The DCIT, Circle-1(1), Vijayawada V. M/s The Durga Co-operative Urban Bank Ltd., Vijayawada

ITA 511/VIZ/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7149 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 22-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TH LUCAS PETER
• Assessee Lawyers: Y SURYACHANDRA RAO
• Keywords: Bad and doubtful debts
• Section: 145; 56

Judgement Text

ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 1 OF 10 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO. 511/VIZAG/2010 ASSESSMENT YEAR: 2007-08 DY.COMMISSIONER OF INCOME TAX CIRCLE-1(1) VIJAYAWADA VS. THE DURGA COOPERATIVE URBAN BANK LTD., VIJAYAWADA (APPELLANT) (RESPONDENT) PAN NO: AAAAT 6364 K APPELLANT BY: SHRI T.H. LUCAS PETER, CIT (DR) RESPONDENT BY: SHRI Y. SURYA CHANDRA RAO, CA ORDER PER SHRI B. R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST THE O RDER DATED 14.09.2010 PASSED BY LEARNED CIT(A), VIJAYAWADA AND IT RELATES TO THE ASSESSMENT YEAR 2007-08. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE GIVE RISE TO A SINGLE ISSUE VIZ., WHETHER THE LEARNED CIT (A) IS JUSTIFIE D IN HOLDING THAT THE INTEREST INCOME RELATING TO NON PERFORMING ASSETS ( HERE IN AFTER NPA) IS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE. 3. THE FACTS RELATING TO THE ISSUE ARE STATED IN BR IEF. THE ASSESSEE IS A COOPERATIVE BANK AND IT IS GOVERNED BY THE DIRECTIO NS ISSUED BY THE RESERVE BANK OF INDIA. THE ASSESSEE SOCIETY IS GENERATING IN COME BY CARRYING ON BANKING BUSINESS BY PROVIDING CREDIT FACILITY TO IT S MEMBERS. THE ASSESSEE SOCIETY ENJOYED EXEMPTION UNDER SECTION 80P OF THE ACT UP TO THE ASSESSMENT YEAR 2006-07. CONSEQUENT TO THE AMENDMEN T MADE TO SECTION 80P, THE PROFIT OF ASSESSEE SOCIETY FROM BANKING BU SINESS BECAME TAXABLE. ACCORDINGLY THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE YEAR UNDER ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 2 OF 10 CONSIDERATION ON 31.10.2007 DECLARING A TOTAL INCOM E OF RS.1.61 CRORE. DURING THE COURSE OF SCRUTINY PROCEEDINGS, THE ASSE SSING OFFICER NOTICED THAT THE ASSESSEE DID NOT INCLUDE THE INTEREST OF R S.18,26,306/-, BEING THE RELATABLE TO THE NPA ADVANCES. WHEN QUESTIONED, THE ASSESSEE SUBMITTED ITS REPLY AS UNDER: RESERVE BANK OF INDIA HAS PRESCRIBED PRUDENTIAL NO RMS IN RESPECT OF INCOME RECOGNITION ASSET CLASSIFICATION, PROVISIONING AND OTHER RELATED MATTERS AND THEREBY ISSUED GUIDEL INES REGARDING ACCOUNTING OF ACCRUED INTEREST ON BORROWA L ACCOUNTS WHICH ARE TREATED AS NON-PERFORMING ADVANCES. THE C OPY OF THE CIRCULAR ISSUED BY RESERVE BANK OF INDIA IS ENC LOSED HEREWITH FOR YOUR PERUSAL. ACCORDINGLY, ACCRUED INT EREST IN RESPECT OF NON-PERFORMING ADVANCES WAS DEBITED TO I NTEREST RECEIVABLE ACCOUNT AND CORRESPONDING AMOUNT CREDITE D TO OVERDUE INTEREST RESERVE ACCOUNT. SUBSEQUENTLY, IF A NY INTEREST IS ACTUALLY RECEIVED, THE REALIZED INTERES T WAS CREDITED TO INTEREST ACCOUNT. THE BANK HAS BEEN FOLLOWING TH E SAME POLICY SINCE THE ISSUE OF RBI GUIDELINES AND THE AMO UNT SHOWN UNDER OVERDUE INTEREST RESERVE ACCOUNT REPRESENTS TH E NON REALIZED ACCRUED INTEREST ON NON-PERFORMING ADVANCE S FOR SEVERAL YEARS. THE ASSESSING OFFICER EXAMINED THE REPLY OF THE ASS ESSEE VIS--VIS SECTION 43D OF THE ACT. THE SAID SECTION PROVIDES THAT THE INTEREST INCOME FOR SUCH CATEGORIES OF BAD OR DOUBTFUL DEBTS SHALL BE CHARGE D WITH TAX IN THE PREVIOUS YEAR IN WHICH IT IS CREDITED. HOWEVER, THE SAID SECTION WAS APPLICABLE ONLY TO PUBLIC FINANCIAL INSTITUTIONS OR A SCHEDULED BANK OR A STATE FINANCIAL CORPORATION. SINCE THE ASSESSEE DOES NOT FALL IN THAT CATEGORY, THE ASSESSING OFFICER HELD THAT THE PROVISIONS OF SECTI ON 43D ARE NOT APPLICABLE TO THE ASSESSEE. SINCE THE ASSESSEE IS FOLLOWING M ERCANTILE SYSTEM OF ACCOUNTING, THE ASSESSING OFFICER OPINED THAT THE I NTEREST ON NPA ADVANCES ACCRUED TO THE ASSESSEE AND ACCORDINGLY HE ADDED TH E INTEREST RELATING TO NPA ADVANCES, I.E. RS.18,26,306/- TO THE TOTAL INCO ME OF THE ASSESSEE. 4. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LEARNED CIT (A) AND INTER ALIA, CONTENDED AS UNDER: ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 3 OF 10 A) UNDER SECTION 5 OF THE INCOME TAX ACT, ONLY REAL INCOME NEEDS TO BE TAXED. SINCE THE INTEREST ON NPA IS A NOTIONAL INCO ME, THE SAME NEED NOT BE TAXED. B) AS PER SECTION 56 OF BANKING REGULATION ACT, THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDIA ARE NECESSARILY TO BE FOLLOWED BY THE ASSESSEE. THE NORMS PRESCRIBED BY THE RBI FOR I NCOME RECOGNITION AND ASSET CLASSIFICATION (HERE IN AFTER PRUDENTIAL NORMS) HAVE BEEN ISSUED BY THE RESERVE BANK OF INDIA IN THE PUBLIC INTEREST AND TO REGULATE BANKING POLICIES. C) AS PER THE PRUDENTIAL NORMS ISSUED BY RESERVE BA NK OF INDIA, ALL THE ASSETS ADVANCES GIVEN BY THE ASSESSEE HAVE TO BE CLASSIFIED AS PERFORMING ASSETS (PA) AND NON PERFORMING ASSETS (N PA), IN ACCORDANCE WITH THE METHODOLOGY PRESCRIBED UNDER PR UDENTIAL NORMS. AS PER THE SAID NORMS, AN ASSET SHALL BE CLA SSIFIED AS NPA WHEN IT SEIZES TO GENERATE INCOME. THE CONTENTION OF THE ASSESSEE BEFORE LEARNED CIT(A ) WAS THAT THE INTEREST ON NPA ADVANCES CANNOT BE SAID TO HAVE BEEN ACCRUED TO IT. 5. THE LEARNED CIT (A) REEXAMINED THE ISSUE IN THE LIGHT OF CONTENTIONS MADE BY THE ASSESSEE AND TOOK THE VIEW THAT THE INT EREST ON NPA DID NOT ACCRUE TO THE ASSESSEE AND HENCE THE ADDITION MADE BY THE ASSESSING OFFICER IS NOT SUSTAINABLE. ACCORDINGLY HE DELETED THE IMPUGNED ADDITION WITH THE FOLLOWING OBSERVATIONS: 4. THE ONLY ISSUE FOR ADJUDICATION IN THIS APPEAL IS THE ISSUE OF ACCRUAL OF INTEREST ON NPAS. THIS ISSUE HAS BEEN A SUBJECT MATTER OF APPEAL BEFORE THE HON'BLE ITAT, HYDERABAD DIVISION BENCH IN THE CASE OF TCI FINANCE LTD VS. ACIT (2004 ) 91 ITD 573 (HYD). THE HON'BLE TRIBUNAL, AFTER GOING THROUG H GUIDELINES ISSUED BY THE RESERVE BANK OF INDIA AND T HE ACCOUNTINGS STANDARDS NOTIFIED BY THE CENTRAL GOVER NMENT IN PURSUANCE OF SEC.145 OF THE ACT OBSERVED THAT NON-R ECOGNITION OF INCOME ON THE GROUND THAT THE INCOME HAD NOT REA LLY ACCRUED AS THE REALISABILITY OF THE PRINCIPAL OUTST ANDING ITSELF WAS DOUBTFUL, IS LEGALLY CORRECT UNDER THE MERCANTI LE SYSTEM OF ACCOUNTING. ONCE THERE IS A DOUBT REGARDING THE REA LISIBILITY OF THE PRINCIPAL AMOUNT ITSELF, IT CANNOT BE SAID THAT THE INTEREST ON SUCH AMOUNT ACCRUED TO THE ASSESSEE EVEN UNDER T HE MERCANTILE SYSTEM OF ACCOUNTING. THE HON'BLE MADRAS HIGH ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 4 OF 10 COURT IN THE CASE OF CIT VS. ANNAMALAI FINANCE LTD (2005) 275 ITR 451 (MAD) HELD THAT WHEN THE PRINCIPAL AMOUNT I TSELF IS DOUBTFUL OF RECOVERY, IT CANNOT BE SAID THAT ANY IN TEREST ACCRUED ON SUCH PRINCIPAL AMOUNT. AS THE APPELLANT IS FOLLOWING AN ESTABLISHED METHOD OF ACCOUNTING AND RECOGNIZING THE INTEREST INCOME ON NPAS AT THE TIME OF REALIZATION AND IN THE LIGHT OF THE DECISION CITED ABOVE WHEREIN THE ACCOU NTING PRINCIPLES MANDATED BY THE RESERVE BANK OF INDIA HAV E NOT BEEN FOUND TO BE CONTRARY TO THE ACCOUNTING STANDAR DS NOTIFIED BY THE CENTRAL GOVERNMENT IN PURSUANCE OF SEC.145(2 ) OF THE ACT, FOLLOWING THE ABOVE JUDICIAL PRONOUNCEMENTS, I AM OF THE VIEW THAT THE INTEREST INCOME DID NOT ACCRUE TO THE APPELLANT ON NON-PERFORMING ASSETS DURING THE YEAR. IN VIEW O F THE ABOVE, THE ADDITION OF RS.18,26,306/- IS NOT SUSTAI NABLE IN LAW AND, THEREFORE, IS DELETED. 6. AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), T HE REVENUE IS IN APPEAL BEFORE US. THE LEARNED DEPARTMENTAL REPRESENTATIVE, BY PLACING RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F SOUTHERN TECHNOLOGIES LTD VS. ACIT (320 ITR 577) SUBMITTED THAT THE PRUDENTIA L NORMS PRESCRIBED BY RESERVE BANK OF INDIA CANNOT OVERRIDE THE PROVISIONS OF INCOME TAX ACT. ACCORDINGLY HE CONTENDED THAT THE INTEREST RELATABL E TO NPA WAS RIGHTLY ASSESSED BY THE ASSESSING OFFICER AND ACCORDINGLY PLEADED TH AT THE ORDER OF THE LEARNED CIT (A) BE REVERSED. 7. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE DECISION RENDERED BY HON'BLE DELHI HIGH COURT, VIDE ITS ORDE R DATED 29.11.2010 IN THE CASE OF CIT VS. M/S VASISTH CHAY VYAPAR LTD (ITA 55 2/2005 AND OTHERS) IS DIRECTLY APPLICABLE TO THE INSTANT ISSUE RAISED BY THE REVENUE. THE HON'BLE DELHI HIGH COURT HAS HELD THAT THE INTEREST ON NPA ASSETS DOES NOT ACCRUE TO THE ASSESSEE. WHILE RENDERING THE SAID DECISION, THE D ELHI HIGH COURT HAS DULY CONSIDERED THE DECISION OF THE HON'BLE SUPREME COUR T IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). HE FURTHER SUBMITTED THA T THE ISSUE IN THE CASE OF SOUTHERN TECHNOLOGIES LTD, WAS NOT RELATED TO THE T AXABILITY OF INTEREST ON NPA. THE ISSUE THERE IS WAS ABOUT THE ADMISSIBILITY OF D EDUCTION CLAIMED TOWARDS THE PROVISION MADE ON NPA ASSETS. THE SAID COMPANY H AD DEBITED ITS PROFIT AND ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 5 OF 10 LOSS ACCOUNT WITH THE SAID PROVISION, AS PER THE PR UDENTIAL NORMS PRESCRIBED BY RESERVE BANK OF INDIA. ACCORDINGLY, IT CLAIMED THE SAID PROVISION ON NPA ASSETS AS A DEDUCTION UNDER SECTION 36(1) (VII) OF THE ACT . THE ASSESSING OFFICER REJECTED THE SAID CLAIM AS THE SAID CLAIM WAS FOUND TO BE NOT IN ACCORDANCE WITH THE INCOME TAX ACT. THE HON'BLE SUPREME COURT APPROV ED THE DECISION OF THE ASSESSING OFFICER. IT IS PERTINENT TO NOTE THAT IN THAT CASE, NO ADDITION WAS MADE IN RESPECT OF THE INTEREST RELATABLE TO NPA. ACCOR DINGLY HE SUBMITTED THAT THE DECISION OF HON'BLE APEX COURT RENDERED IN THE CASE OF M/S SOUTHERN TECHNOLOGIES LTD IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE AND ONLY THE DECISION RENDERED BY HON'BLE DELHI HIGH COURT IN TH E CASE OF M/S VASISTH CHAY VYAPAR LTD, (SUPRA) IS SQUARELY APPLICABLE. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULL Y PERUSED THE RECORD. THE QUESTION OF TAXABILITY OF INTEREST ON NPAS HAS BEEN CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VY APAR LTD (SUPRA); WHEREIN THE HON'BLE DELHI HIGH COURT TOOK INTO ACCOUNT THE DECI SION RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD, THE ASSESSEE THEREIN W AS A NON BANKING FINANCIAL COMPANY AND IT WAS ALSO BOUND BY THE PRUDENTIAL NO RMS DIRECTIONS ISSUED BY THE RESERVE BANK OF INDIA FOR INCOME RECOGNITION AN D ASSET CLASSIFICATION. THE ASSESSEE DID NOT INCLUDE THE INTEREST INCOME RELATA BLE TO NPA ASSETS IN ITS TOTAL INCOME. THE ASSESSING OFFICER, HOWEVER, ADDED THE S AID 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 S YSTEM OF ACCOUNTING. THE LEARNED CIT (A) AFFIRMED THE ORDER OF THE ASSESSING OFFICER. HOWEVER, THE ITAT DELETED THE AFORESAID INCOME. HENCE THE REVENUE PRE FERRED APPEAL BEFORE THE HON'BLE DELHI HIGH COURT. 8.1 AFTER HEARING THE RIVAL SUBMISSIONS, THE HO N'BLE DELHI HIGH COURT TOOK NOTE OF SEC.45Q OF RESERVE BANK OF INDIA ACT WHICH READS AS UNDER: ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 6 OF 10 CHAPTER IIIB TO OVERRIDE OTHER LAWS. 45Q. THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFE CT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FO RCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. THE HIGH COURT TOOK NOTE OF THE FACT THAT THE PROVI SION OF 45Q OF RESERVE BANK OF INDIA HAS OVERRIDING EFFECT OVER ANY OTHER LAW. THEN THE HON'BLE HIGH COURT ALSO CONSIDERED ACCOUNTING STANDARD AS-9 ON REVE NUE RECOGNITION AND ALSO EXTRACTED FOLLOWING RELEVANT PORTION FROM THE SAID ACCOUNTING STANDARD: 9. EFFECT OF UNCERTAINTIES ON REVENUE RECOGNITION 9.1 RECOGNITION OF REVENUE REQUIRES THAT REVENUE IS A MEASURABLE AND THAT AT THE TIME OF SALE OR THE RENDERING OF TH E SERVICE, IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIMATE COLLEC TION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLEC TION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAIS ING ANY CLAIM, E.G., FOR ESCALATION OF PRICE, EXPORT INCENTIVES, I NTEREST ETC., REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF U NCERTAINTY INVOLVED. IN SUCH CASES, IT MAY BE APPROPRIATE TO RE COGNIZE REVENUE ONLY WHEN IT IS REASONABLY CERTAIN THAT THE ULTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAI NTY AS TO ULTIMATE COLLECTION, REVENUE IS RECOGNIZED AT THE T IME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENTS. 9.3 WHEN THE UNCERTAINTY RELATING 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 REV ENUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RECOGNITION OF R EVENUE 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 RECOGNIT ION OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO THE EFFECT OF UNCERTAINTIES, IT IS CONSIDERED AS REVENUE OF TH E PERIOD IN WHICH IT IS PROPERLY RECOGNIZED. ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 7 OF 10 8.2 THE DELHI HIGH COURT ALSO CONSIDERED THE DE CISION RENDERED IN THE FOLLOWING CASES: I) CIT VS. ELGI FINANCE LTD., 293 ITR 357 (MAD) II) CIT VS. KKM INVESTMENTS (CAL) SLP DISMISSED BY SUP REME COURT (310 ITR 4) III) CIT VS. MOTOR CREDIT CO (P) LTD., 127 ITR 572 (MAD) IV) UCO BANK VS. CIT 237 ITR 889 (SC) V) CIT VS. SHOORJI VALLABHDAS & CO 46 ITR 144 (SC) VI) GODHRA ELECTRICITY CO. LTD., VS.CIT 225 ITR 746 VII) CIT VS. GOYAL M G GASES (P) LTD., 303 ITR 159 (DEL) VIII) CIT VS. EICHER LTD., ITA NO.431/2009 DATED 15.7.200 9 (DEL) 8.3 AFTER CONSIDERING THE ACCOUNTING STANDARD 9 AND THE VARIOUS CASE LAW LISTED ABOVE, THE HON'BLE DELHI HIGH COURT HELD THA T THE INTEREST ON NPA ADVANCE CANNOT BE TREATED AS ACCRUED TO THE ASSESSEE. 8.4 BEFORE THE DELHI HIGH COURT, THE REVENUE T OOK SUPPORT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN T ECHNOLOGIES LTD (SUPRA). THE DELHI HIGH COURT CONSIDERED THE SAID DECISION O F 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 SUB MISSION OF MR. SABHARWAL IS BASED ENTIRELY ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGY (S UPRA). NO DOUBT, IN FIRST BLUSH, READING OF THE JUDGMENT GIVE S AN INDICATION THAT THE COURT HAS HELD THAT RESERVE BAN K OF INDIA ACT DOES NOT OVERRIDE THE PROVISIONS OF THE I NCOME TAX ACT. HOWEVER, WHEN WE EXAMINE THE ISSUE INVOLVED THEREI N MINUTELY AND DEEPLY IN THE CONTEXT IN WHICH THAT HA D ARISEN AND CERTAIN OBSERVATIONS OF THE APEX COURT CONTAINED IN THAT VERY JUDGMENT, WE FIND THAT THE PROPOSITION ADVANCED BY MR.SABHARWAL MAY NOT BE ENTIRELY 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 TER MS 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 EXPEN DITURE OR LOSS BUT MORE IN THE NATURE OF A RESERVE, AND THUS NOT DEDUCTIBLE UNDER SECTION 36(I)(VII) OF THE ACT. THE ASSESSING ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 8 OF 10 OFFICER, HOWEVER, DID NOT BRING TO TAX RS.20,34,605 /- AS INCOME (BEING INCOME ACCRUED UNDER THE MERCANTILE SYSTEM OF ACCOUNTING). THE DISPUTE BEFORE THE APEX COURT CENTERED AROUND DEDUCTIBILITY OF PROVISION FOR NPA. AFTER ANALYZING THE PROVISIONS OF THE RESERVE BANK OF IND IA ACT, THEIR LORDSHIPS OF THE APEX COURT OBSERVED THA T 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 T HAT EXTENT, IT WAS OBSERVED THAT THE PRUDENTIAL NORMS D O NOT OVERRIDE THE PROVISIONS OF THE ACT. HOWEVER, THE APEX COURT MADE A DISTINCTION WITH REGARD TO INCOME RECO GNITION AND HELD THAT INCOME HAD TO BE RECOGNIZED IN TERMS OF THE PRUDENTIAL NORMS, EVEN THOUGH THE SAME DEVIATED FRO M MERCANTILE SYSTEM OF ACCOUNTING AND/OR SECTION 45 ( SIC. 145) OF THE INCOME TAX ACT. IT CAN BE SAID, THEREFORE, THAT THE APEX COURT APPROVED THE REAL INCOME THEORY WH ICH IS ENGRAINED IN THE PRUDENTIAL NORMS FOR RECOGNITION O F REVENUE BY NBFC. 9. THE HON'BLE SUPREME COURT IN THE CASE OF M/S SOU THERN TECHNOLOGIES LTD (SUPRA) DISSECTED THE MATTER INTO TWO PARTS VIZ., A ) INCOME RECOGNITION AND B) PERMISSIBLE DEDUCTION/EXCLUSIONS UNDER THE INCOME TA X ACT. IN SO FAR AS INCOME RECOGNITION IS CONCERNED, THE HON'BLE SUPREME COURT HELD THAT SECTION 145 OF THE INCOME TAX ACT HAS NO ROLE TO PLAY AND THE ASSESSING OFFICER HAS TO FOLLOW RESERVE BANK OF INDIA DIRECTIONS 1998, SINCE BY VIR TUE OF 45Q OF THE RESERVE BANK OF INDIA ACT, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS OF RESERVE BANK OF INDIA VIS--VIS INCOME RECOGNITION PRINCIPLES IN THE COMPANIES ACT 1956. IN SO FAR AS COMPUTATION OF INCOME UNDER THE INCOME TAX AC T IS CONCERNED, (WHICH INVOLVES DEDUCTION OF PERMISSIBLE DEDUCTIONS AND EX CLUSIONS) THE ADMISSIBILITY OF SUCH DEDUCTIONS SHALL BE GOVERNED BY THE PROVISIONS OF THE INCOME TAX ACT. THE RELEVANT OBSERVATIONS 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 RB I UNDER CHAPTER IIIB OF THE RBI ACT, 1934. THESE NORMS DEAL ES SENTIALLY WITH INCOME RECOGNITION. THEY FORCE THE NBFCS TO DI SCLOSE THE AMOUNT OF NPA IN THEIR FINANCIAL ACCOUNTS. THEY FOR CE THE NBFCS ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 9 OF 10 TO REFLECT TRUE AND CORRECT PROFITS . BY VIRTUE OF SECTION 45Q, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS 199 8 VIS-- VIS INCOME RECOGNITION PRINCIPLES IN THE COMPANIE S ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, THESE DIRECTIONS 1998 AND THE IT ACT OPERA TE IN DIFFERENT AREAS. THESE DIRECTIONS 1998 HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THESE DIRECTIONS CANNOT OVERRULE THE PERMISSIBLE DEDUCTIONS OR THEIR EXC LUSION UNDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND COMPANIES ACT IS ONLY IN THE MATTER OF INCOME RE COGNITION AND PRESENTATION OF FINANCIAL STATEMENTS. THE ACCOU NTING POLICIES ADOPTED BY AN NBFC CANNOT DETERMINE THE TA XABLE INCOME. IT IS WELL SETTLED THAT THE ACCOUNTING POLI CIES FOLLOWED BY A COMPANY CAN BE CHANGED UNLESS THE AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD RESULT IN UNDERST ATEMENT 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. HE NCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE IT ACT HAS NO ROLE TO PLAY IN THE PRESENT DI SPUTE. 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 I S ALSO GOVERNED BY THE RESERVE BANK OF INDIA. HENCE THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDIA ARE EQUALLY APPLICABLE TO THE ASSESSEE AS IT IS APPLICABLE TO THE COMPANIES REGISTERED UNDER THE CO MPANIES ACT. THE HON'BLE SUPREME COURT HAS HELD IN THE CASE OF SOUTHERN TECH NOLOGIES LTD (SUPRA), THAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA ACT H AS AN OVERRIDING EFFECT VIS-- VIS INCOME RECOGNITION PRINCIPLE UNDER THE COMPANIE S ACT. HENCE SEC.45 Q OF THE RBI ACT SHALL HAVE OVERRIDING EFFECT OVER THE I NCOME RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIVE BANKS ALSO. HENCE THE ASSE SSING OFFICER HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998, AS HELD B Y THE HON'BLE SUPREME COURT. 10.1 BASED ON THE PRUDENTIAL NORMS, THE ASSESSE E HEREIN DID NOT ADMIT THE INTEREST RELATABLE TO NPA ADVANCES IN ITS TOTAL INC OME. THE HON'BLE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD (SUPRA ) HAS HELD THAT THE INTEREST ITA NO 511 OF 2010 THE DURGA COOPERATIVE URBAN BANK LTD VIJAYAWADA PAGE 10 OF 10 ON NPA ASSETS CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE. IN THIS REGARD, THE FOLLOWING OBSERVATIONS OF HON'BLE DELHI HIGH CO URT IN THE ABOVE CITED CASE ARE RELEVANT: WHAT TO TALK OF INTEREST, EVEN THE PRINCIPLE AMOUN T ITSELF HAD BECOME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LEGITIMATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NO T ACCRUED. THE SAID DECISION OF THE HON'BLE DELHI HIGH COURT I S 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 IN COME RELATABLE ON NPA ADVANCES DID NOT ACCRUE TO THE ASSESSEE. ACCORDING LY WE UPHOLD HIS ORDER. 11. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMI SSED. PRONOUNCED IN THE OPEN COURT ON 10 TH MARCH, 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE:10-03-2011 COPY TO 1 THE DY.COMMISSIONER OF INCOME TAX CIRCLE-1(1) 2 ND FLOOR, CR BUILDINGS, BANDAR ROAD, VIJAYAWADA 520 002 2 THE DURGA COOPERATIVE URBAN BANK LTD., 11-22-10 R AJA RANGAYYA APPA RAO STREET, KOTHAPETA, VIJAYAWADA 3 4. THE CIT VIJAYAWADA THE CIT(A), VIJAYAWADA 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM