D.C.I.T, Circle Moga, MOGA V. THE MOGA CENTRAL CO - OPRATIVE BANK, MOGA

ITA 223/ASR/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7792 (ITAT-AMRITSAR)
• Duration Of Justice: 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 29-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MANISH K GUPTA
• Keywords: Bad and doubtful debts
• Section: 145; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. T. S. KAPOOR, ACCOUNTANT MEMBER AND SH. N.K. CHOUDHRY, JUDICIAL MEMBER I.T.A NOS. 222 & 223/(ASR)/2017 ASSESSMENT YEARS: 2010-11 & 2011-12 PAN: AAAJT0776C DY. C. I. T., CIRCLE MOGA. VS. THE MOGA CENTRAL CO-OP. BANK LTD., FEROZPUR ROAD, MOGA. (APPELLANT) (RESPONDENT) APPELLANT BY : SH. RAHUL DHAWAN (D. R.) RESPONDENT BY: SH. MANISH K. GUPTA (C. A.) DATE OF HEARING: 30.08.2017 DATE OF PRONOUNCEMENT: 04.10.201 7 ORDER PER T. S. KAPOOR (AM): THESE ARE TWO APPEALS FILED BY REVENUE AGAINST THE SEPARATE ORDERS OF LD. CIT(A), LUDHIANA BOTH DATED 24.02.2017 FOR A SST. YEAR: 2010-11 & 2011-12 RESPECTIVELY. 2. COMMON GROUNDS OF APPEAL HAS BEEN TAKEN IN THESE APPEALS AND THESE WERE HEARD TOGETHER AND THEREFORE FOR THE SAK E OF CONVENIENCE, A COMMON AND CONSOLIDATED ORDER IS BEING PASSED. 3. AT THE OUTSET, THE LD. AR SUBMITTED THAT THE ISS UE RAISED BY REVENUE IN ITS APPEAL ARE DULY COVERED IN FAVOUR OF ASSESSEE BY THE ORDER OF HON'BLE AMRITSAR BENCH IN THE CASE OF JALANDHAR CENTRAL CO-OPERATIVE BANK LTD. AND KAPURTHALA CENTRAL CO-OPERATIVE BANK LTD. WHEREIN VIDE ORDER DATED 20.01.2017 AND 14.07.2017 RESPECTIVELY, THE HON'BLE ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 2 AMRITSAR BENCH OF THE TRIBUNAL HAS HELD THAT ASSESS EE WAS NOT REQUIRED TO ACCOUNT FOR INTEREST ACCRUED ON NON PERFORMING A SSETS. 4. THE LD. AR IN THIS RESPECT FILED THE COPIES OF T RIBUNAL ORDERS IN THE CASE OF JALANDHAR CENTRAL CO-OPERATIVE BANK LTD. AN D KAPURTHALA CENTRAL CO-OPERATIVE BANK LTD. THE LD. AR ALSO INVI TED OUR ATTENTION TO AN ORDER DATED 03.01.2017 PASSED BY CHANDIGARH BENC H OF THE TRIBUNAL IN THE CASE OF LUDHIANA CENTRAL CO-OPERATIVE BANK L TD. WHEREIN AGAIN SAME ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE. THE L D. AR ALSO INVITED OUR ATTENTION TO AN ORDER OF HON'BLE GUJARAT HIGH C OURT IN THE CASE OF PR. C.I.T., RAJKOT VS. JIVAN COMMERCIAL CO-OPERATIVE BA NK LTD. WHEREIN THE HON'BLE HIGH COURT VIDE ITS ORDER DATED AUGUST 23, 2017 HAS DISMISSED THE APPEAL OF REVENUE UNDER SAME FACTS AND CIRCUMST ANCES. 5. THE LD. DR FAIRLY AGREED THAT THE ISSUE WAS SQUA RELY COVERED IN FAVOUR OF ASSESSEE, HOWEVER HE MAINTAINED THAT WHIL E ALLOWING APPEAL OF THE ASSESSEE, THE LD. CIT(A) HAS IGNORED THE DECISI ON OF HON'BLE SUPREME COURT IN THE CASE OF STATE BANK OF TRAVANCORE VS. C .I.T., KERALA 158 ITR 102. 6. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GONE THOUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT THE ISSUE INVOLVED I N THESE APPEALS, IS REGARDING NON DECLARATION OF INTEREST INCOME ON NON PERFORMING ASSETS BY THE ASSESSEE. THE HON'BLE AMRITSAR BENCH IN THE CAS E OF JALANDHAR CENTRAL CO-OPERATIVE BANK LTD. VIDE ITS ORDER DATED 20.01.2017 HAS DISMISSED THE APPEALS FILED BY REVENUE AND SIMILARL Y IN THE CASE OF ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 3 KAPURTHALA CENTRAL CO-OPERATIVE BANK LTD., THE AMRI TSAR BENCH HAS AGAIN DISMISSED THE APPEALS FILED BY REVENUE ON SIM ILAR ISSUE. THE HON'BLE CHANDIGARH BENCH VIDE ITS ORDER DATED 03.01 .2017 IN ITA NO. 526/CHD/2013 HAS ALSO DISMISSED THE APPEAL FILED BY REVENUE UNDER SAME FACTS AND CIRCUMSTANCES. WHILE DISMISSING THE APPEAL, THE HON'BLE TRIBUNAL HAS DISCUSSED THE CASE LAW OF HON'BLE SUPR EME COURT IN THE CASE OF STATE BANK OF TRAVANCORE AND HAS HELD THAT IT HAS BEEN OVERRULED BY THE APEX COURT ITSELF IN THE CASE OF UCO BANK LT D. (SUPRA) AND THEREFORE THE GRIEVANCE OF THE REVENUE IS NOT JUSTI FIED. FOR THE SAKE OF COMPLETENESS THE DECISION OF THE HON'BLE CHANDIGARH BENCH OF TRIBUNAL IN THE CASE OF LUDHIANA CENTRAL CO-OPERATIVE BANK L TD. THE FINDINGS OF HON'BLE TRIBUNAL AS CONTAINED FROM PARA 13 ARE REPR ODUCED BELOW: 13. WE FIND THAT THE ISSUE OF ACCOUNTING FOR INTER EST ON STICKY LOANS/NPAS, HAS BEEN DEALT WITH IN A NUMBER OF DEC ISIONS BOTH BY THE APEX COURT AND VARIOUS HIGH COURTS AND TRIBUNALS AL SO, WHEREIN AFTER APPLYING THE REAL INCOME THEORY, THE PRESCRIBED A CCOUNTING STANDARD ISSUED BY ICAI ON REVENUE RECOGNITION, AS-9, THE AC COUNTING PRACTICE OF THE ASSESSEE RELATING TO INTEREST ON STICKY LOANS A ND THE RBI GUIDELINES RELATING TO ACCOUNTING FOR INTEREST ON NPAS, IT WA S HELD THAT SUCH INCOME WAS TAXABLE IN THE YEAR OF RECEIPT ONLY, WHEN ITS R EALIZATION BECOMES REASONABLY CERTAIN. 14. THE APEX COURT IN THE CASE OF UCO BANK, CALCUTT A VS. CIT, WEST BENGAL (1999) 4 SUPREME COURT CASES 599 APPROVED TH E RECEIPT BASIS OF ACCOUNTING FOR INTEREST ON LOANS WHOSE RECOVERY WAS DOUBTFUL, HOLDING 10 THE SAME TO BE IN ACCORDANCE WITH ACCOUNTING PRACTI CE AND IN CONFORMITY WITH THE METHOD PRESCRIBED UNDER SECTION 145 OF THE ACT. THE RELEVANT FINDINGS OF THE APEX COURT ARE AS FOLLOWS: WE HAVE TO CONSIDER WHETHER INTEREST ON A LOAN WHO SE RECOVERY IS DOUBTFUL AND WHICH HAS NOT BEEN RECOVERED BY THE AS SESSEE-BANK FOR THE LAST THREE YEARS BUT HAS BEEN KEPT IN A SUS PENSE ACCOUNT AND HAS NOT BEEN BROUGHT TO THE PROFIT AND LOSS ACC OUNT OF THE ASSESSEE, CAN BE INCLUDED IN THE INCOME OF THE ASSE SSEE FOR THE ASSESSMENT YEAR 1981-82. IT IS THE CASE OF THE ASSE SSEE THAT IN RESPECT OF LOANS WHICH ARE ADVANCED BY IT TO VARIOU S CUSTOMERS, RECOVERY OF SOME LOANS IS VERY DOUBTFUL. IT IS DOUB TFUL WHETHER EVEN THE INTEREST ON THE LOANS ADVANCED WILL BE RECOVERE D FROM THE ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 4 CUSTOMER. IN SUCH CASES, THE INTEREST CALCULATED ON THE LOAN AMOUNT IS CREDITED IN A SUSPENSE ACCOUNT. THIS AMOUNT IS N OT BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE-BANK BECAUS E THESE ARE AMOUNTS WHICH ARE NOT LIKELY TO BE REALIZED BY THE BANK. HENCE THEY DO NOT FORM A PART OF THE REAL INCOME OF THE BANK. IF AND WHEN ANY SUCH AMOUNT OR A PART OF IT IS RECOVERED, IT IS INC LUDED IN THAT ASSESSMENT YEAR IN THE TOTAL INCOME OF THE ASSESSEE FOR THE PURPOSE OF PAYMENT OF INCOME-TAX. THE METHOD OF ACCOUNTING WHICH IS FOLLOWED BY THE ASSESSEE-BANK IS MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, THE