ITO, Ward 1(3), Jalna V. Mahesh Nagari Sahakari Pat Sanstha Ltd., Jalna

ITA 1874/PUN/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76283 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 01-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Keywords: Bad and doubtful debts
• Section: 145; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1874 / P N/ 20 1 2 ASSESSMENT YEAR : 200 9 - 10 INCOME - TAX OFFICER, WARD - 1(3), JALN A (APPELLANT) VS. MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., F.H. - 14, 1 ST FLOOR, SWAMI COMPLEX, SAROJANIDEVI ROAD, JALNA (RESPONDENT) PAN NO. AAAAM5643C APPELLANT BY: SHRI S.P. WALIMBE RESPONDENT BY: SMT. DEEPA KHARE DATE OF HEARING : 18 - 03 - 2014 DATE OF PRONOUNCEMENT : 25 - 03 - 2014 ORDER PER R.S . PADVEKAR , JM : - THIS APPEAL IS FILED BY THE REVENUE CHALLENGING THE IMPUGNED ORDER OF THE LD. CIT(A) , AURANGABAD DATED 25 - 07 - 2012 FOR THE A.Y. 200 9 - 10. IN PLACE OF ORIGINAL GROUNDS THE REVENUE HAS FILED THE FOLLOWING GROUNDS: 1. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HONOURABLE CIT(A), AURANGABAD, ERRED IN NOT APPRECIATING THE FACTS THAT, THE ACTIVITIES OF THE COOPERATIVE CREDIT SOCIETY IS SIMILAR TO THE COOPERATIVE BANKING, A DEDUCTION FRO M GROSS TOTAL INCOME IN RESPECT OF INCOME OF COOPERATIVE CREDIT SOCIETY ENGAGED ENTIRELY IN COOPERATIVE BANKING ACTIVITIES UNDER SECTION 80P(2)(A)(I) OF THE IT ACT,1961 SHALL NOT BE ELIGIBLE FOR DEDUCTION. A RELIANCE IS PLACED ON THE DECISION OF HONOURABLE MADRAS HIGH COURT IN THE CASES OF STATE BANK OF INDIA STAFF COOPERATIVE SOCIETY LIMITED & OTHERS VS. ITO REPORTED IN 233 ITR 144 (1998) AND SYNDICATE BANK EMPLOYEES COOPERATIVE THRIFT & CREDIT SOCIETY LIMITED VS. ITO REPORTED IN 287 ITR 40 (2006) WHEREIN IT WAS HELD THAT THE ACTIVITIES SIMILAR TO THAT OF THE ASSESSEE COOPERATIVE SOCIETY WERE HELD TO BE AKIN TO BANKING ACTIVITIES. 2 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 2. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HONOURABLE CIT(A), AURANGABAD ERRED IN NOT APPRECIATING THE FACTS THAT, CLAU SE (VIIA) INSERTED IN SECTION 2(24) BY THE FINANCE ACT, 2006 TO PROVIDE THAT THE PROFITS AND GAINS OF BUSINESS OF BANKING INCLUDES INCOME OF CREDIT CO - OPERATIVE SOCIETIES FROM PROVIDING CREDIT FACILITIES TO ITS MEMBERS. 3. UNDER THE FACTS AND CIRCUMSTANCES O F THE CASE, THE HONOURABLE CIT(A), AURANGABAD ERRED IN NOT APPRECIATING THE FACTS THAT, THE AMENDMENT TO SECTION 80P(4) BY FINANCE ACT, 2006 PROVIDES THAT THE PROVISIONS OF SECTION 80P SHALL NOT APPLY IN RELATION TO CO - OPERATIVE BANK OTHER THAN PRIMARY AGR ICULTURAL CREDIT SOCIETY AND PRIMARY CO - OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK. 4. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HONOURABLE CIT(A), AURANGABAD ERRED IN NOT APPRECIATING THE FACTS THAT, THE EXPLANATION TO SECTION 80P(4) LAID DO WN THAT A 'CO - OPERATIVE BANK' SHALL HAVE THE MEANING ASSIGNED TO IT IN PART - V OF THE BANKING REGULATION ACT, 1949. 2. THE BRIEFLY STATED FACTS ARE AS UNDER. THE ASSESSEE IS A CO - OPERATIVE SOCIETY ENGAGED IN PROVIDING CREDIT FACILITIES TO ITS MEMBERS. T HE ASSESSEE FILED THE RETURN OF INCOME CLAIMING THE DEDUCTION U/S. 80P (2)(A)(I) OF THE INCOME - TAX ACT TO THE EXTENT OF RS.52,87,029/ - . THE ASSESSING OFFICER DENIED THE DEDUCTION TO THE ASSESSEE AND REASONS GIVEN BY THE ASSESSING OFFICER FOR DENYING THE D EDUCTION WHICH CAN BE SUMMARIZED AS UNDER: (1). THE APPELLANT CREDIT COOPERATIVE IS A PRIMARY COOPERATIVE BANK AS PER EXPLANATION BELOW SUB - SECTION 4 OF SECTION SOP AND HENCE NOT ELIGIBLE TO CLAIM DEDUCTION U/S 80P(2)(A)(I) OF THE I.T. ACT. (2). THE CLAUSE (VIIA) INSERTED IN SECTION 2(24) BY THE FINANCE ACT, 2006 TO PROVIDE THAT THE PROFITS AND GAINS OF BUSINESS OF BANKING INCLUDES INCOME OF CREDIT COOPERATIVE SOCIETIES FROM PROVIDING CREDIT FACILITIES TO ITS MEMBERS. 3 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA (3). THE AMENDMENT TO SECTION 80(4) BY FINANCE ACT, 2006 PROVIDES THAT THE PROVISIONS OF SECTION 8 OP SHALL NOT APPLY IN RELATION TO COOPERATIVE BANK OTHER THAN PRIMARY AGRICULTURAL CREDIT SOCIETY AND PRIMARY COOPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK. (4). THE EXPLANATION TO SECTION 8 0P(4) LAID DOWN THAT A 'CO - OPERATIVE BANK' SHALL HAVE THE MEANING ASSIGNED TO IT IN PART - V OF THE BANKING REGULATION ACT, 1949. (5). AS PER CLARIFICATION ISSUED BY CBDT IN F.N0.133/06/2007 - TPL VIDE LETTER DATED 09/05/2008, CO - OPERATIVE BANK SHALL HAVE THE MEANING ASSIGNED TO IT IN PART - V OF THE BANKING REGULATION ACT, 1949. AS PER PART - V OF THE BANKING REGULATION ACT, 'CO - OPERATIVE BANKS' MEANS A STATE CO - OPERATIVE BANK, A CENTRAL CO - OPERATIVE BANK AND PRIMARY CO - OPERATIVE BANK. (6). CLAUSE (CCI) OF SECTION - 5 DEFINES A COOPERATIVE BANK TO INCLUDE A PRIMARY COOPERATIVE BANK AND CLAUSE (CCII) DEFINES A COOPERATIVE CREDIT SOCIETY TO MEAN COOPERATIVE SOCIETY THE PRIMARY OBJECT OF WHICH IS TO PROVIDE FINANCIAL ACCOMMODATION TO ITS MEMBERS. CLAUSE (CCV) DEFINES A PRIMARY COOPERATIVE BANK IS A COOPERATIVE SOCIETY WHOSE PRIMARY OBJECTIVE OR PRINCIPAL BUSINESS IS TRANSACTING IN BANKING BUSINESS WHOSE PAID - UP CAPITAL AND RESERVE IS MORE THAN RS.1,00,000/ - ETC. (7). THE REPORT OF MADHAVARAO COMMITTEE 1999 FORMED BY RBI SUPPORTS THE VIEW THAT PRIMARY CREDIT COOPERATIVE SOCIETIES AUTOMATICALLY BECOMES A PRIMARY COOPERATIVE BANK AND HENCE IT HAS TO APPLY TO RBI FOR A LICENCE TO CARRY ON BANKING BUSINESS BUT IT CAN CARRY ON BANKING BUSINESS UNTIL IT IS GRANTED A LICENCE OR N OTIFIED THAT A LICENCE CANNOT BE GRANTED TO IT. (8). THE APPELLANT IS CARRYING ON THE BANKING ACTIVITY AS DEFINED IN SECTION - 5 OF THE BANKING REGULATION ACT AS PER WHICH 'BANKING MEANS THE ACCEPTING FOR THE PURPOSE OF LENDING OR INVESTMENT OF DEPOSITS OF M ONEY FROM THE PUBLIC REPAYABLE ON DEMAND OR OTHERWISE AND WITHDRAWAL BY CHEQUE, DRAFT ORDER OR OTHERWISE.' HOWEVER, THE TERM TRANSACTION IN BANKING BUSINESS WILL INCLUDE NOT ONLY THE BUSINESS ENUMERATED IN SECTION 5B OF BANKING REGULATION ACT, 1949 BUT ALS O THOSE ACTIVITIES. THIS VIEW IS SUPPORTED BY THE DECISIONS IN THE CASE OF CIT VS. AHMEDNAGAR DISTRICT CENTRAL 4 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA COOPERATIVE BANK LTD. (2003) 264 ITR 38, CIT VS. BARODA PEOPLES COOPERATIVE BANK LD. 280 ITR 282 (GUJ.) 3. IN SUM AND SUBSTANCE THE ASSESSING OF FICER IN TERPRETED SUB - SEC. ( 4 ) NEWLY INSERTED TO SEC. 80P AND CONCLUDED THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM THE DEDUCTION U/S. 80P(2)(A)(I) OF THE ACT. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT(A) AND LD. CIT(A) ALLOWED THE CLAIM OF THE ASS ESSEE. 4. WE HAVE HEARD THE PARTIES. THE LD. COUNSEL SUBMITS THAT THE ISSUE STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT, B BENCH, PUNE IN THE CASE OF ITO VS. JANKALYAN NAGARI SAHAKARI PAT SANSTHA LTD. (2012) TAXMAN.COM 127 (PUNE). IN THE CASE OF JANKALYAN NAGARI SAHAKARI PAT SANSTHA LTD. (SUPRA) THE IDENTICAL ISSUE HAS COME FOR CONSIDERATION AND THE TRIBUNAL HAS HELD AS UNDER: 4. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RECORDS. IN THIS CASE , AS PER THE FACTS ON RECORD, THE ASSESSEE IS A CO - OPERATIVE CREDIT SOCIETY. SECTION 80P HAS UNDERGONE AN AMENDMENT W.E.F. 1.4.2007 BY INSERTION OF SUB - SEC. (4) WHICH READS AS UNDER : (4) THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN RELATION TO ANY CO - OPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIETY OR A PRIMARY CO - OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK. EXPLANATION FOR THE PURPOSE OF THIS SUB - SECTION, - (A) CO - OPERATIVE BANK AND PRIMARY AGRICULTURAL CREDIT SOCIETY SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO THEM IN PART V OF THE BANKING REGULATION ACT, 1949 (10 OF 1949); (B) PRIMARY CO - OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK MEANS A SOCIETY HAVING ITS AREA OF OPERATION CONFINED TO A TALUK AND THE PRINCIPAL O BJECT OF WHICH IS TO PROVIDE FOR LONG - TERM CREDIT FOR AGRICULTURAL AND RURAL DEVELOPMENT ACTIVITIES. 5. IT IS TO BE MENTION HERE THAT UP TO A.Y. 2006 - 07, ANY CO - OPERATIVE SOCIETY WHICH WAS ENGAGED IN THE BUSINESS OF CARRYING ON 5 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA BANKING WAS ELIGIBLE FOR DEDUCTION IN RESPECT OF THE WHOLE OF THE AMOUNT OF PROFIT ATTRIBUTABLE TO ITS BANKING ACTIVITIES. FOR THE BENEFIT OF DECIDING THE PRESENT ISSUE, IT IS NECESSARY TO CONSIDER THE LEGAL POSITION AS APPLICABLE UP - TO THE A.Y. 2006 - 07, MORE PARTICULARLY IN VI EW OF SUB - SECTION (2) OF SEC. 80 - P. SECTION 80 P (2) READS AS UNDER : - 80P. (1) WHERE, IN THE CASE OF AN ASSESSEE BEING A CO - OPERATIVE SOCIETY, THE GROSS TOTAL INCOME INCLUDES ANY INCOME REFERRED TO IN SUB - SECTION (2), THERE SHALL BE DEDUCTED, I N ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, THE SUMS SPECIFIED IN SUB - SECTION(2), IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. (2) THE SUMS REFERRED TO IN SUB - SECTION (1) SHALL BE THE FOLLOWING, NAMELY : - (A) IN THE CASE OF A CO - OPERATIVE SOCIETY ENGAGED IN - (I) CARRYING ON THE BUSINESS OF BANKING OR PROVIDING CREDIT FACILITIES TO ITS MEMBERS, OR (II) A COTTAGE INDUSTRY, OR (III) THE MARKETING OF AGRICULTURAL PRODUCE GROWN BY ITS MEMBERS, OR (IV) THE PURCHASE OF AGRICULTURAL IMPLEMENTS, SE EDS, LIVESTOCK OR OTHER ARTICLES INTENDED FOR AGRICULTURE FOR THE PURPOSE OF SUPPLYING THEM TO ITS MEMBERS, OR (V) .. (VI) .. 6. SUB - SECTION (4) WAS INTRODUCED FOR WITHDRAWING THE DEDUCTION TO THE CO - OPERATIVE BANK OTHER THAN PRIMARY AGRICULTURE CREDIT SOCIETY OR PRIMARY CO - OPERATIVE AGRICULTURE AND RURAL DEVELOPMENT BANK. IN VIEW OF EXPLANATION BELOW SUB - SEC.(4) OF SEC. 80P, THE DEFINITION OF THE CO - OPERATIVE BANK AS ASSIGNED IN PARA 5 OF THE BANKING REGULATION ACT IS TO BE CONSIDERED. IN THE OPINION OF THE A.O, AS THE NATURE OF THE ACTIVITIES OF THE ASSESSEE CREDIT SOCIETY ARE ANALOGOUS TO THE BANKING ACTIVITIES, WHICH ARE MORE SPECIFICALLY 6 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA DESCRIBE IN THE BANKING REGULATION ACT AND HENCE, ASSESSEE PARTAKES THE CHARACTER OF PRIMARY CO - OPERATIVE BA NK AS DEFINED IN CLAUSE (CCII ) OF THE BANKING REGULATION ACT 1949. CLAUSE (CCI ) OF SEC 5 OF BR ACT DEFINES THE CO - OPERATIVE BANK MEANS STATE CO - OPERATIVE BANK, CENTRAL CO - OPERATIVE BANK AND PRIMARY CO - OPERATIVE BANK. 7. THE PRIMARY CO - OPERATIV E BANK IS TREATED AS CO - OPERATIVE BANK IN VIEW OF CL. (CCI) OF SEC 5 OF THE B. R. ACT, 1949. DEFINITION OF PRIMARY CO - OPERATIVE BANK IS GIVEN IN CL. (CCV) OF SEC. 5 OF B. R. ACT, 1949, WHICH READS AS UNDER; PRIMARY CO - OPERATIVE BANK MEANS A CO - OPERATI VE SOCIETY OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIETY (I) THE PRIMARY OBJECT OR PRINCIPAL BUSINESS OF WHICH IS THE TRANSACTIONS OF BANKING BUSINESS; (II) THE PAID - UP SHARE CAPITAL AND RESERVES OF WHICH ARE NOT LESS THAN ONE LACK OF RUPEES; AND (I II) THE BY - LAWS OF WHICH DO NOT PERMIT ADMISSION OF ANY OTHER CO - OPERATIVE SOCIETY AS A MEMBER: PROVIDED THAT THIS SUB - CLAUSE SHALL NOT APPLY TO THE ADMISSION OF CO - OPERATIVE BANK AS A MEMBER BY REASON OF SUCH CO - OPERATIVE BANK SUBSCRIBING TO SHARE CAPITAL OF SUCH CO - OPERATIVE SOCIETY OUT OF FUNDS PROVIDED BY STATE GOVERNMENT FOR THE PURPOSE. ON CAREFUL PERUSAL OF ABOVE DEFINITION IT IS SEEN THAT BASIC MANDATE ANY CO - OPERATIVE SOCIETY TO COVER IN DEFINITION OF PRIMARY CO - OPERATIVE BANK IS THAT ITS PR IMARY OBJECT OR PRINCIPAL BUSINESS SHOULD BE TRANSACTIONS OF BANKING BUSINESS. THE TERM BANKING IS DEFINED IN B. R. ACT AND AS PER SAID DEFINITION THERE IS NO RESTRICTION THAT DEPOSITOR SHOULD BE MEMBER OF SAID SOCIETY BUT IT IS PUBLIC AT LARGE WITH WHOM BUSINESS TRANSACTIONS CAN BE CARRIED OUT. OTHER TWO CONDITIONS AS MENTIONED IN CLS.(II) &(III) ARE ON FULFILLING FIRST CONDITION GIVEN IN CL.(I). IN PRESENT CASE NOTHING IS ON RECORD TO SUGGEST THAT ALL THREE CONDITIONS ARE FULFILLED TO HOLD THAT ASSESSEE WHICH IS A CO - OPERATIVE SOCIETY IS A PRIMARY CO - OPERATIVE BANK 8. IT IS PERTINENT TO NOTE HERE THAT THE DEFINITION OF THE CO - OPERATIVE CREDIT SOCIETY IS GIVEN IN CLAUSE (CCII) OF SEC. 5 WHICH READS AS UNDER : 7 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA CO - OPERATIVE CREDIT SOCIETY MEANS A CO - OPERATIVE SOCIETY, THE PRIMARY OBJECT OF WHICH IS TO PROVIDE FINANCIAL ACCOMMODATION TO ITS MEMBERS AND INCLUDES A CO - OPERATIVE LAND MORTGAGE BANK; 9. THE BANKING REGULATION ACT, 1949 DEFINES OF CO - OPERATIVE BANK IN CL.(CCI) OF SEC. 5 (AS INSERTED BY SEC. 56 OF THE SAID ACT) AND CO - OPERATIVE CREDIT SOCIETY IS NOT INCLUDED BUT ITS IDENTITY IS KEPT SEPARATE BY WAY OF INDEPENDENT DEFINITION IN VIEW OF CLAUSE (CCII) OF SEC. 5 OF THE BANKING REGULATION ACT WHICH DEFINES WHAT IS MEANING OF CREDIT CO - OPERATIVE SOCIETY. ON PLAIN READING OF THE BANKING REGULATION ACT, 1949, NOWHERE IT IS SUGGESTED THAT THE TERM CO - OPERATIVE BANK ALSO INCLUDES CO - OPERATIVE CREDIT SOCIETY ALSO. MEANING OF ANY TERM OR EXPRESSION IS TO BE ASCERTAINED IN THE CO NTEXT OF PROVISIONS OF REFERRED ACT. AS PER SUB - SEC. (4) OF SEC. 80P OF THE I. T. ACT, CO - OPERATIVE BANK MEANS STATE CO - OPERATIVE BANK, A CENTRAL CO - OPERATIVE BANK AND A PRIMARY CO - OPERATIVE BANK. IT IS SEEN THAT CO - OPERATIVE BANK IS DEPRIVED OF THE BENEFI T OF THE DEDUCTION U/S. 80P(2)(A)(I) OF THE ACT. AS PER THE INTERPRETATION GIVEN BY THE AO, ASSESSEE CO - OPERATIVE CREDIT SOCIETY PARTAKES THE CHARACTER OF THE PRIMARY CO - OPERATIVE BANK AND AS THE PRIMARY CO - OPERATIVE BANK IS INCLUDED IN THE DEFINITION OF THE CO - OPERATIVE BANK AND HENCE, IS NOT ENTITLED TO THE BENEFITS OF SEC. 80P(2)(A)(I) OF I. T. ACT. IN OUR OPINION, THIS IS NOT THE CORRECT INTERPRETATION. IT IS WELL SETTLED PRINCIPLE IN THE INTERPRETATION OF THE TAXING PROVISIONS THAT THE SAME ARE TO BE STRICTLY CONSTRUED AND THERE IS N ROOM FOR ANY INTENDMENT. THERE IS NO PRESUMPTION AS TO TAX.NOTHING IS TO BE READ OR NOTHING IS TO BE IMPLIED. ONE HAS TO FAIRLY LOOK INTO LANGUAGE USED BY THE PARLIAMENT. THE PARLIAMENT HAS ADOPTED THE DEFINITION OF THE CO - OPERATIVE BANK BY REFERING THE SAME AS GIVEN IN THE BANKING REGULATION ACT, 1949. IT IS CALLED LEGISLATION BY REFERENCE AND WE HAVE TO GIVE THE STRICT INTERPRETATION WHILE INTERPRETING THE EFFECT OF SUB - SEC. (4) TO SEC. 80 P. IN OUR OPINION, C O - OPERATIVE CREDIT SOCIETY IS DISTINCT AND SEPARATE FROM THE CO - OPERATIVE BANK NOR IT CAN BE SAID AS A PRIMARY CO - OPERATIVE BANK WITHIN THE MEANING OF BANKING REGULATION ACT, 1949. HENCE, THE ASSESSEEEE BEING A CO - OPERATIVE CREDIT SOCIETY IS ENTITLED FOR DEDUCTION U/S. 80 P(2)(A)(I) OF THE ACT. WE ACCORDINGLY UPHOLD THE ORDER OF THE LD CIT(A). 8 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 5. WE, THEREFORE, FOLLOWING THE PRINCIPLES LAID DOWN IN THE CASE OF JANKALYAN NAGARI SAHAKARI PAT SANSTHA LTD. (SUPRA) CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. MOREOVER THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HON'BLE HIGH COURT OF GUJARAT IN THE CASE OF CIT, GANDHINAGAR VS. JAFARI MOMIN VIKAS CO - OP. CREDIT SOCIETY LTD. ITA NOS. 442, 443 AND 863 OF 2013 ORDER DATED 15 - 01 - 2014. ACCORD INGLY, GROUND NOS. 1, 2 AND 3 ARE DISMISSED. 6. SO FAR AS GROUND NO. 4 IS CONCERNED, WHICH IS IN RESPECT OF THE INTEREST ON NPA A/C. IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE SOCIETY IS NOT INCLUDING THE INTEREST ON NPA IN ITS TOTAL INCOM E A S NOTED BY THE ASSESSING OFFICER TO THE EXTENT OF RS.2,54,733/ - THE ASSESSEE HAS NOT INCLUDED THE INTEREST ON THE NPA A/C. THE ASSESSING OFFICER, ACCORDINGLY, BROUGHT TO TAX THE SAID AMOUNT. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT(A) AND LD. CIT(A) HELD AS UNDER: 6.4. IN VIEW OF THE ABOVE FACTS AND DISCUSSION, CIRCULARS ISSUED BY RBI AND CBDT, THE RATIO LAID DOWN BY THE VARIOUS DECISIONS RELIED ON BY THE APPELLANT AND ALSO THE DECISIONS REFERRED TO IN EARLIER PARA, I AM OF THE CONSIDERED VIEW THAT THE A.O. IS NOT JUSTIFIED IN MAKING THIS ADDITION. THE A.O. IS DIRECTED TO DELETE THE ADDITION AND WHILE DOING SO THE A.O. IS ALSO DIRECTED TO OBTAIN THE FOLLOWING DETAILS FROM THE APPELLANT (A) THE DETAILS OF NPA ACCOUNT WITH NPA STATEMENTS OF BANK S SUBMITTED TO RBI. (B) THE DETAIL OF INTEREST ACCRUED DURING THE YEAR ON NPA ACCOUNTS. (C) THE DETAIL OF INTEREST ACTUALLY RECEIVED DURING THE YEAR ON NPA ACCOUNTS. (D) THE DETAIL OF INTEREST RECEIVED OR ACCRUED DURING THE YEAR ON NPA ACCOUNTS AND CREDITED TO PROFIT AND LOSS ACCOUNT. (E) THE DETAIL OF INTEREST RECEIVED OR ACCRUED DURING THE YEAR AND DEBITED TO PROFIT AND LOSS ACCOUNT ON ACCOUNT OF PROVISION FOR OVERDUE INTEREST RESERVE OR INTEREST ON NPA ACCOUNTS. A ND THEN THE FOLLOWING INTEREST, IF ANY, ON NPA SHOULD BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 9 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA (A) INTEREST ON NPA ACCOUNTS ACTUALLY RECEIVED DURING THE YEAR. (B) INTEREST ACTUALLY RECEIVED OR ACCRUED ON NPA ACCOUNTS AND FIRST CREDITED AND THEN DEBITED TO PROFIT AND LOSS ACCOUNT ON ACCOUNT OF PROVISION FOR OVERDUE INTEREST RESERVE OR INTEREST ON NPA ACCOUNTS. 7 . IN SUM AND SUBSTANCE THE LD. CIT(A) DIRECTED THE ASSESSING OFFICER THAT INTEREST ON NPA A/C. ACTUALLY RECEIVED DURING THE YEAR SHOULD BE BROUGHT TO TAX AND WHICH ARE ROUTED TO THE PROFIT AND LOSS A/C. THE LD. COUNSEL ARGUE S THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING THE METHOD OF RECOGNIZING THE INTEREST INCOME OF THE NPA A/C. ON ACTUAL RECEIPT BASIS. THE LD. COUNSEL ALSO FILED THE CIRCULAR ISSUED BY THE COMMISSIONER AND REGISTRAR, CO - OPERATIVE SOCIETIES , MAHARASHTRA STATE, PUNE . SHE SUBMITS THAT THIS IS FIRST YEAR IN WHICH THE METHOD FOLLOWED BY THE ASSESSEE IS D ISTURBED BY THE ASSESSING OFFICER. SHE ALSO RELIED ON THE DECISION OF THE ITAT, PUNE IN THE CASE OF ACIT, CIRCLE - 3, NANDED VS. THE OMERGA JANT A SAHAKARI BANK LTD., ITA NO. 350/PN/2013 ORDER DATED 31 - 10 - 2013. SHE SUBMITS THAT EVEN IF THE ASSESSEE IS NOT A CO - OPERATIVE BANK BUT AT THE SAME TIME THE PRINCIPLES LAID DOWN IN THE CASE OF THE OMERGA JANTA SAHAKARI BANK LTD. (SUPRA) ARE SQUARELY APPLIC ABLE TO THE ASSESSEE. SHE PLEADED FOR CONFIRMING THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. 8 . PER CONTRA, THE LD. DR SUBMITS THAT THE RBI GUIDELINES ARE NOT BINDING ON THE ASSESSEE CREDIT SOCIETY AND THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING HENCE, THE ASSESSING OFFICER HAS RIGHTLY BROUGHT TO TAX ON INTEREST ON THE NPA A/C. 9 . IN THE CASE OF THE OMERGA JANTA SAHAKARI BANK LTD. (SUPRA) THE ISSUE BEFORE THE TRIBUNAL WAS WHETHER THE METHOD FOLLOWED BY THE ASSESSEE BANK RECOGNIZING THE INTEREST INCOME ON NPAS ON ACTUAL RECEIPT BASIS WAS JUSTIFIED. THE TRIBUNAL HELD AS UNDER: 10 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 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 CONVERGEN CE 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 I NCLUDED IN SECOND SCHEDULE OF RBI SO AS TO FALL WITHIN THE SCOPE OF SECTION 43D OF THE ACT. NOTABLY, SECTION 43D OF THE ACT PRESCRIBES THAT INTEREST INCOME ON SUCH CATEGORIES OF BAD AND DOUBTFUL DEBTS AS PRESCRIBED BY THE RBI GUIDELINES SHALL BE CHARGEABL E 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 P RESENT CONTROVERSY CANNOT BE ADJUDICATED IN THE LIGHT OF SECTION 43D OF THE ACT, AND IT IS LIABLE TO BE DECIDED ON GENERAL PRINCIPLES AS TO WHETHER THE IMPUGNED INCOME HAS ACCRUED TO THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. 9. IN THIS CONNECTION , WE FIND THAT THE VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL CONTROVERSY. THE ASSESSEE BEFORE THE VISAKHAPATNAM BENCH WAS A CO - OPERATIVE BANK OPERATING UNDER A LICENSE ISSU ED 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 MERCANTIL E SYSTEM OF ACCOUNTING ADOPTED BY THE ASSESSEE THEREIN. THE ASSESSEE, ON THE OTHER HAND, CONTENDED THAT HAVING REGARD TO THE GUIDELINES ISSUED BY RBI REGARDING ACCOUNTING OF INTEREST ON NPAS, NO INTEREST INCOME ACCRUED IN RESPECT OF NPAS AND THAT THE SAME WAS TO BE TAXED ONLY ON RECEIPT BASIS. THE TRIBUNAL OBSERVED THAT THE QUESTION OF TAXABILITY OF INTEREST ON NPAS CLASSIFIED BY RBI, WAS CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) WHEREIN AFTER CONSIDERI NG THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IT WAS HELD THAT INTEREST INCOME RELATABLE TO NPAS WAS NOT INCLUDIBLE IN TOTAL INCOME ON ACCRUAL BASIS SINCE THE SAME DID NOT ACCRUE TO THE ASSESSEE. THE FOLLOW ING DISCUSSION BY THE VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE 11 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 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 O N NPAS HAS BEEN CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD (SUPRA); WHEREIN THE HON'BLE DELHI HIGH COURT TOOK INTO ACCOUNT THE DECISION RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LT D (SUPRA). IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD, THE ASSESSEE THEREIN WAS A NON BANKING FINANCIAL COMPANY AND IT WAS ALSO BOUND BY THE PRUDENTIAL NORMS DIRECTIONS ISSUED BY THE RESERVE BANK OF INDIA FOR INCOME RECOGNITION AND ASSET CLASSIFICATION. THE ASSESSEE DID NOT INCLUDE THE INTEREST INCOME RELATABLE TO NPA ASSETS IN ITS TOTAL INCOME. THE ASSESSING OFFICER, HOWEVER, ADDED THE SAID INTEREST AS THE INCOME OF THE ASSESSEE BY HOLDING THAT IT HAD ACCRUED TO THE ASSESSEE EVEN IT WAS NOT REALIZED AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE LEARNED 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 SUBMISSIONS, 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 INCO NSISTENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. THE HIGH COURT TOOK NOTE OF THE FACT THAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA HAS OVERRIDING EFFECT OVER ANY OT HER 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 12 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 9.1 RECOGNITION OF REVENUE REQUIRES THAT REVENUE IS A MEASURABLE AND THAT AT THE TIME OF SALE OR THE RENDERING OF THE SERVICE, IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIMATE COLLECTION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REASONABLE CERTAINTY IS L ACKING 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 REAS ONABLY CERTAIN THAT THE ULTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAINTY AS TO ULTIMATE COLLECTION, REVENUE IS RECOGNIZED AT THE TIME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENTS. 9.3 WHEN THE UNCERTAINTY REL ATING TO COLLECTABILITY ARISES SUBSEQUENT TO THE TIME OF SALE OR THE RENDERING OF THE SERVICE, IT IS MORE APPROPRIATE TO MAKE A SEPARATE PROVISION TO REFLECT THE UNCERTAINTY RATHER THAN TO ADJUST THE AMOUNT OF REVENUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RECOGNITION OF REVENUE IS THAT THE CONSIDERATION RECEIVABLE FOR THE SALE OF GOODS, THE RENDERING OF SERVICES OR FROM THE USE OF OTHERS OF ENTERPRISE RESOURCES IS REASONABLY DETERMINABLE. WHEN SUCH CONSIDERATION IS NOT DETERMINABLE WITHIN REASONABLE LIMITS, THE RECOGNITION OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO THE EFFECT OF UNCERTAINTIES, IT IS CONSIDERED AS REVENUE OF THE PERIOD IN WHICH IT IS PROPERLY RECOGNIZED. 8.2 THE DELHI HIGH COURT ALSO CON SIDERED 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 V S. CIT 237 ITR 889 (SC) V) CIT VS. SHOORJI VALLABHDAS & CO 46 ITR 144 (SC) 13 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 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 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 SUPPO RT 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 THAT RESERVE BANK OF INDIA ACT DOES NOT OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT. HOWEVER, WHEN WE EXAMINE THE ISSUE INVOLVED THEREIN MINUTELY AND DEEPLY IN THE CONTEXT IN WHICH THAT HAD ARISEN AND CERTAIN OBSERVATIONS OF THE APEX C OURT CONTAINED IN THAT VERY JUDGMENT, WE FIND THAT THE PROPOSITION ADVANCED BY MR.SABHARWAL MAY NOT BE ENTIRELY CORRECT. IN THE CASE BEFORE THE SUPREME COURT, THE ASSESSEE A NBFC DEBITED RS.81,68,516 AS PROVISION AGAINST NPA IN THE PROFIT AND LOSS ACCOUNT, WHICH WAS CLAIMED AS DEDUCTION IN TERMS OF SECTION 36(1) (VII) OF THE ACT. THE ASSESSING OFFICER DID NOT ALLOW THE 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 O F 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 CENT ERED 14 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 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 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 DISTINCTI ON 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 INCOME TAX ACT. IT CAN BE SAID, THEREF ORE, THAT THE APEX COURT 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 PART S VIZ., A) INCOME RECOGNITION AND B) PERMISSIBLE DEDUCTION/EXCLUSIONS UNDER THE INCOME TAX ACT. IN SO FAR AS INCOME RECOGNITION IS CONCERNED, THE HON'BLE SUPREME COURT HELD THAT SECTION 145 OF THE INCOME TAX ACT HAS NO ROLE TO PLAY AND THE ASSESSING OFFICE R HAS TO FOLLOW RESERVE 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 S O FAR AS COMPUTATION OF INCOME UNDER THE INCOME TAX ACT IS CONCERNED, (WHICH INVOLVES DEDUCTION OF PERMISSIBLE DEDUCTIONS AND EXCLUSIONS) THE ADMISSIBILITY OF SUCH DEDUCTIONS SHALL BE GOVERNED BY THE PROVISIONS OF THE INCOME TAX ACT. THE RELEVANT OBSERVATI ONS OF THE HON'BLE SUPREME COURT ARE EXTRACTED BELOW: APPLICABILITY OF SECTION 145 40. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE RBI DIRECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER CHAPTER IIIB OF THE RBI ACT, 1934. 15 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA THESE NORMS D EAL 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 1 998 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 T AXABLE 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 STATE MENTS. 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 UNDERSTATEMEN T 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 PRUDENTIAL NOR MS ISSUED BY THE RESERVE 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 O F 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. 16 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 10.1 BASED ON THE PRUDENTIAL NORMS, THE ASSESSEE HEREIN DID NOT ADMIT THE INTEREST RELATABLE TO NPA ADVANCES IN ITS TOTAL INCOME. T HE 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 CA SE 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 CO URT IS EQUALLY APPLICABLE TO THE ISSUE IN OUR HANDS. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY WITH THE DECISION OF THE LEARNED CIT (A) IN HOLDING THAT THE INTEREST INCOME RELATABLE ON NPA ADVANCES DID NOT ACCRUE TO THE ASSESSEE. ACCORDINGLY WE UPHOLD HIS O RDER. 10. FOLLOWING THE AFORESAID DISCUSSION, WHICH HAS BEEN RENDERED ON AN IDENTICAL ISSUE UNDER SIMILAR CIRCUMSTANCES, WE FIND NO REASONS TO INTERFERE WITH THE ULTIMATE CONCLUSION OF THE CIT(A) IN DELETING THE IMPUGNED ADDITION RELATING TO INTEREST IN COME IN RESPECT OF NPAS. 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 HONB LE 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 T HE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IN HOLDING THAT INTEREST ON NPAS WAS ASSESSABLE TO TAX ON ACCRUAL BASIS. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS PUT - FORTH BY THE LEARNED DEPARTMENTAL REPRESENTATIVE BASED ON THE JUDGEMENT OF THE HONBLE 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 HONBL E MADRAS HIGH COURT TOOK THE VIEW THAT THE 17 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA 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 BASIS 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 NORM S 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 JUDGME NT OF THE JURISDICTIONAL HIGH COURT. WE ARE FACED WITH TWO CONTRARY JUDGMENTS OF THE NON - JURISDICTIONAL HIGH COURT. IN SUCH A SITUATION, WE ARE INCLINED TO PREFER A VIEW WHICH IS FAVOURABLE OF THE ASSESSEE FOLLOWING THE JUDGEMENT OF THE HONBLE SUPREME C OURT 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 TO THE AFFIRMED. WE HOLD SO. 10 . ADMITTEDLY, THE ASSESSEE IS NOT A CO - OPERATIVE BANK BUT IT IS A CREDIT SOCIETY. THE RBI GUIDELINES ARE NOT BINDING ON THE ASSESSEE CREDIT SOCIETY. AT THE SAME TIME IT I S SEEN THAT THE COMMISSIONER AND REGISTRAR OF THE CO - OPERATIVE SOCIETY HAS ISSUED A CIRCULAR WHICH IS A PAR I - MATERIA WITH THE GUIDELINES ISSUED BY THE RBI IN RESPECT OF THE TREATMENT TO BE GIVEN TO THE ASSETS MORE PARTICULARLY FOR DECIDING HOW TO MAKE THE CLASSIFICATION OF THE ASSETS AS A NPA. IN THE SAID CIRCULAR THE GUIDELINES ARE ALSO GIVEN IN RESPECT OF THE OVERDUE INTEREST ON THE NPA A/C. THE ASSESSEE HAS FOLLOWED THIS PARTICULAR METHOD OF ACCOUNTING CONSISTENTLY WHICH HAS BEEN ACCEPTED IN PAST. MOR EOVER, THE LD. CIT(A) HAS DIRECTED THE ASSESSING OFFICER TO VERIFY WHETHER THE ASSESSEE HAS OFFERED THE INTEREST ON NPA A/C. IN THE YEAR OF ACTUAL RECEIPT BASIS. THE LD. CIT(A) HAS ALSO DIRECTED TO VERIFY WHETHER THE INTEREST ON NPA A/C. IS ROUTED 18 ITA NO. 1874 /PN/201 2 , MAHESH NAGARI SAHAKARI PAT SANSTHA LTD., JALNA THROUGH THE PROFIT AND LOSS ACCOUNT. IF THE ASSESSEE SOCIETY ITSELF HAS RECOGNIZED THE INTEREST ON NPA A/C. AS ITS INCOME BY CREDITING THE SAME TO THE PROFIT AND LOSS ACCOUNT THEN THE SAME IS TO BE BROUGHT TO TAX. IN OUR OPINION NO INTERFERENCE IS CALLED FOR TH E ORDER OF THE LD. CIT(A) ON THIS ISSUE. ACCORDINGLY, SAME ARE CONFIRM. ACCORDINGLY, GROUND NO. 4 IS DISMISS. 1 1 . IN THE RESULT, THE REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 25 - 03 - 2014 SD/ - SD/ - ( R.K. PANDA ) ( R.S. P ADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 25 TH MARCH, 2014 COPY TO 1 DEPARTMENT 2 ASSESSEE 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 TAX APPELLATE TRIBUNAL PUNE