Assistant Commissioner of Income-tax, V. Madheshwari Urban Development Co.op. Bank Ltd., Solapur

ITA 567/PUN/2014

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1205 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 21-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVIKANT GUPTA
• Assessee Lawyers: B; P M SHINGTE HEERAJ JAIN
• Keywords: Question of law; Bad and doubtful debts
• Section: 260A; 145

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.567/PN/2014 '% % / ASSESSMENT YEAR : 2009-10 ACIT, CIRCLE-1, SOLAPUR . / APPELLANT V/S MADHESHWARI URBAN DEVELOPMENT COOPERATIVE BANK LIMITED, IST FLOOR, MARKET COMMITTEE COMPLEX, AT & POST MADHA, DIST: SOLAPUR PAN NO.AAABM0276E . / RESPONDENT / APPELLANT BY : SHRI RAVIKANT GUPTA / RESPONDENT BY : SHRI P.M. SHINGTE HEERAJ JAIN & B / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 01-01-2014 OF THE CIT(A)-III, PUNE RELATING TO ASSESSMENT YEAR 2009-10. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COOPERATIVE SOCIETY CARRYING ON THE BUSINESS OF BANKING A ND IS COVERED UNDER THE BANKING REGULATION ACT, 1949. IT FILED ITS RETURN OF INCOME ON 29-09-2009 DECLARING TOTAL INCOME OF / DATE OF HEARING :26.08.2015 / DATE OF PRONOUNCEMENT:28.08.2015 2 ITA NO.567/PN/2014 RS.45,82,770/-. DURING THE COURSE OF ASSESSMENT PROCEEDIN GS, THE AO NOTED THAT INTEREST RECEIVABLE ON LOANS CATEGOR IZED AS NPA WAS NOT ACCOUNTED FOR AS INCOME OF THE YEAR BUT THE SA ME WAS DIRECTLY TAKEN TO THE BALANCE SHEET AND REPRESENTED B Y CONTRA ENTRIES. ON BEING CONFRONTED BY THE AO AS TO WHY SUCH INTEREST RECEIVABLE SHOULD NOT BE CONSIDERED AS INCOME OF THE ASS ESSEE FOR THE YEAR UNDER CONSIDERATION, IT WAS ARGUED BY THE ASSE SSEE THAT AS PER THE DIRECTIONS OF THE RBI, ON THE CONCEPT OF INCOM E RECOGNITION, INTEREST ON OVERDUE LOAN ACCOUNT WAS CREDITE D TO THE PROFIT AND LOSS ACCOUNT ONLY ON ACTUAL REALISATION THOUGH THE ASSESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTIN G. IT WAS ARGUED THAT THERE WAS DRAFTING LACUNA IN SECTION 43D BY NOT INCLUDING COOPERATIVE BANKS IN ITS AMBIT AFTER DEDUCTION U/S .80P TO COOPERATIVE BANKS WAS WITHDRAWN. IT WAS ARGUED THA T THE DIRECTIONS OF THE RBI, BEING APEX BODY, WERE MANDATORY ON THE ASSESSEE AND THE SAME HAVE BEEN CONSISTENTLY FOLLOWED B Y THE ASSESSEE AS WELL AS OTHER COOPERATIVE BANKS. THE CIRCULA R NO.F.201/81/84/TA-II DATED 09-10-1984 ISSUED BY CBDT WAS ALSO BROUGHT TO THE NOTICE OF THE AO WHICH CLARIFIES THE TA XABILITY OF INTEREST ON THE NPAS. 3. HOWEVER, THE AO WAS NOT SATISFIED WITH THE ARGUMENTS OF THE ASSESSEE. HE OBSERVED FROM THE VARIOUS DETAILS FURNISHED BEFORE HIM THAT THE NPAS CATEGORIZED BY THE ASSESSEE ALSO INCLU DED SUB- STANDARD DOUBTFUL ASSETS SUGGESTING THAT THE INTEREST T HEREON HAS NOT BEEN REMAINED UNRECOVERABLE FOR THE LAST 3 CONSECUT IVE PREVIOUS YEARS. ACCORDING TO THE AO, THE ASSESSEE CON TRAVENED THE PROVISIONS OF SECTION 43D AND THEREFORE INTEREST ON S TICKY ADVANCES WAS LIABLE TO BE CONSIDERED AS INCOME FOR THE Y EAR UNDER 3 ITA NO.567/PN/2014 CONSIDERATION. ACCORDINGLY, THE AO BROUGHT TO TAX SUCH INTEREST QUANTIFIED AT RS.26,59,026/- BEING INCOME OF THE YEAR. 4. BEFORE CIT(A) IT WAS ARGUED THAT AS PER THE DECISION O F HONBLE SUPREME COURT IN THE CASE OF UCO BANK VS. CIT R EPORTED IN 237 ITR 889 THE GUIDELINES ISSUED BY CBDT IN THE CIRCU LAR NO.F.201/21/81/84 ITA-II DATED 09-10-1984 IS BINDING ON THE DEPARTMENT AND THEREFORE THE AO WAS NOT JUSTIFIED IN BRIN GING TO TAX THE INTEREST ON NPAS ON ACCRUAL BASIS. VARIOUS DECIS IONS OF THE TRIBUNAL WERE ALSO BROUGHT TO THE NOTICE OF THE CIT(A ) ACCORDING TO WHICH INTEREST ON NPAS DID NOT ACCRUE TO T HE ASSESSEE. 5. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF OSMANABA D JANTA SAHAKARI BANK LTD. VIDE ITA NO.795/PN/2011 THE CIT (A) DELETED THE ADDITION. WHILE DOING SO, HE HELD THAT THE PR OVISIONS OF SECTION 43D ARE APPLICABLE IN CASE OF THE ASSESSEE UNLES S ACCRUED INTEREST WAS ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT AND THEREFORE THE SAME IS TO BE TAXED ONLY TO THE EXT ENT ACTUALLY RECOVERED. HE NOTED FROM THE BALANCE SHEET AND PROFIT A ND LOSS ACCOUNT FOR THE IMPUGNED ASSESSMENT YEAR THAT THE INTE REST RECEIVABLE ON NPAS HAS BEEN DIRECTLY TAKEN TO INTEREST RECEIVABLE ACCOUNT ON THE ASSET SIDE OF THE BALANCE SHEET AND COR RESPONDING LIABILITY IS CREATED BY DEBITING THE INTEREST OVERDUE RESER VE ACCOUNT AND THE SAME HAS NOT BEEN INCLUDED IN THE INT EREST SHOWN AS RECEIVED IN THE PROFIT AND LOSS ACCOUNT. HE ACCORDINGLY DIRECTED THE AO TO DELETE THE ADDITION MADE BY HIM ON AC COUNT OF INTEREST RECEIVABLE ON NPAS ON ACCRUAL BASIS. 