ASSESSEE CONSIDERS INCOME BY WAY OF IN TEREST PERTAINING TO DOUBTFUL LOANS AS NOT REAL INCOME IN THE YEAR IN WHICH IT ACCRUES, BUT ONLY WHEN IT IS REALIZED. A MIXED M ETHOD OF ACCOUNTING IS THUS FOLLOWED BY THE ASSESSEE-BANK. T HIS METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS IN ACCORDANCE WITH ACCOUNTING PRACTICE. IN SPICER AND PEGLER'S PRACTIC AL AUDITING THE RELEVANT PASSAGE OCCURRING AT PAGE 186-187 HAS BEEN REPRODUCED IN THE MINORITY JUDGMENT OF THIS COURT IN STATE BANK O F TRAVANCORE V. COMMISSIONER OF INCOME-TAX, KERALA [(1986) 158 ITR 102 AT P.I2O]. IT IS AS FOLLOWS: 'WHERE INTEREST HAS NOT BEEN PAID, I T IS SOMETIMES LEFT OUT OF ACCOUNT ALTOGETHER. THIS PREVENTS THE POSSIB ILITY OF IRRECOVERABLE INTEREST BEING CREDITED TO REVENUE, A ND DISTRIBUTED AS PROFIT. ON THE OTHER HAND, THIS TREATMENT DOES NOT RECORD THE ACTUAL STATE OF THE LOAN ACCOUNT, AND IN THE CASE OF BANKS AND OTHER CONCERNS WHOSE BUSINESS IT IS TO ADVANCE MONEY, IT IS USUAL TO FIND THE INTEREST IS REGULARLY CHARGED UP, BUT WHEN ITS RECOVERY IS DOUBTFUL, THE AMOUNT THEREOF IS EITHER FULLY PROVID ED AGAINST OR TAKEN TO THE CREDIT OF AN INTEREST SUSPENSE ACCOUNT AND CARRIED FORWARD AND NOT TREATED AS PROFIT UNTIL ACTUALLY RE CEIVED.' SIMILARLY, REFERRING TO INTEREST ON DOUBTFUL DEBTS, SHUKLA AND GREWAL ON ADVANCED ACCOUNTS, NINTH EDITION AT PAGE 1089 STATE AS FOLLOWS: 'INTEREST ON DOUBTFUL DEBTS SHOULD BE DEBITED TO TH E LOAN ACCOUNT CONCERNED BUT SHOULD NOT BE CREDITED TO INTEREST AC COUNT. INSTEAD, IT SHOULD BE CREDITED TO INTEREST SUSPENSE ACCOUNT. TO THE EXTENT THE INTEREST IS RECEIVED IN CASH, THE INTEREST SUSPENSE ACCOUNT SHOULD BE TRANSFERRED TO INTEREST ACCOUNT; THE REMAINING A MOUNT SHOULD BE CLOSED BY TRANSFER TO THE LOAN ACCOUNT. THIS TREATM ENT ACCORDS WITH THE 11 PRINCIPLE THAT NO ITEM SHOULD BE TREATED AS INCOME UNLESS IT HAS BEEN RECEIVED OR THERE IS A REASONABLE CERTAINT Y THAT IT WILL BE REALIZED. (VIDE STATE BANK OF TRANVACORE V. CIT [SUPRA]) THE ASSESSEE'S METHOD OF ACCOUNTING, THEREFORE, TRANSFERRING THE D OUBTFUL DEBT TO AN INTEREST SUSPENSE ACCOUNT AND NOT TREATING IT AS PR OFIT UNTIL ACTUALLY RECEIVED, IS IN ACCORDANCE WITH ACCOUNTING PRACTICE . UNDER SECTION 145 OF THE INCOME-TAX ACT, 1961, INCO ME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION OR INCOME FROM OTHER SOURCES' SHALL BE COMPUTED IN ACC ORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; PROVIDED THAT IN A CASE WHERE THE ACCOUNTS ARE CORR ECT AND COMPLETE BUT THE METHOD EMPLOYED IS SUCH THAT IN THE OPINION OF THE INCOME- TAX OFFICER, THE INCOME CANNOT PROPERLY BE DEDUCED THEREFROM, THE ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 5 COMPUTATION SHALL BE MADE IN SUCH MANNER AND ON SUC H BASIS AS THE INCOME-TAX OFFICER MAY DETERMINE. IN THE PRESEN T CASE THE METHOD EMPLOYED IS ENTIRELY FOR A PROPER DETERMINAT ION OF INCOME. (EMPHASIS SUPPLIED BY US) 15. FURTHER THE APEX COURT ALSO REFERRED TO THE CBD T CIRCULAR DATED 9T H OCTOBER 1984 STATING THAT INTEREST ON LOANS ON WHIC H THERE HAS BEEN NO RECOVERY FOR 3 YEARS WILL BE SUBJECTED TO TAX ON RE CEIPT BASIS, AND HELD AS FOLLOWS: THE QUESTION WHETHER INTEREST EARNED, ON WHAT HAVE COME TO BE KNOWN AS 'STICKY' LOANS, CAN BE CONSIDERED AS INCOM E OR NOT UNTIL ACTUAL REALIZATION, IS A QUESTION WHICH MAY ARISE B EFORE SEVERAL INCOME TAX OFFICERS EXERCISING JURISDICTION IN DIFF ERENT PARTS OF THE COUNTRY. UNDER THE ACCOUNTING PRACTICE, INTEREST WH ICH IS TRANSFERRED TO THE SUSPENSE ACCOUNT AND NOT BROUGHT TO THE PROF IT AND LOSS ACCOUNT OF THE COMPANY IS NOT TREATED AS INCOME. TH E QUESTION WHETHER IN A GIVEN CASE SUCH 'ACCRUAL' OF INTEREST IS DOUBTFUL OR NOT, MAY ALSO BE PROBLEMATIC. IF, THEREFORE, THE BOARD H AS CONSIDERED IT NECESSARY TO LAY DOWN A GENERAL TEST FOR DECIDING W HAT IS A DOUBTFUL DEBT, AND DIRECTED THAT ALL INCOME TAX OFFICERS SHO ULD TREAT SUCH AMOUNTS AS NOT FORMING PART OF THE INCOME OF THE AS SESSEE UNTIL REALIZED, THIS DIRECTION BY WAY OF A CIRCULAR CANNO T BE CONSIDERED AS TRAVELLING BEYOND THE POWERS OF THE BOARD UNDER SEC TION 119 OF THE INCOME TAX ACT. SUCH A CIRCULAR IS BINDING UNDER SE CTION 119. THE CIRCULAR OF 9TH OF OCTOBER, 1984, THEREFORE, PROVID ES A TEST FOR RECOGNIZING WHETHER A CLAIM FOR INTEREST CAN BE TRE ATED AS A DOUBTFUL CLAIM UNLIKELY TO BE RECOVERED OR NOT. THE TEST PRO VIDED BY THE SAID CIRCULAR IS TO SEE WHETHER, AT THE END OF THREE YEA RS, THE AMOUNT OF INTEREST HAS, IN FACT, BEEN RECOVERED BY THE BANK O R NOT. IF IT 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 ASS ESSEE UNTIL IT IS ACTUALLY RECOVERED. 16. THIS VIEW WAS REAFFIRMED IN A LATER JUDGMENT BY THE APEX COURT IN MERCANTILE BANK LTD., VS. CIT, BOMBAY CITY-III (200 6) 5 SSC 221. 17. FURTHER THE ISSUE OF TAXABILITY OF INTEREST ON NPA ACCOUNTS ON RECEIPT BASIS BY COOPERATIVE BANKS HAS BEEN DEALT WITH BY V ARIOUS HIGH COURTS, WHEREIN IT WAS HELD THAT THE ASSESSEE WAS BOUND BY RBI GUIDELINES TO ACCOUNT FOR SUCH INTEREST ON RECEIPT BASIS AND BY V IRTUE OF THE PROVISIONS OF SECTION 45Q OF THE RBI ACT, THE RBI GUIDELINES HAD AN OVERRIDING EFFECT OVER OTHER ACTS INCLUDING THE INCOME TAX ACT, 1961. 18. THE GUJARAT HIGH COURT IN THE CASE OF PR.CIT-5 VS. SHRI MAHILA SEWA SAHAKARI BANK LTD. (TAX APPEAL NO.531 OF 2015 DATED 5.8.2016 ,RELYING UPON THE DECISION OF THE APEX COURT IN SOUTHERN TEC HNOLOGIES LIMITED VS JCIT, COIMBATORE,(2010) 320 ITR 577,HELD THAT SO FA R AS INCOME RECOGNITION WAS CONCERNED EVEN THE AO HAD TO FOLLOW THE RBI DIRECTIONS,1998 IN VIEW OF SECTION 45Q OF THE RBI A CT AND SECTION 145 OF ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 6 THE INCOME TAX ACT HAD NO ROLE TO PLAY IN THE SAME. THE HONBLE COURT HELD AT PARA 20 TO 23 OF ITS ORDER AS FOLLOWS: 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 CONTAINED THEREIN. IN ORDER TO REFLECT A BANK'S ACTUAL FINANCIAL HEALTH IN ITS BALANCE SHEET, THE R ESERVE BANK HAS INTRODUCED PRUDENTIAL 13 NORMS FOR INCOME RECOGNITI ON, ASSET CLASSIFICATION AND PROVISIONING FOR ADVANCES PORTFO LIO OF THE CO- OPERATIVE BANKS. THE GUIDELINES 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 RECOGNI TION HAS TO BE OBJECTIVE AND BASED ON THE RECORD OF RECOVERY. INCO ME FROM NON- PERFORMING ASSETS (NPA) IS NOT RECOGNISED ON ACCRUA L 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 ACCRUAL BASIS. THUS, IN VIEW OF THE MANDA TE OF THE RBI GUIDELINES THE ASSESSEE CANNOT RECOGNISE INCOME FRO M NON- PERFORMING ASSETS ON ACCRUAL BASIS BUT CAN BOOK SUC H INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. THUS, THIS IS A CASE WHERE AT THE THRESHOLD, THE ASSESSEE, IN VIEW OF THE RBI GUIDELI NES, CANNOT RECOGNIZE INCOME FROM NPA ON ACCRUAL BASIS. THIS IS , THEREFORE, A CASE PERTAINING TO RECOGNITION OF INCOME AND NOT CO MPUTATION OF THE INCOME OF THE ASSESSEE. 21. THE SUPREME COURT IN SOUTHERN TECHNOLOGIES LIMITED (SUPRA) HAS HELD THAT THE 1998 DIRECTIONS ARE ONLY DISCLOSURE NORMS AND HAVE NOTHING TO DO WITH COMPUTATION OF TOTAL IN COME UNDER THE IT ACT OR WITH THE ACCOUNTING TREATMENT. THE 1998 D IRECTIONS ONLY LAY DOWN THE MANNER OF PRESENTATION OF NPA PROVISIO N 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 O F PRESENTATION O F FINANCIAL STATEM ENTS UNDER SCHEDULE VI TO THE COMPANIES ACT; (II) IN NOT RECOGNIZING THE 'INCOME' UNDER THE MERCANTIL E SYSTEM O F ACCOUNTING AND ITS INSISTENCE TO FOLLOW CASH SYST EM WITH RESPECT TO ASSETS CLASSIFIED AS 14 NPA AS PER ITS N ORMS; (III) IN CREATING A PROVISION FOR ALL NPAS SUMMARILY AS AGAINST CREATING A PROVISION ONLY WHEN THE DEBT IS DOUBTFUL O F RECOVERY UNDER THE NORMS OF THE ACCOUNTING STANDARD S ISSUED BY THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA . THESE DEVIATIONS PREVAIL OVER CERTAIN PROVISIONS OF THE COMPANIES ACT, 1956 TO PROTECT THE DEPOSITORS IN TH E CONTEXT O F INCOME RECOGNITION AND PRESENTATION O F THE ASS ETS AND ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 7 PROVISIONS CREATED AGAINST THEM. THUS, THE P&L ACCO UNT PREPARED BY NBFC IN TERMS O F THE RBI DIRECTIONS, 1 998 DOES NOT RECOGNIZE 'INCOME FROM NPA' AND, THEREFORE, DIR ECTS A PROVISION TO BE MADE IN THAT REGARD AND HENCE AN 'A DD BACK'. IT IS IMPORTANT TO NOTE THAT 'ADD BACK' IS T HERE ONLY IN THE CASE O F PROVISIONS. [EMPHASIS SUPPLIED]' 22. THEREFORE, IN TERMS OF THE ABOVE DECISION, WHER E AN ASSESSEE MAKES PROVISION FOR NPA AND SEEKS DEDUCTIO N OF SUCH AMOUNT UNDER SECTION 36(1)(VII) OR SECTION 37 OF THE ACT, THEN IN THE COMPUTATION OF INCOME, THE RBI GUIDELIN ES WOULD HAVE NO ROLE TO PLAY, AND HENCE, AN ADD BACK. INSOF AR AS INCOME RECOGNITION IS CONCERNED, THE SUPREME COURT HAS HELD THUS: 'APPLICABILITY OF SECTION 145 57. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE THE RB I DIRECTIONS, 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER CHAPTER III-B O F THE RBI ACT, 1934. T HESE NORMS DEAL ESSENTIALLY WITH INCOME RECOGNITION. THE Y FORCE THE NBFCS TO DISCLOSE THE AMOUNT O F NPA IN THEIR F INANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO REFLECT 'TRUE AND CORRECT' PROFITS. BY VIRTUE O F SECTION 45-Q, AN OVERRIDING EFFECT IS GIVEN TO THE RBI DIRECTIONS, 1998 VIS-A-VIS 'INCOME RECOGNITION' PRINCIPLES IN THE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, TH ESE RBI DIRECTIONS, 15 1998 AND THE IT ACT OPERATE IN DIFFE RENT AREAS. THESE RBI DIRECTIONS, 1998 HAVE NOTHING TO DO WITH COMPUTATION O F TAXABLE INCOME. THESE DIRECTIONS CA NNOT OVERRULE THE 'PERMISSIBLE DEDUCTIONS' OR 'THEIR EXC LUSION' UNDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE D IRECTIONS AND THE COMPANIES ACT IS ONLY IN THE MATTER OF INCO ME RECOGNITION AND PRESENTATION O F FINANCIAL STATEMEN TS. THE ACCOUNTING POLICIES ADOPTED BY AN NBFC CANNOT DETER MINE THE TAXABLE INCOME. IT IS WELL SETTLED THAT THE ACC OUNTING POLICIES FOLLOWED BY A COMPANY CAN BE CHANGED UNLES S THE AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD R ESULT IN UNDERSTATEMENT OF PROFITS. HOWEVER, HERE IS THE CAS E WHERE THE AO HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VI EW O F SECTION 45-Q O F THE RBI ACT. HENCE, AS FAR AS INCO ME 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, T HE COURT HAS HELD THAT EVEN THE ASSESSING OFFICER HAS TO FOL LOW 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 NOT ROLE TO PLAY. 23. IN THE LIGHT OF THE ABOVE DISCUSSION WHAT EMERG ES IS THAT WHILE DETERMINING THE TAX LIABILITY OF AN ASSESSEE, TWO FACTORS ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 8 WOULD COME INTO PLAY. FIRSTLY, THE RECOGNITION OF I NCOME IN TERMS OF THE RECOGNIZED ACCOUNTING PRINCIPLES AND A FTER SUCH INCOME IS RECOGNIZED, THE COMPUTATION THEREOF, IN T ERMS 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 AN D THE ACCOUNTING PRINCIPLES HAVE NO ROLE TO PLAY. HOWEVER , RECOGNITION OF INCOME STANDS ON A DIFFERENT FOOTING . INSOFAR AS INCOME RECOGNITION IS CONCERNED, IT WOULD BE THE RB I DIRECTIONS WHICH WOULD PREVAIL IN VIEW OF THE PROVI SIONS OF SECTION 45Q OF THE RBI ACT AND SECTION 145 WOULD HA VE NO ROLE TO PLAY. HENCE, THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS. 19. FURTHER RELYING UPON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD. (2011) 330 ITR 440, THE COURT HELD THAT THE AO HAS TO FOLLOW RBI DIRECTIONS ON REVENUE RECOGNITION, AND HELD AS FOLLOWS: 25. THE DISTINCTION DRAWN BY THE DELHI HIGH COURT IS THAT WHILE THE ACCOUNTING POLICIES OF ADOPTED BY THE NBF C CANNOT DETERMINE THE TAXABLE INCOME. HOWEVER, INSOFAR AS I NCOME 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 CONCERNE D, SECTION 145 OF THE INCOME TAX ACT, 1961 HAS NO ROLE TO PLAY . 20. THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. DE OGIRI NAGARI SAHAKARII BANK LTD. & OTHERS, 379 ITR 241 REITERATE D THE ABOVE PROPOSITION BY HOLDING AT PARA 9 OF ITS ORDER AS FO LLOWS : 9. THE INCOME TAX APPELLATE TRIBUNAL HAS REFERRED THE CASE OF M/S. VASISTH CHAY VYAPAR LIMITED 330 ITR 440 (DE LHI). IN THIS CASE, THE REVENUE RELIED UPON THE DECISION OF THE HON'BLE SUPREME IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. S UPRA. THE LEARNED INCOME TAX APPELLATE TRIBUNAL HAS REPRO DUCED THE OBSERVATIONS MADE BY THE DELHI HIGH COURT WHILE REFERRING THE SAID CASE OF M/S SOUTHERN TECHNOLOGIE S LIMITED SUPRA. THE ASSESSEE HEREIN BEING A COOPERATIVE BANK ALSO GOVERNED BY THE RESERVE BANK OF INDIA AND THUS THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL NORMS ISSU ED BY THE RESERVE BANK OF INDIA ARE EQUALLY APPLICABLE TO THE CO- OPERATIVE BANKS. THE HON'BLE SUPREME COURT IN THE C ASE OF SOUTHERN TECHNOLOGIES LIMITED SUPRA HELD THAT, PROV ISIONS OF SECTION 45Q OF RESERVE BANK OF 17 INDIA ACT HAS AN OVERRIDING EFFECT VIS-A-VIS INCOME RECOGNITION PRIN CIPLE UNDER THE COMPANIES ACT. HENCE, SECTION 45Q OF THE RBI AC T SHALL HAVE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIVE BANKS. HENCE, THE ASSESSING OFFICER ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 9 HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998, AS HELD BY THE HON'BLE SUPREME COURT. 21. FURTHER RELYING UPON THE DECISION OF THE APEX C OURT IN THE CASE OF UCO BANK, CALCUTTA AND MERCANTILE BANK LTD. (SUP RA) IT ALLOWED THE ASSESSEES APPEAL. 22. IT IS EVIDENT FROM THE ABOVE THAT THE ISSUE REG ARDING TAXABILITY OF INTEREST ON NPAS IS SETTLED IN FAVOUR OF THE ASSES SEE AS BEING TAXABLE IN THE YEAR OF RECEIPT. 23. THE GRIEVANCE OF THE REVENUE THAT THE HON'BLE S UPREME COURTS DECISION IN THE CASE OF STATE BANK OF TRAVANCORE (S UPRA) APPLIES TO THE PRESENT CASE, WE FIND IS MISPLACED, SINCE AS PO INTED OUT ABOVE BY THE LD. COUNSEL OF THE ASSESSEE, IT HAS BEEN OVE RRULED BY THE APEX COURT ITSELF IN THE CASE OF UCO BANK LIMITED ( SUPRA) WHEREIN IT WAS POINTED OUT BY THE APEX COURT THAT WHILE RENDER ING THE JUDGMENT IN THE CASE OF STATE BANK OF TRAVANCORE (S UPRA), THE CIRCULAR DATED 9.10.1984 HAD NOT BEEN BROUGHT TO TH E NOTICE OF THE COURT, NOR THE SUBSEQUENT DECISION OF THE APEX COUR T IN THE CASE OF K.P.VARGHESE VS. ITO (1981) 131 ITR 597 (SC). THE R ELEVANT EXTRACTS OF THE DECISION IN UCO BANK LIMITED ARE REPRODUCED HEREUNDER: 'THERE ARE, HOWEVER, TWO DECISIONS OF THIS COURT W HICH HAVE BEEN STRONGLY RELIED UPON BY THE RESPONDENTS IN THE PRESENT CASE. THE FIRST DECISION IS THE MAJORITY JUDGMENT I N THE STATE BANK OF TRAVANCORE V. COMMISSIONER OF INCOME- TAX, KERALA (1986 (158) ITR 102) DECIDED BY A BENCH OF THREE JU DGES OF THIS COURT BY A MAJORITY OF TWO TO ONE. THIS JUDGME NT DIRECTLY DEALS WITH INTEREST ON 'STICKY ADVANCES' WHICH HAVE BEEN DEBITED TO THE CUSTOMER BUT TAKEN TO THE INTEREST S USPENSE ACCOUNT BY A BANKING COMPANY. THE MAJORITY JUDGMENT HAS REFERRED TO THE CIRCULAR OF 6TH OF OCTOBER, 1952 AN D ITS WITHDRAWAL BY THE SECOND CIRCULAR OF 20TH OF JUNE, 1978. THE MAJORITY APPEARS TO HAVE PROCEEDED ON THE BASIS THA T BY THE SECOND CIRCULAR OF 20TH OF JUNE, 1978 THE CENTRAL B OARD HAD DIRECTED THAT INTEREST IN THE SUSPENSE ACCOUNT ON ' STICKY' ADVANCES SHOULD BE INCLUDIBLE IN THE TAXABLE INCOME OF THE ASSESSEE AND ALL PENDING CASES SHOULD BE DISPOSED O F KEEPING THESE INSTRUCTIONS IN VIEW. THE SUBSEQUENT CIRCULAR OF 9TH OF OCTOBER, 1984 BY WHICH, FROM THE ASSESSME NT YEAR 1979-80 THE BANKING COMPANIES WERE GIVEN THE BENEFI T OF THE CIRCULAR OF 9TH OF OCTOBER, 1984, DOES NOT APPEAR T O HAVE BEEN POINTED OUT TO THE COURT. WHAT WAS SUBMITTED B EFORE THE COURT WAS, THAT SINCE SUCH INTEREST HAD BEEN AL LOWED TO BE EXEMPTED FOR MORE THAN HALF A CENTURY, THE PRACT ICE HAD TRANSFORMED ITSELF INTO LAW AND THIS POSITION SHOUL D NOT HAVE BEEN DEVIATED FROM. NEGATIVING THIS CONTENTION, THE COURT SAID THAT THE QUESTION OF HOW FAR THE CONCEPT OF RE AL 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 ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 10 ACCRUAL OF INCOME, WILL HAVE TO BE JUDGED 'IN THE L IGHT OF THE PROVISIONS OF THE ACT, THE PRINCIPLES OF ACCOUNTANC Y RECOGNISED AND FOLLOWED, AND FEASIBILITY'. THE COUR T SAID THAT THE EARLIER CIRCULARS BEING EXECUTIVE 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 CIRCULA RS CANNOT DETRACT FROM THE ACT. THE DECISION OF THE CONSTITUT ION BENCH OF THIS COURT IN NAVNITLAL C. JAVERI V. K.K. SEN (S UPRA), OR THE SUBSEQUENT DECISION IN K.P. VARGHESE V. 19 INCOME T AX OFFICER (SUPRA) ALSO DO NOT APPEAR TO HAVE BEEN POI NTED OUT TO THE COURT. SINCE THE LATER CIRCULAR OF 9.10.1984 WA S NOT POINTED OUT TO THE COURT, THE COURT NATURALLY PROCE EDED ON THE ASSUMPTION THAT THE BENEFIT GRANTED UNDER THE EARLI ER CIRCULAR WAS NO LONGER AVAILABLE TO THE ASSESSEE AND THOSE C IRCULARS COULD NOT BE RESORTED TO FOR THE PURPOSE OF OVERCOM ING THE PROVISIONS OF THE ACT. INTERESTINGLY, THE CONCURRIN G JUDGMENT OF THE SECOND JUDGE HAS NOT DEALT WITH THIS QUESTIO N AT ALL BUT HAS DECIDED THE MATTER ON THE BASIS OF OTHER PROVIS IONS OF LAW. ' 24. THEREFORE, THE CONTENTION OF THE REVENUE THAT T HE DECISION IN THE CASE OF STATE BANK OF TRAVANCORE (SUPRA) APPLIES TO THE ASSESSEES CASE IS DISMISSED. 25. THE ARGUMENT OF THE LEARNED D.R. THAT THE DECIS ION OF THE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD. (SUPRA) WOULD NOT APPLY TO THE ASSESSEES CASE SINCE THE ASSESSEE IS A COOPERATIVE SOCIETY WHILE IN THE CASE OF VASISTH CHAY VYAPAR LT D. (SUPRA), THE ASSESSEE WAS A NBFC, IS ALSO DISMISSED SINCE THE PR INCIPLE ENUNCIATED BY THE DELHI HIGH COURT IN VASISTH CHAY VYAPAR LTD. (SUPRA) HAS BEEN FOLLOWED IN THE CASE OF SHRI MAHIL A SEWA SAHAKARI BANK LTD. (SUPRA) BY THE HON'BLE GUJARAT HIGH COURT AND VARIOUS OTHER DECISIONS CITED BY THE ASSESSEE BEFORE US ,AN D THE ASSESSEE IN ALL THOSE CASES BEING A COOPERATIVE BANK, THE DECIS ION RENDERED THEREIN SQUARELY APPLIES TO THE CASE OF THE ASSESSE E. 26. THE ARGUMENT OF THE LEARNED D.R. THAT THE ASSES SEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IS ALSO DISMISS ED SINCE THIS ASPECT HAS BEEN DEALT WITH BY 20 VARIOUS HIGH COURT S REFERRED TO ABOVE WHEREIN THEY HAVE CATEGORICALLY HELD THAT EVE N FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING THE INTEREST ON NPA ACCOUNT CANNOT BE SAID TO HAVE ACCRUED IN THE IMPUGNED YEAR SINCE THE RECOVERY OF THE SAME WAS IMPOSSIBLE AND EVEN OTHERWISE FOR THE PURPOSE OF INCOME RECOGNITION THE RBI DIRECTIONS, 1998, HAD TO BE FOLLOWED IN VIEW OF SECTION 45Q OF THE RBI ACT. 27. IN THE LIGHT OF THE ABOVE DISCUSSION WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A),HOLDING THE INTEREST ON NPAS A S TAXABLE IN THE YEAR OF RECEIPT , SO AS TO WARRANT INTERFERENCE. 28. IN THE RESULT THE APPEAL OF THE REVENUE IS DISM ISSED. ITA NOS. 222&223(ASR)/2017 ASST. YEARS: 2010-11&2011-12 11 THEREFORE FOLLOWING THE ABOVE JUDICIAL PRECEDENTS, WE DO NOT FIND ANY MERIT IN THE GROUNDS TAKEN BY REVENUE. 7. IN VIEW OF THE ABOVE, THE APPEALS FILED BY REVEN UE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04.10.2017 SD/- SD/- (N. K. CHOUDHRY) (T. S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 04.10.2017. /GP/SR. PS . COPY OF THE ORDER FORWARDED TO: (1) THE ASSESSEE: (2) THE (3) THE CIT(A), (4) THE CIT, (5) THE SR DR, I.T.A.T., TRUE COPY BY ORDER