DCIT, Ludhiana V. M/s The Ludhiana Central Co Operative Bank Ltd., Ludhiana

ITA 749/CHANDI/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6859 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DR GULSHAN RAI
• Keywords: Bad and doubtful debts
• Section: 145; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A CHANDIGARH BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA NO. 749/CHD/2017 ASSESSMENT YEAR: 2010-11 DY.CIT VS. M/S THE LUDHIANA CENTRAL CO- CIRCLE-6, OPERATIVE BANK LTD., NEAR SADAR LUDHIANA POLICE STATION, CIVIL LINES, LUDHIANA PAN NO. AAAJT1911B (APPELLANT) (RESPONDENT) APPELLANT BY : SH. PARVEEN JINDAL RESPONDENT BY : DR. GULSHAN RAI DATE OF HEARING : 07/09/2017 DATE OF PRONOUNCEMENT : 21/09/2017 ORDER PER DR. B.R.R. KUMAR, A.M. THE APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 24/02/2017 PASSED BY THE CIT(A)-3, LUDHIANA. 2. THE REVENUE HAS RAISED ONLY ONE EFFECTIVE GROUND WHICH READS AS UNDER: I. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D. CIT(A) HAS ERRED IN ALLOWING RELIEF OF ADDITION MADE BY TH E AO ON ACCOUNT OF INTEREST ACCRUED ON NON PERFORMING ASSETS BY IGN ORING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F STATE BANK OF TRAVANCORE(158 ITR 102). FURTHER, THE LD. CIT(A) HA S WRONGLY RELIED UPON THE FINDING OF HONBLE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD. WHICH IS A NON BANKING FINANCIAL C ORPORATION SOCIETY REGISTERED UNDER PUNJAB STATE CO-OPERATIVE SOCIETIES ACT. MOREOVER, THE DECISION OF THE LD. CIT(A) IS PERVER SE AS THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. 3. THE ISSUE RAISED IN THE PRESENT APPEAL PERTAINS TO DELETION OF RS. 2,67,88,000/- BY THE CIT(A) ON ACCOUNT OF INTEREST ON LOANS CATEGORIZED AS NPA 2 ON ACCRUAL BASIS AS AGAINST RECEIPT BASIS CLAIMED B Y THE ASSESSEE. THE ADDITION WAS MADE BY THE AO ON THE BASIS THAT THE ASSESSEE W AS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HENCE THE INTEREST ON NPA S NEEDS TO BE INCLUDED. 4. THE SIMILAR ISSUE HAS BEEN EARLIER DEALT BY THE COORDINATE BENCH OF ITAT, CHANDIGARH IN THE ASSESSEES OWN CASE FOR THE AY 20 09-10. BEFORE US THE LD. DR RELIED ON THE ORDER OF THE AO WHILE THE LD. AR RELI ED ON THE EARLIER ORDER OF THE ITAT CHANDIGARH BENCH. FOR BREVITY AND READY REFERE NCE THE RELEVANT PORTION OF THE ORDER IN THE CASE OF THE ASSESSEE IN ITA NO. 56 2/CHD/2013 IS REPRODUCED HEREUNDER: 13. WE FIND THAT THE ISSUE OF ACCOUNTING FOR INTERE ST ON STICKY LOANS/NPA'S, HAS BEEN DEALT WITH IN A NUMBER OF DEC ISIONS BOTH BY THE APEX COURT AND VARIOUS HIGH COURTS AND TRIBUNAL S ALSO, WHEREIN AFTER APPLYING THE 'REAL INCOME THEORY', THE PRESCR IBED ACCOUNTING STANDARD ISSUED BY ICAI ON REVENUE RECOGNITION, AS- 9, THE ACCOUNTING PRACTISE OF THE ASSEESSEE RELATING TO IN TEREST ON STICKY LOANS AND THE RBI GUIDELINES RELATING TO ACCOUNTING FOR INTEREST ON NPA'S, IT WAS HELD THAT SUCH INCOME WAS TAXABLE IN THE YEAR OF RECEIPT ONLY, WHEN ITS REALISATION BECOMES REASONAB LY CERTAIN. 14. THE APEX COURT IN THE CASE OF UCO BANK, CALCUTTA VS. CIT, WEST BENGAL (1999) 4 SUPREME COURT CASES 5 99 APPROVED THE RECEIPT BASIS OF ACCOUNTING FOR INTEREST ON L OANS WHOSE RECOVERY WAS DOUBTFUL, HOLDING THE SAME TO BE IN A CCORDANCE WITH ACCOUNTING PRACTICE AND IN CONFORMITY WITH THE METH OD PRESCRIBED UNDER SECTION 145 OF THE ACT. THE RELEVANT FINDINGS OF THE APEX COURT ARE AS FOLLOWS : 'WE HAVE TO CONSIDER WHETHER INTEREST ON A LOAN WHO SE RECOVERY IS DOUBTFUL AND WHICH HAS NOT BEEN RECOVERED BY THE AS SESSEE-BANK FOR THE LAST THREE YEARS BUT HAS BEEN KEPT IN A SUSPENSE AC COUNT AND HAS NOT BEEN BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, CAN BE INCLUDED IN THE INCOME OF THE ASSESSEE FOR THE ASSE SSMENT YEAR 1981-82. IT IS THE CASE OF THE ASSESSEE THAT IN RESPECT OF LOAN S WHICH ARE ADVANCED BY IT TO VARIOUS CUSTOMERS, RECOVERY OF SOME LOANS IS VERY DOUBTFUL. IT IS DOUBTFUL WHETHER EVEN THE INTEREST ON THE LOANS ADV ANCED WILL BE RECOVERED FROM THE CUSTOMER. IN SUCH CASES, THE INT EREST CALCULATED ON THE LOAN AMOUNT IS CREDITED IN A SUSPENSE ACCOUNT. THIS AMOUNT IS NOT BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE ASSES SEE-BANK BECAUSE THESE ARE AMOUNTS WHICH ARE NOT LIKELY TO BE REALIS ED BY THE BANK. HENCE THEY DO NOT FORM A PART OF THE REAL INCOME OF THE B ANK. IF AND WHEN ANY SUCH AMOUNT OR A PART OF IT IS RECOVERED, IT IS INC LUDED IN THAT ASSESSMENT YEAR IN THE TOTAL INCOME OF THE ASSESSEE FOR THE PU RPOSE OF PAYMENT OF INCOME-TAX. THE METHOD OF ACCOUNTING WHICH IS FOLLOWED BY THE A SSESSEE-BANK IS MERCANTILE SYSTEM OF ACCOUNTING. HOWEVER, THE ASSES SEE CONSIDERS INCOME BY WAY OF INTEREST PERTAINING TO DOUBTFUL LO ANS AS NOT REAL INCOME IN THE YEAR IN WHICH IT ACCRUES, BUT ONLY WHEN IT I S REALISED. A MIXED METHOD OF ACCOUNTING IS THUS FOLLOWED BY THE ASSESS EE-BANK. THIS METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS IN ACCORDA NCE WITH ACCOUNTING PRACTICE. IN SPICER AND PEGLER'S PRACTIC AL AUDITING THE RELEVANT PASSAGE OCCURRING AT PAGE 186-187 HAS BEEN REPRODUC ED IN THE MINORITY 3 JUDGMENT OF THIS COURT IN STATE BANK OF TRAVANCORE V. COMMISSIONER OF INCOME-TAX, KERALA [(1986) 158ITR 102 AT P.I2O]. IT IS AS FOLLOWS: 'WHERE INTEREST HAS NOT BEEN PAID, IT IS SOMETIMES LEFT OUT OF ACCOUNT ALTOGETHER. THIS PREVENTS THE POSSIBILITY OF IRRECO VERABLE INTEREST BEING CREDITED TO REVENUE, AND DISTRIBUTED AS PROFIT. ON THE OTHER HAND, THIS TREATMENT DOES NOT RECORD THE ACTUAL STATE OF THE L OAN ACCOUNT, AND IN THE CASE OF BANKS AND OTHER CONCERNS WHOSE BUSINESS IT IS TO ADVANCE MONEY, IT IS USUAL TO FIND THE INTEREST IS REGULARL Y CHARGED UP, BUT WHEN ITS RECOVERY IS DOUBTFUL, THE AMOUNT THEREOF IS EITHER FULLY PROVIDED AGAINST OR TAKEN TO THE CREDIT OF AN INTEREST SUSPENSE ACCOUNT AND CARRIED FORWARD AND NOT TREATED AS PROFIT UNTIL ACTUALLY RECEIVED.' SIMILARLY, REFERRING TO INTEREST ON DOUBTFUL DEBTS, SHUKLA AND GREWAL ON ADVANCED ACCOUNTS, NINTH EDITION AT PAGE 1089 STATE AS FOLLOWS: 'INTEREST ON DOUBTFUL DEBTS SHOULD BE DEBITED TO THE LOAN ACC OUNT CONCERNED BUT SHOULD NOT BE CREDITED TO INTEREST ACCOUNT. INSTEAD , IT SHOULD BE CREDITED TO INTEREST SUSPENSE ACCOUNT. TO THE EXTENT THE INT EREST IS RECEIVED IN CASH, THE INTEREST SUSPENSE ACCOUNT SHOULD BE TRANSFERRED TO INTEREST ACCOUNT; THE REMAINING AMOUNT SHOULD BE CLOSED BY TRANSFER T O THE LOAN ACCOUNT. THIS TREATMENT ACCORDS WITH THE PRINCIPLE THAT NO I TEM SHOULD BE TREATED AS INCOME UNLESS IT HAS BEEN RECEIVED OR THERE IS A RE ASONABLE CERTAINTY THAT IT WILL BE REALISED. (VIDE STATE BANK OF TRANVACORE V. CIT [SUPRA]I THE ASSESSEE'S METHOD OF ACCOUNTING THEREFORE, TRANSFERRING THE DOUBTFUL DEB T TO AN INTEREST SUSPENSE ACCOUNT AND NOT TREATING IT AS PROFIT UNTI L ACTUALLY RECEIVED, IS IN ACCORDANCE WITH ACCOUNTING PRACTICE. UNDER SECTION 145 OF THE INCOME-TAX ACT, 1961, INCO ME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON OR INCOME FROM OTHER SOURCES' SHALL BE COMPUTED IN ACCORDANCE WITH THE M ETHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; PROV IDED THAT IN A CASE WHERE THE ACCOUNTS ARE CORRECT AND COMPLETE BUT THE METHOD EMPLOYED IS SUCH THAT IN THE OPINION OF THE INCOME- TAX OFFI CER, THE INCOME CANNOT PROPERLY BE DEDUCED THEREFROM, THE COMPUTATION SHAL L BE MADE IN SUCH MANNER AND ON SUCH BASIS AS THE INCOME-TAX OFFICER MAY DETERMINE. IN THE PRESENT CASE THE METHOD EMPLOYED IS ENTIRELY FO R A PROPER DETERMINATION OF INCOME.' (EMPHASIS SUPPLIED BY US) 15. FURTHER THE APEX COURT ALSO REFERRED TO THE CBDT CIRCULAR DATED 9 TH OCTOBER 1984 STATING THAT INTEREST ON LOANS ON WHICH THERE HAS BEEN NO RECOVERY FOR 3 YEARS WILL B E SUBJECTED TO TAX ON RECEIPT BASIS, AND HELD AS FOLLOWS : 'THE QUESTION WHETHER INTEREST EARNED, ON WHAT HAVE COME TO BE KNOWN AS 'STICKY' LOANS, CAN BE CONSIDERED AS INCOME OR N OT UNTIL ACTUAL REALIZATION, IS A QUESTION WHICH MAY ARISE BEFORE S EVERAL INCOME TAX OFFICERS EXERCISING JURISDICTION IN DIFFERENT PARTS OF THE COUNTRY. UNDER THE ACCOUNTING PRACTICE, INTEREST WHICH IS TRANSFERRED TO THE SUSPENSE ACCOUNT AND NOT BROUGHT TO THE PROFIT AND LOSS ACCOUNT OF THE C OMPANY IS NOT TREATED AS INCOME. THE QUESTION WHETHER IN A GIVEN CASE SUCH 'ACCRUAL' OF INTEREST IS DOUBTFUL OR NOT, MAY ALSO BE PROBLEMATI C. IF, THEREFORE, THE BOARD HAS CONSIDERED IT NECESSARY TO LAY DOWN A GEN ERAL TEST FOR DECIDING WHAT IS A DOUBTFUL DEBT, AND DIRECTED THAT ALL INCOME TA X OFFICERS SHOULD TREAT SUCH AMOUNTS AS NOT FORMING PART OF THE INCOM E OF THE ASSESSEE UNTIL REALIZED, THIS DIRECTION BY WAY OF A CIRCULAR CANNO T BE CONSIDERED AS TRAVELLING BEYOND THE POWERS OF THE BOARD UNDER SEC TION 119 OF THE 4 INCOME TAX ACT. SUCH A CIRCULAR IS BINDING UNDER SE CTION 119. THE CIRCULAR OF 9TH OF OCTOBER, 1984, THEREFORE, PROVIDES A TEST FOR RECOGNISING WHETHER A CLAIM FOR INTEREST CAN BE TREATED AS A DOUBTFUL CLAIM UNLIKELY TO BE RECOVERED OR NOT. THE TEST PROVIDED BY THE SAID CIR CULAR IS TO SEE WHETHER, AT THE END OF THREE YEARS, THE AMOUNT OF INTEREST H AS, IN FACT, BEEN RECOVERED BY THE BANK OR NOT. TFU IS NOT RECOVERED FOR A PERIOD OF THREE YEARS, THEN IN THE FOURTH YEAR AND ONWARDS THE CLAI M FOR INTEREST HAS TO BE TREATED AS A DOUBTFUL CLAIM WHICH NEED NOT BE INCLU DED IN THE INCOME OF THE ASSESSEE UNTIL IT IS ACTUALLY RECOVERED.' 16. THIS VIEW WAS REAFFIRMED IN A LATER JUDGMENT BY THE APEX COURT IN MERCANTILE BANK LTD., VS. CIT, BOMBAY CITY-III ( 2006) 5 SSC 221. 17. FURTHER THE ISSUE OF TAXABILITY OF INTEREST ON NPA ACCOUNTS ON RECEIPT BASIS BY COOPERATIVE BANKS HAS BEEN DEALT W ITH BY VARIOUS HIGH COURTS, WHEREIN IT WAS HELD THAT THE ASSESSEE WAS BOUND BY RBI GUIDELINES TO ACCOUNT FOR SUCH INTEREST ON RECEIPT BASIS AND BY VIRTUE OF THE PROVISIONS OF SECTION 45Q OF THE RBI ACT, THE RBI GUIDELINES HAD AN OVERRIDING EFFECT OVER OTHER ACTS INCLUDING THE INCOME TAX ACT, 1961. 18. THE GUJARAT HIGH COURT IN THE CASE OF PR.CIT-5 VS. SHRI MAHILA SEWA SAHAKARI BANK LTD. (TAX APPEAL NO.531 OF 2015 DATED 5.8.2016 .RELYING UPON THE DECISION OF THE APEX COURT IN SOU THERN TECHNOLOGIES LIMITED VS JCIT, COIMBATORE,(2010) 320 ITR 577,HELD THAT SO FAR AS INCOME RECOGNITION WAS CONCERNED EVE N THE AO HAD TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF SECTI ON 45Q OF THE RBI ACT AND SECTION 145 OF THE INCOME TAX ACT HAD NO RO LE TO PLAY IN THE SAME. THE HON'BLE COURT HELD AT PARA 20 TO 23 O F ITS ORDER AS FOLLOWS : 20. SECTION 45Q FINDS PLACE IN CHAPTER IIIB OF THE RBI ACT. THUS, THE PROVISIONS OF CHAPTER RIB OF THE RBI ACT HAVE AN OV ERRIDING EFFECT QUA OTHER ENACTMENTS TO THE EXTENT THE SAME ARE INCONSI STENT WITH THE PROVISIONS CONTAINED THEREIN. IN ORDER TO REFLECT A BANK'S ACTUAL FINANCIAL HEALTH IN ITS BALANCE SHEET, THE RESERVE BANK HAS I NTRODUCED PRUDENTIAL NORMS FOR INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING FOR ADVANCES PORTFOLIO OF THE CO-OPERA TIVE BANKS. THE GUIDELINES PROVIDED THEREUNDER ARE MANDATORY AN D IT IS INCUMBENT UPON ALL CO-OPERATIVE BANKS TO FOLLOW THE SAME. INSOFAR AS INCOME RECOGNITION IS CONCERNED, CLAUSE 4.1.1 OF THE CIRCULAR PROVIDES THAT THE POLICY OF INCOME RECOGNI TION HAS TO BE OBJECTIVE AND BASED ON THE RECORD OF RECOVERY. I NCOME FROM NON-PERFORMING ASSETS (NPA) IS NOT RECOGNISED ON AC CRUAL BASIS BUT IS BOOKED AS INCOME ONLY WHEN IT IS ACTUA LLY RECEIVED. THEREFORE, BANKS SHOULD NOT TAKE TO INCOM E ACCOUNT INTEREST ON NON-PERFORMING ASSETS ON ACCRUAL BASIS. THUS, IN VIEW OF THE MANDATE OF THE RBI GUIDELINES THE ASSES SEE CANNOT RECOGNISE INCOME FROM NON-PERFORMING ASSETS ON ACCRUAL BASIS BUT CAN BOOK SUCH INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. THUS, THIS IS A CASE WHERE AT TH E THRESHOLD, THE ASSESSEE, IN VIEW OF THE RBI GUIDELINES CANNOT RECOGNISE INCOME FROM NPA ON ACCRUAL BASIS. THIS IS, THEREFOR E, A CASE PERTAINING TO RECOGNITION OF INCOME AND NOT COMPUTA TION OF THE INCOME OF THE ASSESSEE. 21 . THE SUPREME COURT IN SOUTHERN TECHNOLOGIE S LIMITED (SUPRA) HAS HELD THAT THE 1998 DIRECTIONS ARE ONLY DISCLOSU RE NORMS AND HAVE NOTHING TO DO WITH COMPUTATION OF TOTAL INCOME UNDE R THE IT ACT OR WITH THE ACCOUNTING TREATMENT. THE 1998 DIRECTIONS ONLY LAY DOWN THE MANNER OF PRESENTATION OF NPA PROVISION IN THE BALANCE SHE ET OF AN NBFC. THE 5 COURT HAS REFERRED TO THE DEVIATIONS BETWEEN THE RB I DIRECTIONS AND THE COMPANIES ACT AS FOLLOWS: ' 42. BROADLY, THERE ARE THREE DEVIATIONS: (I) IN THE MATTER OF PRESENTATION OF FINANCIAL STAT EMENTS UNDER SCHEDULE VI TO THE COMPANIES ACT; (II) IN NOT RECOGNISING THE 'INCOME' UNDER THE MERCANTILE SYSTEM OF ACCOUNTING AND ITS INSISTENCE TO FOLLOW CASH SYSTEM WITH RESPECT TO ASSETS CLASSIFIE D AS NPA AS PER ITS NORMS (III) IN CREATING A PROVISION FOR ALL NPAS SUMMARILY AS AGAINST CREATING A PROVIS ION , ONLY WHEN THE DEBT IS DOUBTFUL O F RECOVERY UNDER T HE NORMS OF THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA . THESE DEVIATIONS PREVAIL OVER CERTAIN PROVISIONS OF THE COMPANIES ACT, 1956 TO PROTECT THE DEPOSITORS IN THE CONTEXT OF INCOME RECOGNITION AND PRESENTATION OF THE ASSETS AND PROVISIONS CREATED A GAINST THEM. THUS, THE P&L ACCOUNT PREPARED BY NBFC IN TERMS OF THE RBI DI RECTIONS, 1998 DOES NOT RECOGNISE 'INCOME FROM NPA ' AND, THEREFORE, DIRECTS A PROVISION TO BE MADE IN THAT REGARD AND HENCE AN 'ADD BACK'. IT IS IMPORTANT TO NOTE THAT ADD BACK' IS THERE ONLY IN THE CASE OF PROVISIONS. [EMPHASIS SUPPLIED]' 22. THEREFORE, IN TERMS OF THE ABOVE DECISION, WHERE AN ASSESSEE MAKES PROVISION FOR NPA AND SEEKS DEDUCTION OF SUCH AMOUN T UNDER SECTION 36FL)(VII) OR SECTION 37 OF THE ACT, THEN IN THE CO MPUTATION OF INCOME, THE RBI GUIDELINES WOULD HAVE NO ROLE TO PLAY , AND HENCE, AN ADD BACK. INSOFAR AS INCOME RECOGNITION IS CONCERNED, THE SUPREME COURT HAS HELD THUS: ' APPLICABILITY OF SECTION 145 57 . AT THE OUTSET, WE MAY STATE THAT IN ESSENCE THE RBI DIRECTIONS, 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER C HAPTER III-B OF THE RBI ACT, 1934. THESE NORMS DEAL ESSENTIALLY WITH INCOME RECOGNITION. THEY FORCE THE NBFCS TO DISCLOSE THE AMOUNT OF NPA IN THEIR FINANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO REFLECT 'TRUE AND CORRECT' PROFITS. BY VIRTUE O F SECTION 45-Q, AN OVERRIDING EFFECT IS GIVEN TO THE RBI DIRECTIONS , 1998 VIS-A-VIS 'INCOME RECOGNITION' PRINCIPLES IN THE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, THESE RBI DIRECTIONS, 1998 AND THE IT ACT OPERATE IN DIFFERENT AREAS. THESE RBI DIRECTION S, 1998 HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THESE DIRECT IONS CANNOT OVERRULE THE 'PERMISSIBLE DEDUCTIONS' OR 'THEIR EXCLUSION' U NDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND THE COMP ANIES ACT IS ONLY IN THE MATTER OF INCOME RECOGNITION AND PRESENTATION O F FINANCIAL STATEMENTS. THE ACCOUNTING POLICIES ADOPTED BY AN N BFC CANNOT DETERMINE THE TAXABLE INCOME. IT IS WELL SETTLED TH AT THE ACCOUNTING POLICIES FOLLOWED BY A COMPANY CAN BE CHANGED UNLES S THE AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD RESULT IN UND ERSTATEMENT OF PROFITS. HOWEVER, HERE IS THE CASE WHERE THE AO HAS TO FOLLO W THE RBI DIRECTIONS, 1998 IN VIEW OF SECTION 45-Q OF THE RBI ACT. HENCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, SECTION 145 OF THE IT ACT HAS NO ROLE TO PLAY IN THE PRESENT DISPUTE.' THUS, INSOFAR AS INCOME RECOGNITION IS CONCERNED, T HE COURT HAS HELD THAT EVEN THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DI RECTIONS, 1998 IN VIEW OF SECTION 45Q OF THE RBI ACT AND THAT AS FAR AS INCOM E RECOGNITION IS CONCERNED, SECTION 145 OF THE INCOME TAX ACT, HAS N OT ROLE TO PLAY. 23. IN THE LIGHT OF THE ABOVE DISCUSSION WHAT EMERG ES IS THAT WHILE DETERMINING THE TAX LIABILITY OF AN ASSESSEE, TWO F ACTORS WOULD COME INTO PLAY. FIRSTLY, THE RECOGNITION OF INCOME IN TERMS O F THE RECOGNISED ACCOUNTING PRINCIPLES AND AFTER SUCH INCOME IS RECO GNISED, THE COMPUTATION THEREOF, IN TERMS OF THE PROVISIONS OF THE INCOME TAX ACT, 6 1961. INSOFAR AS THE COMPUTATION OF TAXABILITY IS C ONCERNED, THE SAME IS SOLELY GOVERNED BY THE PROVISIONS OF THE INCOME TAX ACT AND THE ACCOUNTING PRINCIPLES HAVE NO ROLE TO PLAY. HOWEVER , RECOGNITION OF INCOME STANDS ON A DIFFERENT FOOTING. INSOFAR AS IN COME RECOGNITION IS CONCERNED, IT WOULD BE THE RBI DIRECTIONS WHICH WOU LD PREVAIL IN VIEW OF THE PROVISIONS OF SECTION 45Q OF THE RBI ACT AND SE CTION 145 WOULD HAVE NO ROLE TO PLAY. HENCE, THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS. 19. FURTHER RELYING UPON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. VASISTH CHAY VYAP AR LTD. (2011) 330 ITR 440, THE COURT HELD THAT THE AO HAS TO FOLL OW RBI DIRECTIONS ON REVENUE RECOGNITION, AND HELD AS FOLLOWS '25. THE DISTINCTION DRAWN BY THE DELHI HIGH COURT IS THAT WHILE THE ACCOUNTING POLICIES OF ADOPTED BY THE NBFC CANNOT DETERMINE THE TAXABLE INCOME. HOWEVER , INSOFAR AS INCOME RECOGNITION IS CONCERNED, THE ASSESSING OFFICER HAS TO FOLLOW THE RBI DIRECTIONS, 1998 IN VIEW OF S ECTION 45Q OF THE RBI ACT. THAT INSOFAR AS INCOME RECOGNITION IS CONCERNED SECTION 145 OF THE INCOME TAX ACT, 1961 HAS NO ROLE TO PLAY.' 20. THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. DEOGIRI NAGARI SAHAKARII BANK LTD. & OTHERS, 379 ITR 241 REITERATE D THE ABOVE PROPOSITION BY HOLDING AT PARA 9 OF ITS ORDER AS FO LLOWS : '9. THE INCOME TAX APPELLATE TRIBUNAL HAS REFERRED THE CASE OFM/S. VAS ISTH CHAY VYAPAR LIMITED 330 ITR 440 (DELHI). IN THIS CASE, T HE REVENUE RELIED UPON THE DECISION OF THE HON'BLE SUPREME IN THE CAS E OF SOUTHERN TECHNOLOGIES LTD. SUPRA. THE LEARNED INCOME TAX APPELLATE TRIBUNAL HAS REPRODUCED THE OBSERVATIONS MADE BY THE DELHI HIGH COURT WHILE REFERRING THE SAID CASE OF M/S SOUTHERN TECHNOLOGIES LIMITED SUPRA. THE ASSESSEE HEREIN BEING A COOPERATIVE BANK ALSO GOVERNED BY THE RESERVE BANK OF INDIA AND THUS THE DIRECTIONS WITH REGARD TO THE PRUDENTIAL N ORMS ISSUED BY THE RESERVE BANK OF INDIA ARE EQUALLY APPLICABLE TO THE CO-OPERATIVE BANKS. THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LIMITED SUPRA HELD THAT, PROVISIONS OF SECTION 45Q OF RESERVE BANK OF INDIA ACT HAS AN OVERRIDING EFFECT VIS-A-VIS INCOME RECOG NITION PRINCIPLE UNDER THE COMPANIES ACT. HENCE, SECTION 45Q OF THE RBI AC T SHALL HAVE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINC IPLE FOLLOWED BY COOPERATIVE BANKS. HENCE, THE ASSESSING OFFICER HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998, AS HELD BY THE HON'B LE SUPREME COURT. ' 21. FURTHER RELYING UPON THE DECISION OF THE APEX COURT IN THE CASE OF UCO BANK, CALCUTTA AND MERCANTILE BANK LTD. (SUPRA) IT ALLOWED THE ASSESSEE'S APPEAL. 22. IT IS EVIDENT FROM THE ABOVE THAT THE ISSUE REGARDI NG TAXABILITY OF INTEREST ON NPA'S IS SETTLED IN FAVOU R OF THE ASSESSEE AS BEING TAXABLE IN THE YEAR OF RECEIPT. 23. THE GRIEVANCE OF THE REVENUE THAT THE HON'BLE SUPRE ME COURT'S DECISION IN THE CASE OF STATE BANK OF TRAVA NCORE (SUPRA) APPLIES TO THE PRESENT CASE, WE FIND IS MISPLACED, SINCE AS POINTED OUT ABOVE BY THE LD. COUNSEL OF THE ASSESSEE, IT HA S BEEN OVERRULED BY THE APEX COURT ITSELF IN THE CASE OF UCO BANK LI MITED (SUPRA) WHEREIN IT WAS POINTED OUT BY THE APEX COURT THAT W HILE RENDERING THE JUDGMENT IN THE CASE OF STATE BANK OF TRAVANCOR E (SUPRA), THE CIRCULAR DATED 9.10.1984 HAD NOT BEEN BROUGHT TO TH E NOTICE OF THE COURT, NOR THE SUBSEQUENT DECISION OF THE APEX COUR T IN THE CASE OF 7 K.P.VARGHESE VS. ITO (1981) 131 ITR 597 (SC). THE R ELEVANT EXTRACTS OF THE DECISION IN UCO BANK LIMITED ARE REPRODUCED HEREUNDER : 'THERE ARE, HOWEVER, TWO DERISIONS OF THIS COURT WHICH HAVE BEEN STRONGLY RELIED UPON BY THE RESPONDENTS IN THE PRESENT CASE. THE FIRST DECISION IS THE MAJORITY JUDGMENT IN THE STATE BANK OF TRAVANCORE V. COMMISSIONER OF INCOME- TAX, KERALA (1986 (158) TTR 102) DERIDED BY A BENCH OF THREE JUDGES OF THIS COURT BY A MAJORITY OF TWO TO ONE. THIS JUDGMENT DIRECTLY DEALS WITH INTEREST ON 'STICKY ADVANCES' WHICH HAVE BEEN DEBITED TO THE CUSTOMER BUT TAKEN TO THE INTEREST SUSPENSE ACCOUNT BY A BANKING COMPANY. THE MAJORITY JUDGMENT HAS REFERRED TO THE CIRCULAR OF 6TH OF OCTOBER, 1952 AND ITS WITHDRAWAL BY THE SECOND CIRCULAR OF 20TH OF JUNE, 1978. THE MAJORITY APPEARS TO HAVE PROCEEDED ON THE BASIS THAT BY THE SECOND CIRCULAR OF 20 TH JUNE, 1978 THE CENTRAL BOARD HAD DIRECTED THAT INTEREST IN THE SUSPENSE ACCOUNT ON 'STICKY' ADVANCES SHOULD BE INC LUDIBLE IN THE TAXABLE INCOME OF THE ASSESSEE AND ALL PENDI NG CASES SHOULD BE DISPOSED OF KEEPING THESE INSTRUCTIONS IN VIEW. THE SUBSEQUENT CIRCULAR OF 9TH OF OCTOBER, 1984 BY WHICH THE ASSESSMENT YEAR 1979-80 THE BANKING COMPANIES WERE GIVEN THE BENEFIT OF THE CIRCULAR OF 9TH OF OCTOBER, 1984, DOES NOT APPEAR TO HAVE BEEN POINTED OUT TO THE COURT. WHAT WAS SUBMITTED BEFORE THE COURT WAS, THAT SINCE SUCH INTEREST HAD BEEN ALLOWED TO BE EXEMPTED FOR MORE THAN HALF A CENTURY, THE PR ACTICE HAD TRANSFORMED ITSELF INTO LAW AND THIS POSITION SHOUL D NOT HAVE BEEN DEVIATED FROM. NEGATIVING THIS CONTENTION, THE COURT SAID THAT THE QUESTION OF HOW FAR THE CONCEPT OF REAL INCOME ENTE RS INTO THE QUESTION OF TAXABILITY IN THE FACTS AND CIRCUMSTANCES OF THE CASE, AND HOW FAR AND TO WHAT EXTENT THE CONCEPT OF REAL INCOME SHOULD INTERMINGLE WITH THE ACCRUAL OF INCOME, WILL HAVE TO BE JUDGED 'IN THE LIGHT OF THE PROVISIONS OF THE ACT, THE PRINCIPLES OF ACCOUNTANCY RECOGNISED AND FOLLOWED, AND FEASIBILITY . THE COURT SAID THAT THE EARLIER CIRCULARS BEING EXECUTI VE IN CHARACTER CANNOT ALTER THE PROVISIONS OF THE ACT. T HESE WERE IN THE NATURE OF CONCESSIONS WHICH COULD ALWAYS BE PROSPECTIVELY WITHDRAWN. THE COURT ALSO OBSERVED THAT THE CIRCULARS CANNOT DETRACT FROM THE ACT. THE DECISION OF THE CONSTITUTION BENCH OF THIS COURT IN NAVNITLAL C. JAVERI V. K.K. SEN (SUPRA), OR THE SUBSEQUENT DECISION IN K.P. VARGHESE V. INCOME TAX OFFICER (SUPRA) ALSO DO NOT APPEAR TO HAVE BEEN POINTED OUT TO THE COURT. SINCE THE LATER CIRCULAR OF 9.10.1984 WAS NOT POINTED OUT TO THE COURT, THE COURT NATURALLY PROCEEDED ON THE ASSUMPTION THAT THE BENE FIT GRANTED UNDER THE EARLIER CIRCULAR WAS NO LONGER AVAILABLE TO THE ASSESSEE AND THOSE CIRCULARS COULD NOT BE RESORTED TO FOR THE PURPOSE OF OVERCOMING THE PROVISIONS OF THE ACT. INTERESTINGLY, THE CONCURRIN G JUDGMENT OF THE SECOND JUDGE HAS NOT DEALT WITH THIS QUESTION AT ALL BUT H AS DECIDED THE MATTER ON THE BASIS OF OTHER PROVISIONS OF LAW. ' 24. THEREFORE, THE CONTENTION OF THE REVENUE THAT THE DECISION IN THE CASE OF STATE BANK OF TRAVANCORE (S UPRA) APPLIES TO THE ASSESSEE'S CASE IS DISMISSED. 25. THE ARGUMENT OF THE LEARNED D.R. THAT THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD. (SUPRA) WOULD NOT APPLY TO THE ASSESSEE'S CASE SINCE THE AS SESSEE IS A COOPERATIVE SOCIETY WHILE IN THE CASE OF VASISTH CH AY VYAPAR LTD. (SUPRA), THE ASSESSEE WAS A NBFC, IS ALSO DISMISSED SINCE THE PRINCIPLE ENUNCIATED BY THE DELHI HIGH COURT IN VAS ISTH CHAY VYAPAR LTD. (SUPRA) HAS BEEN FOLLOWED IN THE CASE O F SHRI MAHILA SEWA SAHAKARI BANK LTD. (SUPRA) BY THE HON'BLE GUJA RAT HIGH COURT AND VARIOUS OTHER DECISIONS CITED BY THE ASSESSEE B EFORE US ,AND THE ASSESSEE IN ALL THOSE CASES BEING A COOPERATIVE BANK, THE 8 DECISION RENDERED THEREIN SQUARELY APPLIES TO THE CASE OF THE ASSESSEE. 26. THE ARGUMENT OF THE LEARNED D.R. THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IS AL SO DISMISSED SINCE THIS ASPECT HAS BEEN DEALT WITH BY VARIOUS HI GH COURTS REFERRED TO ABOVE WHEREIN THEY HAVE CATEGORICALLY H ELD THAT EVEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING THE I NTEREST ON NPA ACCOUNT CANNOT BE SAID TO HAVE ACCRUED IN THE IMPUG NED YEAR SINCE THE RECOVERY OF THE SAME WAS IMPOSSIBLE AND E VEN OTHERWISE FOR THE PURPOSE OF INCOME RECOGNITION THE RBI DIREC TIONS, 1998, HAD TO BE FOLLOWED IN VIEW OF SECTION 45Q OF THE RBI AC T. 27. IN THE LIGHT OF THE ABOVE DISCUSSION WE FIND NO INF IRMITY IN THE ORDER OF THE CIT(A) HOLDING THE INTEREST ON NPA 'S AS TAXABLE IN THE YEAR OF RECEIPT , SO AS TO WARRANT INTERFERENCE . 5. FOLLOWING THE AFOREMENTIONED ORDER IN THE CASE O F THE ASSESSSEE ON THE SIMILAR ISSUE THE ORDER OF THE LD. CIT(A) WHICH WAS BASED ON THE EARLIER TRIBUNALS ORDER, WE DECLINE TO INTEREFERE IN THE ORDER OF THE LD. CIT(A). 6. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON SD/- SD/- (DIVA SINGH) (DR. B.R.R. KUMA R) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 21/09/2017 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR