXPENDITURE SHOULD BE CONSIDERED AFTER NETTING OFF THE INTEREST INCOME. AS THE ISSUE IS COVERED BY DECISIONS OF TRIBUNAL, IT IS DIRECTED THAT THE ONLY NET AMOUNT OF INTEREST EXPENSE SHOULD BE CONSIDERED FOR DISALLOWA NCE UNDER RULE 8D(II). AO IS THEREFORE DIRECTED TO COMPUTE DISALLOWANCE UNDER RULE 8D(II) AFTER REDUCING INTEREST INCOME OF RS 2,50,27,681/ - AND INTEREST OTHERWISE DISALLOWED IN RELATION TO INTEREST FREE ADVANCES FROM GROSS INTEREST EXPENSE OF RS 9,01,84,4 17/ - . THE DISALLOWANCE OF INTEREST ATTRIBUTABLE TO INTEREST FREE ADVANCE TO SISTER CONCERN TO BE RETAINED. 7.3 REGARDING AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES OR SHALL NOT FORM PART OF TOTAL INCOME FOR THE PURPOSES OF APPLICATION OF RULE 8D( II) AND (III), IT IS NOTICED FROM ORIGINAL ASSESSMENT ORDER THAT AO HAS ADOPTED AVERAGE VALUE OF RS. 164,42,83,763/ - AND 164,42,03,902/ - AS OPENING AND CLOSING VALUE OF SUCH INVESTMENTS. THE FIGURES ADOPTED BY AO ARE APPARENTLY INCORRECT AS THE SAME ARE EVE N MORE THAN TOTAL INVESTMENTS APPEARING IN BALANCE SHEET. PRIMA FACIE THE CORRECT VALUES OF OPENING AND CLOSING INVESTMENTS IN SHARES ARE 117, 48,93,814/ - AND RS. 117,48,13,953/ - WHICH SHOULD BE ADOPTED FOR COMPUTATION OF DISALLOWANCE. : 5 M/S. VRINDAVAN SERVICES PVT. LTD. 7.4 REGARDING THE OT HER CONTENTION REGARDING LIMITING DISALLOWANCE UNDER THIRD LIMB OF RULE 8D, I.E. 0.5% OF AVERAGE INVESTMENT GENERATING EXEMPT INCOME TO ACTUAL ADMINISTRATIVE EXPENSE DEBITED TO P&L ACCOUNT, IT IS NOTICED THAT IN THE ORIGINAL ASSESSMENT ORDER WHICH HAS BEEN FOLLOWED BY AO IN SUBSEQUENT ORDER, NO DISALLOWANCE HAS BEEN MADE UNDER THIS HEAD. APPELLANT HAS DISALLOWED A SUM OF RS 9,17,015/ - BEING THE TOTAL OF ADMINISTRATIVE EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT. THE ISSUE IS NOT DISPUTED AS THE AO HAS NEITH ER REJECTED APPELLANTS STAND NOR MADE ANY DISALLOWANCE. 7.5 AO IS DIRECTED TO RECOMPUTE THE DISALLOWANCE U/S 1 4A APPLYING RULE 8D AS ABOVE AND GROUNDS OF APPEAL ARE DISPOSED OFF ACCORDINGLY AS PARTLY ALLOWED., 9. A GAINST THE ABOVE ORDER , THE R EVENUE IS IN APPEAL BEFORE US. 10. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS . WE FIND THAT AS REGARDS THE DISALLOWANCE UNDER RULE 8D (2) (III) IS CONCERNED, THE SPECIAL BENCH IN THE CASE OF VIREET INVESTMENT PVT. LTD. (SUPRA) HAS HELD THAT FOR CALCULATION OF THE AVERAGE VALUE OF INVESTMENT ONLY TH OSE INVESTMENT SHOULD BE CONSIDERED WHICH HAVE YIELD ED EXEMPT INCOME. 11. AS REGARDS THE LIMIT T O THE DISALLOWANCE TO THE EXTENT OF EXPENDITURE DE BITED IS CONCERNED, THE SAM E IS ALSO COVERED BY THE DECISION OF THE IQBAL M CHAGALA (SUPRA). ACCORDINGLY, WE MODIFY THE ORDER OF THE LD. CIT(A) IN THIS REGARD AND DIRECT THE A.O. TO GIVE EFFECT TO THE CASE LAWS AS MENTIONED ABOVE IN THE COMPUTATION . 12. ANOTHER ISSUE RAISED IN IT A NO.232/M / 15 IS THAT THE L D. CIT(A) ERRED IN GRANTING RELIEF BY DELETING THE ADDITION BEING INTEREST ON NON - PERFORMING ASSET RECEIVED FROM. 1 3 . BRIEF FACTS OF THE CASE ARE THAT DURING THE ORIGINAL ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY AO FROM ITS INFORMATION THAT DURING FY 2007 - 08 INTEREST INCOME OF RS . 49,10,349/ - WAS CREDITED IN THE NAME OF ASSESSEE BY A COMPANY CALLED PORTFOLIO F ASHIONS PVT LTD, BUT THE SAME HAS NOT BEEN CREDITED BY ASSESSEE IN ITS P&L AC COUNT NOR OFFERED TO TAX IN COMPUTATION OF INCOME. UPON ENQUIRY IT WAS SUBMITTED BY ASSESSEE THAT ASSESSEE IS A NON - BANKING FINANCE COMPANY (NBFC) AND AS PER RBI GUIDELINES 6 M/S. VRINDAVAN SERVICES PVT. LTD. APPLICABLE TO NBFCS, INCOME INCLUDING INTEREST ON NON - PERFORMING ASSETS (NPA) SHALL BE RECOGNISED ONLY WHEN IT IS ACTUALLY RE ALISED. IT WAS EXPLAINED THAT DURING FY 2007 - 08, LOAN GIVEN TO PORTFOLIO FASHION PVT LTD HAD BECOME NPA AND THEREFORE INTEREST ON THE SAME WILL BE ACCOUNTED ONLY UPON REALIZATION . THE AO HOWEVER DID NOT ACCEPT THE EXPLANATION ON THE GROUND THAT ASSESSEE WA S NOT AN NBFC, IT HAD FAILED TO EXPLAIN AS TO HOW THE LOAN HAD BECOME NPA WHEN LOAN APPEARS IN BALANCE SHEET UNDER THE HEAD LOANS AND ADVANCES AND MOST IMPORTANTLY ASSESSEE FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE THE SAID INCOME SHOULD HAVE BEEN OFFERED TO TAX IN AY 2008 - 09 ON ACCRUAL BASIS. THEREFORE THE AO MADE ADDITION OF RS 49,10,3497 - AS ASSESSEE 'S UNDISCLOSED INCOME. IN THE ORDER PASSED U/S 153C RWS 143(3), THE AO HAS RETAINED THE ADDITION ON THE BASIS OF ORIGINAL ASSESSMENT ORDER 1 4 . U PON THE ASSESSEE'S APPEAL , THE LD. CIT(A) GRANTED RELIEF TO THE ASSESSEE BY HOLDING AS UNDER : 9.2 THE FACTS OF THE CASE AND SUBMISSION MADE BY AR HAVE BEEN EXAMINED. ASSESSEE HAS FURNISHED CERTIFICATE NO 1 - 00527 DATED 27.12.2013 ISSUED BY RBI, AHMEDABAD REGIONAL OFFICE WHICH HAS BEEN ISSUED IN LIEU OF ORIGINAL CERTIFICATE NO 05.06289 DATED 1.04.2004 ISSUED BY RBI, KOLKATA REGIONAL OFFICE GRANTING REGISTRATION TO APPELLANT TO C ARRY ON THE BUSINESS OF NON - BANKING FINANCIAL INSTITUTION IN SUPPORT OF ITS CLAIM THAT IT IS INDEED A NON - BANKING FINANCE COMPANY REGISTERED WITH RESERVE BANK OF INDIA SINCE 1.04.2004 AND HENCE AT THE RELEVANT TIME BOUND BY DIRECTIONS OF RBI. 9.3 IT IS TH E ARGUMENT OF APPELLANT THAT AS PER PREVAILING RBI GUIDELINES IN RESPECT OF NBFCS, INTEREST INCOME IN RESPECT OF NPAS WAS TO BE RECOGNIZED ONLY UPON ACTUAL REALISATION. APPELLANT HAS FURTHER CLAIMED THAT THE LOAN IN THE NAME OF PORTFOLIO FASHIONS PVT LTD H AD BECOME NPA DURING FY 2007 - 08 IN SO FAR AS INTEREST HAD BECOME PAST DUE FOR MORE THAN SIX MONTHS AND HENCE IT HAD TO STOP RECOGNITION OF ANY INTEREST INCOME IN RESPECT OF SAID NPA AS PER RBI GUIDELINES WHICH WERE BINDING DESPITE FOLLOWING ACCRUAL SYSTEM OF ACCOUNTING. THEREFORE IT RECOGNISED THE SUM OF RS 49,10,3497 - , BEING INTEREST PERTAINING TO PERIOD FY 2007 - 08, IN ITS BOOKS IN FY 2008 - 09 UPON REALISATION OF THE SAME AND OFFERED TO TAX IN AY 2009 - 10. IT ALSO SUBMITTED THAT THE RELEVANT TDS CREDIT HAS A LSO BEEN CLAIMED IN AY 2009 - 10 UPON THE RELEVANT INCOME BEING OFFERED TO TAX. 9.4 I HAVE PERUSED THE RELEVANT GUIDELINES ISSUED BY RBI IN THIS REGARD AS NON - BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTIONS, 1998 7 M/S. VRINDAVAN SERVICES PVT. LTD. VIDE NOTIFICATION NO. DFC.115/DG(SPT) - 98 DATED 2.01.1998. THE SAID PRUDENTIAL NORMS ARE APPLICABLE TO A NON - BANKING FINANCIAL COMPANY WHICH IS HAVING A NET OWNED FUND (NOF) OF RS. 25 LACS AND ABOVE AND ACCEPTING/HOLDING PUBLIC DEPOSITS. IT IS ALSO APPLIED TO A RESIDUARY NON - BA NKING COMPANY AS DEFINED IN THE DIRECTIONS ISSUED BY THE RBI. THE RELEVANT CLAUSE OF THE SAID PRUDENTIAL NORMS ON INCOME R OGNITION IS AS FOLLOWS: 3. INCOME RECOGNITION (1) THE INCOME RECOGNITION SHALL BE BASED ON RECOGNIZED ACCOUNTING PRINCIPLES. (2) INC OME INCLUDING INTEREST/DISCOUNT OR ANY OTHER CHARGES ON NPA SHALL BE RECOGNIZED ONLY WHEN IT ACTUALLY REALIZED. ANY SUCH INCOME RECOGNIZED BEFORE THE ASSET BECAME NON PERFORMING AND REMAINING UNREALIZED SHALL BE REVERSED. (3) IN RESPECT OF HIRE PURCHASE AS SET INSTALMENTS ARE OVERDUE FOR MORE THAN 12 MONTHS, INCOME SHALL BE RECOGNIZED ONLY WHEN HIRE CHARGES ARE ACTUALLY RECEIVED. ANY SUCH INCOME TAKEN TO THE CREDIT OF PROFIT AND LOSS ACCOUNT BEFORE THE ASSET BECAME NON - PERFORMING AND REMAINING UNREALIZED SHA LL BE REVERSED. (4) IN RESPECT OF LEASE ASSETS, WHERE LEASE RENTALS ARE OVERDUE FOR MORE THAN 12 MONTHS, THE INCOME SHALL BE RECOGNIZED ONLY WHEN LEASE RENTALS ARE ACTUALLY RECEIVED. THE NET LEASE RENTALS TAKEN TO THE CREDIT OF PROFIT AND LOSS ACCOUNT BEFO RE THE ASSET BECAME NON - PERFORMING AND REMAINING UNREALIZED SHALL BE REVERSED. UNDER THE PRUDENTIAL NORMS/ THE NON - PERFORMING ASSET HAS BEEN DEFINED AS FOLLOWS: (XII) 'NON - PERFORMING ASSET) (REFERRED TO IN THESE DIRECTIONS AS 'NPA 1 ) MEANS: ~ (A) AN ASSET, IN RESPECT OF WHICH, INTEREST HAS REMAINED PAST DUE FOR SIX MONTHS; (B) A TERM LOAN INCLUSIVE OF UNPAID INTEREST, WHEN THE INSTALMENT IS OVERDUE FOR MORE THAN SIX MONTHS OR ON WHICH INTEREST AMOUNT REMAINED PAST DUE FOR SIX MONTHS; (C) A BILL WHICH REMAINS OVERDUE FOR SIX MONTHS; (D) THE INTEREST IN RESPECT OF A DEBT OR THE INCOME ON RECEIVABLES UNDER THE HEAD 'OTHER CURRENT ASSETS* IN THE NATURE OF SHORT TERM LOANS/ADVANCES, WHICH FACILITY REMAINED OVERDUE FOR A PERIOD OF SIX MONTHS; (E) ANY DUES ON ACCOUN T OF SALE OF ASSETS OR SERVICES RENDERED OR REIMBURSEMENT OF EXPENSES INCURRED, WHICH REMAINED OVERDUE FOR A PERIOD OF SIX MONTHS; 9.5 FROM THE ABOVE, IT IS AGREEABLE THAT PER GUIDELINES OF RBI, THE APPELLANT WHICH WAS A REGISTERED NBFC, NO INTEREST INCOM E WAS TO BE RECOGNISED IN ITS ACCOUNTS IN RESPECT OF LOAN TO PORTFOLIO FASHIONS WHICH HAD BECOME NPA DUE TO INTEREST BECOMING PAST DUE SIX MONTHS DURING FY 2007 - 08. APPELLANT CLAIMS THAT THE INTEREST INCOME HAS BEEN RECOGNISED IN FY 2008 - 09 PERTAINING TO A Y 2009 - 10 UPON RECEIPT OF SAME AS ISSUE OF PREFERENCE SHARES ON 30.03.2009 AND OFFERED TO TAX IN AY 2009 - 10. HOWEVER, THE NEXT ISSUE IS WHETHER, RBI GUIDELINES OVERRIDE PROVISIONS OF SECTION OF INCOME TAX ACT IN SO FAR AS ACCRUAL OF INCOME ON NPAS IS 8 M/S. VRINDAVAN SERVICES PVT. LTD. CONCE RNED AS IT DOES NOT ALLOW MIXED SYSTEM OF ACCOUNTING. I FIND THAT THE ISSUE IS NOW SETTLED IN FAVOUR OF APPELLANT BY THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LIMITED VS JCIT 320 ITR 577. WHILE HOLDING THAT 'PROVISION FOR N PAS' AS PER RBI GUIDELINES CANNOT BE ALLOWED AS ADMISSIBLE DEDUCTION IN VIEW OF SPECIFIC PROVISIONS OF SECTION 36(L)(VII) IN RESPECT OF BAD DEBTS, AS REGARDS TO APPLICABILITY OF SECTION 145 TO RECOGNITION OF INCOME/ HON'BLE COURT HELD THAT AO HAS TO FOLLOW RBI DIRECTIONS IN VIEW OF BINDING NATURE OF SECTION 45Q OF THE RBI ACT THE OBSERVATIONS OF HON'BLE COURT ARE REPRODUCES BELOW: 'APPLICABILITY OF SECTION 145 32. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE RBI DIRECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NO RMS 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 OFNPA IN THEIR FINANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO REFLECT 'TRUE AND CORRECT' PROFITS. BY V IRTUE 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 IT ACT OPERATE IN DIFFEREN T 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 IT 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 I CAN BE CHANGED UNLESS THE AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD ' RESULT IN UNDERSTATEMENT OF PROFITS. HOWEVER, HERE IS THE CASE WHERE TIRE AO HAS TO FOLLO W THE RBI DIRECTIONS 1998 IN VIEW OF SECTION 45Q OF THE RBI ACT. HENCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE IT ACT I HAS NO ROLE TO PLAY IN T H E PRESENT DISPUTE.' I ALSO FIND THAT A SIMILAR VIEW HAS BEEN TAKEN BY HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS VASHISHT CHAY VYAPAR LIMITED 330 ITR 440 AND HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS ELGI FINANCE LIMITED 293 ITR 357. 9.6 IN VIEW OF THE ABOVE, THE ADDITION OF RS 49,10,349 / - MADE BY AO AS INTEREST ON NPA ON ACCRUAL BASIS IS DELETED. AS A COROLLARY CREDIT FOR TDS DEDUCTED IN RESPECT OF SAID SUM WILL ONLY BE ALLOWED IN THE YEAR IN WHICH THE INCOME HAS BEEN INCLUDED IN THE TAXABLE INCOME. THIS GROUND OF APPEAL IS THEREFORE ALLOWED. 15. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT THE ASSESSEE HAS CLAIMED THAT I T I S AN N BFC ( N O N B A N K I N G F I N A N C E C O M P A N Y ) . IT H AS NOT ACCOUNTED FOR INTERES T ON LOAN GIVEN TO PORTFOLIO F ASHIONS PVT LTD AS IT HAS BECOME A NPA (NON PERFORMING ASSET) AND THE ASSESSEE FOLLOWING THE RBI GUIDELINES ON PRUDENTIAL NORMS FOR INCOME RECOGNITION ON NPA H AS NOT ACCOUNTED FOR THE INTEREST AS THE LOAN HAS BECOME THE 9 M/S. VRINDAVAN SERVICES PVT. LTD. NPA. T HE A.O. HAS REJECTED THE SAME BY DOUBTING THE ASSESSEES CLAIM OF BEING AN N B FC AND FURTHER HOLDING THAT IN VIEW OF THE MERCANTILE SYSTEM OF ACCOUNTING AND THE LOAN APPEARING IN THE BALANCE SHEET OF THE ASSESSEE IT WAS INCUMBENT UPON THE ASSESSEE TO ACCOUN T FOR THE INTEREST ON ACCRUAL BASIS. WE FIND THAT AS AGAINST THE ABOVE THE LD. CIT(A) HAS GIVEN A FINDING THAT THE ASSESSEE IS DULY REGISTERED WITH RBI AS AN N B FC. FURTHERMORE, IT HAS NOW BEEN ACCEPTED BY THE HIGHER COURTS THAT RBI GUIDELINES ON PRUDENTIAL NORMS OF INCOME RECOGNITION ON NPA HAVE TO BE ACCEPTED . THIS VIEW IS SUPPORTED BY THE OBSERVATION OF THE HONBLE APEX COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LIMITED (SUPRA) QUOTED BY THE LD. C IT(A). ONCE THIS VIEW IS ACCEPTED, THE ASSESSEE BEING AN NBFC WAS NOT REQUIRED TO ACCOUNT FOR INTEREST ON ACC RUAL BASIS ON LOANS WHICH HAVE BECAME NPA. THIS VIEW ALSO GETS SUPPORTED BY THE HON'BLE DELHI HIGH COURT DECISION IN THE CASE OF VASHISHT CHAY VYAPAR LIMITED (SUPRA). HENCE, WE DO NOT FIND ANY I NFIRMITY IN THE ORDER OF THE LD. C IT(A). ACCORDINGLY, WE UPHOLD THE SAME. 16. IN THE RESULT, ALL THE APPEALS BY THE ASSESSEE AND THE REVENUE ARE PARTLY ALLOWED AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 2 2 . 1 1 . 2 0 1 8 S D / - S D / - ( PAWAN SINGH ) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 2 2 . 1 1 . 2 0 1 8 ROSHANI , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT - CONCERNED 5. DR, ITAT, MUMBAI 6. GUARD FILE BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI