ACIT, Aurangabad V. Peoples Co-Op Bank Ltd, Hingoli

ITA 1500/PUN/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84958 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 25-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P S NAIK
• Assessee Lawyers: N O N E
• Keywords: Bad and doubtful debts
• Section: 145; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 1500 / P N/ 20 1 3 ASSESSMENT YEAR : 20 10 - 11 THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE - 1, AURANGABAD VS. PEOPLES CO - OPERATIVE BANK LTD., HINGOLI, HEAD OFFICE, AKOLA ROAD, HINGOLI (APPELLANT) (RESPONDENT) PAN NO. AAABP0329B APPELLANT BY: SHRI P.S. NAIK RESPONDENT BY: N O N E DATE OF HEARING : 11 - 08 - 2014 DATE OF PRO NOUNCEMENT : 27 - 0 8 - 2014 ORDER PER R.S . PADVEKAR , JM : - IN THIS APPEAL, THE REVENUE HAS CHALLENGED THE IMPUGNED ORDER OF THE LD. CIT(A) , AURANGABAD DATED 02 - 05 - 2013 FOR THE A.Y. 20 10 - 11 . THE GROUND NO. 1 READS AS UNDER: 1. WHETHER ON THE FACTS AND CIR CUMSTANCES OF THE CASE THE CIT(A) IS CORRECT IN DECIDING THAT ASSESSEE CAN OFFER HIS INTEREST RECEIVED FROM BAD AND DOUBTFUL DEBTS (NPA) ON ACTUAL RECEIPT BASIS AS PER RBI GUIDELINES EVEN THOUGH ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IN SP ITE OF THAT, PROVISION OF SECTION 43D IS NOT APPLICABLE TO THE ASSESSEE. 2. THE FACTS WHICH ARE REVEALED FROM THE RECORD AS UNDER. THE ASSESSEE IS A CO - OPERATIVE BANK AND ENGAGED IN THE BUSINESS OF BANKING. THE ASSESSEE FILED THE RETURN OF INCOME FOR THE A.Y. 2010 - 11 ON 27 - 09 - 2010 DECLARING TOTAL INCOME OF RS.2,12,27,66/ - . THE ASSESSEES CASE WAS SELECTED FOR SCRUTINY BY THE ASSESSING OFFICER. SO FAR AS T HE ISSUE BEFORE US IS CONCERNED, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE 2 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI HAS NO T OFFERED ACCRUED INTEREST ON NPA WHICH WAS TO THE EXTENT OF RS.1,11,84,000/ - . IN THE OPINION OF THE ASSESSING OFFICER AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE SAME SHOULD HAVE BEEN OFFERED FOR TAX. THE ASSESSING OFFICER ASKED T HE EXPLANATION OF THE ASSESSEE WHY THE ABOVE INTEREST ON NPA SHOULD NOT BE BROUGHT TO TAX. THE ASSESSEE FILED THE REPLY . T HE ASSESSING OFFICER REJECTED THE CONTENTION OF THE ASSESSEE THAT THE SAID AMOUNT CANNOT BE TREATED AS AN INCOME AND MADE THE ADDITI ON OF RS.1,11,84,000/ - . THE ASSESSEE CARRIED THE ISSUED BEFORE THE LD. CIT(A) AND LD. CIT(A) DELETED THE ADDITION. NOW, THE REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD THE LD. DR FOR THE REVENUE. NONE WAS PRESENT FOR THE ASSESSEE. 3. WE FIND THAT TH E ISSUE STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BANK , ON THE FACTS OF THIS CASE , BY THE DECISION OF THE ITAT, PUNE IN THE CASE OF ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 3, NANDED VS. THE OMERGA JANTA SAHAKARI BANK LTD, OSMANABAD ITA NO. 350/PN/ 2013 AND CO NO. 61/PN/2013 DATED 31 - 10 - 2013. THE OPERATIVE PART OF THE SAID DECISION IS AS UNDER: 3. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. THE LD. COUNSEL SUBMITS THAT THE ISSUE OF TAXABILITY OF THE OVERDUE INTEREST ON NPA ACCOUNT HAS BEEN C ONSIDERED BY THE ITAT, PUNE IN THE CASE OF ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 3, NANDED VS. THE OMERGA JANTA SAHAKARI BANK LTD, OSMANABAD ITA NO. 350/PN/2013 AND CO NO. 61/PN/2013 DATED 31 - 10 - 2013. HE ALSO PLACED HIS RELIANCE ON THE DECISION OF THE ITAT, A BENCH, PUNE IN THE CASE OF M/S. THE AJARA URBAN CO - OP. BANK LTD., KOLHAPUR VS. ACIT, KOLHAPUR ITA NOS. 2067 & 2068/PN/2013 DATED 31 - 12 - 2013. WE HAVE ALSO HEARD THE LD. DR, WHO PLACED HIS RELIANCE ON THE DECISION OF THE HONBLE MADRAS HIGH COURT OF MADRAS IN THE CASE OF CIT VS. SAKTHI FINANCE LTD., (2013) 31 TAXMANN.COM 305 (MADRAS). 4. WE FIND THAT THE IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE ITAT, A BENCH, PUNE IN THE CASE OF THE OMERGA JANTA SAHAKARI BANK LTD., OSMANABAD (SUPRA). THE OPERAT IVE PART OF THE REASONING AND FINDING IN THE SAID DECISION IS AS UNDER: 3 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN SO FAR AS THE APPLICABILITY OF SECTION 43D OF THE ACT TO THE ASSESSEE IS CONCERNED, THERE IS A CONVERGENCE OF OPINION BETWEEN THE ASSESSEE AND THE REVENUE TO THE EFFECT THAT THE SAME IS NOT APPLICABLE TO THE ASSESSEE. OSTENSIBLY, ASSESSEE IS A CO - OPERATIVE BANK CARRYING ON BANKING BUSINESS IN TERMS OF A LICENSE GRANTED BY RBI AND IS NOT A SCHEDULED BANK INCLUDED IN SECOND SCH EDULE OF RBI SO AS TO FALL WITHIN THE SCOPE OF SECTION 43D OF THE ACT. NOTABLY, SECTION 43D OF THE ACT PRESCRIBES THAT INTEREST INCOME ON SUCH CATEGORIES OF BAD AND DOUBTFUL DEBTS AS PRESCRIBED BY THE RBI GUIDELINES SHALL BE CHARGEABLE TO TAX IN THE YEAR IN WHICH SUCH INTEREST INCOME IS CREDITED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT OR IN THE YEAR OF ACTUAL RECEIPT, WHICHEVER IS EARLIER. SINCE ASSESSEE IS NOT AN ENTITY COVERED WITHIN THE SCOPE OF SECTION 43D OF THE ACT, THE PRESENT CONTROVERSY CA NNOT BE ADJUDICATED IN THE LIGHT OF SECTION 43D OF THE ACT, AND IT IS LIABLE TO BE DECIDED ON GENERAL PRINCIPLES AS TO WHETHER THE IMPUGNED INCOME HAS ACCRUED TO THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. 9. IN THIS CONNECTION, WE FIND THAT THE VI SAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL CONTROVERSY. THE ASSESSEE BEFORE THE VISAKHAPATNAM BENCH WAS A CO - OPERATIVE BANK OPERATING UNDER A LICENSE ISSUED BY RBI BUT WAS NOT A SCHEDULED BANK SO AS TO FALL WITHIN THE SCOPE OF SECTION 43D OF THE ACT. THE ISSUE RELATED TO TAXABILITY OF INTEREST INCOME RELATING TO NPAS, WHICH AS PER THE REVENUE WAS LIABLE TO BE TAXED ON ACCRUAL BASIS IN LINE WITH MERCANTILE SYSTEM OF ACCOUNTIN G ADOPTED BY THE ASSESSEE THEREIN. THE ASSESSEE, ON THE OTHER HAND, CONTENDED THAT HAVING REGARD TO THE GUIDELINES ISSUED BY RBI REGARDING ACCOUNTING OF INTEREST ON NPAS, NO INTEREST INCOME ACCRUED IN RESPECT OF NPAS AND THAT THE SAME WAS TO BE TAXED ONLY ON RECEIPT BASIS. THE TRIBUNAL OBSERVED THAT THE QUESTION OF TAXABILITY OF INTEREST ON NPAS CLASSIFIED BY RBI, WAS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) WHEREIN AFTER CONSIDERING THE DECISION OF TH E HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IT WAS HELD THAT INTEREST INCOME RELATABLE TO NPAS WAS 4 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI NOT INCLUDIBLE IN TOTAL INCOME ON ACCRUAL BASIS SINCE THE SAME DID NOT ACCRUE TO THE ASSESSEE. THE FOLLOWING DISCUSSION BY THE VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) IS WORTHY OF NOTICE : - 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULLY PERUSED THE RECORD. THE QUESTION OF TAXABILITY OF INTEREST ON NPAS HAS BEEN CONSI DERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD (SUPRA); WHEREIN THE HON'BLE DELHI HIGH COURT TOOK INTO ACCOUNT THE DECISION RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). IN THE CAS E OF M/S VASISTH CHAY VYAPAR LTD, THE ASSESSEE THEREIN WAS A NON BANKING FINANCIAL COMPANY AND IT WAS ALSO BOUND BY THE PRUDENTIAL NORMS DIRECTIONS ISSUED BY THE RESERVE BANK OF INDIA FOR INCOME RECOGNITION AND ASSET CLASSIFICATION. THE ASSESSEE DID NOT INCLUDE THE INTEREST INCOME RELATABLE TO NPA ASSETS IN ITS TOTAL INCOME. THE ASSESSING OFFICER, HOWEVER, ADDED THE SAID INTEREST AS THE INCOME OF THE ASSESSEE BY HOLDING THAT IT HAD ACCRUED TO THE ASSESSEE EVEN IT WAS NOT REALIZED AS THE ASSESSEE WAS FOL LOWING MERCANTILE SYSTEM OF ACCOUNTING. THE LEARNED CIT (A) AFFIRMED THE ORDER OF THE ASSESSING OFFICER. HOWEVER, THE ITAT DELETED THE AFORESAID INCOME. HENCE THE REVENUE PREFERRED APPEAL BEFORE THE HON'BLE DELHI HIGH COURT. 8.1 AFTER HEARING THE RIVAL SU BMISSIONS, THE HON'BLE DELHI HIGH COURT TOOK NOTE OF SEC.45Q OF RESERVE BANK 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 CO NTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. 5 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI THE HIGH COURT TOOK NOTE OF THE FACT THAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA HAS OVERRIDING EFFECT OVER ANY OTHER LAW. THEN THE HON 'BLE HIGH COURT ALSO CONSIDERED ACCOUNTING STANDARD AS - 9 ON REVENUE RECOGNITION AND ALSO EXTRACTED FOLLOWING RELEVANT PORTION FROM THE SAID ACCOUNTING STANDARD: 9. EFFECT OF UNCERTAINTIES ON REVENUE RECOGNITION 9.1 RECOGNITION OF REVENUE REQUIRES THA T REVENUE IS A MEASURABLE AND THAT AT THE TIME OF SALE OR THE RENDERING OF THE SERVICE, IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIMATE COLLECTION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAISING ANY CLAIM, E.G., FOR ESCALATION OF PRICE, EXPORT INCENTIVES, INTEREST ETC., REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES, IT MAY BE APPROPRIATE TO RECOGNIZE REVENUE ONLY WHEN IT IS REASONABLY CERTAIN THAT T HE ULTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAINTY AS TO ULTIMATE COLLECTION, REVENUE IS RECOGNIZED AT THE TIME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENTS. 9.3 WHEN THE UNCERTAINTY RELATING TO COLLECTABILI TY ARISES SUBSEQUENT TO THE TIME OF SALE OR THE RENDERING OF THE SERVICE, IT IS MORE APPROPRIATE TO MAKE A SEPARATE PROVISION TO REFLECT THE UNCERTAINTY RATHER THAN TO ADJUST THE AMOUNT OF REVENUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RE COGNITION OF REVENUE IS THAT THE CONSIDERATION RECEIVABLE FOR THE SALE OF GOODS, THE RENDERING OF SERVICES OR FROM THE USE OF OTHERS OF ENTERPRISE RESOURCES IS REASONABLY DETERMINABLE. WHEN SUCH CONSIDERATION IS NOT DETERMINABLE WITHIN REASONABLE LIMITS, T HE RECOGNITION OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO THE EFFECT OF UNCERTAINTIES, IT IS CONSIDERED AS REVENUE OF THE PERIOD IN WHICH IT IS PROPERLY RECOGNIZED. 6 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI 8.2 THE DELHI HIGH COURT ALSO CONSIDERED THE DECISION RENDERED IN THE FOLLOWING CASES: I) CIT VS. ELGI FINANCE LTD., 293 ITR 357 (MAD) II) CIT VS. KKM INVESTMENTS (CAL) SLP DISMISSED BY 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 (S C) 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 T HE ACCOUNTING STANDARD 9 AND THE VARIOUS CASE LAW LISTED ABOVE, THE HON'BLE DELHI HIGH COURT HELD THAT THE INTEREST ON NPA ADVANCE CANNOT BE TREATED AS ACCRUED TO THE ASSESSEE. 8.4 BEFORE THE DELHI HIGH COURT, THE REVENUE TOOK SUPPORT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). THE DELHI HIGH COURT CONSIDERED THE SAID DECISION OF HON'BLE APEX COURT AND EXPLAINED THE SAME AS UNDER: WE HAVE ALREADY HELD THAT EVEN UNDER THE INCOME TAX ACT, INTEREST INCOME HAD NOT ACCRUED. MOREOVER, THIS SUBMISSION OF MR. SABHARWAL IS BASED ENTIRELY ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGY (SUPRA). NO DOUBT, IN FIRST BLUSH, READING OF THE JUDGMENT GIVES AN INDICATION THAT THE COURT HAS HELD TH AT RESERVE BANK OF INDIA ACT DOES NOT OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT. HOWEVER, WHEN WE EXAMINE THE ISSUE INVOLVED THEREIN MINUTELY AND DEEPLY IN THE CONTEXT IN WHICH THAT HAD ARISEN AND CERTAIN OBSERVATIONS OF THE APEX COURT CONTAINED IN THA T VERY JUDGMENT, WE FIND THAT THE PROPOSITION ADVANCED BY MR.SABHARWAL MAY NOT BE ENTIRELY CORRECT. IN THE CASE BEFORE THE SUPREME COURT, THE ASSESSEE A NBFC DEBITED RS.81,68,516 AS PROVISION AGAINST NPA IN THE 7 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI 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 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 DEDUCTIBI LITY 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 S UCH DEDUCTIONS/EXCLUSIONS SATISFY THE RELEVANT CONDITIONS STIPULATED THEREFORE UNDER THE ACT. TO THAT EXTENT, IT WAS OBSERVED THAT THE PRUDENTIAL NORMS DO NOT OVERRIDE THE PROVISIONS OF THE ACT. HOWEVER, THE APEX COURT MADE A DISTINCTION WITH REGARD TO IN COME 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 INCOME TAX ACT. IT CAN BE SAID, THEREFORE, THAT THE APEX CO URT APPROVED THE REAL INCOME THEORY WHICH IS ENGRAINED 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 MATTER INTO TWO PARTS VIZ., A) INCOME REC OGNITION AND B) PERMISSIBLE DEDUCTION/EXCLUSIONS UNDER THE INCOME TAX ACT. IN SO FAR AS INCOME RECOGNITION IS CONCERNED, THE HON'BLE SUPREME COURT HELD THAT SECTION 145 OF THE INCOME TAX ACT HAS NO ROLE TO PLAY AND THE ASSESSING OFFICER HAS TO FOLLOW RESER VE BANK OF INDIA DIRECTIONS 1998, SINCE BY VIRTUE OF 45Q OF THE RESERVE BANK OF INDIA ACT, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS OF RESERVE BANK OF INDIA VIS - - VIS INCOME RECOGNITION PRINCIPLES IN THE COMPANIES ACT 1956. IN SO FAR AS COMPUTATION OF INCOME UNDER THE INCOME TAX ACT IS 8 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI CONCERNED, (WHICH INVOLVES DEDUCTION OF PERMISSIBLE DEDUCTIONS AND EXCLUSIONS) THE ADMISSIBILITY OF SUCH DEDUCTIONS SHALL BE GOVERNED BY THE PROVISIONS OF THE INCOME TAX ACT. THE RELEVANT OBSERVATIONS OF THE HON'BLE SU PREME COURT ARE EXTRACTED BELOW: APPLICABILITY OF SECTION 145 40. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE RBI DIRECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER CHAPTER IIIB OF THE RBI ACT, 1934. THESE NORMS DEAL ESSENTIALLY WITH INCOME RECOGNITION. THEY FORCE THE NBFCS TO DISCLOSE THE AMOUNT OF NPA IN THEIR FINANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO REFLECT TRUE AND CORRECT PROFITS. BY VIRTUE OF SECTION 45Q, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS 1998 VIS - - 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 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 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 PROFITS. HOWEVER , HERE IS THE CASE WHERE THE AO HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998 IN VIEW OF SECTION 45Q OF THE RESERVE BANK OF INDIA ACT. HENCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE 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 BANK OF INDIA. HENCE THE DIRECTIONS WITH REGARD TO THE 9 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI PRUDENTIAL NORMS ISSUED BY THE RESE RVE BANK OF INDIA 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), THAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA ACT HAS AN OVERRIDING EFFECT VIS - - VIS INCOME RECOGNITION PRINCIPLE UNDER THE COMPANIES ACT. HENCE SEC.45 Q OF THE RBI ACT SHALL HAVE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIVE BANKS ALSO. HENCE THE ASSESSING OFFICER HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998, AS HELD BY THE HON'BLE SUPREME COURT. 10.1 BASED ON THE PRUDENTIAL NORMS, THE ASSESSEE HEREIN DID NOT ADMIT THE INTEREST RELATABLE TO NPA ADVANCES IN ITS TOTAL INCOME. THE HON'BLE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD (SUPRA) HAS HELD THAT THE INTEREST ON NPA ASSETS CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE. IN THIS REGARD, THE FOLLOWING OBSERVATIONS OF HON'BLE DELHI HIGH COURT IN THE ABOVE CITED CASE ARE RELEVANT: WH AT TO TALK OF INTEREST, EVEN THE PRINCIPLE AMOUNT ITSELF HAD BECOME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LEGITIMATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NOT ACCRUED. THE SAID DECISION OF THE HON'BLE DELHI HIGH COURT IS EQUALLY APPLIC ABLE 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. FOLLOWIN G THE AFORESAID DISCUSSION, WHICH HAS BEEN RENDERED ON AN IDENTICAL ISSUE UNDER SIMILAR CIRCUMSTANCES, WE FIND NO REASONS TO INTERFERE WITH THE ULTIMATE CONCLUSION OF THE CIT(A) IN DELETING THE IMPUGNED ADDITION RELATING TO INTEREST INCOME IN RESPECT OF NP AS. 10 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI 11. SO, HOWEVER, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SAKTHI FINANCE LTD., (2013) 31 TAXMANN.COM 305 (MADRAS) HAS DIFFERED WITH THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) ON A SIMILAR ISSUE, I.E. RELATING TO INTEREST INCOME ON NPAS. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER POINTED OUT THAT THE HONBLE MADRAS HIGH COURT FOLLOWED THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IN HOLDING THAT INTEREST ON NPAS WAS ASSESSABLE TO TAX ON ACCRUAL BASIS. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS PUT - FORTH BY THE LEARNED DEPARTMENTAL REPRESENTATIVE BASED ON THE JUDGEMENT OF THE H ONBLE MADRAS HIGH COURT IN THE CASE OF SAKTHI FINANCE LTD. (SUPRA). THE CONTROVERSY BEFORE THE HONBLE MADRAS HIGH COURT RELATED TO NON - RECOGNITION OF INTEREST INCOME ON NPAS BY THE ASSESSEE FOLLOWING THE RBI GUIDELINES. THE HONBLE MADRAS HIGH COURT TO OK THE VIEW THAT THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) ALSO APPLIED TO THE INCOME RECOGNITION NORMS PROVIDED BY RBI AND THEREFORE IT HELD THE INTEREST INCOME ON NPAS IS LIABLE TO BE TAXED ON ACCRUAL BA SIS AND NOT IN TERMS OF RBIS GUIDELINES. BUT THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) HAS TAKEN A VIEW THAT SOUTHERN TECHNOLOGIES LTD. (SUPRA) CASE DID NOT APPLY TO THE INCOME RECOGNITION NORMS PRESCRIBED BY RBI. OSTENSIBLY, THERE IS DIVERGENCE OF OPINION BETWEEN THE HONBLE DELHI HIGH COURT AND THE HONBLE MADRAS HIGH COURT AS NOTED BY THE HONBLE MADRAS HIGH COURT IN ITS ORDER. 12. IN SO FAR AS, PRESENT CASE IS CONCERNED THERE IS NO JUDGMENT OF THE JURISDICTION AL HIGH COURT. WE ARE FACED WITH TWO CONTRARY JUDGMENTS OF THE NON - JURISDICTIONAL HIGH COURT. IN SUCH A SITUATION, WE ARE INCLINED TO PREFER A VIEW WHICH IS FAVOURABLE OF THE ASSESSEE FOLLOWING THE JUDGEMENT OF THE HONBLE 11 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI SUPREME COURT IN THE CASE OF CI T 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 OR DER OF THE CIT(A) IS LIABLE TO THE AFFIRMED. WE HOLD SO. 4. WE, THEREFORE, FOLLOWING THE LEGAL PRINCIPLES LAID DOWN IN THE CASE OF THE OMERGA JANTA SAHAKARI BANK LTD. (SUPRA) CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS ISSUES AND GROUND NO. 1 STANDS DI SMISSED. 5. THE GROUND NO. 2 READS AS UNDER: 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) IS CORRECT IN HOLDING THAT THE FORFEITED AMOUNT OF THE DIVIDEND IS NOT AN INCOME OF THE ASSESSEE U/S. 28 OF THE ACT. 6. IT WAS NOTIC ED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS CREDITED TO R ESERVE F UND AN AMOUNT TO THE EXTENT OF RS. 14,08,302/ - WHICH WAS ON ACCOUNT OF UNCLAIMED DIVIDEND. THE ASSESSEE HAS SHOWN THE UNCLAIMED DIVIDEND AT LIABILITIES SIDE OF THE BALANCE SHEET BUT IN THIS YEAR THE SAME IS CREDITED TO THE R ESERVE F UND. THE ASSESSING OFFICER HAS NOTED THAT THE DIVIDEND IS DECLARED BY THE BANK OUT OF ITS PROFIT AS PER ITS RULES AND REGULATIONS. THE ASSESSING OFFICER H AS FURTHER OBSERVED THAT THE ASSESSEE HAS FORFEITED T HE DIVIDEND PAYABLE AND AMOUNT CREDITED TO RESERVE FUND WHICH IS OTHERWISE PAYABLE TO THIRD PARTY I.E. SHAREHOLDERS. THE ASSESSEE EXPLAINED TO THE ASSESSING OFFICER THAT THE BANK HAD DECLARED DIVIDEND FOR THE YEAR 2005 - 06 AND OUT OF THE TOTAL DIVIDEND PAY ABLE TO THE SHAREHOLDERS, A BALANCE OF RS.14,08,302/ - REMAINED UNCLAIMED BY THE SHAREHOLDERS. AS PER THE REGULATIONS OF THE BANK AND THE RESERVE BANK DIRECTIONS, SAID UNCLAIMED DIVIDEND IS TRANSFERRED TO THE RESERVE FUND. THE ASSESSEE ALSO PLEADED THAT T HE UNCLAIMED DIVIDEND CANNOT BE SUBJECTED TO TAX U/S. 41(1) AS THE ASSESSEE HAS NOT 12 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI CLAIMED ANY EXPENDITURE TOWARDS UNCLAIMED DIVIDEND. THE ASSESSEE ALSO CONTENDED THAT THE PROVISION F OR DIVIDEND IS CONSIDERED AS AN APPROPRIATION OF THE PROFIT AFTER TAX A ND IT CAN NEVER BE STATED TO BE A TRADING LIABILITY OF THE BANK. THE ASSESSING OFFICER WAS NOT IMPRESSED WITH THE EXPLANATION OF THE ASSESSEE . I N HIS OPINION THE DECISION OF THE APEX COURT IN THE CASE OF T.V. SUNDARAM IYENGAR AND SONS LTD. 222 ITR 344 (S C) IS APPLICABLE AND AS PER THE PRINCIPLES LAID DOWN OF THE APEX COURT IN THE SAID DECISION THE UNCLAIMED DIVIDEND WHICH IS CREDITED TO THE RESERVE FUND IS LIABLE TO BE TAXED IN THE HANDS OF THE ASSESSEE. H E, THEREFORE, MADE THE ADDITION OF RS.14,08,302/ - . THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT(A) AND LD. CIT(A) DELETED THE ADDITION. NOW, THE REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD THE LD. DR. 7. WE FIND THAT THIS ISSUE ALSO STANDS COVERED IN FAVOUR OF THE ASSESSEE BANK BY THE DECISION OF THE ITAT, A BENCH, PUNE IN THE CASE OF A CIT, CIRCLE - 1, AURANGABAD VS. M/S. SUNDERLAL SAWJI URBAN C O - OP. BANK LTD., ITA NO. 2353/PN/2012 DATED 24 - 09 - 2013. IN THE CASE OF M/S. SUNDERLAL SAWJI URBAN C O - OP. BANK LTD. (SUPRA) THE IDENTICAL CONTROVERSY HAS BEEN CONSIDERED BY THE ITAT, A BENCH, PUNE AND OPERATIVE PART OF THE SAID DECISION IS AS UNDER: 7. WE HAVE HEARD THE PARTIES. IN THIS CASE, IT IS NOT CONTROVERTED BEFORE US BY THE LD. DR THAT THE DIVIDEND WHICH IS FORFEITED WAS PROVIDED FROM THE BUSINE SS PROFIT WHICH HAS ALREADY SUFFERED THE TAX. IN OUR OPINION, AS RIGHTLY HELD BY THE LD.CIT(A), THE PROVISIONS OF SECTION 41(1) ARE NOT APPLICABLE TO THE ISSUE BEFORE US AS THE SAID PROVISION OPERATE IN THE DIFFERENT SITUATION. IN THE CASE OF T.V. IYENGA R AND SONS LTD (SUPRA) APPLICABILITY OF THE SECTION 41(1) WAS BEFORE THE HONBLE SUPREME COURT BUT IN PRESENT CASE SECTION 41(1) ITSELF IS NOT APPLICABLE, THEN WE NEED NOT DISCUSS THE PRINCIPLES LAID DOWN IN THE SAID DECISION. WE FIND NO FAULT IN DELETING THE ADDITION BY THE LD.CIT(A), WHICH IS AS PER LAW. WE ACCORDINGLY CONFIRM THE ORDER OF THE LD.CIT(A) AND DISMISS THE GROUND NO.2 TAKEN BY THE REVENUE. 13 ITA NO. 1500 /PN/2013, PEOPLES CO - OP. BANK LTD., HINGOLI 8. IN THE PRESENT CASE ADMITTEDLY THERE IS NO DISPUTE ABOUT THE FACT THAT PROVISION TOWARDS THE DIVIDE ND IS OUT OF AN APPROPRIATION OF THE PROFIT WHICH HAS ALREADY OFFERED FOR TAX. WE, THEREFORE, FIND NO REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A) AS HE HAS RIGHTLY HELD THAT THE UNCLAIMED DIVIDEND CANNOT BE TREATED AS AN INCOME OF THE ASSESSEE U/ S. 28 OF THE INCOME TAX ACT. THE LD. CIT(A) HAS FOLLOWED THE DECISION OF THE ITAT, PUNE IN THE CASE OF GULSHAN MERCANTILE URBAN CO - OP. BANK LTD., ITA NO. 4981/DEL/2010 DATED 29 - 04 - 2011. WE, THEREFORE, FIND NO REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A). ACCORDINGLY, SAME IS CONFIRM ED . 9. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 27 - 0 8 - 20 1 4 SD/ - SD/ - ( G . S . PAN NU ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 27 TH AUGUST, 20 1 4 COPY TO 1 ASSESSEE 2 DEPARTMENT 3 THE CIT(A) , AURANGABAD 4 THE CIT, AURANGABAD 5 THE DR, ITAT, B BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME T AX APPELLATE TRIBUNAL PUNE