ITO, Wd.-1(3), Nashik V. Shri Bhairavnath Nagari Sah. Patsanstha ltd., Nashik

ITA 1288/PUN/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80048 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 13-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Bad and doubtful debts
• Section: 14A; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.1288/PN/2011 (A.Y: 2008-09) ITO, WARD 1(3), NASHIK APPELLANT VS. SHRI BHAIRAVNATH NAGARI SAHAKARI PATSANSTHA LTD., KRISHNAI COMPLEX, GANESH PETH, SINNAR, NASHIK. PAN: AAAAD1323N RESPONDENT APPELLANT BY : SHRI RAJESH DAMOR RESPONDENT BY : SHRI NIKH IL PATHAK DATE OF HEARING: 17.07.2014 DATE OF ORDER : 30.07.2014 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEAL)-I, NASHIK, D ATED 04.08.2011 FOR A.Y. 2008-09 ON THE FOLLOWING GROUND S. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE HONORABLE CIT(A) ERRED BY HOLDING THAT ASSESSE E IS ELIGIBLE TO CLAIM DEDUCTION OF RS.20,00,000/- ON AC COUNT OF PROVISIONING FOR BAD AND DOUBTFUL DEBT AND RS.2,01,145/- ON ACCOUNT OF PROVISIONING FOR IRRECOVERABLE OVERDUE INTEREST. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE HONORABLE CIT(A) ERRED BY STATING THAT GUIDELINES I SSUED UNDER THE MAHARASHTRA COOPERATIVE SOCIETIES ACT, B Y THE REGISTRAR OF CO-OPERATIVE SOCIETIES, MAHARASHTRA OV ER- RIDE THE PROVISIONS OF THE INCOME-TAX ACT, IGNORING THE DECISION DELIVERED BY THE HONORABLE SUPREME COURT I N 2 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. THE CASE OF SOUTHERN TECHNOLOGIES LTD VS. JCIT 228 CTR 440 (2010) REGARDING PRESENTATION/ACCOUNTING OF NPA 'S 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE HONORABLE CIT(A) ERRED BY DIRECTING THE ASSESSING O FFICER TO GIVE SET-OFF OF THE BUSINESS LOSS AGAINST THE IN COME TAXABLE UNDER THE OTHER HEADS OF INCOME, IGNORING T HE PROVISIONS OF SEC 14A READ WITH SECTION 2(24), 5 & 80A(1) OF THE INCOME-TAX ACT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE I T IS REQUESTED TO QUASH THE ORDER OF THE HONORABLE CIT(A ) AND RESTORE THE ORDER OF THE ASSESSING OFFICER, 5. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, MODIFY TH E GROUNDS OF APPEAL, IF CONSIDERED NECESSARY SUBSEQUE NTLY. 2. THE ASSESSEE IS A CO-OPERATIVE SOCIETY ENGAGED IN THE BUSINESS ACTIVITY OF CREDIT CO-OP. SOCIETY I.E. PRO VIDING CREDIT FACILITIES TO ITS MEMBERS. THE ASSESSEE HAS MADE P ROVISION FOR BAD AND DOUBTFUL DEBTS. THE ASSESSING OFFICER FOUN D THAT THE PROVISION HAS BEEN MADE AS PER BANKING RULES, BUT T HE ASSESSEE IS NEITHER NON-SCHEDULED NOR COOPERATIVE BANK CARRY ING ON THE BANKING BUSINESS AND HENCE, THE DEDUCTION WAS NOT A LLOWABLE U/S.36(1)(VIIA) OF THE ACT. 2.1 THE MATTER WAS CARRIED BEFORE FIRST APPELLATE A UTHORITY, WHEREIN THE VARIOUS CONTENTIONS WERE RAISED ON BEHA LF OF ASSESSEE AND HAVING CONSIDERED THE SAME, THE CIT(A) HAS ALLO WED THE CLAIM. THE SAME HAS BEEN OPPOSED BEFORE US ON BEHA LF OF REVENUE, INTER ALIA, SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT THE ASSESSEE IS ELIGIBLE TO CLAIM DEDU CTION ON ACCOUNT OF PROVISIONING FOR BAD AND DOUBTFUL DEBTS. THE CIT(A) ERRED IN STATING THAT THE GUIDELINES ISSUED UNDER T HE MAHARASHTRA COOPERATIVE SOCIETIES ACT, BY THE REGIS TRAR OF CO- OPERATIVE SOCIETIES, MAHARASHTRA OVER-RIDE THE PROV ISIONS OF THE INCOME-TAX ACT. ACCORDINGLY, THE LEARNED DEPARTMEN TAL REPRESENTATIVE HAS REQUESTED TO SET ASIDE THE ORDER OF CIT(A) AND 3 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. THAT OF ASSESSING OFFICER BE RESTORED. ON THE OTHE R HAND, THE LEARNED AUTHORIZED REPRESENTATIVE HAS SUPPORTED THE ORDER OF CIT(A) ON THE ISSUE. 2.2 AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND M ATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS NOT A COOPERAT IVE SOCIETY CARRYING ON BANKING BUSINESS, THEREFORE, THE PROVIS IONS OF SECTION 36(1)(VIIA) OF THE ACT ARE NOT APPLICABLE. THE CIT (A) HAS NOT REFERRED TO ANY SECTION OF THE MAHARASHTRA CO-OP. S OCIETIES ACT, 1960 WHICH STATES THAT THE PROVISIONS OF THE ACT WI LL OVER-RIDE THE INCOME-TAX ACT. IN THE CASE OF SOUTHERN TECHNOLOGI ES LTD. (2010) 228 CTR 440, THE HONBLE SUPREME COURT HAS HELD THA T RBI DIRECTIONS DO NOT OVERRIDE THE PROVISIONS OF THE IN COME-TAX ACT. THE CIT(A) HAS NOT TAKEN INTO CONSIDERATION THIS DE CISION OF THE HONBLE SUPREME COURT WHILE DECIDING THE ISSUE. TH E ASSESSEE CAN CLAIM DEDUCTION U/S.36(1)(VII), HOWEVER, TO BE ELIGIBLE FOR THE DEDUCTION, THE DEBT HAS TO BE WRITTEN OFF; MAKING P ROVISION WILL NOT SUFFICE. AS THE ASSESSEE HAS NOT WRITTEN OFF T HE DEBT, SO IT IS NOT ELIGIBLE TO CLAIM THE AMOUNT AS DEDUCTION U/S.3 6(L)(VII) OF THE ACT. IN VIEW OF THE ABOVE, THE ORDER OF CIT(A) ON THE ISSUE IS SET ASIDE AND THAT OF THE ASSESSING OFFICER IS RESTORED . 3. REGARDING DISALLOWANCE OF AN AMOUNT OF 2,01,145/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROVISIONING FOR IRRECOVERABLE OVERDUE INTEREST. IN THIS REGARD, IT WAS POINTED OUT ON BEHALF OF ASSESSEE THAT THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF ITAT, PUNE B BENCH IN THE CASE OF ACIT VS. M/S. SAMARTH SAHAKARI BANK LTD. IN ITA NO.2354/PN/2012, WHEREIN BY FOLLOWING THE DECISION OF PUNE BENCH DECISION IN THE CASE OF ACIT VS. THE OMERGE J ANTA SAHAKARI BANK LTD. HAS DECIDED THE ISSUED IN FAVOUR OF THE ASSESSEE. FOR THE SAKE OF CONVENIENCE, THE DECISIO N OF THE OMERGA (SUPRA) IS REPRODUCED AS UNDER: 4 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. 5. APART FROM THE AFORESAID, THE CITA(A) HAS RELIE D UPON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF WESTERN MAHARASHTRA DEVELOPMENT CORPORATION LTD. VS. DCIT, (2008) 114 TTJ 54 (PUNE) AND ALSO THE JUD GEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD., 330 ITR 440 (DEL) TO HOLD THAT IN TEREST INCOME ON NPAS WAS NOT TAXABLE ON ACCRUED BASIS. T HE CIT(A) HAS ALSO REFERRED TO AND RELIED UPON THE DEC ISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF OSMAN ABAD JANTA SAH. BANK LTD. VS. ACIT, ITA NO.795/PN/2011 D ATED 31.08.2012 WHEREIN FOLLOWING THE DECISION OF THE VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. THE DURGA COOPERATIVE URBAN BANK LTD. IN ITA NO . 511/VIZAG/2010 DATED 10.03.2011 ON A SIMILAR CONTRO VERSY, IT HAS BEEN HELD THAT INTEREST INCOME RELATABLE TO NPAS IS NOT TAXABLE ON ACCRUAL BASIS. 6. FOR ALL THE ABOVE REASONS, THE CIT(A) DELETED TH E ADDITION OF RS.19,24,030/- MADE BY THE ASSESSING OF FICER. AGAINST THE AFORESAID DECISION, REVENUE IS IN APPEA L BEFORE US. 7. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS PLACED RELIANCE ON THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. ACIT, (2010) 320 ITR 577 (SC) SUBMITTED THAT THE INCOME ON NPAS IS LIABLE TO BE T AXED IN TERMS OF THE MERCANTILE SYSTEM OF ACCOUNTING ADOPTE D BY THE ASSESSEE AND THAT THE TAXABILITY OF SUCH INCOME WOU LD NOT BE GOVERNED BY THE PRUDENTIAL NORMS PRESCRIBED BY R BI BECAUSE RBI GUIDELINES CANNOT OVERRIDE THE PROVISIO NS OF THE ACT. ACCORDINGLY, IT WAS CONTENDED THAT INTEREST I NCOME RELATABLE TO NPAS WAS RIGHTLY ASSESSED BY THE ASSES SING OFFICER AND IT WAS CONTENDED THAT THE ORDER OF THE CIT(A) AND ALSO THE PRECEDENTS NOTED BY THE CIT(A) IN HIS ORDER. THE LEARNED COUNSEL ALSO POINTED OUT THAT THEREIN S O FAR AS THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE C ASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) RELIED UPON BY T HE LEARNED DEPARTMENTAL REPRESENTATIVE, THE SAME HAS B EEN DISTINGUISHED BY THE CIT(A) FOLLOWING THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA). THE LEARNED COUNSEL HAS ALSO REFERRED TO THE PAPER BOOK TO POINT OUT THAT THOUGH THE ASSE SSEE WAS NOT A SCHEDULED BANK YET IT WAS OPERATING UNDER A L ICENSE GRANTED BY RBI AND IT WAS BOUND AND GOVERNED BY THE PRUDENTIAL NORMS ISSUED BY RBI FOR INCOME RECOGNITI ON, ASSET CLASSIFICATION, PROVISIONING AND OTHER RELATE D MATTERS AND A COPY OF SUCH RBI CIRCULAR DATED 01.07.2008 PL ACED AT PAGES 23 TO 42 OF THE PAPER BOOK. 5 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN SO FAR AS THE APPLICABILITY OF SEC TION 43D OF THE ACT TO THE ASSESSEE IS CONCERNED, THERE IS A CO NVERGENCE OF OPINION BETWEEN THE ASSESSEE AND THE REVENUE TO THE EFFECT THAT THE SAME IS NOT APPLICABLE TO THE ASSES SEE. OSTENSIBLY, ASSESSEE IS A CO-OPERATIVE BANK CARRYIN G ON BANKING BUSINESS IN TERMS OF A LICENSE GRANTED BY R BI AND IS NOT A SCHEDULED BANK INCLUDED IN SECOND SCHEDU LE OF RBI SO AS TO FALL WITHIN THE SCOPE OF SECTION 43D O F THE ACT. NOTABLY, SECTION 43D OF THE ACT PRESCRIBES THAT INT EREST INCOME ON SUCH CATEGORIES OF BAD AND DOUBTFUL DEBTS AS PRESCRIBED BY THE RBI GUIDELINES SHALL BE CHARGEABL E TO TAX IN THE YEAR IN WHICH SUCH INTEREST INCOME IS CREDIT ED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT OR IN THE Y EAR OF ACTUAL RECEIPT, WHICHEVER IS EARLIER. SINCE ASSESS EE IS NOT AN ENTITY COVERED WITHIN THE SCOPE OF SECTION 43D OF T HE ACT, THE PRESENT CONTROVERSY CANNOT BE ADJUDICATED IN TH E LIGHT OF SECTION 43D OF THE ACT, AND IT IS LIABLE TO BE DECI DED ON GENERAL PRINCIPLES AS TO WHETHER THE IMPUGNED INCOM E 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 CONSI DERED AN IDENTICAL CONTROVERSY. THE ASSESSEE BEFORE THE VISAKHAPATNAM BENCH WAS A CO-OPERATIVE BANK OPERATI NG UNDER A LICENSE ISSUED BY RBI BUT WAS NOT A SCHEDU LED 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 TAX ED ON ACCRUAL BASIS IN LINE WITH MERCANTILE SYSTEM OF ACC OUNTING ADOPTED BY THE ASSESSEE THEREIN. THE ASSESSEE, ON THE OTHER HAND, CONTENDED THAT HAVING REGARD TO THE GUIDELINE S 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 OBSER VED THAT THE QUESTION OF TAXABILITY OF INTEREST ON NPAS CLAS SIFIED BY RBI, WAS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) WHEREI N AFTER CONSIDERING THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IT W AS HELD THAT INTEREST INCOME RELATABLE TO NPAS WAS NOT INCL UDIBLE IN TOTAL INCOME ON ACCRUAL BASIS SINCE THE SAME DID NO T 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 :- 6 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULLY PERUSED THE RECORD. THE QUESTION OF TAXAB ILITY 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 TH E HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). IN THE CASE OF M/S VASIST H 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 AS SET CLASSIFICATION. THE ASSESSEE DID NOT INCLUDE THE IN TEREST 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 CIT (A) AFFIRMED THE ORDER OF THE ASSESSING OFFICER. HOWEVER, THE ITAT DELETED TH E AFORESAID INCOME. HENCE THE REVENUE PREFERRED APPEA L BEFORE THE HON'BLE DELHI HIGH COURT. 8.1 AFTER HEARING THE RIVAL SUBMISSIONS, THE HON'BL E DELHI HIGH COURT TOOK NOTE OF SEC.45Q OF RESERVE BA NK OF INDIA ACT WHICH READS AS UNDER: CHAPTER IIIB 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 PROVI SION OF 45Q OF RESERVE BANK OF INDIA HAS OVERRIDING EFFE CT OVER ANY OTHER LAW. THEN THE HON'BLE HIGH COURT ALS O 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 UNREASONA BLE TO EXPECT ULTIMATE COLLECTION. 7 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLEC TION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAISING ANY CLAIM, E.G., FOR ESCALATION OF PRICE, E XPORT INCENTIVES, INTEREST ETC., REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES, IT MAY BE APPROPRIATE TO RECOGNIZE REVE NUE ONLY WHEN IT IS REASONABLY CERTAIN THAT THE ULTIMAT E COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAI NTY AS TO ULTIMATE COLLECTION, REVENUE IS RECOGNIZED AT THE TIME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENTS. 9.3 WHEN THE UNCERTAINTY RELATING TO COLLECTABILITY ARISES SUBSEQUENT TO THE TIME OF SALE OR THE RENDER ING OF THE SERVICE, IT IS MORE APPROPRIATE TO MAKE A SEPARATE PROVISION TO REFLECT THE UNCERTAINTY RATHE R 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 TH E 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 RECOGNIT ION OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO THE EFFECT OF UNCERTAINTIES, IT IS CONSIDERED AS RE VENUE OF THE PERIOD IN WHICH IT IS PROPERLY RECOGNIZED. 8.2 THE DELHI HIGH COURT ALSO CONSIDERED THE DECISI ON RENDERED IN THE FOLLOWING CASES: I) CIT VS. ELGI FINANCE LTD., 293 ITR 357 (MAD) II) CIT VS. KKM INVESTMENTS (CAL) SLP DISMISSED B Y SUPREME COURT (310 ITR 4) III) CIT VS. MOTOR CREDIT CO (P) LTD., 127 ITR 572 (MAD) IV) UCO BANK VS. CIT 237 ITR 889 (SC) V) CIT VS. SHOORJI VALLABHDAS & CO 46 ITR 144 (SC) VI) GODHRA ELECTRICITY CO. LTD., VS.CIT 225 ITR 746 VII) CIT VS. GOYAL M G GASES (P) LTD., 303 ITR 159 (DEL) VIII) CIT VS. EICHER LTD., ITA NO.431/2009 DATED 15.7.2009 (DEL) 8.3 AFTER CONSIDERING THE ACCOUNTING STANDARD 9 AND THE VARIOUS CASE LAW LISTED ABOVE, THE HON'BLE DELHI HI GH COURT 8 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. HELD THAT THE INTEREST ON NPA ADVANCE CANNOT BE TRE ATED AS ACCRUED TO THE ASSESSEE. 8.4 BEFORE THE DELHI HIGH COURT, THE REVENUE TOOK S UPPORT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). THE DELHI HIGH C OURT CONSIDERED THE SAID DECISION OF HON'BLE APEX COURT AND EXPLAINED THE SAME AS UNDER: WE HAVE ALREADY HELD THAT EVEN UNDER THE INCOME TA X ACT, INTEREST INCOME HAD NOT ACCRUED. MOREOVER, THI S SUBMISSION OF MR. SABHARWAL IS BASED ENTIRELY ON TH E JUDGMENT OF THE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGY (SUPRA). NO DOUBT, IN FIRST BLU SH, READING OF THE JUDGMENT GIVES AN INDICATION THAT TH E 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 HA D 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 CO URT, THE ASSESSEE A NBFC DEBITED RS.81,68,516 AS PROVISION AGAINST NPA IN THE PROFIT AND LOSS ACCOUN T, WHICH WAS CLAIMED AS DEDUCTION IN TERMS OF SECTION 36(1) (VII) OF THE ACT. THE ASSESSING OFFICER DID N OT ALLOW THE DEDUCTION CLAIMED AS AFORESAID ON THE GROUND THAT THE PROVISION OF NPA WAS NOT IN THE NAT URE OF EXPENDITURE OR LOSS BUT MORE IN THE NATURE OF A RESERVE, AND THUS NOT DEDUCTIBLE UNDER SECTION 36(I )(VII) OF THE ACT. THE ASSESSING OFFICER, HOWEVER, DID NOT BRING TO TAX RS.20,34,605/- AS INCOME (BEING INCOME ACCRUED UNDER THE MERCANTILE SYSTEM OF ACCOUNTING). THE DISPUTE BEFORE THE APEX COURT CENTERED AROUND DEDUCTIBILITY OF PROVISION FOR NPA. AFTER ANALYZING THE PROVISIONS OF THE 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 CONDITIO NS 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 AP EX COURT MADE A DISTINCTION WITH REGARD TO INCOME RECOGNITION AND HELD THAT INCOME HAD TO BE RECOGNIZED IN TERMS OF THE PRUDENTIAL NORMS, EVEN THOUGH THE SAME DEVIATED FROM MERCANTILE SYSTEM OF ACCOUNTING AND/OR SECTION 45 (SIC. 145) OF THE INCO ME 9 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. TAX ACT. IT CAN BE SAID, THEREFORE, THAT THE APEX C OURT APPROVED THE REAL INCOME THEORY WHICH IS ENGRAINE D IN THE 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 MAT TER INTO TWO PARTS VIZ., A) INCOME RECOGNITION AND B) PERMIS SIBLE DEDUCTION/EXCLUSIONS UNDER THE INCOME TAX ACT. IN S O FAR AS INCOME RECOGNITION IS CONCERNED, THE HON'BLE SUP REME COURT HELD THAT SECTION 145 OF THE INCOME TAX ACT H AS NO ROLE TO PLAY AND THE ASSESSING OFFICER HAS TO FOLLO W RESERVE BANK OF INDIA DIRECTIONS 1998, SINCE BY VIRTUE OF 4 5Q OF THE RESERVE BANK OF INDIA ACT, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS OF RESERVE BANK OF INDIA VIS--VIS I NCOME RECOGNITION PRINCIPLES IN THE COMPANIES ACT 1956. I N SO FAR AS COMPUTATION OF INCOME UNDER THE INCOME TAX ACT I S CONCERNED, (WHICH INVOLVES DEDUCTION OF PERMISSIBLE DEDUCTIONS AND EXCLUSIONS) THE ADMISSIBILITY OF SUC H DEDUCTIONS SHALL BE GOVERNED BY THE PROVISIONS OF T HE INCOME TAX ACT. THE RELEVANT OBSERVATIONS OF THE HO N'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, 19 34. THESE NORMS DEAL ESSENTIALLY WITH INCOME RECOGNITIO N. 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 SE CTION 45Q, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTION S 1998 VIS--VIS INCOME RECOGNITION PRINCIPLES IN T HE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, THESE DIRECTIONS 1998 AND THE IT 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 IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND COMPANIES ACT IS ONLY IN THE MATTER OF INCOME RECOGNITION AND PRESENTATION OF FINANCIAL STATEMENT S. THE ACCOUNTING POLICIES ADOPTED BY AN NBFC CANNOT DETERMINE THE TAXABLE INCOME. IT IS WELL SETTLED TH AT THE ACCOUNTING POLICIES FOLLOWED BY A COMPANY CAN BE CHANGED UNLESS THE AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD RESULT IN UNDERSTATEMENT OF PROFI TS. HOWEVER, HERE IS THE CASE WHERE THE AO HAS TO FOLLO W 10 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. THE RESERVE BANK OF INDIA DIRECTIONS 1998 IN VIEW O F SECTION 45Q OF THE RESERVE BANK OF INDIA ACT. HENCE , AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE IT ACT HAS NO ROLE TO PLAY IN THE PRESENT DISPUTE. 10. TURNING TO THE FACTS OF THE CASE BEFORE US, THE ASSESSEE HEREIN IS A COOPERATIVE BANK AND IT IS NOT IN DISPUTE THAT IT IS ALSO GOVERNED BY THE RESERVE BAN K OF INDIA. HENCE THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDI A ARE EQUALLY APPLICABLE TO THE ASSESSEE 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), T HAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA ACT H AS AN OVERRIDING EFFECT VIS--VIS INCOME RECOGNITION PRINCIPLE UNDER THE COMPANIES ACT. HENCE SEC.45 Q O F THE RBI ACT SHALL HAVE OVERRIDING EFFECT OVER THE I NCOME RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIVE BANKS ALSO. HENCE THE ASSESSING OFFICER HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998, AS HELD BY T HE 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 HIG H 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 REGAR D, THE FOLLOWING OBSERVATIONS OF HON'BLE DELHI HIGH CO URT 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 I S 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 CIRCUM STANCES, WE FIND NO REASONS TO INTERFERE WITH THE ULTIMATE C ONCLUSION 11 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. OF THE CIT(A) IN DELETING THE IMPUGNED ADDITION REL ATING TO INTEREST INCOME IN RESPECT OF NPAS. 11. SO, HOWEVER, THE LEARNED DEPARTMENTAL REPRESENT ATIVE HAS SUBMITTED THAT THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SAKTHI FINANCE LTD., (2013) 31 TAXM ANN.COM 305 (MADRAS) HAS DIFFERED WITH THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VY APAR LTD. (SUPRA) ON A SIMILAR ISSUE, I.E. RELATING TO I NTEREST INCOME ON NPAS. THE LEARNED DEPARTMENTAL REPRESENT ATIVE FURTHER POINTED OUT THAT THE HONBLE MADRAS HIGH CO URT FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IN HOLDI NG THAT INTEREST ON NPAS WAS ASSESSABLE TO TAX ON ACCRUAL B ASIS. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS PUT-FO RTH BY THE LEARNED DEPARTMENTAL REPRESENTATIVE BASED ON TH E JUDGEMENT OF THE HONBLE MADRAS HIGH COURT IN THE C ASE OF SAKTHI FINANCE LTD. (SUPRA). THE CONTROVERSY BEFOR E THE HONBLE MADRAS HIGH COURT RELATED TO NON-RECOGNITIO N OF INTEREST INCOME ON NPAS BY THE ASSESSEE FOLLOWING T HE RBI GUIDELINES. THE HONBLE MADRAS HIGH COURT TOOK THE VIEW THAT THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) ALSO APP LIED TO THE INCOME RECOGNITION NORMS PROVIDED BY RBI AND THEREFORE IT HELD THE INTEREST INCOME ON NPAS IS LI ABLE TO BE TAXED ON ACCRUAL BASIS AND NOT IN TERMS OF RBIS GU IDELINES. BUT THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) HAS TAKEN A VIEW THAT SOUT HERN TECHNOLOGIES LTD. (SUPRA) CASE DID NOT APPLY TO THE INCOME RECOGNITION NORMS PRESCRIBED BY RBI. OSTENSIBLY, T HERE IS DIVERGENCE OF OPINION BETWEEN THE HONBLE DELHI HIG H COURT AND THE HONBLE MADRAS HIGH COURT AS NOTED BY THE H ONBLE MADRAS HIGH COURT IN ITS ORDER. 12. IN SO FAR AS, PRESENT CASE IS CONCERNED THERE I S NO JUDGMENT OF THE JURISDICTIONAL HIGH COURT. WE ARE FACED WITH TWO CONTRARY JUDGMENTS OF THE NON-JURISDICTION AL HIGH COURT. IN SUCH A SITUATION, WE ARE INCLINED TO PRE FER A VIEW WHICH IS FAVOURABLE OF THE ASSESSEE FOLLOWING THE J UDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. 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 CIT(A) IS LIABLE T O THE AFFIRMED. WE HOLD SO. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. 12 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. 3.1 FACTS BEING SIMILAR, SO FOLLOWING THE SAME REAS ONING, WE ARE NOT INCLINED TO INTERFERE WITH THE FINDING OF CIT(A ) WHO HAD DELETED THE ADDITION OF 2,01,145/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST INCOME RELATING TO N ON PERFORMING ASSETS. WE UPHOLD THE SAME. 4. THE NEXT ISSUE IS WITH REGARD TO SET OFF OF BUSI NESS LOSS AGAINST THE INCOME UNDER THE OTHER HEADS. THE ASSE SSEE HAD CLAIMED SET OFF OF BUSINESS LOSS ARRIVED AT BY HIM AT 3,77,467/- AGAINST THE INCOME FROM OTHER SOURCES INCLUDING SHO RT TERM CAPITAL GAIN ARRIVED AT BY HIM AT 9,53,330/-. THE ASSESSING OFFICER HAS NOT ALLOWED THE SET OFF OF BUSINESS LOS S AGAINST INCOME FROM OTHER SOURCES AND SHORT TERM CAPITAL GAIN ASSE SSED BY HIM. THE ASSESSEE HAD FILED AN APPLICATION FOR RECTIFICA TION BEFORE THE ASSESSING OFFICER CLAIMING THAT THE SET OFF SHOULD BE ALLOWED. THE ASSESSING OFFICER HAD REJECTED THE CLAIM OF THE ASS ESSEE IN ORDER U/S.154 OF THE ACT STATING THAT THE INCOME OF CREDI T CO-OPERATIVE SOCIETY IS EXEMPT U/S.80P(2) OF THE ACT AND HENCE, THE LOSS OF SOCIETY COULD NOT BE ALLOWED AGAINST TAXABLE INCOME FROM OTHER SOURCES AND SHORT TERM CAPITAL GAINS. THE MATTER W AS CARRIED BEFORE FIRST APPELLATE AUTHORITY, WHEREIN THE VARIO US CONTENTIONS WERE RAISED ON BEHALF OF ASSESSEE AND HAVING CONSID ERED THE SAME, THE CIT(A) HAD GRANTED RELIEF TO THE ASSESSEE . THE SAME HAS BEEN OPPOSED BEFORE US ON BEHALF OF REVENUE, IN TER ALIA, SUBMITTED THAT THE CIT(A) ERRED BY DIRECTING THE AS SESSING OFFICER TO GIVE SET-OFF OF THE BUSINESS LOSS AGAINST THE IN COME TAXABLE UNDER THE OTHER HEADS OF INCOME, IGNORING THE PROVI SIONS OF SEC. 14A READ WITH SECTION 2(24), 5 & 80A(1) OF THE INCO ME-TAX ACT. ACCORDINGLY, THE ORDER OF CIT(A) BE SET ASIDE AND T HAT OF ASSESSING OFFICER BE RESTORED ON THE ISSUE. ON THE OTHER HAN D, THE LEARNED AUTHORIZED REPRESENTATIVE HAS SUPPORTED THE ORDER O F CIT(A) ON THE ISSUE. 13 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. 4.1 AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND M ATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS CLAIMED SET O FF OF BUSINESS LOSS AGAINST INCOME FROM OTHER SOURCES AND SHORT TE RM CAPITAL GAIN U/S.71 OF THE ACT. THE PROVISIONS OF SECTION 71 IS REPRODUCED BELOW: '71(1) WHERE IN RESPECT OF ANY ASSESSMENT YEAR THE NET RESULT OF THE COMPUTATION UNDER ANY HEAD OF INCOME OTHER THAN 'CAPITAL GAINS' IS A LOSS AND THE ASSESSEE HAS NO INCOME UNDER THE HEAD 'CAPITAL GAINS', HE SHALL SUB JECT TO THE PROVISION OF THIS CHAPTER, BE ENTITLED TO HAVE THE AMOUNT OF SUCH LOSS SET OFF AGAINST HIS INCOME, IF ANY, ASSESSABLE FOR THAT ASSESSMENT YEAR UNDER ANY OTHER HEAD. (2) WHERE IN RESPECT OF ANY ASSESSMENT YEAR THE NET RESULT OF THE COMPUTATION UNDER THE HEAD OF INCOME, OTHER THA N CAPITAL GAINS' IS A LOSS AND THE ASSESSEE HAS INCOM E ASSESSABLE UNDER THE HEAD 'CAPITAL GAINS', SUCH LOS S MAY SUBJECT TO THE PROVISIONS OF THIS CHAPTER, BE SET O FF AGAINST HIS INCOME, IF ANY, ASSESSABLE FOR THAT ASSESSMENT YEAR UNDER ANY HEAD OF INCOME INCLUDING THE HEAD CAPITAL GAINS' (WHETHER RELATING TO SHORT TERM CAPITAL ASSETS OR A NY OTHER CAPITAL ASSETS.) [(2A) NOT WITHSTANDING ANYTHING CONTAINED IN SUB-SE CTION(L) OR SUB-SECTION(2) WHEREIN RESPECT OF ANY ASSESSMENT YEAR, THE NET RESULT OF THE COMPUTATION UNDER THE HEAD 'P ROFIT AND GAINS OF BUSINESS OR PROFESSION' IS A LOSS AND THE ASSESSEE HAS INCOME ASSESSABLE UNDER THE HEAD 'SALARIES', TH E ASSESSEE SHALL NOT BE ENTITLED TO HAVE SUCH LOSS SE T OFF AGAINST SUCH INCOME.]' 4.2 FROM THE ABOVE PROVISION, IT IS CLEAR THAT IN O RDER TO ARRIVE AT GROSS TOTAL INCOME, THE BUSINESS LOSS HAS TO BE SET OFF AGAINST INCOME FROM OTHER SOURCES AND SHORT TERM CAPITAL GA IN AS CLAIMED BY THE ASSESSEE. THE INCOME OF THE ASSESSE E SOCIETY IS NOT EXEMPT U/S.10 AND HENCE THE SAME FORMS PART OF THE GROSS TOTAL INCOME. THE DEDUCTION U/S.80P IS TO BE ALLOW ED AFTER ARRIVING AT GROSS TOTAL INCOME THAT TOO SUBJECT TO THE FULFILLMENT OF VARIOUS CONDITIONS LAID DOWN IN THE SAID SECTION. IN VIEW OF THE 14 ITA NO.1288 OF 11 SHRI BHAIRAVNATH NAGARI SAH. PATSANSTHA LTD. ABOVE, THE CIT(A) HAD RIGHTLY HELD THAT THE ASSESSI NG OFFICER WAS NOT JUSTIFIED IN NOT ALLOWING SET OFF OF BUSINESS L OSS AGAINST THE INCOME FROM OTHER SOURCES AND SHORT TERM CAPITAL GA IN. THE ASSESSING OFFICER WAS RIGHTLY DIRECTED TO ALLOW THE SET OFF AGAINST BUSINESS LOSS. THE SAME NEEDS NO INTERFERENCE FROM OUR SIDE. WE UPHOLD THE SAME. 5. IN THE RESULT, APPEAL FILED BY THE REVENUE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 30 TH DAY OF JULY, 2014. SD/- SD/- (R.K. PANDA) (SHAILENDRA KUMAR YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 30 TH JULY, 2014 GCVSR COPY TO:- 1) DEPARTMENT 2) ASSESSEE 3) THE CIT(A)-I, NASHIK 4) THE CIT-I, NASHIK 5) THE DR, A BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// SENIOR PRIVATE SECRETARY, I.T.A.T., PUNE