ACIT, Nanded V. Jankalyan Urban Co-Op Bank Ltd, Osmanabad

ITA 2390/PUN/2012

• Counselvise Citation: 239024514 RSA 2012
• Duration Of Justice: 1 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 03-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Assessee Lawyers: PRA SHANT KULKARNI
• Keywords: Bad and doubtful debts
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.2390/PN/2012 A.Y. 2009-10 ACIT, CIRCLE-3, NANDED APPELLANT VS. JANKALYAN URBAN CO-OPERATIVE BANK LTD., KALAM DHOKI ROAD, KALAM DIST., OSMANABAD PAN: AAEFJ0853E RESPONDENT APPELLANT BY : SHRI S.P. W ALIMBE RESPONDENT BY : SHRI PRA SHANT KULKARNI DATE OF HEARING: 01.01.2014 DATE OF ORDER : 03.01.2014 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEAL), [SHORT CIT( A)] AURANGABAD, DATED 14.09.2012 FOR A.Y. 2009-10 ON TH E FOLLOWING GROUNDS. 1. THE CIT (A), AURANGABAD HAS ERRED IN DELETING THE ADDITION OF RS. 18,11,395/- ON ACCOUNT OF INTEREST ACCRUED ON NPA BY IGNORING THE PROVISIONS OF SECTION 145 SE CTION 43D OF THE INCOME-TAX ACT, 1962. 2. THE CIT (A), AURANGABAD HAS ERRED IN IGNORING THAT RBI DIRECTIONS & INCOME-TAX ACT OPERATE ION DIFFERENT F IELDS. 3. THE LD. CIT(A) HAS ERRED IN IGNORING THE FACT THAT THE ASSESSEE IS FOLLOWING HYBRID SYSTEM OF ACCOUNTING I .E. BOTH THE MERCANTILE & CASH SYSTEM, SIMULTANEOUSLY. 2 4. THE CIT(A) HAS ERRED IN NOT CONSIDERING THE PRINCIP LE LAID BY THE HON'BLE SUPREME COURT IN THE CASE OF SO UTHERN TECHNOLOGIES VS. JCIT 320 ITR 577 (SC). 5. THE ORDER OF THE A.O. BE RESTORED AND THE CIT (A), AURANGABAD BE VACATED. 6. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER A NY GROUNDS OF APPEAL. 2. THE ASSESSEE IS A COOPERATIVE BANK, REGISTERED U /S.9(1) OF MAHARASHTRA CO-OP. SOCIETIES ACT, 1960. THE ASSESS EE HAS FILED ITS RETURN OF INCOME ON 25.09.2009 DECLARING TOTAL INCOME OF RS.40,99,100/-. THE ASSESSING OFFICER HAS ASSESSED THE INCOME OF THE ASSESSEE AT RS.59,10,495/- BY MAKING ADDITIO N OF RS.18,11,395/- ON ACCOUNT OF INTEREST ACCRUED ON NP A. 3. AT THE OUTSET OF HEARING, THE LEARNED AUTHORIZED REPRESENTATIVE HAS POINTED OUT THAT THE ISSUE RAISE D BY THE REVENUE IS COVERED IN FAVOUR OF ASSESSEE BY THE DEC ISION OF THIS TRIBUNAL VIDE ORDER DATED 31.08.2012 IN ITA NO.795/ PN/2011 IN THE CASE OF ACIT, VS OSMANABAD JANTA SAH. BANK LTD. , WHEREIN THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER: 2. THE ASSESSEE IS A COOPERATIVE BANK CARRYING ON THE BUSINESS OF BANKING AND THE PROVISIONS OF BANKING REGULATION ACT, 1949 ARE APPLICABLE AS RBI LICENSE IS ISSUED. THE ASSESSEE BANK FILED THE RETURN OF INCOME FOR TH E A.Y. 2007-08 DECLARING TOTAL INCOME OF RS.4,34,07,380/-. THE RETURN FILED BY THE ASSESSEE WAS SELECTED FOR SCRUT INY AND ASSESSMENT HAS BEEN COMPLETED U/S.143(3) OF THE ACT . IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSES SEE BANK HAS NOT CONSIDERED THE INTEREST RECEIVABLE ON STICK Y ADVANCES/NON-PERFORMING ASSETS (NPA) AS INCOME AND SAME HAS BEEN DIRECTLY TAKEN TO THE BALANCE SHEET WITHOU T ROUTING THROUGH THE PROFIT AND LOSS ACCOUNT. THE A SSESSING OFFICER HAS OBSERVED THAT THE PROVISIONS OF SECTION 43D OF THE I.T. ACT, CANNOT BE APPLIED TO THE ASSESSEE BAN K AS IT IS NOT A SCHEDULED BANK BUT A COOPERATIVE BANK. IN OP INION OF THE ASSESSING OFFICER, AFTER CONSIDERING THE PROVIS IONS OF SECTION 43D, NON-SCHEDULED COOPERATIVE BANKS ARE 3 SPECIFICALLY EXCLUDED FROM THE EXEMPTION INCLUDING INTEREST OF STICKY ADVANCES. THE ASSESSING OFFICER ALSO TOO K INTO CONSIDERATION THE CBDT CIRCULAR NO.F-201/81/84 ITA- II DATED 09.10.1984. IN THE OPINION OF THE ASSESSING OFFICER, SAID CIRCULAR WAS ISSUED REGARDING CLARIFICATION AB OUT TAXABILITY OF THE INTEREST ACCRUED ON DOUBTFUL/BAD ADVANCES OF BANKING COMPANIES, WHERE SUCH INTEREST REMAINS UNRECOVERED CONSECUTIVELY FOR THREE YEARS THEN SUCH INTEREST SHALL NOT FORM PART OF TAXABLE INCOME OF THE BANKIN G COMPANY IN THE FOURTH YEAR. IN SUM AND SUBSTANCE, IN THE OPINION OF THE ASSESSING OFFICER, TO GET THE BENEFI T OF THE SAID CIRCULAR, THE ASSESSEE SHOULD BE THE BANKING C OMPANY AND INTEREST SHOULD HAVE BEEN REMAINED UNRECOVERED CONSECUTIVELY FOR THREE YEARS. THE ASSESSING OFFIC ER, THEREFORE, MADE THE ADDITION OF RS.6,86,73,957/- IN RESPECT OF THE INTEREST ON STICKY ADVANCES BY ADDING THE SA ME TO THE TOTAL INCOME. 3. THE ASSESSEE CHALLENGED THE SAID ADDITION BEFORE THE LD. CIT(A) AND FOUND FAVOUR AS LD. CIT(A) IN HIS DE TAILED REASONED ORDER DELETED THE SAID ADDITION. THE REAS ONS GIVEN BY THE LD. CIT(A) FOR DELETING THE ADDITION ARE AS UNDER: 4.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE, THE ASSESSMENT ORDER OF THE A.O. AND THE SUBMISSION S OF THE APPELLANT AND VARIOUS JUDICIAL DECISIONS REL IED ON BY THE APPELLANT AND ALSO AVAILABLE ON THE ISSUE UN DER APPEAL. THE CONTENTIONS RAISED BY THE A.O. FOR MAKI NG THE ADDITION OF RS.6,86,73,957/- IN RESPECT OF INTE REST ON STICKY LOANS ARE FIRST CONSIDERED AND DEALT WITH AS UNDER- (I) THE MAIN CONTENTION OF THE A.O. IS THAT THE EX EMPTION AVAILABLE U/S 43D CANNOT BE EXTENDED TO NON SCHEDUL ED CO-OPERATIVE BANK IN VIEW OF OVERRIDING PROVISIONS OF SECTION 43D, NON SCHEDULED CO-OPERATIVE BANKS ARE SPECIFICALLY EXCLUDED FROM THE EXEMPTION REGARDING INTEREST ON STICKY ADVANCES' AND THE BANK HAS CONTRAVENED THE PROVISIONS OF SECTION 43D THEREFORE THE INTEREST ON STICKY ADVANCES IS LIABLE TO BE CONSIDE RED AS INCOME. THIS CONTENTION OF THE A.O. IS APPARENTLY INCORRECT AS SECTION 43D DOES NOT GRANT ANY EXEMPTI ON TO ASSESSEES. THIS SECTION LAYS DOWN THAT INTEREST IN RELATION TO NON PERFORMING ASSETS/BAD OR DOUBTFUL DEBTS SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YE AR IN WHICH IT IS CREDITED TO PROFIT & LOSS ACCOUNT OR AC TUALLY RECEIVED WHICHEVER IS EARLIER. THIS SECTION IS APPL ICABLE TO SCHEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS, COMPANIES ETC. AND NOT TO NON SCHEDULED CO-OPERATIV E 4 BANKS AND NON BANKING FINANCIAL COMPANIES (NBFC). THIS DOES NOT MEAN THAT INTEREST INCOME ON NPA/BAD OR DOUBTFUL DEBT WHICH IS DOUBTFUL OF RECOVERY AND WHI CH IS NOT TAXABLE UNLESS ACTUALLY RECOVERED IN THE HAN DS OF SCHEDULED BANK ETC. CARRYING ON BANKING BUSINESS, S HALL BE TAXABLE IN THE HANDS OF NON SCHEDULED BANKS WHO ARE ALSO CARRYING ON BANKING BUSINESS UNDER THE LIC ENSE OF RESERVE BANK OF INDIA. SECTION 43D HAS IN FACT RECOGNIZED THE PRINCIPLE THAT, THE INCOME NEVER ACC RUES WHEN THE PRINCIPAL AMOUNT ITSELF IS NON-PERFORMING OR DOUBTFUL AND AS SUCH ITS TAXABILITY NEEDS TO BE POSTPONED TILL ACTUAL REALIZATION OF INTEREST. THE ABOVE CONTENTIONS OF THE A.O. ARE, THEREFORE, ERRONEOUS A ND HENCE REJECTED. (II) THE A.O. HAS ALSO CONTENDED THAT THE DECISION IN THE CASE OF UCO BANK VS. CIT 154 CTR 88 (SC) IS NOT APPLICABLE TO THE APPELLANT BANK AS THE DECISION IS IN THE CASE OF COMMERCIAL BANK. IN THIS DECISION THE HON'B LE APEX COURT HAS LAID DOWN THAT INTEREST ON A LOAN WH OSE RECOVERY IS DOUBTFUL AND WHICH HAS NOT BEEN RECOVER ED BY THE ASSESSEE BANK FOR LAST THREE YEARS BUT HAS B EEN KEPT IN A SUSPENSE ACCOUNT AND HAS NOT BEEN BROUGHT TO PROFIT & LOSS ACCOUNT OF THE ASSESSEE COULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE. THOUGH THE ASSESSEE IS A NON SCHEDULED BANK, THE RATIO LAID DO WN BY THE HON'BLE APEX COURT IN THE CASE OF UCO BANK I S CERTAINLY APPLICABLE TO THE NON SCHEDULED BANKS CARRYING ON BANKING BUSINESS UNDER THE LICENSE ISSU ED BY RBI. THE CONTENTION RAISED BY THE A.O. IS, THERE FORE, NOT CORRECT. (III) THE A.O. HAS ALSO CONTENDED THAT CBDT CIRCULA R NO.F-201/81/84 ITA-II DATED 09/10/1984 IS NOT APPLICABLE TO THE APPELLANT AS THE APPELLANT IS NOT A BANKING COMPANY AND THE INTEREST HAS NOT REMAINED UNRECOVERED FOR THREE PREVIOUS YEARS. RELEVANT PORT ION OF THE CIRCULAR READS AS UNDER- 'INTEREST IN RESPECT OF DOUBTFUL DEBTS CREDITED TO SUSPENSE ACCOUNT BY THE BANKING COMPANIES WILL BE SUBJECTED TO TAX BUT INTEREST CHARGED IN AN ACCOUNT WHERE THERE HAS BEEN NO RECOVERY FOR THREE CONSECUT IVE ACCOUNTING YEARS WILL NOT BE SUBJECTED TO TAX IN TH E FOURTH YEAR AND ONWARDS'. HOWEVER, IF THERE IS A RECOVERY IN THE FOURTH YEAR OR LATER THE ACTUAL AMOUNT RECOVERED ONLY WILL BE SUBJECT TO TAX IN THE RESPECTIVE YEARS. APPARENTLY, THE PERIOD OF THREE 5 CONSECUTIVE ACCOUNTING YEARS WOULD HAVE BEEN MENTIONED ON THE BASIS OF THE RBI GUIDELINES. HENCE , THIS PERIOD MAY VARY WITH THE CHANGE IN RBI GUIDELI NES. THOUGH THE APPELLANT IS NOT A BANKING COMPANY BUT I S A NON SCHEDULED BANK, THE RATIO LAID DOWN BY THE ABOV E CIRCULAR IS ALSO APPLICABLE TO THE CASES OF THE NON SCHEDULED BANKS INCLUDING THE APPELLANT. IT CANNOT BE ASSUMED OR HELD THAT THE INCOME WHICH IS NOT TAXABL E IN THE HANDS OF THE BANKS WHICH ARE BANKING COMPANIES CARRYING ON BUSINESS OF BANKING, SHALL BECOME TAXAB LE IN THE HANDS OF NON SCHEDULED BANKS CARRYING ON BUSINESS OF BANKING UNDER THE LICENSE ISSUED BY RBI . THEREFORE, THE ABOVE CONTENTION OF THE APPELLANT IS ALSO INCORRECT AND HENCE REJECTED. 4.3 ON THE OTHER HAND, THE CONTENTION OF THE APPELL ANT THAT THE INTEREST ON NON PERFORMING ASSETS/BAD OR DOUBTFUL DEBTS, WHICH IS NOT LIKELY TO BE RECOVERED IS NOT LIABLE TO TAX IS SUPPORTED BY- (I) THE RATIO LAID DOWN BY THE CBDT CIRCULAR NO.F- 201/81/84 ITA-II DATED 09/10/1984. (II) THE INTEREST ON NPA/BAD OR DOUBTFUL DEBTS CANN OT BE SAID TO HAVE ACCRUED TO THE ASSESSEE AS PER THE PROVISIONS OF INCOME TAX ACT PARTICULARLY SECTION-5 OF THE ACT. (III) BY VIRTUE OF MASTER CIRCULAR OF RBI IN RESPEC T OF PRUDENTIAL NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING PERTAINING TO ADVAN CES, INTEREST ON NON PERFORMING ADVANCES HAS BEEN CREDIT ED TO NPA INTEREST RECEIVABLE ACCOUNT AND BROUGHT TO T AX IN THE YEAR IN WHICH ACTUALLY RECEIVED. (IV) THE APPELLANT BANK FOLLOWED ACCOUNTING STANDAR D- 9 (AS-9): REVENUE RECOGNITION PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. IN ACCORDANCE WITH THE SAID ACCOUNTING STANDARD, WHERE THERE IS AN UNCERTAINTY ABOUT THE COLLECTION OF REV ENUE, RECOGNITION OF INCOME OR SUCH REVENUE IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES, RECOGNITION OF REVENUE SHALL BE MADE ON ONLY RECEIP T BASIS OR ONLY WHEN IT IS REASONABLY CERTAIN THAT, T HE ULTIMATE COLLECTION WILL BE MADE. IN VIEW OF AS-9, APPELLANT BANK RECOGNIZED REVENUE (INTEREST INCOME) ON ADVANCES CLASSIFIED AS NPA ON ACTUAL RECEIPT BASIS, BECAUSE THE CERTAINTY OF RECOVERY OF INTEREST WAS NOT KNOWN TO THE BANK AS PER THE RBI NORMS. 6 (V) THE APPELLANT BANK CONSISTENTLY FOLLOWED THE SA ID SYSTEM OF ACCOUNTING IN RESPECT OF INTEREST ON NPA AS PER PRUDENTIAL NORMS OF RECOGNITION OF INCOME AND ASSET CLASSIFICATION SINCE BEGINNING. THIS IS IN CONSONANCE WITH THE PROVISIONS OF SECTION 145 OF TH E ACT. IT IS WELL SETTLED LAW THAT THE METHOD OF ACCO UNTING REGULARLY FOLLOWED AND WHICH IS REGULARLY ACCEPTED BY THE REVENUE WHILE ASSESSING INCOME OF THE EARLIER Y EARS HAS TO BE ACCEPTED BY THE A.O. WHILE ASSESSING INCO ME OF THE SUBSEQUENT YEARS. (VI) THE ASSESSEE IS A CO-OPERATIVE BANK AND IT HAS TO FOLLOW THE RESERVE BANK OF INDIA'S GUIDELINES ISSUE D FROM TIME TO TIME. THROUGH 'MASTER CIRCULAR ON INCO ME RECOGNITION, ASSET CLASSIFICATION, PROVISIONARY AND OTHER RELATED MATTERS - UCBS,' THE RESERVE BANK HAS ISSUE D FOLLOWING GUIDELINES FOR INCOME RECOGNITION ON NPA ACCOUNTS. 'THE POLICY OF INCOME RECOGNITION HAS TO BE OBJECTI VE AND BASED ON THE RECORD OF RECOVERY. INCOME FROM NON- PERFORMING ASSETS IS NOT RECOGNIZED ON ACCRUAL BASI S BUT IS BOOKED AS INCOME ONLY WHEN IT IS ACTUALLY RECEIV ED. THEREFORE, BANKS SHOULD NOT TAKE TO INCOME ACCOUNT INTEREST ON NON-PERFORMING ASSET ON ACCRUAL BASIS.' HENCE, ACCORDING TO THE GUIDELINES ASSESSEE RECOGNI ZES THE INCOME ON NPA ACCOUNT ON ACTUAL RECEIPT BASIS A ND HAS TO OFFER THE SAME FOR TAXATION IN THE YEAR IN W HICH IT IS ACTUALLY RECEIVED AND THE ASSESSEE HAS FOLLOWED THE SAME. (VII) THE THEORY OF ONLY REAL INCOME IS TO BE TAXED IS SETTLED LAW AND IT HAS BEEN HELD BY VARIOUS COURTS THAT NOTWITHSTANDING THAT AN ASSESSEE MAY BE FOLLOWING T HE MERCANTILE SYSTEM OF ACCOUNTING, THE ASSESSEE COULD ONLY BE TAXED ON REAL INCOME AND NOT ON ANY HYPOTHETICAL/ILLUSORY INCOME. THIS PROPOSITION OF L AW IS SUPPORTED BY FOLLOWING DECISIONS - (A) UCO BANK VS. CIT 237 ITR 889(SC) (B) CIT VS. SHORJI VALLABHDAS AND CO. 46 ITR 144 (SC) (C) GODHRA ELECTRICITY CO.LTD. VS. CIT 225 ITR 746 (SC) (D) THE HON'BLE DELHI HIGH COURT'S CONSOLIDATED DECISIO N DATED 29/11/2010 IN THE CASES OF CIT VS. VASISTH 7 CHAY VYAPAR LTD. AND OTHERS (ITATONLINE.ORG - NOV.2010) (VIII) THE CONTENTION OF THE APPELLANT IN RESPECT O F INTEREST ON NPA/BAD OR DOUBTFUL DEBTS IS SUPPORTED BY THE RA TIO LAID DOWN IN THE FOLLOWING DECISIONS- (A) UNITED BANK OF INDIA VS. DCIT 64 TTJ 432 (CAL. ITAT ) (B) ANZ GRINDLEY BANK VS. CIT 250 ITR 125 (CAL.) (C) AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION VS. CIT 258 ITR 601 (BOM.) (D) CIT VS. BANK OF AMERICA NT & SA 262 ITR 504 (BOM.) (E) STATE BANK OF INDIA VS. IAC 23 TTJ 492 (MUM.) (F) BANK OF MAHARASHTRA VS. ITO 16 ITD 113 (PUNE) (G) SECOND ITO VS. MAHARASHTRA STATE FINANCE CORPORATION LTD. 28 TTJ 386 (BOM.) (H) ITO VS. ORISSA STATE FINANCIAL CORPORATION 39 TTJ 603(CUTTACK) (IX) FURTHER, THE HON'BLE JURISDICTIONAL BENCH OF H ON'BLE ITAT PUNE, IN ITS ORDER DATED 31/01/2008, IN THE CA SE OF WESTERN MAHARASHTRA DEVELOPMENT CORPORATION LTD. VS. DCIT, (2008) 114 TTJ (PUNE) 54, HAS ELABORATELY CONSIDERED A SIMILAR SITUATION WHERE RECOVERIES OF INTEREST ON SEED MONEY LOAN GIVEN BY THE ASSESSEE COMPANY WAS EXTREMELY LOW AND POSSIBILITIES OF RECOVERING THESE AMOUNTS WAS SOMEWHAT REMOTE, THE HON'BLE ITAT HAS OBSERVED THAT, NO DOUBTS, THERE IS A LEGAL RIGHT TO RECEIVE THE INTEREST BUT THERE ARE A LSO GROUND REALITIES WHICH DO NOT PERMIT STRICT ENFORCE MENT OF THIS RIGHT. WHILE HOLDING THAT SUCH INTEREST EVE N THOUGH ACCRUED AS PER MERCANTILE SYSTEM OF ACCOUNTI NG BUT DID NOT GIVE REAL INCOME TO THE ASSESSEE. THE HON'BLE ITAT HAS OBSERVED AS UNDER: 'IN OUR CONSIDERED OPINION, ANY OTHER VIEW OF THE M ATTER WILL RESULT IN DISTORTION IN THE FINANCIAL RESULTS DISCLOSED BY THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE . IT IS ALSO IMPORTANT TO REMAIN ALIVE TO THE FACT THAT THE PROVISIONS OF S.145(1) ARE SUBJECT TO, INTER ALIA, MANDATE TO AS-I WHICH ALSO PRESCRIBED THAT 'ACCOUNTING POLI CIES ADOPTED BY THE ASSESSEE SHOULD BE SUCH SO AS TO REPRESENTS A TRUE AND FAIR VIEW OF THE STATE OF AFF AIRS OF THE BUSINESS, PROFESSION OR VOCATION IN THE FINANCI AL 8 STATEMENTS PREPARED AND PRESENTED BY ON THE BASIS O F SUCH ACCOUNTING POLICIES. IN THE NAME OF COMPLIANCE WITH S. 145(1), IT CANNOT BE OPEN TO ANYONE TO FORC E ADOPTION OF ACCOUNTING POLICIES WHICH RESULT IN A DISTORTED VIEW OF THE AFFAIRS OF THE BUSINESS. THER EFORE, EVEN UNDER THE MERCANTILE METHOD OF ACCOUNTING, AND , ON PECULIAR FACTS OF THIS CASE, THE ASSESSEE IS JUS TIFIED IN FOLLOWING THE POLICY OF NOT RECOGNIZING THESE INTER EST REVENUE TILL THE POINT OF TIME WHEN THE UNCERTAINTY TO REALIZE THE REVENUE VANISHES.' (X) THE HON'BLE DELHI HIGH COURT IN THE CASES OF M/ S VASISTH CHAY VYAPAR LTD. AND M/S TED CO. INVESTMENT & FINANCIAL SERVICES (P) LTD. BEARING ITA NOS. ITA 552/2005, ITA 565/2005, ITA 1191/2007, ITA 139/2008, ITA 466/2008, ITA 537/2008, ITA 408/2003 DATED 29/11/2010 HAS DECIDED THE SIMILAR ISSUE IN FAVOUR OF THE ASSESSEES IN THE CASE OF NON BANKING FINANCIAL COMPANIES WHICH CAN BE REGARDED AS AT PAR WITH NON SCHEDULED CO-OPERATIVE BANK. IN THIS CASE, THE A.O. AND THE CIT(APPEALS) HAVE HELD THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING AND AS PER PROVISIONS OF SECTION-5 OF THE INCOME TA X ACT, 1961, INTEREST INCOME HAD ACCRUED TO THE ASSESSEE. IN THEIR VIEW, PROVISIONS OF RESERVE BANK OF INDIA ACT , 1934 OR THE DIRECTIONS OF RBI ISSUED UNDER THE SAID ACT COULD NOT OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT. THE HON'BLE ITAT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE HON'BLE DELHI HIGH COURT HAS DISMISSE D THE APPEALS OF THE REVENUE OBSERVING/HOLDING AS UND ER- (1) THE HON'BLE ITAT IS OF THE VIEW THAT THE PROVIS IONS OF SECTION 45Q OF THE RBI ACT SHALL OVERRIDE THE PROVI SIONS OF THE INCOME TAX ACT AND THE ASSESSEE IS JUSTIFIED IN NOT CREDITING INCOME FROM THE LOAN ADVANCED FOLLOWI NG THE RBI ACT AND PRUDENTIAL NORMS ISSUED THERE UNDER . THE HON'BLE ITAT HAS ALSO HELD THAT IN TERMS OF SEC TION 145 OF THE ACT, NO ADDITION COULD BE MADE IN THE HA NDS OF THE ASSESSEE IN RESPECT OF SUCH UNREALIZED INTER EST WHEN THE LOAN WAS ADMITTEDLY NPA. (2) THE SECTION 45Q OF THE RBI ACT WHICH STARTS WI TH NON-OBSTANTE CLAUSE, READS AS UNDER - 'CHAPTER IIIB TO OVERRIDE OTHER LAWS. 45Q. THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFE CT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH 9 CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FO RCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW.' THE ASSESSEE COMPANY IN THAT CASE BEING NBFC IS GOVERNED BY PROVISIONS OF RBI ACT AND HENCE IN VIEW OF PROVISIONS OF SECTION 45Q OF THE RBI ACT AND THE PRUDENTIAL NORMS ISSUED BY THE RBI IN EXERCISE OF I TS STATUTORY POWERS, IT CANNOT BE SAID THAT INTEREST I N RESPECT OF NPA ACCRUED TO THE ASSESSEE. THE ABOVE PROPOSITION IS SUPPORTED BY THE JUDGEMENT OF THE HON'BLE APEX COURT IN THE CASE OF TRO VS. CUSTODIAN, SPECIAL COURT ACT, 1934 REPORTED IN 293 ITR 369 (SC) WHEREIN IT WAS HELD THAT WHERE AN ACT MAKE S A PROVISION WITH NON-OBSTANTE CLAUSE THAT WOULD OVERRIDE THE PROVISIONS OF OTHER ACTS. (3) THE ASSESSEE IS BOUND TO FOLLOW ACCOUNTING STANDARD-9 ISSUED BY ICAI WHEREIN IT HAS BEEN LAID DOWN THAT THE REVENUE WHICH IS DOUBTFUL OF RECOVERY/WHERE RECOVERY OF INCOME IS UNCERTAIN, THE REVENUE NEED NOT BE RECOGNIZED. (4) EVEN UNDER THE PROVISIONS OF INCOME TAX ACT, IN TEREST WHICH IS DOUBTFUL OF RECOVERY CANNOT BE SAID TO HAV E 'ACCRUED'. THE REAL INCOME CAN ONLY BE TAXED AND IF UNRECOVERABLE INTEREST ON NPA IS CONSIDERED AS INCO ME TRUE AND FAIR VIEW AS PER BOOKS OF ACCOUNTS AND FIN AL STATEMENTS OF ACCOUNTS WOULD NOT BE REFLECTED. (5) THE DECISION IN THE CASE OF SOUTHERN TECHNOLO GY LTD. VS. JCIT 320 ITR 577 (SC) IS NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE AS IN THE SAID CA SE THE ISSUE ABOUT ALLOWABILITY OF CLAIM OF DEDUCTION IN T ERMS OF SECTION 36(1)(VII) OF THE ACT HAS BEEN DECIDED. IN THE SAID CASE, THE HONBLE APEX COURT MADE DISTINCTION WITH REGARD TO INCOME RECOGNITION AND HELD THAT INCOME HAD TO BE RECOGNIZED IN TERMS OF PRUDENTIAL NORMS EVEN THOUGH THE SAME DEVIATED FROM MERCANTILE SYSTEM OF ACCOUNTING AND/OR SECTION 145 OF THE INCOME TAX ACT . (6) THE ISSUE HAS BEEN DECIDED IN PARA-17 WHICH IS REPRODUCED BELOW - '17. IN THIS SCENARIO, WE HAVE TO EXAMINE THE STREN GTH IN THE SUBMISSION OF LEARNED COUNSEL FOR THE REVENUE T HAT WHETHER IT CAN STILL BE HELD THAT INCOME IN THE FOR M OF INTEREST THOUGH NOT RECEIVED HAD STILL ACCRUED TO T HE ASSESSEE UNDER THE PROVISIONS OF INCOME TAX ACT WAS , 10 THEREFORE, ELIGIBLE TO TAX. OUR ANSWER IS IN THE NE GATIVE 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 EX AMINE AS TO WHETHER IN THE GIVEN CIRCUMSTANCES, INTEREST INCOME HAS ACCRUED TO THE ASSESSEE. IT IS STATED AT THE COST OF REPETITION THAT ADMITTED POSITION IS THAT T HE ASSESSEE HAD NOT RECEIVED ANY INTEREST ON THE SAID ICD PLACED WITH SHAW WALLACE SINCE THE ASSESSMENT YEAR 1996-9,7 AS IT HAD BECOME NPAS IN ACCORDANCE WITH T HE PRUDENTIAL NORMS WHICH WAS ENTERED IN THE BOOKS OF ACCOUNTS AS WELL. THE ASSESSEE HAS FURTHER SUCCESSF ULLY DEMONSTRATED THAT EVEN IN THE SUCCEEDING 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 WHICH WERE F ILED BY MANY CREDITORS. THESE CIRCUMSTANCES, LED TO AN UNCERTAINTY IN SO FAR AS RECOVERY OF INTEREST WAS CONCERNED, AS A RESULT OF THE AFORESAID PRECARIOUS FINANCIAL POSITION OF SHAW WALLANCE. WHAT TO TALK O F INTEREST, EVEN THE PRINCIPAL AMOUNT ITSELF HAD BECO ME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LEGITI MATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NO T ACCRUED. WE ARE IN AGREEMENT WITH THE SUBMISSION OF MR. VOHRA ON THIS COUNT, SUPPORTED BY VARIOUS DECIS IONS OF DIFFERENT HIGH COURTS 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 REGARD TO THE PROVIS IONS OF SECTION 45Q OF THE RBI AND PRUDENTIAL NORMS ISSU ED BY THE RBI IN EXERCISE OF ITS STATUTORY POWERS. (EMPHASIS SUPPLIED) 4.4 IN VIEW OF THE ABOVE FACTS AND DISCUSSION, CIRC ULARS ISSUED BY RBI AND CBDT, THE RATIO LAID DOWN BY THE VARIOUS DECISIONS RELIED ON BY THE APPELLANT AND AL SO THE DECISIONS REFERRED TO IN EARLIER PARA, I AM OF THE CONSIDERED VIEW THAT THE A.O. IS NOT JUSTIFIED IN M AKING THIS ADDITION. THE A.O. IS DIRECTED TO DELETE THE A DDITION. THE A.O. IS ALSO DIRECTED TO OBTAIN THE FOLLOWING D ETAILS FROM THE A.O. 11 (A) THE DETAILS OF NPA ACCOUNTS WITH NPA STATEMENTS OF BANKS 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. AND THEN THE FOLLOWING INTEREST, IF ANY, ON NPA SHO ULD BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. (A) INTEREST ON NPA ACCOUNTS ACTUALLY RECEIVED DUR ING THE YEAR. (B) INTEREST ACTUALLY RECEIVED OR ACCRUED ON NPA ACCOUNTS AND FIRST CREDITED AND THEN DEBITED TO PRO FIT AND LOSS ACCOUNT ON PROVISION FOR OVERDUE INTEREST RESERVE OR INTEREST ON NPA ACCOUNTS. GROUND NO.1 IS ALLOWED ACCORDINGLY. 4. IN SUM AND SUBSTANCE THE LD. CIT(A) ON PRINCIPLE ACCEPTED THE PLEA OF THE ASSESSEE THAT PROVISIONS O F SECTION 43D ARE APPLICABLE TO THE ASSESSEE COMPANY. IN THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BAN K VS. CIT(SUPRA) IS APPLICABLE EVEN TO THE NON-SCHEDULED BANK LIKE ASSESSEE. NOW THE REVENUE IS IN APPEAL BEFORE US. 5. WE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AN D PERUSED THE RECORD. WE FIND THAT THE IDENTICAL ISS UE HAS BEEN CONSIDERED BY THE ITAT, VISAKHAPATNAM BENCH, I N THE CASE OF DCIT, VIJAYAWADA VS. THE DURGA COOPERATIVE URBAN BANK LTD., VIJAYAWADA, IN ITA.NO.511/VIZAG/2010 DAT ED 10.03.2011. IN THE SAID CASE ALSO, IT WAS NOTICED BY THE ASSESSING OFFICER THAT ASSESSEE DID NOT INCLUDE THE INTEREST OF RS.18,26,306/- ON THE NPA ADVANCES. AGAIN THE I SSUE OF APPLICABILITY OF SECTION 43D WAS CONSIDERED TO THE NON- 12 SCHEDULED BANKS. THE TRIBUNAL PLACED ITS HEAVY REL IANCE ON THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF VASHIST CHAY VYAPAR LTD. [330 ITR 440 (DEL.)], IN W HICH THE HONBLE DELHI HIGH COURT HAS CONSIDERED THE DECISIO N IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. [320 ITR 577 (SC )]. THE TRIBUNAL FINALLY HELD THAT THE INTEREST INCOME RELA TABLE TO NPA ADVANCES DID NOT ACCRUE TO THE ASSESSEE. 6. AN IDENTICAL VIEW HAS BEEN TAKEN BY THE ITAT, AHMEDABAD BENCH IN THE CASE OF KARNAVATI COOPERATIV E BANK LTD. VS. DY.CIT [134 ITD 486 (AHMEDABAD)]. IN THE CASE OF KARNAVATI COOPERATIVE BANK LTD. (SUPRA), TH E TRIBUNAL HAS CONSIDERED THE PROVISIONS OF SECTION 4 3D AND ITS APPLICATION TO THE NON-SCHEDULED BANKS. THE RE ASONS GIVEN BY THE TRIBUNAL IN THE CASE OF KARNAVATI COOP ERATIVE BANK LTD. (SUPRA) FOR HOLDING THAT INTEREST ON THE STICKY ADVANCES/NPA ADVANCES CANNOT BE BROUGHT TO TAX BY FOLLOWING THE DECISION IN THE CASE OF UCO BANK (SUP RA), WHICH IS AS UNDER: 15.1. ON CAREFUL ANALYSIS OF THIS SECTION OUR FIRS T OBSERVATION IS THAT SECTION 43D IS IN CONTRAST WITH THE FUNDAMENTAL PRINCIPLE OF ACCOUNTANCY. THE CARDINAL PRINCIPLE OF MERCANTILE SYSTEM OF ACCOUNTANCY IS TH AT AN INCOME IS TO BE SHOWN IN THE BOOKS OF ACCOUNT ON ACCRUAL BASIS. THE PRINCIPLE IS THAT IT IS IMMATERI AL WHETHER IT WAS ACTUALLY RECEIVED OR NOT, BUT IF AN INCOME IS EXPECTED TO BE RECEIVED, THEN IT SHOULD BE BROUG HT TO BOOKS OF ACCOUNT AS AN INCOME ACCRUED TO THE ASSESS EE. CONTRARY TO THIS RECOGNIZED PRINCIPLE, THIS SECTION HAS PRESCRIBED THAT AN INCOME BY WAY OF INTEREST SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED. THE WORDS CREDITED AND ACTUALLY RECEIV ED HAS BEEN HIGHLIGHTED HEREINABOVE WHILE REPRODUCING THE SECTION IN QUESTION. THE OTHER DEVIATION FROM THE S AID ACCEPTED PRINCIPLE OF ACCOUNTANCY IS THAT AN INCOME BY WAY OF INTEREST SHALL BE CHARGEABLE TO TAX IN THE PREVIOUS YEAR IN WHICH IT IS ACTUALLY RECEIVED. THE ACT SAYS THAT THE INCIDENCE OF CREDIT OR ACTUALLY RE CEIVED, WHICHEVER IS EARLIER IS TO BE TAKEN INTO ACCOUNT FO R THE PURPOSE OF CHARGEABILITY OF INCOME BY WAY OF INTERE ST. SIMULTANEOUSLY, IT IS NOTEWORTHY THAT THIS SECTION IS AN OVERRIDING SECTION BECAUSE THE OPENING WORD IS NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT. THEREFORE, IN SP ITE OF ANYTHING CONTAINED IN THE ACT, THE PROVISIONS OF TH IS SECTION SHALL OVERRIDE THOSE PROVISIONS. ONCE THE S TATUTE HAS CATEGORICALLY MADE A LAW IN RESPECT OF PUBLIC FINANCIAL INSTITUTIONS THAT INTEREST IS CHARGEABLE TO TAX 13 EITHER IN THE YEAR IN WHICH CREDITED OR ACTUALLY RE CEIVED, WHICHEVER IS EARLIER, THEN IT IS COMPULSORY TO ABID E BY THE SAID RULE. ACCORDING TO US, NO SCOPE IS LEFT WI TH THE REVENUE AUTHORITIES TO IGNORE THESE PROVISIONS DUE TO UNAMBIGUOUS USE OF LANGUAGE IN THE SECTION. (II) STATUS OF ASSESSEE FOR THE PURPOSE OF APPLICAT ION SECTION 43-D. AS FAR AS THE STATUS OF THE ASSESSEE IS CONCERNED, THE ASSESSING OFFICER HAS STATED THAT THE ASSESSEE-BANK IS A CO-OPERATIVE BANK. UNDISPUTEDLY, THE ASSESSEE IS ALSO GOVERNED BY THE RBI GUIDELINES. VIDE AN EXPLANATION (D) R.W.S. 36(1)(VIIA) ANNEXED TO SECTION 43-D THE DEFI NITION OF THE ENTITIES INCORPORATED BY THE SECTION HAVE BE EN DEFINED AND IN THE ABSENCE OF ANY CONTRARY MATERIAL , WE HEREBY HOLD THAT THE ASSESSEE IS COVERED BY ONE OF THE ENTITIES, HENCE THE PROVISIONS OF SECTION 43-D ARE TO BE APPLIED. (III) APPLICABILITY OF CBDT CIRCULAR. NEXT ISSUE IS THAT WHETHER A CIRCULAR HAVING EFFECT OF RELAXING RIGOUR OF LAW CAN BE TREATED AS INCONSISTENT WITH T HE PROVISIONS OF A STATUTE. IN ORDER TO AID PROPER DET ERMINATION OF THE INCOME OF MONEY LENDERS AND BANKS, THE CENTRAL BOARD OF DIRECT TAXES HAS ISSUED A CIRCULAR DATED OCTOBER 6, 1952, PROVIDING THAT WHERE INTEREST ACCRUING ON DOUBTFUL DEBTS IS CREDITED TO A SUSPENSE ACCOUNT, IT NEED NOT BE INCL UDED IN ASSESSEES TAXABLE INCOME, PROVIDED THE INCOME TAX OFFICER IS SATISFIED THAT RECOVERY IS PRACTICALLY IMPROBABLE. THE CBDT U/S.119 OF THE I.T.ACT HAS POWER TO ISSUE CIRCULARS IN EXERCISE OF ITS STATUTORY POWERS. IF THE BOARD CONSIDER IT N ECESSARY TO LAY DOWN CERTAIN RULES AND THEN DIRECT THE SUB-ORDI NATE AUTHORITIES, SUCH DIRECTIONS ARE REQUIRED TO BE FOL LOWED AND SUCH CIRCULAR WOULD BE BINDING ON THE DEPARTMENT UN LESS AND UNTIL HELD AS ULTRA VIRES BY A COURT OF LAW. T HE BOARD HAS POWERS TO RELAX THE SEVERITY OR THE STRICTNESS OF LAW AND THE AUTHORITIES ARE REQUIRED TO FOLLOW THOSE INSTRU CTIONS AS HELD IN THE CASE OF C.B. GAUTAM VS. UNION OF INDIA 108 CTR 304 (SC) & 110 CTR 179 (SC); NAVNITLAL C.ZAVERI 56 ITR 198(SC) AND K.P.VARGHESE 131 ITR 597 (SC). IN THE LAND-MARK DECISION, THE HON'BLE SUPREME COUR T IN THE CASE OF UCO BANK VS. CIT (1999) 237 ITR 889 (SC) HA S THEREFORE HELD, FIRST, THAT A BENEFICIAL CIRCULAR I S NOT TO BE TREATED AS INCONSISTENT WITH THE PROVISIONS OF STAT UTE AND BINDING ON THE AUTHORITIES. SECOND, THAT IN RESPECT OF INTEREST 14 ON STICKY ADVANCES INTEREST INCOME IS TO BE TAXED ONLY WHEN ACTUALLY RECEIVED AS PRESCRIBED BY CBDT CIRCUL AR. HOWEVER, IN THE PAST AN INTERESTING TURN HAD TAKEN PLACE BY AN ORDER OF THE HONBLE KERALA HIGH COURT IN THE CA SE OF STATE BANK OF TRAVANCORE REPORTED IN 110 ITR 336 (KER.), WHEREIN IT WAS HELD THAT THE ASSESSEE, A BANKING COMPANY, DID NOT CREDIT IN ITS ACCOUNT THE INTEREST THAT HAD ACCRUED ON STICKY ADVANCES BECAUSE THE ASSESSEE FELT THAT THE INTERE ST COULD NOT TO BE REALISED. IT CREDITED THE INTEREST TO A S EPARATE ACCOUNT KNOWN AS INTEREST SUSPENSE ACCOUNT. ON RE FERENCE, THE HON'BLE COURT HAS HELD THAT THERE WAS AN ACCRUA L OF INCOME LIABLE TO INCOME-TAX AND THE ASSESSEE WAS NO T JUSTIFIED IN NOT CREDITING THE INTEREST INCOME ON S UCH STICK ADVANCES IT ITS ACCOUNTS. HOWEVER, LATER ON AT THE HON'BLE APEX COURT WHILE PRONOUNCING THE JUDGMENT OF THE SA ID STATE BANK OF TRAVANCORE VS. CIT REPORTED IN (1986)158 IT R 102(SC), THERE WERE HON'BLE THREE JUDGES PRESIDING THE COURT, OUT OF WHICH HONBLE TWO JUDGES WERE IN THE OPINION THAT THE INTEREST ON STICKY ADVANCES WAS RIGHTLY TREATED AS INCOME WHICH HAD ACCRUED TO THE APPELLANT. THERE WA S A DESCENDING NOTE BY ONE OF THE HON'BLE JUDGE AND COM MENTED THAT WHETHER AN INCOME ON RECEIPT BASIS OR ON ACCRU AL BASIS, IT IS THE REAL INCOME AND NOT ANY HYPOTHETICAL INCO ME WHICH MAY HAVE THEORETICALLY ACCRUED, I.E. SUBJECT TO TAX UNDER THE ACT. NEVERTHELESS, THAT DECISION WAS NOT FOLLOWED W HILE DECIDING THE APPEAL OF UCO BANK (SUPRA) BY THE HON' BLE THREE JUDGES OF THE SUPREME COURT, ALREADY DISCUSSED BY U S SUPRA. WE, THEREFORE SUMMARIZE THAT AS OF NOW THE L AW AS LAID DOWN IN UCO BANK IS THAT IN TERMS OF CBDT CIRC ULAR THE INTEREST IS TO BE ADDED AS INCOME ONLY WHEN ACTUALL Y RECEIVED OR CREDITED IN RESPECT OF THE STICKY ADVANCES WHI LE MAKING ASSESSMENT FOR A FINANCIAL INSTITUTION. (IV) INTERPRETATION OF THE LANGUAGE OF THE STATUTE : WE HAVE REPRODUCED VERBATIM THE PROVISIONS OF SECTI ON 43-D OF THE I.T.ACT AND EXPRESSED AN OPINION THAT I F THE STATUTE HAS USED THE TERMINOLOGY FOR THE CHARGEABIL ITY OF INTEREST ON THE BASIS WHEN CREDITED OR ACTUALLY RECEIVED, THEN IN OUR OPINION NO AMBIGUITY HAS BEE N LEFT BY THE STATUTE. IF THE STATUTE IS SO CLEAR THAT AN INTERPRETATION CAN EASILY BE MADE, THEN THAT EXACT MEANING SHOULD BE GIVEN TO THE LANGUAGE OF THE SECT ION. FOR THIS LEGAL PROPOSITION WE PLACE RELIANCE ON KES HAVJI RAVJI AND COMPANY VS. CIT 183 ITR 01 (SC), WHEREIN IT WAS HELD AS UNDER: 15 AS LONG AS THERE IS NO AMBIGUITY IN THE STATUTORY LANGUAGE, RESORT TO ANY INTERPRETATIVE PROCESS TO U NFOLD THE LEGISLATIVE INTENT BECOMES IMPERMISSIBLE. THE SUPPOSED INTENTION OF THE LEGISLATURE CANNOT THEN B E APPEALED TO WHITTLE DOWN THE STATUTORY LANGUAGE WHI CH IS OTHER-WISE UNAMBIGUOUS. IF THE INTENDMENT IS NOT IN THE WORDS, IT IS NOWHERE ELSE. THE NEED FOR INTERPRETATION ARISES WHEN THE WORDS USED IN THE ST ATUTE ARE, ON THEIR OWN TERMS, AMBIVALENT AND DO NOT MANI FEST THE INTENTION OF THE LEGISLATURE. WHEN WORDS ACQUIRE A PARTICULAR MEANING OR SENSE BECAUSE OF THEIR AUTHORITATIVE CONSTRUCTION BY SUPE RIOR COURTS, THEY ARE PRESUMED TO HAVE BEEN USED IN THE SAME SENSE WHEN USED IN SUBSEQUENT LEGISLATION IN T HE SAME OR SIMILAR CONTEXT. TO SAY THAT THE COURT COULD NOT RESORT TO THE SO-CA LLED EQUITABLE CONSTRUCTION OF A TAXING STATUTE IS NOT TO SAY THAT, WHERE A STRICT LITERAL CONSTRUCTION LEADS TO A RESULT NOT INTENDED TO SUBSERVE THE OBJECT OF THE LEGISLAT ION, ANOTHER CONSTRUCTION, PERMISSIBLE IN THE CONTEXT, S HOULD NOT BE ADOPTED. IN THIS RESPECT, TAXING STATUTES AR E NOT DIFFERENT FROM OTHER STATUTES. WE CAN THEREFORE SAFELY DRAW A CONCLUSION THAT BY T HE INSERTION OF A SPECIAL PROVISION TO TAX INTEREST IN COME IN THE CASE OF PUBLIC FINANCIAL INSTITUTION, ETC. SECT ION 43-D HAS TO BE APPLIED IN ITS LETTER AND SPIRIT. IT IS P ERTINENT TO MENTION THAT LATER ON, IN THE CASE OF CIT VS. BANK OF AMERICA S.A. 262 ITR 504 (BOM) THE QUESTION OF INTE REST ON STICKY LOANS WAS DECIDED IN FAVOUR OF THE ASSE SSEE AND HELD THAT THE QUESTION IS TO BE ANSWERED IN FAV OUR OF THE ASSESSEE FOLLOWING THE DECISION OF UCO BANK REPORTED AT 237 ITR 889(SC) :: 240 ITR 355 (SC). LIKEWISE, IN AN ANOTHER CASE OF CIT VS. STATE BANK OF INDIA 262 ITR 662 (BOM.) AGAIN IT WAS HELD THAT THE AMOUNT CREDITED TO THE INTEREST SUSPENSE ACCOUNT WA S NOT TAXABLE FOLLOWING THE DECISION PRONOUNCED IN TH E CASE OF UCO BANK (SUPRA). (V) JUDGEMENT IN FAVOUR OF REVENUE : FROM THE SIDE OF THE REVENUE AN ORDER OF THE TRIBUN AL HAS BEEN VEHEMENTLY RELIED UPON AND THIS IS THE BAS IC REASON OF THE ELABORATE DISCUSSION MADE HEREINABOVE SO AS TO UNFOLD THE CONTROVERSY. IN THE SAID DECISION OF THE TRIBUNAL, VIZ. JT.CIT V/S. INDIA EQUIPMENT LEASING LTD. (2008)111 ITD 37 (CHENNAI), THE RESPECTED CO-ORDINA TE 16 BENCH HAS EXPRESSED THAT QUOTE PRIOR TO INSERTION OF SECTION 43D WITH EFFECT FROM 1-4-1991, RECOGNITION OF INCOME WAS ON THE BASIS OF CIRCULAR OF 9-101984. IT SAID THAT FOR FIRST THREE YEARS THE INCOME MAY BE TAKEN ON ACCRUAL BASIS AND FROM 4TH YEAR ONWARDS, THE INCOME IN RESPECT OF DOUBTFUL DEBTS WAS TO BE RECOGNIZED ON RECEIPT BASIS. SINCE THE INCOME WAS TO BE ASSESSED FOR FIRST THREE YEARS ON ACCRUAL BASIS, PROVISIONS OF S ECTION 43D WERE INSERTED IN THE ACT. CIRCULAR NO.621, DATE D 19- 12-1991 GIVES THE LEGISLATIVE INTENTION STATING THA T SECTION 43D WAS INSERTED WITH A VIEW TO IMPROVING T HE VIABILITY OF BANKS, PUBLIC FINANCIAL INSTITUTIONS E TC., SO AS TO PROVIDE THAT INTEREST ON STICKY LOANS SHALL BE C HARGED TO TAX ONLY IN THE YEAR IN WHICH THE INTEREST IS AC TUALLY RECEIVED OR CREDITED TO THE PROFIT AND LOSS ACCOUNT . THIS BENEFIT WAS EXTENDED WITH EFFECT FROM 1-4-2000 IN T HE CASE OF PUBLIC COMPANIES ENGAGED IN LONG-TERM FINAN CING OF HOUSING PROJECTS APPROVED BY NATIONAL HOUSING BANKS. THE LEGISLATURE IN THEIR WISDOM DID NOT EXTE ND THE SAME BENEFIT TO NBFCS WHICH HAS BEEN GIVEN TO SCHEDULED BANKS, PUBLIC FINANCIAL INSTITUTIONS, ETC . THE PROVISIONS OF SECTION 43D AS STOOD AT RELEVANT TIME CONTAINED AN EXPRESSION 'THE INCOME BY WAY OF INTER EST IN RELATION TO SUCH CATEGORIES OF BAD OR DOUBTFUL D EBTS AS MAY BE PRESCRIBED HAVING REGARD TO THE GUIDELINES ISSUED BY THE RBI IN RELATION TO SUCH DEBTS'. THIS EXPRESSION CONTINUES TO EXIST IN THE NEWLY SUBSTITU TED SECTION 43D APPLICABLE WITH EFFECT FROM 1-4-2000. T HIS SHOWS THAT THE RBI GUIDELINES IN RESPECT OF SCHEDUL ED BANKS, PUBLIC FINANCIAL INSTITUTIONS ETC., WERE NOT SUFFICIENT FOR RECOGNITION OF INCOME ON CASH BASIS FOR THE PURPOSES OF INCOME-TAX. THE INCOME OF SUCH ASSESSEE S WAS DETERMINED AS PER CIRCULAR DATED 9-10-1984. BECAUSE OF THIS REASON, SECTION 43DWAS INSERTED IN THE STATUTE. RBI GUIDELINES IN CASE OF NBFC ARE FOR THE PURPOSE OF CONTROL AND SUPERVISION WITH RESPECT TO PUBLIC INTEREST AND VIABILITY OF THE NBFC. THE GUIDELINES NEVER INTENDED FOR TAKING THE INTEREST INCOME ACCRUED AS PER SECTION 5 OUT OF THE SCOPE OF THE ACT. IF THE CONTE NTION OF ASSESSEE WAS ACCEPTED, IT WOULD AMOUNT TO INSERTION OF 'NBFC' IN SECTION 43D, THAT TOO BY A GUIDELINE ISSU ED FOR DIFFERENT PURPOSES BY AN AUTHORITY OTHER THAN THE PARLIAMENT IN OTHER WORDS, THE DOCTRINE OF 'CASUS OMISSUS' WILL DEEM TO HAVE BEEN APPLIED WHICH IS CONTRARY TO LAW OF LAND.UNQUOTE. THE BASIC REASON FOR DIRECTING TO ASSESS THE ACCRUED INTEREST ON NPA WAS THE RBI GUIDELINES ISSUED ONLY FOR SCHEDULED BANKS, PUB LIC FINANCIAL INSTITUTIONS AND NOT FOR NBFC. THE OBSERV ATION OF THE RESPECTED TRIBUNAL WAS THAT IF THE CONTENTIO N OF 17 THE ASSESSEE WAS TO BE ACCEPTED, THEN IT WOULD AMOU NT TO INSERTION OF NBFC IN SECTION 43-D OF THE I.T.A CT. AS AGAINST THAT, AS FAR AS THE ASSESSEE IS CONCERNED, IT IS AN ACCEPTED FACT THAT THE ASSESSEE IS A COOPERATIVE BANK AND NOT A NON-BANKING FINANCIAL COMPANY AND TH IS NOTEWORTHY DISTINCTION HAS ALREADY BEEN APPRECIATED BY US IN ONE OF THE PARAGRAPHS ABOVE. THERE IS ONE MORE DECISION OF THE HONBLE APEX COUR T WHICH IS YET TO BE MENTIONED WHILE DISCUSSING THE A RGUMENTS RAISED FROM THE SIDE OF THE REVENUE. A DECISION IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JT. CIT 320 ITR 577 (SC) HAS BEEN CITED BUT THE FUNDAMENTAL DIFFERENCE IS THAT T HE ISSUE BEFORE THE HONBLE COURT WAS IN RESPECT OF PROVISIO N FOR NPA AND DEBITED TO P&L ACCOUNT BY A NBFC. THE SAID PROV ISION WAS UNDISPUTEDLY MADE BY THE SAID NBFC AS PER THE PRUDENTIAL NORMS MADE BY THE RESERVE BANK. THEREFOR E WE WANT TO MAKE IT CLEAR THAT THE QUESTION FOR CONSIDE RATION BEFORE THE HONBLE COURT WAS THAT IF A PROVISION FO R DOUBTFUL DEBT IS MADE THEN WHAT WILL BE THE LEGAL POSITION O F THE APPLICABILITY OF EXPLANATION TO SECTION 36(1)(VII) OF THE I.T. ACT. FOR THE SAKE OF READY REFERENCE, RELEVANT PARAGRAPH FROM THE HELD PORTION IS REPRODUCED BELOW: THE INCOME-TAX IS A TAX ON REAL INCOME, I.E., T HE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE ACT. THEREFORE, IF BY THE EXPLANA TION TO SECTION 36(1)(VII) A PROVISION FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMBIT OF BAD DEBT WHICH IS WRITTEN OFF, THEN ONE HAS TO TAKE INTO ACCOUNT THE EXPLANATION IN COMPUTI NG THE TOTAL INCOME UNDER THE INCOME-TAX ACT FAILING W HICH ONE CANNOT ASCERTAIN THE REAL PROFITS. THE PROVISIO N FOR NON-PERFORMING ASSETS DEBITED IN THE PROFIT AND LOS S ACCOUNT UNDER THE RESERVE BANK DIRECTIONS OF 1998 I S ONLY A NOTIONAL EXPENSE AND, THEREFORE, THERE WOULD BE ADD BACK TO THAT EXTENT IN THE COMPUTATION OF TOTAL INCOME UNDER THE INCOME-TAX ACT. THEREFORE THE DISTINCTION CAN EASILY BE DRAWN THAT IN THE APPEAL BEFORE US THE QUESTION IS ACCRUAL OF INTEREST INCOME ON STICKY LOAN BUT IN THIS CITED DE CISION THE QUESTION BEFORE HE APEX COURT WAS ABOUT THE ADMISSIBILITY OF PROVISION MADE IN RESPECT OF DOUBT FUL DEBTS. ( VI ) CONCEPT OF REAL INCOME APPROVED IN THE CASE OF BANKING BUSINESS: 18 BEFORE US, THE THEORY OF REAL INCOME HAS ALSO BEE N ARGUED AND IN SUPPORT A DECISION OF HON'BLE COURT PRONOUNCED IN THE CASE OF CIT VS. GODHRA ELECTRICIT Y CO. 225 ITR 746 (SC). IN SHORT, THE VIEW EXPRESSED WAS THAT IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE ANY TAX AND THAT IF AN INCOME HAS NOT MATERIALIZED, THEN MERELY AN ENTRY M ADE ABOUT A HYPOTHETICAL INCOME BY FOLLOWING BOOK KEEPI NG METHODS, THE LIABILITY TO TAX CANNOT BE ATTRACTED. NOW AT PRESENT THE SITUATION IS THAT THE HON'BLE MA DRAS HIGH COURT IN THE CASE OF CIT VS. ELGI FINANCE LTD. 293 ITR 357 (MAD.) HAS TAKEN A VIEW THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF LEASE, FINANCE AND HIRE PURCHASE AND THAT THE PRINCIPLE OF ACCRUAL COMES INTO PLAY W ITHOUT INCOME WAS RECOGNIZED AND THAT THE ASSESSEE HAD CLA SSIFIED ITS ASSETS ON THE BASIS OF NOTIFICATION ISSUED BY R .B.I. AND FOUND THAT CERTAIN ASSETS CAME UNDER THE CATEGORY O F NPA AND THAT FROM SUCH NPA THE ASSESSEE HAD NOT RECOGNI ZED ANY INCOME IN CONSONANCE WITH THE NOTIFICATION ISSUED B Y RBI AND AS-9 ISSUED BY ICAI AND THAT THE ASSESSEE WAS JUSTI FIED IN NOT RECOGNIZING SUCH INCOME. THE COURT HAD FURTHER EXPRESSED THAT THERE WAS NO OCCASION TO CONSIDER WHETHER THE PRINCIPLE OF ACCRUAL WOULD ARISE OR NOT, NEVERTHELESS, THE IN TEREST FROM SUCH NPA WOULD BE TAXED IN THE APPROPRIATE ASSESSME NT YEAR ON THE BASIS OF ACTUAL RECEIPT. IT IS WORTH TO MENT ION THAT FOR THIS DECISION, THE HON'BLE MADRAS HIGH COURT HAS RE LIED UPON AN ANOTHER DECISION OF THE SAME HIGH COURT PRONOUNC ED IN THE CASE OF JT.CIT VS. INDIA EQUIPMENT LEASING LTD. 293 ITR 350. 7. IN THE CASE BEFORE US, ADMITTEDLY, ASSESSEE HAS DIRECTLY TAKEN THE INTEREST TO THE BALANCE SHEET AND IT IS N OT ROUTED THROUGH THE PROFIT & LOSS ACCOUNT. MOREOVER, THE ISSUE OF THE TAXABILITY OF THE INTEREST ON THE STICKY LOSSES /ADVANCES, IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIO N OF THE COORDINATE BENCHES IN THE CASE OF THE DURGA COOPERA TIVE URBAN BANK LTD., VIJAYAWADA (SUPRA) AND KARNAVATI COOPERATIVE BANK LTD. (SUPRA). WE FIND NO REASON T O INTERFERE WITH THE REASONED ORDER OF THE LD. CIT(A) AND ACCORDINGLY THE SAME IS CONFIRMED. IN THE RESULT, THE REVENUES GROUND IS DISMISSED. 4. NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE ON BEHALF OF REVENUE. IN VIEW OF ABOVE LEGAL BACKGROUND, WE ARE NOT INCLINED TO INTERFERE IN THE FINDINGS OF CIT(A), WHO HAS RIG HTLY DELETED THE ADDITION OF RS.18,11,395/- ON ACCOUNT OF INTEREST A CCRUED ON NPA TO THE ASSESSEE. WE UPHOLD THE SAME. 19 5. IN THE RESULT, APPEAL FILED BY REVENUE IS DISMIS SED. PRONOUNCED IN THE OPEN COURT ON THIS THE DAY 3 RD OF JANUARY, 2014. SD/- SD/- (R.K. PANDA) (SHAILENDRA KUMAR YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 3 RD JANUARY, 2014 GCVSR COPY TO:- 1) DEPARTMENT 2) ASSESSEE 3) THE CIT(A), AURANGABAD 4) THE CIT, AURANGABAD 5) THE DR, B BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// SENIOR PRIVATE SECRETARY, I.T.A.T., PUNE