4 ITA NO.567/PN/2014 6. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE HON'BLE CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS.26,59,026/- MADE BY THE A.O. ON ACCOUNT OF INTEREST RECEIVABLES ON STIC KY ADVANCES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE CIT(A) HAS ERRED IN HOLDING THAT THE PROVIS IONS OF SECTION 43D ARE APPLICABLE TO FINANCIAL INSTITUTIONS AND A SCHEDULE D BANK. THUS, THE ASSESSEE BEING A NON SCHEDULED BANK COULD NOT TAKE THE BENEFIT OF SECTION 43D OF THE INCOME TAX ACT, 1961. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE CIT(A) ERRED IN APPRECIATING THE PROVISIONS OF SECTION 145 OF THE I.T. ACT, 1961, IN ITS CORRECT PERSPECTIVE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HON'BLE CIT(A) ERRED WHILE DELIVERING THE JUDGMENT HAS ALLOWED THE APPEAL OF THE ASSESSEE BANK BY PLACING RELIANCE ON ITS OWN DECISION IN THE ACIT, CIRCLE-3, NANDED VS. OSMANABAD JANATA SAHAKARI BANK LTD. IN ITA NO. 795/PN/2011 VIDE ORDER DATED 31/08/2012. HOWEVER, T HE ABOVE DECISION HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN APPE AL U/S. 260A HAS BEEN FILED BY THE CIT, AURANGABAD WITH THE HON'BLE HIGH COURT OF BOMBAY BENCH AT AURANGABAD, VIDE LODGING NO. 1613/2013 DATED 15/ 01/2013. 5. THE ORDER OF THE CIT(A) BE VACATED AND THAT OF AO BE RESTORED. 6. THE APPELLANT CRAVES TO ADD, ALTER, AMEND, SUBST ITUTE OR DELETE ANY OF THE GROUNDS URGED HEREIN ABOVE AS AND WHEN FOUND NECESSARY. 7. THE LD. DEPARTMENTAL REPRESENTATIVE HEAVILY RELIED ON THE ORDER OF THE AO 8. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND WHILE SUPPORTING THE ORDER OF THE CIT(A) SUBMITTED THAT THE ISS UE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. THE NANDED DIS TRICT CENTRAL COOPERATIVE BANK LTD., NANDED VIDE ITA NOS. 57 AN D 58/2014 ORDER DATED 22-01-2015 AND BATCH OF OTHER AP PEALS WHERE IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE AS SESSEES AND THE APPEALS FILED BY THE REVENUE HAVE BEEN DISMISSED. HE ALSO FILED A COPY OF THE SAID ORDER. 5 ITA NO.567/PN/2014 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES. WE FIND AN IDENTICAL ISSUE HAD COME UP BEFORE THE PU NE BENCH OF THE TRIBUNAL IN THE CASE OF LOKMANGAL CO-OP BAN K LTD. VIDE ITA NO.1540/PN/2014 ORDER DATED 28-11-2014 FOR A.Y . 2009- 10 AND BUNCH OF OTHER APPEALS WHEREIN THE TRIBUNAL HAS O BSERVED AS UNDER : 7. AT THE TIME OF HEARING, IT WAS A COMMON POINT B ETWEEN THE PARTIES THAT AN IDENTICAL CONTROVERSY HAS BEEN CONSIDER ED BY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. TH E OMERGA JANTA SAHAKARI BANK LTD. VIDE ORDER IN ITA NO.350/PN/2013 DATED 31.10.2013. IN THE SAID PRECEDENT, THE TRIBUNAL CONSI DERED THE JUDGEMENT OF THE HON'BLE DELHI HIGH COURT IN THE CA SE OF M/S VASISTH CHAY VYAPAR LTD., 330 ITR 440 (DEL) AS WELL AS THE JU DGEMENT OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SAKT HI FINANCE LTD., (2013) 31 TAXMANN.COM 305 (MADRAS), WHICH HAD EXPRESSED DIVERGENT VIEWS WITH RESPECT TO THE ISSUE OF ACCRUAL OF INTEREST INCOME ON NPA ADVANCES. IN THE ABSENCE OF ANY JUDGEME NT OF THE JURISDICTIONAL HIGH COURT, A VIEW WHICH WAS FAVOURABL E TO THE ASSESSEE WAS FOLLOWED BY THE TRIBUNAL AND THE ISSUE WAS DE CIDED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE REASONING LAID DOW N BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. VEGETAB LE PRODUCTS LTD., (1973) 88 ITR 192 (SC). THE RELEVANT DISCUSSION IN THE ORDER OF THE TRIBUNAL DATED 31.10.2013 (SUPRA) IS REPRODUCED AS UN DER :- '8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN SO FAR AS THE APPLICABILITY OFSECTION 43D OF THE ACT TO THE ASSESSEE IS CONCERNED, THERE IS A CONVERGENCE OF OPINION BETWE EN 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 O F A LICENSE GRANTED BY RBI AND IS NOT A 'SCHEDULED BANK' I NCLUDED IN SECOND SCHEDULE OF RBI SO AS TO FALL WITHIN THE SCOP E OF SECTION 43D OF THE ACT. NOTABLY,SECTION 43D OF THE ACT PRESCRIBES THAT INTEREST INCOME ON SUCH CATEGORIES OF BA D AND DOUBTFUL DEBTS AS PRESCRIBED BY THE RBI GUIDELINES SHALL BE CHARGEABLE TO TAX IN THE YEAR IN WHICH SUCH INTEREST INCOME IS CREDITED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT OR IN THE YEAR OF ACTUAL RECEIPT, WHICHEVER IS EARLIER. SI NCE ASSESSEE IS NOT AN ENTITY COVERED WITHIN THE SCOPE OF SECTION 4 3D OF THE ACT, THE PRESENT CONTROVERSY CANNOT BE ADJUDICATED I N THE LIGHT OF SECTION 43D OF THE ACT, AND IT IS LIABLE TO BE DEC IDED ON GENERAL PRINCIPLES AS TO WHETHER THE IMPUGNED INCOME HAS ACCRUED TO THE ASSESSEE DURING THE YEAR UNDER CONSIDERAT ION. 9. IN THIS CONNECTION, WE FIND THAT THE VISAKHAPATNA M BENCH OF THE TRIBUNAL IN THE CASE OF THE DURGA COOPE RATIVE URBAN BANK LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL CONTROVERSY. THE ASSESSEE BEFORE THE VISAKHAPATNAM BENCH WAS A CO-OPERATIVE BANK OPERATING UNDER A LICENSE ISSUE D BY 6 ITA NO.567/PN/2014 RBI BUT WAS NOT A 'SCHEDULED BANK' SO AS TO FALL WITHIN THE SCOPE OF SECTION 43D OF THE ACT. THE ISSUE RELATED TO T AXABILITY OF INTEREST INCOME RELATING TO NPAS, WHICH AS PER THE REVENUE WAS LIABLE TO BE TAXED ON ACCRUAL BASIS IN LINE WITH M ERCANTILE SYSTEM OF ACCOUNTING ADOPTED BY THE ASSESSEE THEREIN. THE ASSESSEE, ON THE OTHER HAND, CONTENDED THAT HAVING REGA RD TO THE GUIDELINES ISSUED BY RBI REGARDING ACCOUNTING OF I NTEREST ON NPAS, NO INTEREST INCOME ACCRUED IN RESPECT OF NPAS AND THAT THE SAME WAS TO BE TAXED ONLY ON RECEIPT BASIS. TH E TRIBUNAL OBSERVED THAT THE QUESTION OF TAXABILITY OF INTEREST ON NPAS CLASSIFIED BY RBI, WAS CONSIDERED BY THE HON'BLE DE LHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) WHEREIN AFTER CONSIDERING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LT D. (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 FOLLOWING DISCUSSION BY THE VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF TH E DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) IS WORTHY OF NOTI CE:- '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 T HE CASE OF M/S VASISTH CHAY VYAPAR LTD (SUPRA); WHEREIN THE HON' BLE DELHI HIGH COURT TOOK INTO ACCOUNT THE DECISION REND ERED BY THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). IN THE CASE OF M/S VASISTH CHA Y VYAPAR LTD, THE ASSESSEE THEREIN WAS A NON BANKING FINAN CIAL COMPANY AND IT WAS ALSO BOUND BY THE 'PRUDENTIAL NORM S DIRECTIONS' ISSUED BY THE RESERVE BANK OF INDIA FOR INC OME 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 T HE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. TH E LEARNED CIT (A) AFFIRMED THE ORDER OF THE ASSESSING OF FICER. HOWEVER, THE ITAT DELETED THE AFORESAID INCOME. HEN CE THE REVENUE PREFERRED APPEAL BEFORE THE HON'BLE DELHI H IGH COURT. 8.1 AFTER HEARING THE RIVAL SUBMISSIONS, THE HON'BLE DE LHI HIGH COURT TOOK NOTE OF SEC.45Q OF RESERVE BANK OF INDIA ACT WHICH READS AS UNDER: 'CHAPTER IIIB TO OVERRIDE OTHER LAWS. 45Q. THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAI NED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY IN STRUMENT 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 A NY OTHER LAW. THEN THE HON'BLE HIGH COURT ALSO CONSIDERED ACCO UNTING STANDARD 'AS-9' ON 'REVENUE RECOGNITION' AND ALSO EXT RACTED FOLLOWING RELEVANT PORTION FROM THE SAID ACCOUNTING STANDARD: 7 ITA NO.567/PN/2014 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 RENDER ING OF THE SERVICE, IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIM ATE COLLECTION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAISING ANY CLAIM, E.G., FOR ESCALATION OF PRICE, EXPORT INCENTIVES, INT EREST ETC., REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNC ERTAINTY INVOLVED. IN SUCH CASES, IT MAY BE APPROPRIATE TO RECO GNIZE REVENUE ONLY WHEN IT IS REASONABLY CERTAIN THAT THE U LTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAIN TY AS TO ULTIMATE COLLECTION, REVENUE IS RECOGNIZED AT THE TI ME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALLMENTS. 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 REVENUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RECOGNITION OF REV ENUE IS THAT THE CONSIDERATION RECEIVABLE FOR THE SALE OF GOODS, TH E RENDERING OF SERVICES OR FROM THE USE OF OTHERS OF ENTE RPRISE RESOURCES IS REASONABLY DETERMINABLE. WHEN SUCH CONSIDERATION IS NOT DETERMINABLE WITHIN REASONABLE LI MITS, THE RECOGNITION OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO T HE EFFECT OF UNCERTAINTIES, IT IS CONSIDERED AS REVENUE OF THE PERIOD IN WHICH IT IS PROPERLY RECOGNIZED'. 8.2 THE DELHI HIGH COURT ALSO CONSIDERED THE DECISION RENDERED IN THE FOLLOWING CASES: I) CIT VS. ELGI FINANCE LTD., 293 ITR 357 (MAD) II) CIT VS. KKM INVESTMENTS (CAL) - SLP DISMISSED BY 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 (DE L) 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 ITA NO.567/PN/2014 8.4 BEFORE THE DELHI HIGH COURT, THE REVENUE TOOK SU PPORT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA). THE DELHI HIGH COURT CONSID ERED THE SAID DECISION OF HON'BLE APEX COURT AND EXPLAINED THE SAME AS UNDER: 'WE HAVE ALREADY HELD THAT EVEN UNDER THE INCOME TA X ACT, INTEREST INCOME HAD NOT ACCRUED. MOREOVER, THIS SUBMISSION OF MR . SABHARWAL IS BASED ENTIRELY ON THE JUDGMENT OF THE SUPREME COUR T 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 THER EIN MINUTELY AND DEEPLY IN THE CONTEXT IN WHICH THAT HAD ARISEN A ND CERTAIN OBSERVATIONS OF THE APEX COURT CONTAINED IN THAT VERY JUDGMENT, WE FIND THAT THE PROPOSITION ADVANCED BY MR.SABHARWAL M AY NOT BE ENTIRELY CORRECT. IN THE CASE BEFORE THE SUPREME COU RT, 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 A LLOW THE DEDUCTION CLAIMED AS AFORESAID ON THE GROUND THAT THE PROVISION OF NPA WAS NOT IN THE NATURE OF EXPENDITURE OR LOSS BUT M ORE IN THE NATURE OF A RESERVE, AND THUS NOT DEDUCTIBLE UNDER SEC TION 36(I)(VII) OF THE ACT. THE ASSESSING OFFICER, HOWEVER, DID NOT BRING TO TAX RS.20,34,605/- AS INCOME (BEING INCOME ACCRUED U NDER THE MERCANTILE SYSTEM OF ACCOUNTING). THE DISPUTE BEFORE T HE APEX COURT CENTERED 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 DE DUCTIONS OR EXCLUSIONS UNDER THE ACT ARE CONCERNED, THE SAME ARE A DMISSIBLE ONLY IF SUCH DEDUCTIONS/EXCLUSIONS SATISFY THE RELEVANT CONDIT IONS STIPULATED THEREFORE UNDER THE ACT. TO THAT EXTENT, IT WAS OBSERVED THAT THE PRUDENTIAL NORMS DO NOT OVERRIDE THE PROVISI ONS OF THE ACT. HOWEVER, THE APEX COURT MADE A DISTINCTION WITH REGA RD TO 'INCOME RECOGNITION' AND HELD THAT INCOME HAD TO BE RECOGNI ZED IN TERMS OF THE PRUDENTIAL NORMS, EVEN THOUGH THE SAME DEVIATED F ROM MERCANTILE SYSTEM OF ACCOUNTING AND/OR SECTION 45 (SIC. 145) OF THEINCOME TAX ACT. IT CAN BE SAID, THEREFORE, THAT T HE 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 SOUTH ERN TECHNOLOGIES LTD (SUPRA) DISSECTED THE MATTER INTO TWO PARTS VIZ., A) INCOME RECOGNITION AND B) PERMISSIBLE DEDUCTION/EXCLU SIONS UNDER THE INCOME TAX ACT. IN SO FAR AS INCOME RECOGNITION I S 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 FOLL OW 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 PR INCIPLES IN THE COMPANIES ACT 1956. IN SO FAR AS COMPUTATION OF IN COME UNDER THE INCOME TAX ACT IS CONCERNED, (WHICH INVOLVES DEDU CTION OF PERMISSIBLE DEDUCTIONS AND EXCLUSIONS) THE ADMISSIBILITY O F SUCH DEDUCTIONS SHALL BE GOVERNED BY THE PROVISIONS OF THE I NCOME TAX ACT. THE RELEVANT OBSERVATIONS OF THE HON'BLE SUPREME COURT ARE EXTRACTED BELOW: 9 ITA NO.567/PN/2014 'APPLICABILITY OF SECTION 145 40. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE RBI DIR ECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER CHAPTER IIIB OF THE RBI ACT, 1934. THESE NORMS DEAL ESSENTIALLY WI TH INCOME RECOGNITION. THEY FORCE THE NBFCS TO DISCLOSE THE AMOU NT OF NPA IN THEIR FINANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO REF LECT 'TRUE AND CORRECT' PROFITS. BY VIRTUE OF SECTION 45Q, AN OVERR IDING EFFECT IS GIVEN TO THE DIRECTIONS 1998 VIS--VIS 'INCOME RECOGNITION' PRINCIPLES IN THE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, THESE DIRECTIONS 1998 AND THE IT ACT OPERATE IN DIFFERENT AREAS. THESE DIRECTIONS 1998 HAVE NOTHING TO DO WITH C OMPUTATION OF TAXABLE INCOME. THESE DIRECTIONS CANNOT OVERRULE THE 'PERMISSIBLE DEDUCTIONS' OR 'THEIR EXCLUSION' UNDER THE IT ACT. TH E INCONSISTENCY BETWEEN THESE DIRECTIONS AND COMPANIES ACT IS ONLY IN T HE MATTER OF INCOME RECOGNITION AND PRESENTATION OF FINANCIAL STA TEMENTS. THE ACCOUNTING POLICIES ADOPTED BY AN NBFC CANNOT DETERM INE THE TAXABLE INCOME. IT IS WELL SETTLED THAT THE ACCOUNTI NG POLICIES FOLLOWED BY A COMPANY CAN BE CHANGED UNLESS THE AO C OMES TO THE CONCLUSION THAT SUCH CHANGE WOULD RESULT IN UNDERSTATEM ENT OF PROFITS. HOWEVER, HERE IS THE CASE WHERE THE AO HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998 IN VIEW OF SECT ION 45Q OF THE RESERVE BANK OF INDIA ACT. HENCE, AS FAR AS INCOME REC OGNITION 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 A SSESSEE HEREIN IS A COOPERATIVE BANK AND IT IS NOT IN DISPUTE THAT IT IS A LSO GOVERNED BY THE RESERVE BANK OF INDIA. HENCE THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDIA AR E EQUALLY APPLICABLE TO THE ASSESSEE AS IT IS APPLICABLE TO THE COM PANIES REGISTERED UNDER THE COMPANIES ACT. THE HON'BLE SUPRE ME COURT HAS HELD IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA) , THAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA ACT HAS AN OVERRIDING EFFECT VIS-A-VIS INCOME RECOGNITION PRINCIPLE UNDER THE COM PANIES ACT. HENCE SEC.45 Q OF THE RBI ACT SHALL HAVE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIV E BANKS ALSO. HENCE THE ASSESSING OFFICER HAS TO FOLLOW THE RESERVE BA NK OF INDIA DIRECTIONS 1998, AS HELD BY THE HON'BLE SUPREME COURT . 10.1 BASED ON THE PRUDENTIAL NORMS, THE ASSESSEE HEREIN D ID NOT ADMIT THE INTEREST RELATABLE TO NPA ADVANCES IN ITS TO TAL INCOME. THE HON'BLE DELHI HIGH COURT IN THE CASE OF VASISTH CH AY VYAPAR LTD (SUPRA) HAS HELD THAT THE INTEREST ON NPA ASSETS CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE. IN THIS REGARD, THE FOLLOW ING OBSERVATIONS OF HON'BLE DELHI HIGH COURT IN THE ABOVE CITED CASE ARE RELEVANT: 'WHAT TO TALK OF INTEREST, EVEN THE PRINCIPLE AMOUNT ITSELF HAD BECOME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LEGITIMAT E MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NOT 'ACCRUED'. THE SAID DECISION OF THE HON'BLE DELHI HIGH COURT IS E QUALLY APPLICABLE TO THE ISSUE IN OUR HANDS. ACCORDINGLY WE D O NOT FIND ANY INFIRMITY WITH THE DECISION OF THE LEARNED CIT (A) I N HOLDING THAT THE 10 ITA NO.567/PN/2014 INTEREST INCOME RELATABLE ON NPA ADVANCES DID NOT ACC RUE TO THE ASSESSEE. ACCORDINGLY WE UPHOLD HIS ORDER.' 10. FOLLOWING THE AFORESAID DISCUSSION, WHICH HAS BEEN R ENDERED ON AN IDENTICAL ISSUE UNDER SIMILAR CIRCUMSTANCES, WE FIND NO REASONS TO INTERFERE WITH THE ULTIMATE CONCLUSION OF THE CIT(A) IN DELETING THE IMPUGNED ADDITION RELATING TO INTEREST INCOME IN RESP ECT OF NPAS. 11. SO, HOWEVER, THE LEARNED DEPARTMENTAL REPRESENTA TIVE HAS SUBMITTED THAT THE HON'BLE MADRAS HIGH COURT IN THE C ASE OF CIT VS. SAKTHI FINANCE LTD., (2013) 31 TAXMANN.COM 305 (MAD RAS) HAS DIFFERED WITH THE JUDGEMENT OF THE HON'BLE DELHI HI GH 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 DEPA RTMENTAL REPRESENTATIVE FURTHER POINTED OUT THAT THE HON'BLE MADRAS HIGH COURT FOLLOWED THE DECISION OF THE HON'BLE SUPREME C OURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IN HOLDING THAT INTEREST ON NPAS WAS ASSESSABLE TO TAX ON ACCRUAL BASIS. WE HAVE CAREFU LLY CONSIDERED THE SUBMISSIONS PUT-FORTH BY THE LEARNED DEP ARTMENTAL REPRESENTATIVE BASED ON THE JUDGEMENT OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF SAKTHI FINANCE LTD. (SUPRA). THE CONTROVERSY BEFORE THE HON'BLE MADRAS HIGH COURT RELATED TO NON- RECOGNITION OF INTEREST INCOME ON NPAS BY THE ASSESSEE FOLLOWING THE RBI GUIDELINES. THE HON'BLE MADRAS HIGH COURT TOOK THE VI EW THAT THE JUDGEMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F SOUTHERN TECHNOLOGIES LTD. (SUPRA) ALSO APPLIED TO THE INCOME R ECOGNITION NORMS PROVIDED BY RBI AND THEREFORE IT HELD THE INTE REST INCOME ON NPAS IS LIABLE TO BE TAXED ON ACCRUAL BASIS AND NOT IN TERMS OF RBI'S GUIDELINES. BUT THE HON'BLE 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 IN COME RECOGNITION NORMS PRESCRIBED BY RBI. OSTENSIBLY, THERE IS DIVERGENCE OF OPINION BETWEEN THE HON'BLE DELHI HIGH COURT AND THE HON'BLE MADRAS HIGH COURT AS NOTED BY THE HON'BLE MADRAS HIGH COURT IN ITS ORDER. 12. IN SO FAR AS, PRESENT CASE IS CONCERNED THERE IS NO J UDGMENT OF THE JURISDICTIONAL HIGH COURT. WE ARE FACED WITH TWO CON TRARY JUDGMENTS OF THE NON-JURISDICTIONAL HIGH COURT. IN SUCH A SITUAT ION, WE ARE INCLINED TO PREFER A VIEW WHICH IS FAVOURABLE OF THE ASSESSEE FOLLOWING THE JUDGEMENT OF THE HON'BLE SUPREME COUR T 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. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMI SSED.' 8. IT WAS ALSO A COMMON POINT BETWEEN THE PARTIES BEFO RE US THAT THE FACTS AND CIRCUMSTANCES IN THE PRESENT CASE ARE IDENTICA L TO THOSE CONSIDERED BY US IN THE CASE OF THE OMERGA JANTA SAHAK ARI BANK LTD. (SUPRA) AND, THUS FOLLOWING THE SAID PRECEDENT THE PRE SENT CLAIM OF THE ASSESSEE DESERVES TO BE UPHELD. THUS, THE ORDER OF THE CIT(A) IS HEREBY AFFIRMED AND THE REVENUE HAS TO FAIL ON THIS A SPECT. 11 ITA NO.567/PN/2014 9. IN THE RESULT, APPEAL OF THE REVENUE VIDE ITA NO. 1540/PN/2014 FOR ASSESSMENT YEAR 2009-10 IS DISMISSED. 10. WE FIND THE HONBLE BOMBAY HIGH COURT, AURANGABAD BENCH HAS SIMILARLY DECIDED AN IDENTICAL ISSUE IN THE CASE O F CIT VS. THE NANDED DIST. CENTRAL CO-OP BANK LTD., NANDED VIDE INCOME TAX APPEAL NO.57/2014 ORDER DATED 22-01-2015 AND BATCH OF OTHER APPEALS WHEREIN SIMILAR ADDITION MADE BY THE AO WAS DELETED BY THE CIT(A). ON APPEAL FILED BY THE REVENUE THE TRIBUNAL DISMISSED THE APPEAL AND ON FURTHER APPEALS, THE HONBLE HIGH COURT DISMISSED THE APPEALS FILED BY THE REVENUE BY OBSERVING AS UNDER: 3. THE COMMON ISSUE INVOLVED IN ALL THESE APPEALS REL ATING TO THE ASSESSMENT YEAR AS MENTIONED IN THE AFORESAID TABLE ABOUT DELETION OF THE ADDITIONS ON ACCOUNT OF INTEREST ON STICKY ADV ANCES. IN ALL THESE CASES, THE ASSESSING OFFICER, DURING THE ASSESSMENT PROCEEDIN G HAS OBSERVED THAT THE PROVISIONS OF SECTION 43 (D) OF THE INCOME TAX ACT CANNOT BE APPLIED TO THE ASSESSEE AS IT IS NOT A SCHEDULED BANK BUT A CO-OPERATIVE BANK. IN THE OPINION OF THE ASSESSING OFFI CER, CONSIDERING THE PROVISIONS OF SECTION 43-D OF THE INCOM E TAX ACT, NON SCHEDULED CO-OPERATIVE BANKS ARE SPECIFICALLY EXCLUDED FROM THE SPECIAL PROVISIONS OF THE 43-D OF THE INCOME TAX ACT, REGARDING INTEREST ON STICKY ADVANCES. THE ASSESSING OFFICER HAS ALSO HELD THAT CBDT CIRCULAR NO.F-201/81/84 ITA-II DATED 09.10.198 4 IS APPLICABLE ONLY TO BANKING COMPANIES AND NOT TO NON-SCHEDULED BA NKS AND CO OPERATIVE BANKS. 4. BEING AGGRIEVED BY THE SAME, THE ASSESSEE/ABOVE CO-OP ERATIVE BANKS PREFERRED APPEALS SEPARATELY BEFORE THE CIT(A). THE CIT(A) VIDE HIS ORDERS IN ALL THE APPEALS HAS DIRECTED TO DELE TE THE ADDITIONS ON THE INTEREST OF STICKY ADVANCES, ON THE NPA MADE BY THE ASSESSING OFFICER. 5. BEING AGGRIEVED BY THE ORDER OF CIT(A), THE REVE NUE PREFERRED SEPARATE APPEALS IN EACH CASE BEFORE THE INCOME TAX AP PELLATE TRIBUNAL, PUNE BENCH 'A', PUNE. THE LEARNED I.T.A.T . HAS CONFIRMED THE DECISION OF THE CIT(A) AND DISMISSED THE APPEALS OF THE REVENUE. THUS, REVENUE HAS FILED THE AFORESAID APPEALS CHALLENGI NG THE LEGALITY AND CORRECTNESS OF THE ORDER PASSED BY THE INCOME TAX A PPELLATE TRIBUNAL. 6. THE LEARNED COUNSEL MR. ALOK SHARMA, APPEARING FO R THE APPELLANTS/REVENUE SUBMITS THAT, THE ASSESSEE IN ALL THESE CASES ARE THE CO-OPERATIVE BANKS AND NOT A SCHEDULED BANK, THE REFORE, SPECIAL PROVISIONS OF SECTION 43-D OF THE INCOME TAX WILL NOT BE APPLICABLE TO 12 ITA NO.567/PN/2014 THEM. LEARNED COUNSEL FURTHER SUBMITS THAT, IN VIEW OF THE PROVISIONS OF SECTION 145 OF THE INCOME TAX ACT, THE ASSESSEEE/CO- OPERATIVE BANKS HAVE TO FOLLOW EITHER MERCANTILE SYSTEM OF ACCOU NTING OR CASH SYSTEM. THEY CANNOT HAVE MIX SYSTEM OF ACCOUNT. THE LEA RNED COUNSEL ALSO SUBMITS THAT, THE RBI DIRECTIONS UNDER THE RBI ACT ARE PRUDENTIAL NORMS, BUT HAVE NOTHING TO DO WITH THE CO MPUTATION OR TAXABILITY OF THE PROVISION OF THE NPA UNDER THE IT ACT. LEARNED COUNSEL FURTHER SUBMITS THAT THOUGH THE RBI DIRECTIONS DEVIATE FROM THE ACCOUNTING PRACTICE AS PROVIDED BY THE COMPANIES ACT, BUT THEY DO NOT OVERRIDE THE PROVISIONS OF THE IT ACT AND THEY ARE OPERATING IN DIFFERENT FIELDS. THE LEARNED COUNSEL FOR APPELLANTS/R EVENUE LASTLY SUBMITS THAT, THE LEARNED TRIBUNAL OUGHT TO HAVE HELD THAT THE ASSESSEE COOPERATIVE BANK DOES NOT SATISFY THE CONDITIONS O F CBDT CIRCULAR NO.F.201/81/84/ITA-II DATED 09.10.1984 AND THEREFORE COULD NOT AVAIL THE BENEFITS OF THE CIRCULAR. ON THE BASIS OF AFORESAID SUBMISSIONS, THE LEARNED COUNSEL FURTHER SUBMITS THAT SUBST ANTIAL QUESTION OF LAW INVOLVED IN THE ABOVE APPEALS AND THU S ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143 (3) OF THE IN COME TAX ACT, 1961 ARE REQUIRED TO BE CONFIRMED. LEARNED COUNSEL F OR THE APPELLANTS SUBMITS THAT, THE TRIBUNAL OUGHT TO HAVE ALLOWED THE APPEAL BY RELYING ON THE JUDGMENT IN THE MATTER OF SOUTHERN TECHNOLOGIES LTD. VS. JOINT COMMISSIONER OF INCOME TAX, COIMBTORE REPORTED IN 2010 (2) SCC 548. 7. THE LEARNED COUNSEL FOR RESPONDENT/CO-OPERATIVE BA NKS SUBMIT THAT, THE ISSUES INVOLVED IN THE ABOVE APPEALS A RE NO MORE RES-INTEGRA IN VIEW OF THE DECISION RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF UCO BANK, CALCUTTA VS. COMMISSIONE R OF INCOME TAX, WEST BENGAL REPORTED IN (1999) 4 SUPREME COURT CASES 599. 8. LEARNED COUNSEL FOR RESPONDENT SUBMITS THAT, LEARNE D TRIBUNAL HAS RIGHTLY DISMISSED THE APPEALS OF THE REVENU E BY CONFIRMING THE ORDER PASSED BY THE CIT(A). THERE IS NO SUBSTANTIAL QUESTION OF LAW INVOLVED IN THESE APPEALS AND THUS ALL THE APPEALS ARE LIABLE TO BE DISMISSED. 9. THE INCOME TAX APPELLATE TRIBUNAL HAS REFERRED TH E CASE OF M/S. VASISTH CHAY VYAPAR LIMITED 330 ITR 440 (DELHI). IN THIS CASE, THE REVENUE RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. SUPRA. THE LEAR NED INCOME TAX APPELLATE TRIBUNAL HAS REPRODUCED THE OBSERVATIO NS MADE BY THE DELHI HIGH COURT WHILE REFERRING THE SAID CASE OF M/S SOUTHERN TECHNOLOGIES LIMITED SUPRA. THE ASSESSEE HEREIN BEING A C OOPERATIVE BANK ALSO GOVERNED BY THE RESERVE BANK OF INDIA AND T HUS THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL NORMS ISSUED B Y THE RESERVE BANK OF INDIA ARE EQUALLY APPLICABLE TO THE CO-OPER ATIVE BANKS. THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNO LOGIES LIMITED SUPRA HELD THAT, PROVISIONS OF SECTION 45Q OF RESERVE B ANK OF INDIA ACT HAS AN OVERRIDING EFFECT VIS-A-VIS INCOME RECOGNI TION PRINCIPLE UNDER THE COMPANIES ACT. HENCE, SECTION 45Q OF THE R BI ACT SHALL HAVE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINCIPLE FOLLOWED BY COOPERATIVE BANKS. HENCE, THE ASSESSING OFFICER HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998, AS HELD BY THE HON'BLE SUPREME COURT. 13 ITA NO.567/PN/2014 10. THE HONOURABLE APEX COURT IN THE CASE OF UCO BANK CASE (SUPRA) HAD AN OCCASION TO CONSIDER THE NATURE OF CBDT CIRCULAR AND HON'BLE APEX COURT HAS THUS HELD THAT BOARD HAS POWER, INTER ALIA, TO TONE DOWN THE RIGOUR OF THE LAW AND ENSURE A FAIR EN FORCEMENT OF ITS PROVISIONS, BY ISSUING CIRCULAR IN EXERCISE OF ITS STATUTO RY POWERS UNDER SECTION 119 OF ACT WHICH ARE BINDING ON THE AU THORITIES IN THE ADMINISTRATION OF THE ACT, IT IS A BENEFICIAL POWER G IVEN TO THE BOARD FOR PROPER ADMINISTRATION OF FISCAL LAW SO THAT UNDUE HARDSHIP MAY NOT BE CAUSED TO THE ASSESSEE AND THE FISCAL LAWS MAY BE C ORRECTLY APPLIED. FURTHER A SIMILAR ISSUE WAS RAISED ABOUT INTERE ST ACCRUED ON A 'STICKY' LOAN WHICH WAS NOT RECOVERED BY THE ASSESSEE-B ANK FOR THE LAST THREE YEARS AND TRANSFERRED TO THE SUSPENSE ACCOUNT, WOULD OR WOULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE FOR THE PARTICULAR ASSESSMENT YEAR. HON'BLE APEX COURT HAS OBSERVED THAT: - 'THE METHOD OF ACCOUNTING WHICH IS FOLLOWED BY THE A SSESSEE-BANK IS MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, THE ASSESSEE CO NSIDERS INCOME BY WAY OF INTEREST PERTAINING TO DOUBTFUL LOA NS AS NOT REAL INCOME IN THE YEAR IN WHICH IT ACCRUES, BUT ONLY WHE N IT IS REALIZED. A MIXED METHOD OF ACCOUNTING IS THUS FOLLOWED BY THE ASSE SSEE-BANK. THIS METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS I N ACCORDANCE WITH ACCOUNTING PRACTICE. THE ASSESSEE'S METHOD OF ACCOU NTING, TRANSFERRING THE DOUBTFUL DEBT TO AN INTEREST SUSPENSE A CCOUNT AND NOT TREATING IT AS PROFIT UNTIL ACTUALLY RECEIVED, I S IN ACCORDANCE WITH ACCOUNTING PRACTICE UP TO ASSESSMENT YEAR 1978-79 THE T AXABILITY OF INTEREST ON DOUBTFUL DEBTS CREDITED TO SUSPENSE ACCOUNT WILL BE DECIDED IN THE LIGHT OF THE BOARD'S EARLIER CIRCULAR DATED 6-10-1952, AS THE SAID CIRCULAR WAS WITHDRAWN ONLY IN JUNE,1978. THE NEW PROCEDURE UNDER THE CIRCULAR OF 9-10-1984 WILL BE A PPLICABLE FOR AND FROM THE ASSESSMENT YEAR, 1979-80. ALL PENDING DISPUTES O N THE ISSUE SHOULD BE SETTLED IN THE LIGHT OF THESE INSTRUCTIONS. TH EREFORE, UP TO THE ASSESSMENT YEAR 1978-79, THE CBDT'S CIRCULAR OF 6-10 -1952 WOULD BE APPLICABLE; WHILE FROM THE ASSESSMENT YEAR 197 9-80, THE CBDT'S CIRCULAR OF 9-10-1984 IS MADE APPLICABLE. IN T HE PRESENT CASE, THE ASSESSMENT WAS MADE ON THE BASIS OF THE CBDT'S CIRCULA R ON 9- 10-1984, SINCE THE ASSESSMENT PERTAINS TO THE ASSESSMENT YEAR 1981- 82 TO WHICH THE CIRCULAR OF 9-10-1984 IS APPLICABLE. IF, THE BOARD HAS CONSIDERED IT NECESSARY TO LAY DOWN A GENERAL TEST FOR DECIDING WHAT IS A DOUBTFUL DEBT, AND DIRECTED THAT ALL ASSESSING OFF ICER'S SHOULD TREAT SUCH AMOUNTS AS NOT FORMING PART OF THE INCOME O F THE ASSESSEE UNTIL REALIZED, THIS DIRECTION BY WAY OF A CIRCULAR CANNOT BE CONSIDERED AS TRAVELING BEYOND THE POWERS OF THE BOARD UNDER SECTION 119 OF THE INCOME TAX ACT. SUCH A CIRCULAR I S BINDING UNDER SECTION 119. THE CIRCULAR OF 9-10-1984, THEREFORE, P ROVIDES A TEST FOR RECOGNIZING WHETHER A CLAIM FOR INTEREST CAN BE TREA TED 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 YEARS, THE AMOUNT OF INTEREST HAS, IN FACT, BEEN RECOVERED BY THE BANK OR NOT. IF IT IS NOT RECOVERED FOR A PERIOD OF THREE YEARS, THEN IN THE F OURTH YEAR AND ONWARDS THE CLAIM FOR INTEREST HAS TO BE TREATED AS DO UBTFUL CLAIM WHICH NEED NOT BE INCLUDED IN THE INCOME OF THE ASSESSE E UNTIL IT IS ACTUALLY RECOVERED. IN THE PRESENT CASE, THE CIRCULAR S WHICH HAVE BEEN IN FORCE ARE MEANT TO ENSURE THAT WHILE ASSESSING THE I NCOME ACCRUED BY WAY OF INTEREST ON A 'STICKY' LOAN, THE NOTIONAL I NTEREST WHICH IS TRANSFERRED TO A SUSPENSE ACCOUNT PERTAINING TO DOUBTFU L LOANS WOULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE, IF FOR T HREE YEARS SUCH 14 ITA NO.567/PN/2014 INTEREST IS NOT ACTUALLY RECEIVED. THE VERY FACT THA T THE ASSESSEE, ALTHOUGH GENERALLY USING A MERCANTILE SYSTEM OF ACCOUN TING, KEEPS SUCH INTEREST AMOUNTS IN A SUSPENSE ACCOUNT AND DOES NOT BRING THESE AMOUNTS TO THE P&L A/C GOES TO SHOW THAT THE ASSESSE E IS FOLLOWING A MIXED SYSTEM OF ACCOUNTING BY WHICH SUCH INTEREST IS INCLUDED IN ITS INCOME ONLY WHEN IT IS ACTUALLY RECEI VED. LOOKING TO THE METHOD OF ACCOUNTING SO ADOPTED BY THE ASSESSEE IN SU CH CASES, THE CIRCULARS WHICH HAVE BEEN ISSUED ARE CONSISTENT WIT H THE PROVISIONS OF SECTION 145 AND ARE MEANT TO ENSURE THAT ASSESSEES OF THE KIND SPECIFIED WHO HAVE TO ACCOUNT FOR ALL SUCH A MOUNTS OF INTEREST ON DOUBTFUL LOANS ARE UNIFORMLY GIVEN THE BE NEFIT UNDER THE CIRCULAR AND SUCH INTEREST AMOUNTS ARE NOT INCLUDED IN THE INCOME OF THE ASSESSEE UNTIL ACTUALLY RECEIVED IF THE CONDITIONS O F THE CIRCULAR ARE SATISFIED. THE CIRCULAR OF 9-10-1984, ALSO SERVES AN OTHER PRACTICAL PURPOSE OF LAYING DOWN A UNIFORM TEST FOR THE ASSESSING A UTHORITY TO DECIDE WHETHER THE INTEREST INCOME WHICH IS TRANSFERRE D TO THE SUSPENSE ACCOUNT IS, IN FACT, ARISING IN RESPECT OF A DOU BTFUL OR 'STICKY' LOAN. THIS IS DONE BY PROVIDING THAT NON-RECEIPT OF I NTEREST FOR THE FIRST THREE YEARS WILL NOT BE TREATED AS INTEREST ON A DOUBTFUL LOAN. BUT IF AFTER THREE YEARS THE PAYMENT OF INTEREST IS NOT RE CEIVED, FROM THE FOURTH YEAR ONWARDS IT WILL BE TREATED AS INTEREST ON A DOUBTFUL LOAN AND WILL BE ADDED TO THE INCOME ONLY WHEN IT IS ACTU ALLY RECEIVED. THERE IS NO INCONSISTENCY OR CONTRADICTION BETWEEN THE CIRCULAR SO ISSUED AND SECTION 145 OF THE INCOME TAX ACT. IN FACT, THE CIRCULAR CLARIFIES THE WAY IN WHICH THESE AMOUNTS ARE TO BE TRE ATED UNDER THE ACCOUNTING PRACTICE FOLLOWED BY THE LENDER. THE CIR CULAR, THEREFORE, CANNOT BE TREATED AS CONTRARY TO SECTION 145 OF THE INCOME TAX ACT OR ILLEGAL IN ANY FORM, IT IS MEANT FOR A UNIFORM ADMIN ISTRATION OF LAW BY ALL THE INCOME-TAX AUTHORITIES IN A SPECIFIC SITUATION AND, THEREFORE, VALIDLY ISSUED UNDER SECTION 119 OF THE INCOME TAX ACT . AS SUCH, THE CIRCULAR WOULD BE BINDING ON THE DEPARTMENT. THE RE LEVANT CIRCULARS OF CBDT CANNOT BE IGNORED. THE QUESTION IS NOT WHETHE R A CIRCULAR CAN OVERRIDE OR DETRACT FROM THE PROVISIONS OF THE AC T; THE QUESTION IS WHETHER THE CIRCULAR SEEKS TO MITIGATE THE RIGOUR OF A PARTICULAR SECTION FOR THE BENEFIT OF THE ASSESSEE IN CERTAIN SPECIF IED CIRCUMSTANCES. SO LONG AS SUCH A CIRCULAR IS IN FORCE I T WOULD BE BINDING ON THE DEPARTMENTAL AUTHORITIES IN VIEW OF THE PROVISIONS OF SECTION 119 TO ENSURE A UNIFORM AND PROPER ADMINISTRAT ION AND APPLICATION OF THE INCOME TAX ACT.' 11. THE LEARNED COUNSEL FOR RESPONDENT HAS PLACED RELI ANCE IN A CASE OF MERCANTILE BANK LTD., BOMBAY VS. THE COMMISSION ER OF INCOME TAX, BOMBAY CITY-ILL REPORTED IN (2006) 5 SC C 221, WHERE SIMILAR QUESTION WAS RAISED BEFORE THE APEX COURT, THE QUESTION WAS WHETHER THE ASSESSEE IS LIABLE TO BE TAXED UNDER INCOME TAX ACT, 1961 IN RESPECT OF THE INTEREST ON DOUBTFUL ADVANCES C REDITED TO THE INTEREST SUSPENSE ACCOUNT. IN THIS CASE, THE UCO BANK'S C ASE (SUPRA) WAS ALSO REFERRED AND THE HON'BLE APEX COURT HAS ALLOW ED THE APPEAL TO THE EXTENT OF QUESTION RAISED AS AFORESAID. FURTHERM ORE, THE RESPONDENT CO-OPERATIVE BANKS, AS UNDERSTOOD BY SECTIO N 43 C OF THE INCOME TAX ACT ON THE SCHEDULED BANK. 12. LEARNED COUNSEL FOR THE APPELLANTS/REVENUE PLACED RELIANCE ON THE JUDGMENT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JOINT COMMISSIONER OF INCOME TAX, COIMBTORE, REPORTED IN 20 10 (2) SCC 548. HOWEVER, THIS JUDGMENT PERTAINS TO NON BANKING F INANCIAL 15 ITA NO.567/PN/2014 COMPANIES. UCO BANK CASE (SUPRA) AND MERCANTILE BANK ( SUPRA) CASE SQUARELY APPLIES TO THE FACTS OF THE PRESENT CASE AND I SSUES INVOLVED. WE THEREFORE, DO NOT FIND IT NECESSARY TO INTERFERE I N THE JUDGMENT OF THE APPELLATE TRIBUNAL. WE HOLD THAT NO SUBSTANTIAL Q UESTION OF LAW ARISES IN THESE APPEALS. 11. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT CITED (SUPRA) AND IN ABSENCE OF A NY CONTRARY MATERIAL BROUGHT TO OUR NOTICE BY THE LD. DEPA RTMENTAL REPRESENTATIVE AGAINST THE CONSISTENT VIEW OF THE TRIBUN AL ON THIS ISSUE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT (A) DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. ACCORD INGLY, THE SAME IS UPHELD AND THE GROUNDS RAISED BY THE REVEN UE ARE DISMISSED. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28-08-2015. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE ; DATED : 28 TH AUGUST, 2015. ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. & ( ) , / THE CIT(A)-III, PUNE 4. & / THE CIT-III, PUNE 5. 6. ) ,,-, -, / DR, ITAT, A PUNE; 1 / GUARD FILE. / BY ORDER , ) //TRUE COPY // ) , //TRUE COPY// 34 , - / SR. PRIVATE SECRETARY -, / ITAT, PUNE