STATE BANK OF HYDERABAD, HYDERABAD V. JOINT COMMISSIONER OF INCOME TAX

ITTA/202/2005

AI Insights

The case involves the State Bank of India appealing against the order of the Income Tax Appellate Tribunal, which had disallowed the deduction of interest on Non-Performing Assets (NPAs) for the assessment year 1999-2000. The bank had reversed the interest income in the year the assets were classified as NPAs, following RBI guidelines. However, the Income Tax authorities did not allow this deduction, leading to the bank's appeal. The Tribunal and subsequently the High Court upheld the disallowance, stating that the income once recognized in the books cannot be reversed in subsequent years merely because the assets were classified as NPAs in those years.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 753047 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 08-02-2023
• Assessment Year: misc
• Other Referred Cases: Deputy Commissioner of Sales Tax v. M/s. Motor Industries Company, UCO Bank v. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961, Banking Regulation Act, 1949
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: KARTHIK PUTTAMREDDY
• Keywords: Bad debt; Income recognition; Interest deduction; Non-performing assets; RBI guidelines
• Section: 143(3); 260A; 43D; 36(1)(vii)

Judgement Text

"IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY ,THE EIGHTH DAY OF FEBRUARY TWO THOUSAND AND TWENTY THREE PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HON'BLE SRI JUSTICE N.TUKARAMJI INCOME TAX TRIBUNAL APPEAL NO: 202 OF 2005 Appeal Under Section 260 -A of the lncome Tax Act, 1961 against the order of the lncome Tax Appellate Tribunal B Bench, Hyderabad in ITA No..s. 893 & 894 lHydl 2OO2 dated 18-03-2005, pertaining to assessment year 1999- 2000 preferred against the order dated 20-08-2002 in Appeal No.27lDC-3 (1)/ CIT (A) -lV I 2OO2-O3 on the file of the Commissioner of lncome Tax ( Appeals ) lV, Hyderabad preferred against the order of the Deputy Commissioner of lncome Tax , Circle 3 ('l) , Hyderabad dated 19{3-2002 in PAN / GIR No. S-31. Between: State Bank of lndia , Gunfoundry Hyderabad - 5OO OO1 (9t 1\" title is amended as per coun order dated 03-01-2018 in lrrAMp No. 785 of 2017inlANo 1t201t) - - ...epie[r_nr,iilnpplrrint AND Joint Commissioner Of lncome Tax (Assessments ) Special Range _ lV, Basheerbagh, Hyderabad - 500 001' - --\" - '- / vt/' ...RESPONDENT/ Respondent Counset for the Appeilant: SRl. KARTHIK RAMANA PUTTAMREDDY counset for the Respondent: SRr J. v. pRAsAD (sc FoR rNcoME TAx) The Court delivered the following: Judgment (t U AI- B 4 AND BLE RI TI E N.T N f JIIDGMENI, fP,. the Hu,'t,h tt'. Lt'i! ]a'rir t-)jut Bt'utn) Ilearrd lv[r. Kardk Ramana Punamreddy, leamed counsel for the appellant and Mr. J.V.Prasad, leamed Standing C-ounsel, Income Tax Depanment for the respondent. 2. This appeal has been preferred by the assessee as the appellant under Section 260A of the Income Tax Act, 1961 (briefly'the Act' hereinafter) against the order dated t8'03'2005 passed bythe Income Tax Appellate Tribunal' Hyderabad Bench 'B', H/erabad (briefly 'the Tribunal' hereinafter) in I.T.ANo'89a/ Ht'd/2002 for the assessment year 1999'20a0' 3 Appeal was admined vide rhe order dated 17 '09 '2012 on' the following substantial questions of law: a. I{hether on the facts and in the circunrstences of the case' the Tribunal is iustif ied in holdine that interest Peftaining to non- Pe rf orming assets c:rnnot be deducted from the taxable income rclating to en '--- accounting ),ear, even though the rele ':1nt assets I i i I I t t I ! i l 1 have become non- Performing assets onlY in that accounting year ? o*.-i..*' \"-\":: ::.:.T. #l:[1-*\"; oast accounting )ear can :ffi;; for the PurPoses o[ comPuting the uxable income o[ the current accot'nting year ? I*\"i\"t ' otduction from net profit on accourlt U \"r- ,ro\"*'c,n made 'rn respect of interest nertainirg to non-pedormhB rssets is permissible '*d\"' Stttion 28 o[ thc lT Act ? d. (hether a debit to the interest accoturt and credit to a suspense account can be considered as \"writing off a bad debt\" under the provisions o[ Section 36(1)(vif of the IT Act ? 4. Appellant before us is the State Bank of India (cause title amended aitle theorder dated 0l'01'2018 in ITTAMP'No'785 of 2017). For the assessment yar 1999-2OOO' it was assessed bythe assessing offrcer uide the assessment order dated t9'03'2002 passedunderSection 143(3) o[ the Act' 5 In the course of the assessrnent proceedings, it was fot[rd that assessee had accounted gross interest eamed net of unrealised income of previors )car on advances identifiddis 3 Non-Performing Asses (iVpAs) for the fint time during the year as per nonns laid down by the fuserve Bank of India (RBI). Assessee had submimed interest of Rs.4,4g,O5,g22.OO which was I i a i I I reversed during the par reratable ro ceftain borrowings u4rich had becorne Npa.. a, per the guidelines of RBI, inreresr on Mfu was required to be quantified and such interest had to be deducted/reversed to the subsequenr )ear. Ijowevet the assessing officer did not accepr the claim o[ the assessee and added the same to the income of the assesse e uide theassessmenr order dated 19.03.2006. 6. This uras assailed bythe assessee before the (bmrlissioner of Income Tax (Appeals)-lv, Hydenbad (for shon ,()T(A), hereinafter). By th. appellate order dated 2O.OL.2OA2, OT(o held that assessing officer was corecr in disallowing the deduction claimed by the appellant. Advening to Secrion 4JD of the Act, CIT(A) held that income bywayof inreresr in relation to such categories of bad or doubtful debts as maybe prescribed bythe RBI in relation to such debs shall be chargeable to tax in . i I I i I ( L 4 the previous par in vAich it is credited by the Schedule Bank to its profit and loss account. Holding that claim of the assessee is not permissible under Section 43D of the Act, the said ground of appeal was rejected. 7. Thereafrcr, assessee filed funher appeal before the Tribunal. Afrcr advening to the findings of the assessing officer and CXT(A), Tribunal held as follous, We have carefu.lly considertd the rival submissions and perused the record. In the case of TCI Finance (supra) the issue as to w'hether non- recognition of income by fo tlowing RBI nonns can be considered as a recognizccl method of accounting, was considered in detarl and held as if any assessee follciws the RBI norms consistently the same has to be accepted and interest income on MA need not be recognzed. Mrh regard to the inconre dready recognized in the earlier year tle Bench observed, n pan-29 ol rhe order, that the depanment has already accepred the claim made as per the revenal entries. Since the issue is confined to non-recognition of income and not with regarid to the reversal o[ entries, rhe Bench had no occasion to consider this issue w-ith regard 5 t to the claim of deduction of the amount referable to the reversal of the enuies. In the case of Bank of Madura (r\"pra), the Honble Madras Flgh Coun was concemed wit-h the pecuiiar case of .r bank declaring higher income by charging excess interest from one of im customers and on reelizrtion of the same, the excess interest which was charged and collected was claimed as liabiliry in the lear of realizing the misule and credited to the account o[ the crstomer. The Court held that the claim of deduction in the par of realization of mistale is in order. It may be noted here that it was a case of excess co[ection of interest and there was a duty cxst upon the bank to refund the excess interest whereas in the instant case interest on NPAs was eerlier declared as income on accrual basis and though it has not become bad in all resPects' the entry was sought to be reversed only because of RBI guidelines. The assessee has fumished the c ircular leaer of the RBI containing consolidated instructions/guidelines on [urtters relating to prudenthl norrlls on income recognition In the circular dated 4'h JuIy, 2002, the RBI has consolidated all the instructions issued earl-ier' Pans ].2, 3.2.1 and 3'2'2 of' the Circular read as rmder. 6 3.2. Revenal of income 3.2.1,. If any advance, includhg bills purchased and discounted becomes NpA as at the close of credired ro corresponding any tear, interest accrued and income account in the previous lear, should be reversed or provided for if the same is not realizef,. This will apply w Govsmnrcnl guaranteed accounB also. 3.2.2. In respec of NpAs, f ces, commission and similar inconre that have accrued shou.ld ce;xe ro accrue in the curent period and shou.ld be revened or provided a. ,:* _ respecr of pasr periods, I uncolleced.,, As per rhe Circular, if rhe inreresr is shou,n as accruel in the earlier lear bur ,, ,h. ,rb;.;;.;, )ears the advance becc accrued and credited ,orrlt^t MA drc interest be reversed \". r;;; rncom€ account should previous ;ear. ,r. -\"0\"\":: the correspond,rg ,:::1::'{he'1r Ac;' -J: ; :fl: \"::;:11 the mstrucub[ Income Tax Act is a st order to \",*;;;;r lf contarned code .rnct i, -.fro* ,hr, 6.-;]},1r.' it t for the asscssee ro It cou.ld b. ..;\" l#\"\"\"\": :'ch.a deducrion. 1e nore giren b), the a$i / 9.' t I 7 7 assessee, during the relevanr period, 180 dap yardstick was prescribed for idenrifying an asser as standard or NPA For example, if an advance is given on 1\" January 1998 the clear picture as to whether it has become NPA or not emerges on June, 1998. t-et w funher presume that the interest payable by the parry for a period of 6 months is Rs.6 lakhs. tu on I1-3-98 it can be predicted that it would become NPA and thus the assessee xccounts for interest of Rs'3 lakhs for three months ending on 31-3-98. Such interest is assessable to tax in the assessment yeau- 1998-99 ' However, i[ the assessee has not received any interest cluring the previous par relevant to the assessment iear 1999-00, on the expiry of 3O'h day o[ June, 1998 the assessee bank can treat it as NPA and intercst for the period of *ree montls if alreadv credited in the books as income' srrch entry should be reversed in tJre later pan of the accounting lear and for the balance period of 9 months of the previous year 1998-99 the assessee neecl not recognize the income of Rs'9 laklis' If the essessee has other income to the tune of Its'20 i;;r, ..\" tbe assessee claim that onlv Rs'17 lakhs hs to be trt.*ec as *?Tr.,\"\"rffrT;:r.'T urterest to the tune ot I I 8 another Parry was wrongly declared as income rL the earlier lear and thus it needs to be set off in the *r. .** consideration? Non recognidon of income permissible i' 'pp$'g the real income principla and the income which is already accounrcd for in the first part of the laar but revened in the later part of the par also need not be declared as income, by 'pply\"g the same principle, because in the computadon of income of a panicular ytar, the income of that year to be mken into corsideration' However' once income of $x yeal is properly recorded assessee cannot reduce the income from the the the subsequent )ears comPutation on the grourd that in the earlier laar income was shown on accr-ual basis wrongly and thus the income of this year gets reduced if set off is permined. In the given example, it could be seen that the assessee is not claiming any expenditure against the current lear income but seeking reduction of current ytar's income though even accorrding rc the assessee such income accmed in the par under consideration. In our considered opinion, such a claim is not permissible. In the immediatelypreceding par, the assessee having declared income on che accrual basis, the only course open to the assessee to I I 9 derecognise rhe income debr by r.,,\"*;; il; ;##.;:\"1 supponed by the decisi case of state Banr< of ;\" * Apex coun in the r^,elt as rhe decrion ., #;filf::*:ir.J lase of popha oxlgen @) Ltd., (e1 rTD;10- Adminedly, rhe assessee ha nor wricten .O ,i. impugned sum as bad-debt ,/s :e(f)(\"if of th. Act and in facr the case of rhe ;Lssessee is that there is no question of write off us 36(l)(vif of th. A.t. Such being rhe case, we are of the view thar the claim of the assessee is conrrary to law and accordingly we rcject the contention of the assessee. 8. From the above, we find that Tribunal had considered the circular oi RBI dated 04.07.2002 and held thar once an income of a previors 1'e ar is recorded, assessee cannot reduce the income o[ subsequent )rars on the ground that in the earlier 1rear incorne was shown on actual basis wrongly. Tribunal held rhat such a claim o[ the assessee is not pennissible under the provisions of rhe Act. Funher, Tribunal held that assessee had also not written oif the NPAs as bad debts .nder Section 36(1xvii) of the Act' Therefore' there was no questlon of writing off such interest as a bad debt' 9. In the hearing today' leamed counsel for the appellant has referred to Section 21 of the Banking Regulation AcL 1949 and submis that under sub-section (t) thereof' all banking companies are bound to follow policy of the RBI so determined' Therefore, assessee being a banking company had ro comply with the RBI guidehnes' FIe has also referred to a decision of the Supreme C-oun in Depury Commissioner of Sales Tax v' M/s. Motor lndustries Companyl and submia that in that case under the Kerala General Sales Tax Lcr' 1963' Supreme C-ourt had pointed out a waY to overcome such a difficulty' Further reference has been praced on the decision of the Supreme C-ourt in UCO Bank v' Commissioner of Incomc Tax2 to contend that it is always open to the Crntral Board o[- ::10:: Direct Taxes (GDT) to issue instrudrons under Section L19 of t lusly z scc ros 2 lrolo;+ scc slo :: I1:: the Act ro remove anydifficulryin wfiich would be binding on the depanment. event such instructions 10. v/e are afraid we cannor accept such conrenrron urged by Ieamed counsel for the appellant. In the presenr appeal, it is not GDT which has issued circulan or guidelines under Section 119 of the Act. On the other hand, circular has been issued by the RBI wfiich is binding on all the banking companies in general. However, u4en rt comes to assessrnent under tle Ac1, the revenue authondes are bound by the provisions of the Act. Therefore, the claim o[ rhe assessee rhar interest paid on p65 should be excluded from computation of income was rightly negarived by the assessing officer, which has been affirmed by the rqro lower appellate aurhoriries. 11. As pointed our by the Supreme Coun in M,/s. Motor Industries Company (rupo), ir is always open for rhe assessee or appellant to file a revised rerum and claim the deduction. Even if assessment. is completed, assessee could have demanded ! I I l tilzti adjustment or refund by preferring the claim in time' But that was not done 12. Thus in the facs and circurnstances, we do not find that any question o[ law, much less any substantial question of laq arises for consideration of the C-ourt from the order of the Tribunal. 13. Appeal fails and is accordinglydismissed. No costs. fu a sequel, miscellaneous Petitions, Pending if any, stand closed Y Sd/- M. VIJAYA BHASKAR JOINT REGISTRAR //TRUE COPY// SECTION OFFICER To 1. The lncome Tax Appellate Tribunal B Bench, Hyderabad 2. The Commissioner of lncome Tax ( Appeals ) lV, Hyderabad 3. The Deputy Commissioner of lncome Tax , Circle 3 (1) , Hyderabad 4. One CC to SRl. KARTHIK RAMANA PUTTAMREDDY, Advocate [OPUC] 5. One CC to SRl. J v PRASAD (SC FOR INCOME TAX) [OPUC] 6. Two CD Copies kul kam ,IGH COURT DATED:08/02t2023 JUDGMENT ITTA.No.202 of 2OOs DISMISSING THE ITTA I 2 + r,i3 ?t?3 th k "