Deputy Commissioner of Income Tax, Davangere V. M/s. The Cardamom Merchants Co-operative Bank Limited, Haveri

ITA 1490/BANG/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7688 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-08-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 16-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B R RAMESH J
• Keywords: Depreciation; Bad and doubtful debts
• Section: 145; 37; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, B E NGAL U R U BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO S . 14 90 & 1491 / BANG/20 16 (ASSESSMENT YEAR S : 200 7 - 08 & 20 08 - 09 ) DEPUTY COMMISSIONER OF INCOME - TAX , CIRCLE 2(1), DAVANGERE. VS. APPELLANT THE CARDAMOM MERCHANTS CO - OPERATIVE BANK LTD. STATION ROAD, HAVERI. . PAN:AA CCT 0302 K RESPONDENT APPELLANT BY : SHRI B.R.RAMESH, JCIT(DR) RESPONDENT BY : SHRI SANDEEP, CA. DATE OF HEARING : 09 /08/2017 DATE OF PRONOUNCEMENT : 18 /08/2017 O R D E R PER I NTURI RAMA RAO, AM : THESE ARE APPEALS FILED BY THE REVENUE DIRECTED AGAINST DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME - TAX (APPEALS) [CIT(A)], DAVANGERE, DATED 1 1 /0 3 /2016 FOR THE ASSESSMENT YEARS 200 7 - 08 AND 2008 - 09 . SINCE COMMON ISSUES ARE INVOLVED IN BOTH THE APPEALS, WE PROCEED TO DISPOSE OF THE SAME BY THIS COMMON ORDER. ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 2 OF 28 2. THE REVENUE RAISED THE FOLLOWING COMMON GROUNDS OF APPEAL: 3. BRIEFLY FACTS OF THE CASE ARE THAT THE RESPONDENT - ASSESSEE IS A CO - OPERATIVE BANK ENGAGED IN THE BUSINESS OF BANKING. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER [AO] NOTICED THAT THE RESPONDENT - ASSESSEE HAD FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING. HOW EVER, IN RESPECT OF ACCOUNTS WHICH ARE CLASSIFIED AS NON - PERFORMING ASSETS [NPA] ACCOUNTS, INTEREST RECEIVED WAS OFFERED TO TAX ON CASH SYSTEM OF ACCOUNTING. AO WAS OF THE OPINION THAT SINCE THE RESPONDENT - ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOU NTING, INTEREST ACCRUED ON NPA ACCOUNTS SHOULD BE BROUGHT TO TAX. HE, ACCORDINGLY, BROUGHT THE SAME TO TAX AND MADE ADDITION OF RS.3 2,81,605 / - AND ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 3 OF 28 RS. 42,70,105 / - FOR ASSESSMENT YEARS 200 7 - 08 AND 2008 - 09 RESPECTIVELY TOWARDS INTEREST ON NPA ACCOUNTS WHICH IS NOT CREDITED TO P&L ACCOUNT. 4. BEING AGGRIEVED BY THE ABOVE ASSESSMENT ORDER, THE ASSESSEE PREFERRED APPEALS BEFORE THE CIT(A), WHO VIDE IMPUGNED ORDERS, ALLOWED THE APPEALS. AS REGARDS INTEREST ON NPA ACCOUNTS, THE CIT(A) HELD AS FOLLOWS: ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 4 OF 28 ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 5 OF 28 ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 6 OF 28 ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 7 OF 28 6. BEING AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 6.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE AO AND RELIED ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JCIT (3 20 ITR 577)(SC). 6.2 ON THE OTHER HAND, LEARNED AR OF THE ASSESSEE CONTENDED THAT THE ISSUE AS REGARDS RECOGNITION OF INCOME ON NPA ACCOUNTS, IS NO LONGER RES INTEGRA , AS SETTLED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. CAN FI N HOMES LTD. (347 ITR 382) . LEARNED AR OF THE ASSESSEE FURTHER SUBMITTED THAT THE DECISION IN THE CASE OF CAN FIN HOMES LTD (SUPRA) CAME TO BE AFFIRMED BY THE HON BLE SUPREME COURT BY DISMISSING THE SLP(C) NO.11463/2012 DATED 18/07/2014. L EARNED AR OF TH E ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF ITO VS. M/S.SHIVA SAHAKARI BANK NIYAMITHA IN ITA NO.257/BANG/2012 DATED 21/12/2012 . AS REGARDS DEPRECIATION ON ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 8 OF 28 THE VALUE OF INVESTMENTS MADE PURSUANT TO SLR REQUIREMEN TS, LEARNED AR OF THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF TRIBUNAL IN THE CASE OF CANARA BANK VS. JCIT REPORTED IN (2016) 68 TAXMANN.COM 128 (BANG)(TRIB). 7. WE HEARD RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL ON RECO RD. GROUND NOS.1, 5 & 6 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 8. GROUND NOS.2 TO 4 CHALLENGE THE DIRECTION OF THE CIT(A) DELETING ADDITION ON ACCOUNT OF INTEREST ON NPA ACCOUNTS. THIS ISSUE IS NO LONGER RES INTEGRA AS THE HON' BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CAN FIN HOMES LTD. (SUPRA) HELD THAT ON ACCOUNT OF IMPOSSIBILITY OF RECOVERY OF INTEREST DUE ON NPA ACCOUNTS, IT CANNOT BE SAID THAT INTEREST IS SAID TO HAVE ACCRUED AND THE SAME AMOUNT CANNOT BE BROUGHT TO TAX. THE HON BLE HIGH COURT HELD AS FOLLOWS: 8. THEREFORE, IT IS CLEAR, IF AN ASSESSEE ADOPTS MERCANTILE SYSTEM OF ACCOUNTING AND IN HIS ACCOUNTS HE SHOWS A PARTICULAR INCOME AS ACCRUING, WHETHER THAT AMOUNT IS REALLY ACCRUED OR NOT IS LIABLE TO BRING THE SA ID INCOME TO TAX. HIS ACCOUNTS SHOULD REFLECT TRUE AND CORRECT STATEMENT OF AFFAIRS. MERELY BECAUSE THE SAID AMOUNT ACCRUED WAS NOT REALIZED IMMEDIATELY CANNOT BE A GROUND TO AVOID PAYMENT OF TAX. BUT, IF IN HIS ACCOUNT IT IS CLEARLY STATED THOUGH A PARTIC ULAR INCOME IS DUE TO HIM BUT IT IS NOT POSSIBLE TO RECOVER THE SAME, THEN IT CANNOT SAID TO HAVE BEEN ACCRUED AND THE SAID AMOUNT CANNOT BE BROUGHT TO TAX. IN THE INSTANT CASE WE ARE CONCERNED WITH A NON - PERFORMING ASSET. AS THE DEFINITION OF NON - PERFORMI NG ASSET SHOWS AN ASSET BECOMES NON - PERFORMING WHEN IT CEASES TO YIELD INCOME. NON - PERFORMING ASSET IS AN ASSET IN RESPECT OF WHICH INTEREST HAS REMAINED UNPAID AND HAS BECOME PAST DUE. ONCE A PARTICULAR ASSET IS ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 9 OF 28 SHOWN TO BE A NON - PERFORMING ASSET, THEN TH E ASSUMPTION IS IT IS NOT YIELDING ANY REVENUE. WHEN IT IS NOT YIELDING ANY REVENUE, THE QUESTION OF SHOWING THAT REVENUE AND PAYING TAX WOULD NOT ARISE. AS IS CLEAR FROM THE POLICY GUIDELINES ISSUED BY THE NATIONAL HOUSING BANK, THE INCOME FROM NON - PERFOR MING ASSET SHOULD BE RECOGNISED ONLY WHEN IT IS ACTUALLY RECEIVED. THAT IS WHAT, THE TRIBUNAL HELD IN THE INSTANT CASE. THEREFORE, THE CONTENTION OF THE REVENUE THAT IN RESPECT, OF NON - PERFORMING ASSETS EVEN THOUGH IT DOES NOT YIELD ANY INCOME AS THE ASSES SEE HAS ADOPTED A MERCANTILE SYSTEM OF ACCOUNTING, HE HAS TO PAY TAX ON THE REVENUE WHICH HAS ACCRUED NOTIONALLY IS WITHOUT ANY BASIS. IN THAT VIEW OF THE MATTER, THE SECOND SUBSTANTIAL QUESTION FRAMED IS ANSWERED AGAINST, THE REVENUE AND IN FAVOUR OF THE ASSESSEE. SUBSEQUENTLY, THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SHRI BASAVESHWARA SAHAKARI BANK (2016) 242 TAXMAN 411 (KAR.) , FOLLOWING THE DECISION IN THE CASE OF CAN FIN HOMES LTD. (SUPRA) HELD THAT INTEREST ON NPA ACCOUNTS NEED NOT BE BROUGHT TO TAX. 9. RECENTLY, THE HON BLE GUJARAT HIGH COURT IN THE CASE OF PRINCIPAL CIT VS. SHRI MAHILA SEWA SAHAKARI BANK LTD. (242 TAXMAN 60 (GUJ) AFTER REFERRING TO JUDICIAL PRECEDENTS INCLUDING RECOGNITION OF INCOME OF INCOME ON NPA ASSE TS AS WELL AS THE HON BLE SUPREME COURT DECISION IN SOUTHERN TECHNOLOGIES LTD. (SUPRA) HELD AS FOLLOWS: 11. FROM THE RIVAL SUBMISSIONS ADVANCED BY THE LEARNED COUNSEL FOR THE RESPECTIVE PARTIES, IT IS EVIDENT THAT THERE IS NO DISPUTE THAT THE RBI GUIDELIN ES ARE APPLICABLE TO THE ASSESSEE. IT IS THE CASE OF THE ASSESSEE THAT IN VIEW OF THE RBI GUIDELINES, IT CANNOT CHARGE INTEREST ON ACCRUAL BASIS AND THAT FOLLOWING THE THEORY OF REAL INCOME, TAXABILITY OF ANY NOTIONAL INCOME LIKE ACCRUED INTEREST ON NPAS W OULD NOT ARISE. IT HAS ALSO BEEN CONTENDED THAT EVEN OTHERWISE IN VIEW OF THE CBDT CIRCULAR BEARING F ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 10 OF 28 NO.201/21/84 - ITA - II, DATED 09.10.1984, INTEREST ON ACCRUAL BASIS IS NOT TAXABLE IF NOT RECEIVED FOR THREE YEARS EVEN THOUGH CREDITED TO THE SUSPENSE ACCOU NT. 12. THUS, THOUGH THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING, IN TERMS OF THE RBI GUIDELINES WHICH THE ASSESSEE IS BOUND TO FOLLOW, CERTAIN ASSETS WERE REQUIRED TO BE DECLARED AS NON - PERFORMING ASSETS, ACCORDINGLY, THE INCOME PERTAINING TO SUCH ASSETS HAS NOT BEEN CONSIDERED AS INCOME BY THE ASSESSEE. IN THIS BACKGROUND THE QUESTION AS TO WHETHER IN VIEW OF THE GUIDELINES OF THE RESERVE BANK OF INDIA, INTEREST ON NON - PERFORMING ASSETS IS TAXABLE ON ACCRUAL BASIS, IS REQUIRED TO BE CONSIDERE D. 13. THE LAW IN RESPECT OF VARIOUS ASPECTS TOUCHING THE CONTROVERSY IN ISSUE HAS BEEN EXTENSIVELY DEALT WITH IN THE ABOVE DECISIONS ON WHICH RELIANCE HAS BEEN PLACED BY THE LEARNED COUNSEL FOR THE PARTIES. THE EARLIER DECISIONS ARE ON THE QUESTION OF REA L INCOME THEORY AND THE APPLICABILITY OF THE CBDT CIRCULAR TO THE NBFCS AND BANKING COMPANIES, ETC . THE DECISION ON WHICH BOTH THE LEARNED COUNSEL HAVE PLACED STRONG RELIANCE IS IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. ( SUPRA ) WHEREIN THE APPLICABILITY OF THE RBI GUIDELINES VIS - - VIS THE PROVISIONS OF INCOME - TAX ACT, 1961 HAS BEEN DISCUSSED. AS NOTED HEREINABOVE THE DELHI HIGH COURT IN VASISTH CHAY VYAPAR LTD. ( SUPRA ) HAS INTERPRETED THE SAID DECISION IN FAVOUR OF THE ASSESSEE BY PLACING RELIANCE UPON THE OBSERVATIONS MADE IN PARAGRAPH 40 OF THE DECISION, WHEREAS THE MADRAS HIGH COURT IN SAKTHI FINANCE LTD. ( SUPRA ) HAS INTERPRETED THE SAID DECISION AGAINST THE ASSESSEE. 14. BEFORE ADVERTING TO THE ABOVE DECISIONS, IT MAY BE GERMANE TO REFER TO THE HISTORICA L BACKGROUND IN RESPECT OF THE CONTROVERSY IN ISSUE. IT APPEARS THAT RIGHT FROM AUGUST, 1924 THE DISTINCTION BETWEEN AN IRRECOVERABLE LOAN AND A STICKY LOAN WAS RECOGNISED BY THE CENTRAL BOARD OF REVENUE AS ALSO BY THE RESERVE BANK OF INDIA IN THEIR DIVERS E CIRCULARS IN THE CASE OF BANKS, FINANCIAL INSTITUTIONS AND MONEY LENDERS REGULARLY FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND INSTRUCTIONS HAD BEEN ISSUED NOT TO TREAT THE UNREALIZED INTEREST ON SUCH STICKY LOANS AS INCOME BY CARRYING IT TO 'PROFI T AND LOSS ACCOUNT' SO THAT THE FIGURE OF DISTRIBUTABLE PROFITS SHOULD NOT GET INFLATED AND PREFERABLY TO CREDIT THE SAME TO A SPECIAL ACCOUNT SUCH AS 'INTEREST SUSPENSE ACCOUNT' AND IF THE BANKS, FINANCIAL INSTITUTIONS AND MONEY LENDERS, WHO KEPT THEIR AC COUNTS ON MERCANTILE SYSTEM, MAINTAINED A SUSPENSE ACCOUNT IN WHICH THE UNREALIZED INTEREST WAS ENTERED, THE SAME SHOULD NOT BE INCLUDED IN THE ASSESSEE'S TAXABLE INCOME, IF THE INCOME TAX OFFICER WAS SATISFIED, THAT THERE WAS LITTLE PROBABILITY OF THE LOA NS BEING REPAID. IN STATE BANK OF TRAVANCORE'S CASE ( SUPRA ) THE ASSESSEE A SUBSIDIARY OF ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 11 OF 28 THE STATE BANK OF INDIA, USED TO MAINTAIN ACCOUNTS ON MERCANTILE SYSTEM MAKING ENTRIES ON ACCRUAL BASIS. THE ASSESSEE ADOPTED THE CALENDAR YEAR AS ITS PREVIOUS YEAR AN D THE CALENDAR YEARS 1964, 1965 AND 1966 WERE RESPECTIVELY THE RELEVANT PREVIOUS YEARS FOR ASSESSMENT YEARS 1965 - 66, 1966 - 67 AND 1967 - 68 TO WHICH THE QUESTION RELATED. IN THE COURSE OF ITS BANKING BUSINESS THE ASSESSEE CHARGED INTEREST ON ADVANCES CONSIDER ED DOUBTFUL OF RECOVERY OTHERWISE CALLED STICKY ADVANCES BY DEBITING THE CONCERNED PARTIES BUT INSTEAD OF CARRYING IT TO ITS 'PROFIT AND LOSS ACCOUNT' CREDITED THE SAME TO A SEPARATE ACCOUNT STYLED 'INTEREST 'SUSPENSE ACCOUNT' AS THE PRINCIPAL AMOUNTS OF T HESE STICKY ADVANCES THEMSELVES HAD BECOME, NOT BAD OR IRRECOVERABLE BUT EXTREMELY DOUBTFUL OF RECOVERY. HOWEVER, IN ITS RETURNS THE ASSESSEE DISCLOSED SUCH INTEREST SEPARATELY AND CLAIMED THAT THE SAME WAS NOT TAXABLE IN ITS HANDS AS INCOME FOR THE CONCER NED YEARS. THE CONTENTION OF THE ASSESSEE WAS REJECTED AT ALL LEVELS PRINCIPALLY ON TWO GROUNDS (A) SINCE ADMITTEDLY THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING SUCH INTEREST HAD ACCRUED TO IT AT THE END OF EACH ACCOUNTING YEAR AND (B) T HE ASSESSEE HAD ITSELF SHOWN THE ACCRUAL OF SUCH INTEREST BY CHARGING THE SAME TO THE CONCERNED PARTIES BY MAKING DEBIT ENTRIES IN THEIR ACCOUNTS. THE SUPREME COURT HELD THAT THE CONCEPT OF REALITY OF THE INCOME AND THE ACTUALITY OF THE SITUATION ARE RELEV ANT FACTORS WHICH GO TO THE MAKING UP OF THE ACCRUAL OF INCOME BUT ONCE ACCRUAL TAKES PLACE AND INCOME ACCRUES, THE SAME CANNOT BE DEFEATED BY ANY THEORY OF REAL INCOME. THE COURT OBSERVED THAT WITH A PROBLEM LIKE THE PRESENT ONE, IT IS BETTER TO ADHERE TO THE BASIC FUNDAMENTALS OF THE LAW WITH CLARITY AND CONSISTENCY THAN TO BE CARRIED AWAY BY COMMON CLICHS. THE CONCEPT OF REAL INCOME CERTAINLY IS WELL - ACCEPTED ONE AND MUST BE APPLIED IN APPROPRIATE CASES BUT WITH CIRCUMSPECTION AND MUST NOT BE CALLED IN AID TO DEFEAT THE FUNDAMENTAL PRINCIPLES OF LAW OF INCOME TAX AS DEVELOPED. 15. IN UCO BANK, ( SUPRA ) THE SUPREME COURT WAS CALLED UPON TO CONSIDER WHETHER INTEREST ON A LOAN WHOSE RECOVERY IS DOUBTFUL AND WHICH HAS NOT BEEN RECOVERED BY THE ASSESSEE - BANK F OR THE LAST THREE YEARS BUT HAS BEEN KEPT IN A SUSPENSE ACCOUNT, CAN BE INCLUDED IN THE INCOME OF THE ASSESSEE FOR THE ASSESSMENT YEAR 1981 - 82. THE COURT OBSERVED THAT: '5. THE METHOD OF ACCOUNTING WHICH IS FOLLOWED BY THE ASSESSEE - BANK IS THE MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, THE ASSESSEE CONSIDERS INCOME BY WAY OF INTEREST PERTAINING TO DOUBTFUL LOANS AS NOT REAL INCOME IN THE YEAR IN WHICH IT ACCRUES, BUT ONLY WHEN IT IS REALISED. A MIXED METHOD OF ACCOUNTING IS THUS FOLLOWED BY THE ASSESSEE - BAN K. THIS METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS IN ACCORDANCE WITH ACCOUNTING PRACTICE. XXXX' ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 12 OF 28 6. THE ASSESSEE'S METHOD OF ACCOUNTING, THEREFORE, TRANSFERRING THE ( SIC INTEREST ON) DOUBTFUL DEBT TO AN INTEREST SUSPENSE ACCOUNT AND NOT TREATING IT AS PROFIT UNTIL ACTUALLY RECEIVED IS IN ACCORDANCE WITH ACCOUNTING PRACTICE. 7. UNDER SECTION 145 OF THE INCOME - TAX ACT, 1961, INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES' SHALL BE COMPUTED IN AC CORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; PROVIDED THAT IN A CASE WHERE THE ACCOUNTS ARE CORRECT AND COMPLETE BUT THE METHOD EMPLOYED IS SUCH THAT IN THE OPINION OF THE INCOME TAX OFFICER, THE INCOME CANNOT PROPERLY BE DEDU CED THEREFROM, THE COMPUTATION SHALL BE MADE IN SUCH MANNER AND ON SUCH BASIS AS THE INCOME TAX OFFICER MAY DETERMINE. IN THE PRESENT CASE THE METHOD EMPLOYED IS ENTIRELY FOR A PROPER DETERMINATION OF INCOME.' 10. THE QUESTION WHETHER INTEREST EARNED, ON W HAT HAVE COME TO BE KNOWN AS 'STICKY' LOANS, CAN BE CONSIDERED AS INCOME OR NOT UNTIL ACTUAL REALIZATION, IS A QUESTION WHICH MAY ARISE BEFORE SEVERAL INCOME TAX OFFICERS EXERCISING JURISDICTION IN DIFFERENT PARTS OF THE COUNTRY. UNDER THE ACCOUNTING PRACT ICE, INTEREST WHICH IS TRANSFERRED TO THE SUSPENSE ACCOUNT AND NOT BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE COMPANY IS NOT TREATED AS INCOME. THE QUESTION WHETHER IN A GIVEN CASE SUCH 'ACCRUAL' OF INTEREST IS DOUBTFUL OR NOT, MAY ALSO BE PROBLEMATIC. IF, THEREFORE, THE BOARD HAS CONSIDERED IT NECESSARY TO LAY DOWN A GENERAL TEST FOR DECIDING WHAT IS A DOUBTFUL DEBT, AND DIRECTED THAT ALL INCOME TAX OFFICERS SHOULD TREAT SUCH AMOUNTS AS NOT FORMING PART OF THE INCOME OF THE ASSESSEE UNTIL REALIZED, THIS DIRECTION BY WAY OF A CIRCULAR CANNOT BE CONSIDERED AS TRAVELLING BEYOND THE POWERS OF THE BOARD UNDER SECTION 119 OF THE INCOME - TAX ACT. SUCH A CIRCULAR IS BINDING UNDER SECTION 119. THE CIRCULAR OF 9 - 10 - 1984, THEREFORE, PROVIDES A TEST FOR RECOGNISING W HETHER 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 I T IS NOT RECOVERED FOR A PERIOD OF THREE YEARS, THEN IN THE FOURTH YEAR AND ONWARDS THE CLAIM FOR INTEREST HAS TO BE TREATED AS A DOUBTFUL CLAIM WHICH NEED NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE UNTIL IT IS ACTUALLY RECOVERED. 14. THERE ARE, HOWEVER , TWO DECISIONS OF THIS COURT WHICH HAVE BEEN STRONGLY RELIED UPON BY THE RESPONDENTS IN THE PRESENT CASE. THE FIRST DECISION IS THE MAJORITY JUDGMENT IN ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 13 OF 28 STATE BANK OF TRAVANCORE V. CIT 1 DECIDED BY A BENCH OF THREE JUDGES OF THIS COURT BY A MAJORITY OF TWO TO ONE. THIS JUDGMENT DIRECTLY DEALS WITH INTEREST ON 'STICKY ADVANCES' WHICH HAVE BEEN DEBITED TO THE CUSTOMER BUT TAKEN TO THE INTEREST SUSPENSE ACCOUNT BY A BANKING COMPANY. THE MAJORITY JUDGMENT HAS REFERRED TO THE CIRCULAR OF 6 - 10 - 1952 AND ITS WITHDR AWAL BY THE SECOND CIRCULAR OF 20 - 6 - 1978. THE MAJORITY APPEARS TO HAVE PROCEEDED ON THE BASIS THAT BY THE SECOND CIRCULAR OF 20 - 6 - 1978 THE CENTRAL BOARD HAD DIRECTED THAT INTEREST IN THE SUSPENSE ACCOUNT ON 'STICKY' ADVANCES SHOULD BE INCLUDIBLE IN THE TAX ABLE INCOME OF THE ASSESSEE AND ALL PENDING CASES SHOULD BE DISPOSED OF KEEPING THESE INSTRUCTIONS IN VIEW. THE SUBSEQUENT CIRCULAR OF 9 - 10 - 1984 BY WHICH, FROM ASSESSMENT YEAR 1979 - 80 THE BANKING COMPANIES WERE GIVEN THE BENEFIT OF THE CIRCULAR OF 9 - 10 - 198 4, DOES NOT APPEAR TO HAVE BEEN POINTED OUT TO THE COURT. WHAT WAS SUBMITTED BEFORE THE COURT WAS, THAT SINCE SUCH INTEREST HAD BEEN ALLOWED TO BE EXEMPTED FOR MORE THAN HALF A CENTURY, THE PRACTICE HAD TRANSFORMED ITSELF INTO LAW AND THIS POSITION SHOULD NOT HAVE BEEN DEVIATED FROM. NEGATIVING THIS CONTENTION, THE COURT SAID THAT THE QUESTION OF HOW FAR THE CONCEPT OF REAL INCOME ENTERS INTO THE QUESTION OF TAXABILITY IN THE FACTS AND CIRCUMSTANCES OF THE CASE, AND HOW FAR AND TO WHAT EXTENT THE CONCEPT OF REAL INCOME SHOULD INTERMINGLE WITH THE ACCRUAL OF INCOME, WILL HAVE TO BE JUDGED 'IN THE LIGHT OF THE PROVISIONS OF THE ACT, THE PRINCIPLES OF ACCOUNTANCY RECOGNISED AND FOLLOWED AND THE FEASIBILITY'. THE COURT SAID THAT THE EARLIER CIRCULARS BEING EXECU TIVE IN CHARACTER CANNOT ALTER THE PROVISIONS OF THE ACT. THESE WERE IN THE NATURE OF CONCESSIONS WHICH COULD ALWAYS BE PROSPECTIVELY WITHDRAWN. THE COURT ALSO OBSERVED THAT THE CIRCULARS CANNOT DETRACT FROM THE ACT. THE DECISION OF THE CONSTITUTION BENCH OF THIS COURT IN NAVNIT LAL C. JAVERI V. K.K . SEN, [1965] 56 ITR 198 OR THE SUBSEQUENT DECISION IN K.P. VARGHESE V. ITO, [1981] 4 SCC 172 ALSO DO NOT APPEAR TO HAVE BEE N POINTED OUT TO THE COURT. SINCE THE LATTER CIRCULAR OF 9 - 10 - 1984 WAS NOT POINTED OUT TO THE COURT, THE COURT NATURALLY PROCEEDED ON THE ASSUMPTION THAT THE BENEFIT GRANTED UNDER THE EARLIER CIRCULAR WAS NO LONGER AVAILABLE TO THE ASSESSEE AND THOSE CIRCU LARS COULD NOT BE RESORTED TO FOR THE PURPOSE OF OVERCOMING THE PROVISIONS OF THE ACT. INTERESTINGLY, THE CONCURRING JUDGMENT OF THE SECOND JUDGE HAS NOT DEALT WITH THIS QUESTION AT ALL BUT HAS DECIDED THE MATTER ON THE BASIS OF OTHER PROVISIONS OF LAW. 15 . THE SAID CIRCULARS UNDER SECTION 119 OF THE INCOME - TAX ACT WERE NOT PLACED BEFORE THE COURT IN THE CORRECT PERSPECTIVE BECAUSE THE LATTER CIRCULAR CONTINUING CERTAIN ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 14 OF 28 BENEFITS TO THE ASSESSEES WAS OVERLOOKED AND THE WITHDRAWN CIRCULAR WAS LOOKED UPON AS I N CONFLICT WITH LAW. SUCH CIRCULARS, HOWEVER, ARE NOT MEANT FOR CONTRADICTING OR NULLIFYING ANY PROVISION OF THE STATUTE. THEY ARE MEANT FOR ENSURING PROPER ADMINISTRATION OF THE STATUTE, THEY ARE DESIGNED TO MITIGATE THE RIGOURS OF THE APPLICATION OF A PA RTICULAR PROVISION OF THE STATUTE IN CERTAIN SITUATIONS BY APPLYING A BENEFICIAL INTERPRETATION TO THE PROVISION IN QUESTION SO AS TO BENEFIT THE ASSESSEE AND MAKE THE APPLICATION OF THE FISCAL PROVISION, IN THE PRESENT CASE, IN CONSONANCE WITH THE CONCEPT OF INCOME AND IN PARTICULAR, NOTIONAL INCOME AS ALSO THE TREATMENT OF SUCH NOTIONAL INCOME UNDER ACCOUNTING PRACTICE. 16. IN THE PREMISE THE MAJORITY DECISION IN STATE BANK OF TRAVANCORE V . CIT CANNOT BE LOOKED UPON AS LAYING DOWN THAT A CIRCULAR WHICH IS PROPERLY ISSUED UNDER SECTION 119 OF THE INCOME - TAX ACT FOR PROPER ADMINISTRATION OF THE ACT AND FOR RELIEVING THE RIGOUR OF TOO LITERAL A CONSTRUCTION OF THE LAW FOR THE BENEFIT OF THE ASSESSEE IN CERTAIN SITUATIONS WOULD NOT BE BINDING ON THE DEPARTMENT AL AUTHORITIES. THIS WOULD BE CONTRARY TO THE RATIO LAID DOWN BY THE BENCH OF FIVE JUDGES IN NAVNIT LAL C. JAVERI V. K.K. SEN 17. WE DO NOT SEE ANY 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 CIRCULAR WOULD BE BINDING ON THE DEPARTMENT.' 16. IN MERCANTILE BANK LTD. ( SU PRA ) THE SUPREME COURT, AFTER CONSIDERING THE ABOVE TWO DECISIONS OF THE SUPREME COURT HELD THUS: '6. ALTHOUGH THE 1952 CIRCULAR WAS WITHDRAWN IN JUNE 1978 IN VIEW OF THE DECISION OF THE KERALA HIGH COURT TO THE CONTRARY IN STATE BANK OF TRAVANCORE V. CIT THE PRINCIPLE WAS REINTRODUCED BY THE CENTRAL BOARD OF DIRECT TAXES BY ANOTHER CIRCULAR DATED 9 - 10 - 1984. THE 1984 CIRCULAR CLARIFIED THAT UP TO ASSESSMENT YEARS 1978 - 79 THE TAXABILITY OF INTEREST ON DOUBTFUL DEBTS CREDITED TO THE SUSPENSE ACCOUNT WOULD 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. WITH EFFECT FROM 1979 - ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 15 OF 28 80 THE NEW PROCEDURE PRESCRIBED UNDER THE 1984 CIRCULAR WOULD APPLY. THE PROCEDURE PRESCRIBED IS NOT RELEVANT F OR OUR PURPOSES. BUT IT IS CLEAR THAT THE CIRCULAR ISSUED IN 1978 WAS EFFECTIVELY SET ASIDE AND RENDERED INEFFECTIVE. 7. THE COURT IN UCO BANK CASE WAS OF THE VIEW THAT THESE CIRCULARS DATED 6 - 10 - 1952 AND 9 - 10 - 1984 WERE BINDING ON THE AUTHORITIES UNDER SEC TION 119(1) OF THE ACT. THE COURT WAS ALSO OF THE VIEW THAT THE JUDGES IN STATE BANK OF TRAVANCORE DID NOT HAVE THE OCCASION TO CONSIDER THE 1984 CIRCULAR AND PROCEEDED ON THE ASSUMPTION THAT THE 1978 CIRCULAR WAS IN FORCE. THE COURT DID NOT AGREE WITH THE CONCLUSION EXPRESSED BY THE MAJORITY IN STATE BANK OF TRAVANCORE AND SAID: '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 CIRCUL AR 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.' 8. THEREFORE, THE ASSESSMENT YEAR IN QUESTION IN THIS APPEAL SHOULD HAVE BEEN DEALT WITH BY THE DEPARTMENT IN ACCORDANCE WITH THE 1952 CIRCULAR UNDER WHICH THE INTEREST O N DOUBTFUL LOANS COULD NOT BE BROUGHT TO TAX. 9. THE DECISION OF THE HIGH COURT ON THE FIRST QUESTION, HAVING BEEN BASED ON THE DECISION IN STATE BANK OF TRAVANCORE MUST BE HELD TO BE INCORRECT IN VIEW OF THE SUBSEQUENT JUDGMENT OF THIS COURT IN UCO BANK V . CIT .' 17. IN SOUTHERN TECHNOLOGIES LTD. ( SUPRA ), THE SUPREME COURT WAS CONSIDERING A CASE WHERE CATEGORISATION OF ASSETS INTO DOUBTFUL, SUB - STANDARD AND LOSS WAS NOT IN DISPUTE. THE FINANCIAL YEAR OF THE APPELLANT WAS JULY TO JUNE AND THE P&L ACCOUNT AND THE BALANCE SHEET WERE DRAWN AS ON 30TH JUNE. THE P&L ACCOUNT AND BALANCE SHEET WAS FOR THE SHAREHOLDERS, RESERVE BANK OF INDIA (RBI) AND REGISTRAR OF COMPANIES (ROC) UNDER THE COMPANIES ACT, 1956. HOWEVER, FOR THE IT ACT, A SEPARATE P&L ACCOUNT WAS MADE OUT FOR THE YEAR ENDING 31ST MARCH AND THE BALANCE SHEET AS ON THAT DATE WAS PREPARED AND SUBMITTED TO THE ASSESSING OFFICER FOR COMPUTING THE TOTAL INCOME UNDER THE IT ACT, WHICH WAS NOT FOR USE OF RBI OR ROC. FOR THE ACCOUNTING YEAR ENDING 31.3.1998, THE ASSESSEE DEBITED RS.81,68,516 AS PROVISION AGAINST NPA IN THE P&L ACCOUNT ON THREE COUNTS VIZ. HIRE - PURCHASE OF RS.57,38,980, BILL DISCOUNTING OF RS.12,79,500 AND LOANS AND ADVANCES OF RS.31,84,701, IN ALL TOTALLING ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 16 OF 28 RS.1,02,03,121 FROM WHICH THE ASSESSING OFFICER ALLOWED DEDUCTION OF RS.20,34,605 ON ACCOUNT OF HIRE - PURCHASE FINANCE CHARGES LEAVING A BALANCE PROVISION FOR NPA OF RS 81,68,516. BEFORE THE ASSESSING OFFICER, THE ASSESSEE CLAIMED DEDUCTION IN RESPECT OF RS.81,68,516 UNDER SECTION 36(1)(VII) BEI NG PROVISION FOR NPA IN TERMS OF THE RBI DIRECTIONS, 1998 ON THE GROUND THAT THE ASSESSEE HAD TO DEBIT THE SAID AMOUNT TO THE P&L ACCOUNT [IN TERMS OF PARA 9(4) OF THE RBI DIRECTIONS] REDUCING ITS PROFITS, CONTENDING IT TO BE A WRITE - OFF. IN THE ALTERNATIV E, THE ASSESSEE SUBMITTED THAT CONSEQUENT UPON THE RBI DIRECTIONS, 1998 THERE HAS BEEN DIMINUTION IN THE VALUE OF ITS ASSETS FOR WHICH THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 37 AS A TRADING LOSS. THIS LED TO MATTERS GOING IN APPEAL(S). FOLLOW ING THE JUDGMENT OF THE GUJARAT HIGH COURT IN VITHALDAS H. DHANJIBHAI V. CIT [1981] 130 ITR 95/6 TAXMAN 105 , ITAT HELD THAT SINCE THE ASSESSEE HAD DEBITED THE SAID SUM OF RS.81,68,516 TO THE P&L ACCOUNT IT WAS ENTITLED TO CLAIM DEDUCTION AS A WRITE - OFF UNDER SECTION 36(1)(VII) WHICH VIEW WAS NOT ACCEPTED BY THE HIGH COURT, HENCE, CIVIL APPEAL(S) CAME TO BE FILED BEFORE THE SUPREME COURT BY THE NBFCS. THE COURT, ON AN ANA LYSIS OF THE RBI DIRECTIONS, 1998 OBSERVED THUS: 'ANALYSIS OF PARA 9 OF THE RBI DIRECTIONS, 1998 34. VIDE PARA 9, RBI HAS MANDATED THAT EVERY NBFC SHALL DISCLOSE IN ITS BALANCE SHEET THE PROVISION WITHOUT NETTING THEM FROM THE INCOME OR FROM THE VALUE OF THE ASSETS AND THAT THE PROVISION SHALL BE DISTINCTLY INDICATED UNDER THE SEPARATE HEADS OF ACCOUNT AS: (I) PROVISIONS FOR BAD AND DOUBTFUL DEBTS, AND (II) PROVISIONS FOR DEPRECIATION IN INVESTMENTS IN THE BALANCE SHEET UNDER 'CURRENT LIABILITIES AND PROVI SIONS' AND THAT SUCH PROVISION FOR EACH YEAR SHALL BE DEBITED TO THE P&L ACCOUNT SO THAT A TRUE AND CORRECT FIGURE OF 'NET PROFIT' GETS REFLECTED IN THE FINANCIAL ACCOUNTS OF THE COMPANY. THE EFFECT OF SUCH DISCLOSURE IS TO INCREASE THE CURRENT LIABILITIES BY SHOWING THE PROVISION AGAINST THE POSSIBLE LOSS ON ASSETS CLASSIFIED AS NPA. AN NPA CONTINUES TO BE AN ASSET 'DEBTORS/LOANS AND ADVANCES' IN THE BOOKS OF NBFC. FOR CREATING A PROVISION THE ONLY YARDSTICK IS DEFAULT IN TERMS OF THE LOAN UNDER THE RBI NO RMS, A PROVISION IS MATHEMATICAL CALCULATION ON TIME LINES. THE ENTIRE EXERCISE MENTIONED IN THE RBI DIRECTIONS, 1998 IS ONLY IN THE CONTEXT OF PRESENTATION OF NPA PROVISIONS IN THE BALANCE SHEET OF AN NBFC AND IT HAS NOTHING TO DO WITH COMPUTATION OF TAXA BLE INCOME OR ACCOUNTING CONCEPTS. 35. IT IS IMPORTANT TO NOTE THAT THE NET PROFIT SHOWN IN THE P&L ACCOUNT IS THE BASIS FOR NBFCS TO ACCEPT DEPOSITS AND ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 17 OF 28 DECLARE DIVIDENDS. HIGHER THE PROFITS, HIGHER IS THE NOF AND HIGHER IS THE INCREASE IN THE PUBLIC MAKI NG DEPOSITS IN NBFCS. HENCE, THE OBJECT OF THE NBFCS IS DISCLOSURE AND PROVISIONING. NBFCS HAVE TO ACCEPT THE CONCEPT OF 'INCOME' AS EVOLVED BY RBI AFTER DEDUCTING THE PROVISION AGAINST NPA, HOWEVER, AS STATED ABOVE, SUCH TREATMENT IS CONFINED TO PRESENTAT ION/DISCLOSURE AND HAS NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME UNDER THE IT ACT. SCOPE OF THE FINANCE ACT (NO. 2) OF 2001 W.E.F. 1 - 4 - 1989 INSOFAR AS SECTION 36(1)(VII) IS CONCERNED 36. PRIOR TO 1 - 4 - 1989, THE LAW, AS IT THEN STOOD, TOOK THE VIEW T HAT EVEN IN CASES IN WHICH THE ASSESSEE(S) MAKES ONLY A PROVISION IN ITS ACCOUNTS FOR BAD DEBTS AND INTEREST THEREON AND EVEN THOUGH THE AMOUNT IS NOT ACTUALLY WRITTEN - OFF BY DEBITING THE P&L ACCOUNT OF THE ASSESSEE AND CREDITING THE AMOUNT TO THE ACCOUNT OF THE DEBTOR, THE ASSESSEE WAS STILL ENTITLED TO DEDUCTION UNDER SECTION 36(1)(VII). ( SEECIT V. JWALA PRASAD TIWARI , (1953) 24 ITR 537 BOM. AND VITHALDAS H. DHANJIBHAI BARDANWALA, 1981 (130) ITR 95. SUCH STATE OF LAW PREVAILED UP TO AND INCLUDING ASSESSMENT YEAR 1988 - 1989. HOWEVER, BY INSERTION (W.E.F. 1 - 4 - 1989) OF A NEW EXPLANATION TO SECTION 36(1)(VII), IT HAS BEEN CLARIFIED THAT ANY BAD DEBT WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNT OF THE ASSESSEE WILL NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFUL DEBT MADE IN THE ACCOUNTS OF THE ASSESSEE. THE SAID AMENDMENT INDICATES THAT BEFORE 1 - 4 - 1989, EVEN A PROVISION COULD BE TREATED AS A WRITE - OFF. HOWEVER, AFTER 1 - 4 - 1989, A DISTINCT DICHOTOMY IS BROUGHT IN BY WAY OF THE SAID EXPLANATION TO SECTION 36(1)(VII). CONSEQUENTLY, AFTER 1 - 4 - 1989, A MERE PROVISION FOR BAD DEBT WOULD NOT BE ENTITLED TO DEDUCTION UNDER SECTION 36(1)(VII). 37. TO UNDERSTAND THE ABOVE DICHOTOMY, ONE MUS T UNDERSTAND 'HOW TO WRITE - OFF'. IF AN ASSESSEE DEBITS AN AMOUNT OF DOUBTFUL DEBT TO THE P&L ACCOUNT AND CREDITS THE ASSET ACCOUNT LIKE SUNDRY DEBTOR'S ACCOUNT, IT WOULD CONSTITUTE A WRITE - OFF OF AN ACTUAL DEBT. HOWEVER, IF AN ASSESSEE DEBITS 'PROVISION FO R DOUBTFUL DEBT' TO THE P&L ACCOUNT AND MAKES A CORRESPONDING CREDIT TO THE 'CURRENT LIABILITIES AND PROVISIONS' ON THE LIABILITIES SIDE OF THE BALANCE SHEET, THEN IT WOULD CONSTITUTE A PROVISION FOR DOUBTFUL DEBT. IN THE LATTER CASE, THE ASSESSEE WOULD NO T BE ENTITLED TO DEDUCTION AFTER 1 - 4 - 1989. 38. WE HAVE EXAMINED THE P&L ACCOUNT OF FIRST LEASING COMPANY OF INDIA LTD. FOR THE YEAR ENDING 31 - 3 - 2003. ON EXAMINATION OF SCHEDULE J TO THE P&L ACCOUNT WHICH REFERS ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 18 OF 28 TO OPERATING EXPENSES, WE FIND TWO DISTINCT HEADS OF EXPENDITURE, NAMELY, 'PROVISION FOR NON - PERFORMING ASSETS' AND 'BAD DEBTS/ADVANCES WRITTEN - OFF'. IT IS FOR THE APPELLANT(S) TO EXPLAIN THE DIFFERENCE BETWEEN THE TWO TO THE ASSESSING OFFICER. WHICH OF THE TWO ITEMS WILL CONSTITUTE EXPENDITURE UNDE R THE IT ACT HAS TO BE DECIDED ACCORDING TO THE IT ACT. IN THE PRESENT CASE, WE ARE NOT CONCERNED WITH TAXABILITY UNDER THE IT ACT OR THE ACCOUNTING TREATMENT. WE ARE ESSENTIALLY CONCERNED WITH PRESENTATION OF FINANCIAL STATEMENTS BY NBFCS UNDER THE 1998 D IRECTIONS. THE POINT TO BE NOTED IS THAT EVEN ACCORDING TO THE ASSESSEE 'BAD DEBTS/ADVANCES WRITTEN - OFF' IS A DISTINCT HEAD OF EXPENDITURE VIS - - VIS 'PROVISION FOR BAD DEBT'. 39. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. IT IS TRUE THAT UNDER PART I OF SCHE DULE VI TO THE COMPANIES ACT, 1956 AN AMOUNT COULD BE FIRST INCLUDED IN THE LIST OF SUNDRY DEBTORS/LOANS AND THEN DEDUCTED FROM THE LIST AS 'PROVISION FOR DOUBTFUL DEBTS'. HOWEVER, THESE ARE MATTERS OF PRESENTATION OF PROVISIONS FOR DOUBTFUL DEBTS EVEN UND ER THE COMPANIES ACT AND HAVE NOTHING TO DO WITH TAXABILITY UNDER THE IT ACT. 43. AS STATED ABOVE, THE COMPANIES ACT ALLOWS AN NBFC TO ADJUST A PROVISION FOR POSSIBLE DIMINUTION IN THE VALUE OF ASSETS OR PROVISION FOR DOUBTFUL DEBTS AGAINST THE ASSETS AND ONLY THE NET FIGURE IS ALLOWED TO BE SHOWN IN THE BALANCE SHEET, AS A MATTER OF DISCLOSURE. HOWEVER, THE SAID RBI DIRECTIONS, 1998 MANDATE ALL NBFCS TO SHOW THE SAID PROVISIONS SEPARATELY ON THE LIABILITY SIDE OF BALANCE SHEET I.E. UNDER THE HEAD 'CURRENT LIABILITIES AND PROVISIONS'. THE PURPOSE OF THE SAID DEVIATION IS TO INFORM THE USER OF THE BALANCE SHEET THE PARTICULARS CONCERNING QUANTUM AND QUALITY OF THE DIMINUTION IN THE VALUE OF INVESTMENT AND PARTICULARS OF DOUBTFUL AND SUB - STANDARD ASSETS. SIMIL ARLY, THE 1998 DIRECTIONS DO NOT RECOGNISE THE 'INCOME' UNDER THE MERCANTILE SYSTEM AND INSIST THAT NBFCS SHOULD FOLLOW CASH SYSTEM IN REGARD TO SUCH INCOMES. 44. BEFORE CONCLUDING ON THIS POINT, WE NEED TO EMPHASISE THAT THE 1998 DIRECTIONS HAVE NOTHING T O DO WITH THE ACCOUNTING TREATMENT OR TAXABILITY OF 'INCOME' UNDER THE IT ACT. THE TWO VIZ . THE IT ACT AND THE 1998 DIRECTIONS OPERATE IN DIFFERENT FIELDS. 45. AS STATED ABOVE, UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, INTEREST/HIRE CHARGES INCOME ACCRUES WITH TIME. IN SUCH CASES, INTEREST IS CHARGED AND DEBITED TO THE ACCOUNT OF THE BORROWER AS 'INCOME' IS RECOGNISED UNDER ACCRUAL ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 19 OF 28 SYSTEM. HOWEVER, IT IS NOT SO RECOGNISED UNDER THE 1998 DIRECTIONS AND, THEREFORE, IN THE MATTER OF ITS PRESENTATION UNDER THE SAID DIRECTIONS, THERE WOULD BE AN ADD BACK BUT NOT UNDER THE IT ACT NECESSARILY. IT IS IMPORTANT TO NOTE THAT COLLECTIBILITY IS DIFFERENT FROM ACCRUAL. HENCE, IN EACH CASE, THE ASSESSEE HAS TO PROVE, AS HAS HAPPENED IN THIS CASE WITH REGARD TO THE SUM OF RS 20,34,605, THAT INTEREST IS NOT RECOGNISED OR TAKEN INTO ACCOUNT DUE TO UNCERTAINTY IN COLLECTION OF THE INCOME. IT IS FOR THE ASSESSING OFFICER TO ACCEPT THE CLAIM OF THE ASSESSEE UNDER THE IT ACT OR NOT TO ACCEPT IT IN WHICH CASE THERE WILL BE ADD BA CK EVEN UNDER REAL INCOME THEORY AS EXPLAINED HEREINBELOW. 47. PRIOR TO THE RBI DIRECTIONS, 1998, ADVANCES WERE STATED NET OF PROVISIONS FOR NPAS/BAD AND DOUBTFUL DEBTS. THEY WERE SHOWN AT NET FIGURE (ADVANCES LESS PROVISIONS FOR NPAS) AND THE AMOUNT OF PR OVISION FOR NPA WAS SHOWN IN THE NOTES TO THE ACCOUNTS ONLY. SUCH PRESENTATION OF NPA PROVISION WARRANTED DISCLOSURE. THEREFORE, PARA 9(1) OF THE RBI DIRECTIONS, 1998 STIPULATES THAT EVERY NBFC SHALL SEPARATELY DISCLOSE IN ITS BALANCE SHEET THE PROVISION F OR NPAS WITHOUT NETTING THEM FROM THE INCOME OR AGAINST THE VALUE OF ASSETS. THAT, THE PROVISION FOR NPA SHOULD BE SHOWN SEPARATELY ON THE 'LIABILITIES SIDE' OF THE BALANCE SHEET UNDER THE HEAD 'CURRENT LIABILITIES AND PROVISIONS' AND NOT AS A DEDUCTION FR OM 'SUNDRY DEBTORS/ADVANCES'. THEREFORE, RBI HAS TAKEN A POSITION AS A MATTER OF DISCLOSURE, WITH WHICH WE AGREE, THAT IF AN NBFC DEDUCTS A PROVISION FOR NPA FROM 'SUNDRY DEBTORS/LOANS AND ADVANCES', IT WOULD AMOUNT TO NETTING FROM THE VALUE OF ASSETS WHIC H WOULD CONSTITUTE BREACH OF PARA 9 OF THE RBI DIRECTIONS, 1998. CONSEQUENTLY, NPA PROVISIONS SHOULD BE PRESENTED ON THE 'LIABILITIES SIDE' OF THE BALANCE SHEET UNDER THE HEAD 'CURRENT LIABILITIES AND PROVISIONS' AS A DISCLOSURE NORM AND NOT AS ACCOUNTING OR COMPUTATION OF INCOME NORM UNDER THE IT ACT. 48. AT THIS STAGE, WE MAY CLARIFY THAT THE ENTIRE THRUST OF THE RBI DIRECTIONS, 1998 IS ON PRESENTATION OF NPA PROVISION IN THE BALANCE SHEET OF AN NBFC. PRESENTATION/DISCLOSURE IS DIFFERENT FROM COMPUTATION/ TAXABILITY OF THE PROVISION FOR NPA. THE NATURE OF EXPENDITURE UNDER THE IT ACT CANNOT BE CONCLUSIVELY DETERMINED BY THE MANNER IN WHICH ACCOUNTS ARE PRESENTED IN TERMS OF THE 1998 DIRECTIONS. THERE ARE CASES WHERE ON FACTS COURTS HAVE TAKEN THE VIEW THAT THE SO - CALLED PROVISION IS IN EFFECT A WRITE - OFF. THEREFORE, IN OUR VIEW, THE RBI DIRECTIONS, 1998, THOUGH DEVIATE FROM THE ACCOUNTING PRACTICE AS PROVIDED IN THE COMPANIES ACT, DO NOT OVERRIDE THE PROVISIONS OF THE IT ACT. ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 20 OF 28 50. THE QUESTION STILL REMAINS A S TO WHAT IS THE NATURE OF 'PROVISION FOR NPA' IN TERMS OF THE RBI DIRECTIONS, 1998. IN OUR VIEW, PROVISION FOR NPA IN TERMS OF THE RBI DIRECTIONS, 1998 DOES NOT CONSTITUTE EXPENSE ON THE BASIS OF WHICH DEDUCTION COULD BE CLAIMED BY NBFCS UNDER SECTION 36( 1)(VII). PROVISION FOR NPAS IS AN EXPENSE FOR PRESENTATION UNDER THE 1998 DIRECTIONS AND IN THAT SENSE IT IS NOTIONAL. FOR CLAIMING DEDUCTION UNDER THE IT ACT, ONE HAS TO GO BY THE FACTS OF THE CASE (INCLUDING THE NATURE OF TRANSACTION), AS STATED ABOVE. 5 1. ONE MUST KEEP IN MIND ANOTHER ASPECT. REDUCTION IN NPA TAKES PLACE IN TWO WAYS, NAMELY, BY RECOVERIES AND BY WRITE - OFF. HOWEVER, BY MAKING A PROVISION FOR NPA, THERE WILL BE NO REDUCTION IN NPA. SIMILARLY, A WRITE - OFF IS ALSO OF TWO TYPES, NAMELY, A REG ULAR WRITE - OFF AND A PRUDENTIAL WRITE - OFF. ( SEE ADVANCED ACCOUNTS BY SHUKLA, GREWAL AND GUPTA, CH. 26, P. 26.50.) IF ONE KEEPS THESE CONCEPTS IN MIND, IT IS VERY CLEAR THAT THE RBI DIRECTIONS, 1998 ARE MERELY PRUDENTIAL NORMS. THEY CAN ALSO BE CALLED AS DI SCLOSURE NORMS OR NORMS REGARDING PRESENTATION OF NPA PROVISIONS IN THE BALANCE SHEET. THEY DO NOT TOUCH UPON THE NATURE OF EXPENSE TO BE DECIDED BY THE AO IN THE ASSESSMENT PROCEEDINGS. 55. THE POINT TO BE NOTED IS THAT THE IT ACT IS A TAX ON 'REAL INCOME ' I.E. THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE IT ACT. THEREFORE, IF BY EXPLANATION TO SECTION 36(1)(VII) A PROVISION FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMBIT OF THE BAD DEBT WHICH IS WRITTEN - OFF THEN, ONE HAS TO TAKE INTO ACCOUNT THE SAID EXPLANATION IN COMPUTATION OF TOTAL INCOME UNDER THE IT ACT FAILING WHICH ONE CANNOT ASCERTAIN THE REAL PROFITS. THIS IS WHERE THE CONCEPT OF 'ADD BACK' COMES IN. IN OUR VIEW, A PROVISION FOR NPA DEBITED TO P&L ACCOUNT UNDER THE 1998 DIRECTIONS IS ONLY A NOTIONAL EXPENSE AND, THEREFORE, THERE WOULD BE ADD BACK TO THAT EXTENT IN THE COMPUTATION OF TOTAL INCOME UNDER THE IT ACT. 56. ONE OF THE CONTENTIONS RAISED ON BEHALF OF NBFCS BEFORE US WAS THAT IN THIS CASE THERE IS NO SCOPE FO R 'ADD BACK' OF THE PROVISION AGAINST NPA TO THE TAXABLE INCOME OF THE ASSESSEE. WE FIND NO MERIT IN THIS CONTENTION. UNDER THE IT ACT, THE CHARGE IS ON PROFITS AND GAINS, NOT ON GROSS RECEIPTS (WHICH, HOWEVER, HAS PROFITS EMBEDDED IN IT). THEREFORE, SUBJE CT TO THE REQUIREMENTS OF THE IT ACT, PROFITS TO BE ASSESSED UNDER THE IT ACT HAVE GOT TO BE REAL PROFITS WHICH HAVE TO BE COMPUTED ON ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING. IN OTHER WORDS, PROFITS HAVE GOT TO ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 21 OF 28 BE COMPUTED AFTER DEDUCTING LOSSES/EXPE NSES INCURRED FOR BUSINESS, EVEN THOUGH SUCH LOSSES/EXPENSES MAY NOT BE ADMISSIBLE UNDER SECTIONS 30 TO 43 - D OF THE IT ACT, UNLESS SUCH LOSSES/EXPENSES ARE EXPRESSLY OR BY NECESSARY IMPLICATION DISALLOWED BY THE ACT. THEREFORE, EVEN APPLYING THE THEORY OF REAL INCOME, A DEBIT WHICH IS EXPRESSLY DISALLOWED BY EXPLANATION TO SECTION 36(1) (VII), IF CLAIMED, HAS GOT TO BE ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE BECAUSE THE SAID ACT SEEKS TO TAX THE 'REAL INCOME' WHICH IS INCOME COMPUTED ACCORDING TO ORD INARY COMMERCIAL PRINCIPLES BUT SUBJECT TO THE PROVISIONS OF THE IT ACT. UNDER SECTION 36(1)(VII) READ WITH THE EXPLANATION , A 'WRITE - OFF' IS A CONDITION FOR ALLOWANCE. IF 'REAL PROFIT' IS TO BE COMPUTED ONE NEEDS TO TAKE INTO ACCOUNT THE CONCEPT OF 'WRITE - OFF' IN CONTRADISTINCTION TO THE 'PROVISION FOR DOUBTFUL DEBT'. APPLICABILITY OF SECTION 145 57. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE THE RBI DIRECTIONS, 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER CHAPTER III - B 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 45 - Q, AN OVERRIDING EFFECT IS GIVEN TO THE RBI DIRECTIONS, 1998 VIS - - VIS 'INCOME RECOGNITION' PRINCIPLES IN THE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, THESE RBI DIRECTIONS, 1998 AND THE IT ACT OPERATE IN DIFFERENT AREAS. THESE RBI DIRECTIONS, 1998 HAVE NOTH ING 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 THE 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 AO COMES TO THE CONCLUSION THAT SUCH C HANGE WOULD RESULT IN UNDERSTATEMENT OF PROFITS. HOWEVER, HERE IS THE CASE WHERE THE AO HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF SECTION 45 - Q OF THE RBI ACT. HENCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE IT ACT HAS NO ROLE T O PLAY IN THE PRESENT DISPUTE.' ON A CLOSE READING OF THE ABOVE DECISION IT APPEARS THAT IN THE FACTS OF THE SAID CASE, THE ASSESSEE, AFTER MAKING ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 22 OF 28 PROVISION FOR NPA HAD SOUGHT DEDUCTION OF SUCH AMOUNT UNDER SECTION 36(1) (VII) OF THE ACT AND ALTERNATIVELY CLAIMED DEDUCTION UNDER SECTION 37 OF THE ACT. CLEARLY, THEREFORE, DEDUCTION WAS SOUGHT OF AN AMOUNT WHICH WAS SHOWN AS INCOME IN THE EARLIER YEARS. IN THE PRESENT CASE, WE ARE NOT CONCERNED WITH ANY CLAIM FOR DEDUCTION OF PROVISION MADE FOR NPA. IT IS THE CASE OF THE ASSESSEE THAT IN VIEW OF THE INCOME RECOGNITION NORMS LAID DOWN BY THE RBI, INTEREST ON NPA IS NOT TO BE SHOWN AS INCOME AND IS NOT TO BE CHARGED TO TAX. THUS, THIS IS A CASE OF RECOGNITION OF INCOME UNDER SECTION 145 OF THE ACT AND NOT A CASE OF DEDUCTION UNDER ANY PROVISION OF THE INCOME - TAX ACT, 1961. 18. IT IS IN THE LIGHT OF THE ABOVE DISTINGUISHING FEATURE, THAT THE CONTROVERSY IN ISSUE IS REQUIRED TO BE CONSIDERED BY THIS COURT. 19. SECTION 45Q OF THE RBI ACT, WHICH IS RELEVANT FOR THE P RESENT PURPOSE, READS THUS: '45 - Q. CHAPTER III - B TO OVERRIDE OTHER LAWS. 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.' 20. SECTION 45Q FINDS PLACE IN CHAPTER IIIB OF THE RBI ACT. THUS, THE PROVISIONS OF CHAPTER IIIB OF THE RBI ACT HAVE AN OVERRIDING EFFECT QUA OTHER ENACTMENTS TO THE EXTENT THE SAME ARE INCONSISTENT WITH THE PROVISIONS CONTAINE D THEREIN. IN ORDER TO REFLECT A BANK'S ACTUAL FINANCIAL HEALTH IN ITS BALANCE SHEET, THE RESERVE BANK HAS INTRODUCED PRUDENTIAL NORMS FOR INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING FOR ADVANCES PORTFOLIO OF THE CO - OPERATIVE BANKS. THE GUIDE LINES PROVIDED THEREUNDER ARE MANDATORY AND IT IS INCUMBENT UPON ALL CO - OPERATIVE BANKS TO FOLLOW THE SAME. INSOFAR AS INCOME RECOGNITION IS CONCERNED, CLAUSE 4.1.1 OF THE CIRCULAR PROVIDES THAT THE POLICY OF INCOME RECOGNITION HAS TO BE OBJECTIVE AND BASE D ON THE RECORD OF RECOVERY. INCOME FROM NON - PERFORMING ASSETS (NPA) IS NOT RECOGNISED ON ACCRUAL BASIS BUT IS BOOKED AS INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. THEREFORE, BANKS SHOULD NOT TAKE TO INCOME ACCOUNT INTEREST ON NON - PERFORMING ASSETS ON ACCRU AL BASIS. THUS, IN VIEW OF THE MANDATE OF THE RBI GUIDELINES THE ASSESSEE CANNOT RECOGNISE INCOME FROM NON - PERFORMING ASSETS ON ACCRUAL BASIS BUT CAN BOOK SUCH INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. THUS, THIS IS A CASE WHERE AT THE THRESHOLD, THE ASSES SEE, IN VIEW OF THE RBI GUIDELINES, CANNOT RECOGNISE INCOME FROM NPA ON ACCRUAL BASIS. THIS IS, THEREFORE, A CASE PERTAINING TO RECOGNITION OF INCOME AND NOT COMPUTATION OF THE INCOME OF THE ASSESSEE. ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 23 OF 28 21. THE SUPREME COURT IN SOUTHERN TECHNOLOGIES LTD. ( SU PRA ) HAS HELD THAT THE 1998 DIRECTIONS ARE ONLY DISCLOSURE NORMS AND HAVE NOTHING TO DO WITH COMPUTATION OF TOTAL INCOME UNDER THE IT ACT OR WITH THE ACCOUNTING TREATMENT. THE 1998 DIRECTIONS ONLY LAY DOWN THE MANNER OF PRESENTATION OF NPA PROVISION IN THE BALANCE SHEET OF AN NBFC. THE COURT HAS REFERRED TO THE DEVIATIONS BETWEEN THE RBI DIRECTIONS AND THE COMPANIES ACT AS FOLLOWS: '42. BROADLY, THERE ARE THREE DEVIATIONS: ( I ) IN THE MATTER OF PRESENTATION OF FINANCIAL STATEMENTS UNDER SCHEDULE VI TO THE COMPANIES ACT; ( II ) IN NOT RECOGNISING THE 'INCOME' UNDER THE MERCANTILE SYSTEM OF ACCOUNTING AND ITS INSISTENCE TO FOLLOW CASH SYSTEM WITH RESPECT TO ASSETS CLASSIFIED AS NPA AS PER ITS NORMS; ( III ) IN CREATING A PROVISION FOR ALL NPAS SUMMARILY AS AGAINST CREATING A PROVISION ONLY WHEN THE DEBT IS DOUBTFUL OF RECOVERY UNDER THE NORMS OF THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THESE DEVIATIONS PREVAIL OVER CERTAIN PROVISIONS OF THE COMPANIES ACT, 1956 TO P ROTECT THE DEPOSITORS IN THE CONTEXT OF INCOME RECOGNITION AND PRESENTATION OF THE ASSETS AND PROVISIONS CREATED AGAINST THEM. THUS, THE P&L ACCOUNT PREPARED BY NBFC IN TERMS OF THE RBI DIRECTIONS, 1998 DOES NOT RECOGNISE 'INCOME FROM NPA' AND, THEREFORE, DIRECTS A PROVISION TO BE MADE IN THAT REGARD AND HENCE AN 'ADD BACK'. IT IS IMPORTANT TO NOTE THAT 'ADD BACK' IS THERE ONLY IN THE CASE OF PROVISIONS .' [EMPHASIS SUPPLIED] 22. THEREFORE, IN TERMS OF THE ABOVE DECISION, WHERE AN ASSESSEE MAKES PROVISION FO R NPA AND SEEKS DEDUCTION OF SUCH AMOUNT UNDER SECTION 36(1)(VII) OR SECTION 37 OF THE ACT, THEN IN THE COMPUTATION OF INCOME, THE RBI GUIDELINES WOULD HAVE NO ROLE TO PLAY, AND HENCE, AN ADD BACK. INSOFAR AS INCOME RECOGNITION IS CONCERNED, THE SUPREME CO URT HAS HELD THUS: 'APPLICABILITY OF SECTION 145 57. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE THE RBI DIRECTIONS, 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER CHAPTER III - B OF THE RBI ACT, 1934. THESE ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 24 OF 28 NORMS DEAL ESSENTIALLY WITH INCOME REC OGNITION. 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 45 - Q, AN OVERRIDING EFFECT IS GIVEN TO THE RBI DIRECTIONS, 1998 VIS - - VIS 'INCOME REC OGNITION' PRINCIPLES IN THE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, THESE RBI DIRECTIONS, 1998 AND THE IT ACT OPERATE IN DIFFERENT AREAS. THESE RBI DIRECTIONS, 1998 HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THESE DIRECTIONS CANNOT OVERRULE THE 'PERMISSIBLE DEDUCTIONS' OR 'THEIR EXCLUSION' UNDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND THE COMPANIES ACT IS ONLY IN THE MATTER 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 AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD RESULT IN UNDERSTATEMENT OF PROFIT S. HOWEVER, HERE IS THE CASE WHERE THE AO HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF SECTION 45 - Q OF THE RBI ACT. HENCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE IT ACT HAS NO ROLE TO PLAY IN THE PRESENT DISPUTE.' THUS, INSOFAR AS INCOME RECOGNITION IS CONCERNED, THE COURT HAS HELD THAT EVEN THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF SECTION 45Q OF THE RBI ACT AND THAT AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE INCOME - TAX ACT, HAS N OT ROLE TO PLAY. 23. IN THE LIGHT OF THE ABOVE DISCUSSION WHAT EMERGES IS THAT WHILE DETERMINING THE TAX LIABILITY OF AN ASSESSEE, TWO FACTORS WOULD COME INTO PLAY. FIRSTLY, THE RECOGNITION OF INCOME IN TERMS OF THE RECOGNISED ACCOUNTING PRINCIPLES AND AFT ER SUCH INCOME IS RECOGNISED, THE COMPUTATION THEREOF, IN TERMS OF THE PROVISIONS OF THE INCOME - TAX ACT, 1961. INSOFAR AS THE COMPUTATION OF TAXABILITY IS CONCERNED, THE SAME IS SOLELY GOVERNED BY THE PROVISIONS OF THE INCOME - TAX ACT AND THE ACCOUNTING PRI NCIPLES HAVE NO ROLE TO PLAY. HOWEVER, RECOGNITION OF INCOME STANDS ON A DIFFERENT FOOTING. INSOFAR AS INCOME RECOGNITION IS CONCERNED, IT WOULD BE THE RBI DIRECTIONS WHICH WOULD PREVAIL IN VIEW OF THE PROVISIONS OF SECTION 45Q OF THE RBI ACT AND SECTION 1 45 WOULD HAVE NO ROLE TO PLAY. HENCE, THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS. 24. THE DELHI HIGH COURT IN VASISTH CHAY VYAPAR LTD., ( SUPRA ), HAS IN THE CONTEXT OF A SIMILAR ISSUE ARISING IN THE CASE OF A NON - BANKING FINANCIAL COMPANY HAS HE LD THUS: ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 25 OF 28 '17. IN THIS SCENARIO, WE HAVE TO EXAMINE THE STRENGTH IN THE SUBMISSION OF LEARNED COUNSEL FOR THE REVENUE THAT WHETHER IT CAN STILL BE HELD THAT INCOME IN THE FORM OF INTEREST THOUGH NOT RECEIVED HAD STILL ACCRUED TO THE ASSESSEE UNDER THE PROVI SIONS OF INCOME - TAX ACT AND WAS, THEREFORE, EXIGIBLE TO TAX. OUR ANSWER IS IN THE NEGATIVE AND WE GIVE THE FOLLOWING REASONS IN SUPPORT: - (1) FIRST OF ALL WE WOULD DISCUSS THE MATTER IN THE LIGHT OF THE PROVISIONS OF INCOME - TAX ACT AND TO EXAMINE AS TO W HETHER IN THE GIVEN CIRCUMSTANCES, INTEREST INCOME HAS ACCRUED TO THE ASSESSEE. IT IS STATED AT THE COST OF REPETITION THAT ADMITTED POSITION IS THAT THE ASSESSEE HAD NOT RECEIVED ANY INTEREST ON THE SAID ICD PLACED WITH SHAW WALLACE SINCE THE ASSESSMENT Y EAR 1996 - 97 AS IT HAD BECOME NPAS IN ACCORDANCE WITH THE PRUDENTIAL NORMS WHICH WAS ENTERED IN THE BOOKS OF ACCOUNTS AS ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 WELL. THE ASSESSEE HAS FURTHER SUCCESSFULLY DEMONSTRATED THAT EVEN IN THE SUCCEEDIN G ASSESSMENT YEARS, NO INTEREST WAS RECEIVED AND THE POSITION REMAINED THE SAME UNTIL THE ASSESSMENT YEARS 2006 - 07. REASON WAS ADVERSE FINANCIAL CIRCUMSTANCES AND THE FINANCIAL CRUNCH FACED BY SHAW WALLACE. SO MUCH SO, IT WAS FACING WINDING UP PETITIONS WH ICH WERE FILED BY MANY CREDITORS. THESE CIRCUMSTANCES, LED TO AN UNCERTAINTY INSOFAR AS RECOVERY OF INTEREST WAS CONCERNED, AS A RESULT OF THE AFORESAID PRECARIOUS FINANCIAL POSITION OF SHAW WALLACE. WHAT TO TALK OF INTEREST, EVEN THE PRINCIPAL AMOUNT ITSE LF HAD BECOME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LEGITIMATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NOT 'ACCRUED'. WE ARE IN AGREEMENT WITH THE SUBMISSION OF MR. VOHRA ON THIS COUNT, SUPPORTED BY VARIOUS DECISIONS OF DIFFERENT HIGH COURT S INCLUDING THIS COURT WHICH HAS ALREADY BEEN REFERRED TO ABOVE. (2) IN THE INSTANT CASE, THE ASSESSEE - COMPANY BEING NBFC IS GOVERNED BY THE PROVISIONS OF RBI ACT. IN SUCH A CASE, INTEREST INCOME CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE HAVING RE GARD TO THE PROVISIONS OF SECTION 45Q OF THE RBI AND PRUDENTIAL NORMS ISSUED BY THE RBI IN EXERCISE OF ITS STATUTORY POWERS. AS PER THESE NORMS, THE ICD HAD BECOME NPA AND ON SUCH NPA WHERE THE INTEREST WAS NOT RECEIVED AND POSSIBILITY OF RECOVERY WAS ALMO ST NIL , IT COULD NOT BE TREATED TO HAVE BEEN ACCRUED IN FAVOUR OF THE ASSESSEE. NO DOUBT, IN FIRST BLUSH, READING OF THE JUDGMENT GIVES AN INDICATION THAT THE COURT HAS HELD THAT RBI ACT DOES NOT OVERRIDE THE PROVISIONS OF THE INCOME - TAX ACT. HOWEVER, WHEN WE ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 26 OF 28 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 CORREC T. 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 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 B RING 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 RBI ACT, THEIR LORDSHIPS OF TH E APEX COURT OBSERVED THAT INSOFAR 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 THEREFOR 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 PRUDENTIAL NORMS, EVEN THOUGH THE SAME D EVIATED FROM MERCANTILE SYSTEM OF ACCOUNTING AND/OR SECTION 145 OF THE INCOME - TAX ACT. IT CAN BE SAID, THEREFORE, THAT THE APEX COURT APPROVED THE 'REAL INCOME' THEORY WHICH IS ENGRAINED IN THE PRUDENTIAL NORMS FOR RECOGNITION OF REVENUE BY NBFC.' 25. THE DISTINCTION DRAWN BY THE DELHI HIGH COURT IS THAT WHILE THE ACCOUNTING POLICIES OF ADOPTED BY THE NBFC CANNOT DETERMINE THE TAXABLE INCOME. HOWEVER, INSOFAR AS INCOME RECOGNITION IS CONCERNED, THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF SECTION 45Q OF THE RBI ACT. THAT INSOFAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE INCOME - TAX ACT, 1961 HAS NOT ROLE TO PLAY. 26. IN SAKTHI FINANCE LIMITED, ( SUPRA ), THE MADRAS HIGH COURT WAS DEALING WITH A SIMILAR ISSUE IN RELATION T O A NON - BANKING FINANCIAL INSTITUTION. THE COURT DID NOT AGREE WITH THE VIEW ADOPTED BY THE DELHI HIGH COURT IN VASISTH CHAY VYAPAR ( SUPRA ) AND HELD THUS: '16. IN PARAGRAPHS 31 AND 34, THE HON'BLE SUPREME COURT IN NO UNCERTAIN TERMS HELD THAT THE COLLECTIB ILITY OF INTEREST IS DIFFERENT FROM ACCRUAL AND IN EACH AND EVERY CASE, THE ASSESSEE HAS TO PROVE THAT THE INCOME INTEREST IS NOT ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 27 OF 28 RECOGNISED OR NOT TAKEN INTO ACCOUNT DUE TO UNCERTAINTY IN COLLECTION OF THE INCOME. IT IS FOR THE ASSESSING OFFICER TO ACCEPT THE CLAIM OF THE ASSESSEE UNDER THE INCOME - TAX ACT OR NOT TO ACCEPT. IN CASE OF SOUTHERN TECHNOLOGIES LIMITED, (2010) 320 ITR 577, THE ASSESSING OFFICER ACCEPTED THE ASSESSEE'S CASE TOWARDS NON - RECOGNITION OF INTEREST FOR RS.20.34 LAKHS AS WOULD BE APPARE NT FROM A READING OF PARAGRAPH NO.31 OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN CASE OF SOUTHERN TECHNOLOGIES LIMITED, [2010] 320 ITR 577. BY A CAREFUL READING OF THE CASE OF SOUTHERN TECHNOLOGIES LIMITED, [2010] 320 ITR 577, WE ARE OF THE VIEW THAT T HE ASSESSEE HAS TO PROVE IN EACH CASE THAT INTEREST NOT RECOGNISED OR NOT TAKEN INTO ACCOUNT WAS IN FACT DUE TO UNCERTAINTY IN COLLECTION OF INTEREST AND IT IS FOR THE ASSESSING OFFICER TO EXAMINE FACTS OF EACH INDIVIDUAL CASE. 18. MERE CHARACTERISATION OF AN ACCOUNT AS A NPA WOULD NOT BY ITSELF BE SUFFICIENT TO SAY THAT THERE IS UNCERTAINTY AS REGARDS REALIZABILITY OF INCOME OR INTEREST INCOME THEREON. ACCRUAL OF INTEREST IS A MATTER OF FACT TO BE DECIDED SEPARATELY FOR EACH CASE ON THE BASIS OF EXAMINATIO N OF THE FACTS AND CIRCUMSTANCES. THE SAME WOULD REQUIRE AN ASSESSMENT OF THE RELEVANT FACTS AND CIRCUMSTANCES OF EACH CASE. ONLY BY ASSESSMENT OF FACTS AND CIRCUMSTANCES, THE AUTHORITY COULD ARRIVE AT A DECISION WHETHER THERE IS UNCERTAINITY OF THE INTERE ST ACCRUED ON NPA. ONLY WHEN THERE IS UNCERTAINITY OF REALIZABILITY OF INCOME OR INTEREST INCOME THEN IT IS NOT CHARGEABLE TO TAX. THE SYSTEM OF ACCOUNTING FOLLOWED ONLY RECOGNISES IT BRINGING THE INCOME TO BOOKS. THE ADOPTED ACCOUNTING POLICY I.E. , RECOGN ISING INCOME ON NPA ACCOUNTS ONLY SUBJECT TO REALISATION DOES NOT SERVE AS A STANDARD CATEGORY.' 27. FOR THE REASONS STATED HEREINABOVE, THIS COURT IS IN AGREEMENT WITH THE VIEW TAKEN BY THE DELHI HIGH COURT. 10. THE DECISION OF THE HON BLE GUJARAT HI GH COURT IN THE CASE OF SHRI MAHILA SEWA SAHAKARI BANK LTD. (SUPRA) IS WELL - REASONED AND THEREFORE, THE ORDER OF THE CIT(A) IS IN CONFORMITY WITH THE RATIO OF THE DECISION CITED SUPRA. HENCE, WE DO NOT FIND ANY FALLACY IN THE REASONING OF THE CIT(A). HENC E, GROUNDS OF APPEAL IN THIS REGARD ARE DISMISSED. ITA NO S . 1 490 & 1491 /BANG/201 6 PAGE 28 OF 28 12. IN THE RESULT, THE APPEALS FILED BY THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 T H , AUGUST, 201 7 S D/ - SD/ - (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOU NTANT MEMBER PLACE : B EN GAL URU D A T E D : 18 /0 8 /2017 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME - TAX APPELLATE TRIBUNAL BANGALORE