STATE BANK OF HYDERABAD v. JOINT COMMISSIONER OF INCOME TAX
[Citation -2005-LL-0318-3]

Citation 2005-LL-0318-3
Appellant Name STATE BANK OF HYDERABAD
Respondent Name JOINT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 18/03/2005
Assessment Year 1998-99, 1999-2000
Judgment View Judgment
Keyword Tags broken period interest • computation of income • method of accounting • revenue expenditure • date of acquisition • instructions of rbi • excess collection • interest accrued • excess interest • banking company • interest income • stock-in-trade • accrual basis • interest paid • written off • bad debt • bad-debt
Bot Summary: Assessment year 1999-2000: 'Whether interest pertaining to the previous year reversed during the current year on NPAs identified as NPAs for the first time during the financial year 1998-99, is allowable as deduction Assessment years 1998-99 and 1999-2000: 'Whether broken period interest paid on purchase of securities is revenue expenditure since the securities constitute stock-in-trade 2. The second issue which is relevant to the assessment year 1999-2000 only is with regard to the claim of deduction of interest income, pertaining to the previous year, which was reversed during the current year. ' As per the Circular if the interest is shown as accrued in the earlier year but in the subsequent year the advance becomes NPA the interest accrued and credited into income account should be reversed or provided for in the corresponding previous year. If the assessee has not received any interest during the previous year relevant to the assessment year 1999-2000, on the expiry of 30-6- 1998 the assessee bank can treat it as NPA and interest for the period of three months if already credited in the books as income, such entry should be reversed in the later part of the accounting year and for the balance period of 9 months of the previous year 1998-99 the assessee need not recognise the income of Rs. 9 lakhs. Non recognition of income is permissible by applying the real income principle and the income which is already accounted for in the first part of the year but reversed in the later part of the year also need not be declared as income, by applying the same principle, because in the computation of income of a particular year, the income of that year has to be taken into consideration. Once the income of that year is properly recorded the assessee cannot reduce the income from the subsequent years computation on the ground that in the earlier year income was shown on accrual basis wrongly and thus the income of this year gets reduced if set off is permitted. In the given example, it could be seen that the assessee is not claiming any expenditure against the current year's income but seeking reduction of current year's income though even according to the assessee such income accrued in the year under consideration.


These two appeals filed at instance of assessee pertain to assessment years 1998-99 and 1999-2000. Appeal in respect of assessment year 1998-99 arises out of order passed by Assessing Officer under section 154 of Act whereas appeal for assessment year 1999-2000 arises out of order passed under section 143(3) of Act. Since assessee-bank is Government of India Undertaking, it approached Committee of Secretaries for grant of permission to prosecute appeals before Appellate Tribunal. Committee on disputes granted permission to State Bank of Hyderabad to pursue appeals in ITAT only with regard to following issues. Assessment year 1999-2000: 'Whether interest pertaining to previous year reversed during current year on NPAs identified as NPAs for first time during financial year 1998-99, is allowable as deduction? Assessment years 1998-99 and 1999-2000: 'Whether broken period interest paid on purchase of securities is revenue expenditure since securities constitute stock-in-trade? 2. Though assessee has raised several issues in grounds of appeal, since permission was granted to pursue appeals only in respect of abovementioned issues, other grounds urged by assessee were not pressed by learned counsel and accordingly they are not taken up for consideration. 3. With regard to allowance of interest pertaining to broken period, case of learned counsel for assessee is that assessee purchased securities are treated them as stock-in-trade. Since assessee purchased securities with interest, broken period interest is allowable as revenue expenditure. Assessing Officer as well as CIT(A) did not dispute fact that securities were held as stock-in-trade by assessee but claim of deduction was rejected mainly by relying upon decision of Supreme Court in case of Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541. Learned counsel submitted that CBDT has considered decision of Hon'ble Supreme Court in case of Vijaya Bank Ltd. (supra) and clarified that Apex Court was not directly concerned with issue as to whether securities form part of stock- in-trade or capital assets. Board further clarified that question whether particular item of investment constitute stock-in-trade or capital assets, is question of fact since banks have to generally follow instructions of RBI, Assessing Officer was advised to determine, on facts and circumstances of each case, whether any particular security constitute stock-in-trade or investment. Learned counsel has taken us through decision of Apex Court to submit that specific issue as to whether securities constitute stock-in-trade or investment was not subject-matter of consideration by Apex Court whereas in case before us tax authorities have not disputed contention of assessee that securities were held as stock-in-trade. It was also submitted that Circular issued by CBDT is applicable to instant case and asssessee having purchased securities as stock-in-trade, interest paid for broken period till date of acquisition is deductible under section 37 of Act. In this regard, learned counsel relied upon decision of Hon'ble Kerala High Court in case of CIT v. Nedungadi Bank Ltd. [2003] 264 ITR 545 wherein Hon'ble High Court referred to earlier decision of Kerala High Court in case of CIT v. South Indian Bank Ltd. [2000] 241 ITR 374 which was affirmed by Hon'ble Supreme Court in case of CIT v. South India Bank Ltd. [2001] 249 ITR 304 and also referred to decision of Apex Court in case of Vijaya Bank Ltd. (supra) and held that broken period interest is allowable as deduction under section 37 of Act. Learned counsel kly relied upon aforesaid decisions. 4. On other hand, learned DR relied upon orders of tax authorities. Though it is not disputed by learned DR that securities are purchased and held as stock-in-trade, it was submitted that in light of decision of Apex Court in case of Vijaya Bank Ltd. (supra) broken period interest has to be capitalized. It may also be noted that learned DR was not able to point out any decision contrary to view taken by Kerala High Court in case of Nedungadi Bank Ltd. (supra). 5. We have carefully considered rival submissions and perused 5. We have carefully considered rival submissions and perused record. decision of Apex Court in case of Vijaya Bank Ltd. (supra) was explained by CBDT and on same lines Kerala High Court distinguished decision of Apex Court to hold that if securities were held by Banking Company as stock-in-trade of business, interest paid for broken period would constitute allowable outgo in hands of assessee. Admittedly, assessee purchased securities to hold them as stock-in-trade. Under these circumstances, we are of view that interest paid for broken period is allowable as deduction and accordingly direct to accept claim of assessee. 6. second issue which is relevant to assessment year 1999-2000 only is with regard to claim of deduction of interest income, pertaining to previous year, which was reversed during current year. case of assessee is that certain advances borrowings have become non-performing assets. As per guidelines issued by RBI interest on NPAs was quantified and such interest was deducted/reversed in subsequent year when NPAs are identified after end of accounting year. It was pleaded that interest on NPAs is not recognizable as income in accordance with guidelines of RBI and thus such interest has been deducted/reversed to ensure that real interest, accrued to bank, is charged to tax. Assessing Officer as well as CIT(A) rejected contention of assessee. case of revenue is that income of preceding year is not expenditure for earning of interest income of current year. Therefore, netting of interest income is not proper. Reliance was placed upon decision of ITAT, Jaipur Bench in case of Bank of Rajasthan Ltd. v. IAC [1999] 68 ITD 69 to hold that total income or loss of assessee has to be computed in accordance with provisions of Act and procedure laid down by RBI cannot be followed while computing income under IT Act. In paras 2.4 and 2.5 of order, Assessing Officer observed as under: '2.4 contention of assessee cannot be accepted. assessee is following reversal of interest on NPAs as per RBI norms without any sanction under Income-tax Act. As advances have become NPA, same could have been claimed as bad debts under section 36(1)(vii). To allow claim of bad debts under section 36(1)(vii) there are two conditions. First, debt should be bad and second, amount of bad debt should be written off in accounts of assessee. In assessee's case, it is merely reversing entries i.e., debiting interest income and crediting to suspense account. assessee has to establish that above sum has become bad in light of ITAT, Delhi Bench decision in case of DCIT v. India Thermal Corporation Ltd., reported in 56 ITD 307. 2.5 Further, it is not known whether bad debts written off during year are inclusive of NPAs or not. In absence of any details with regard to bad debts written off and interest on NPAs reversed, assessee's claim for deduction of Rs. 4,48,06,822 being unrealized interest income of financial year 1997-98 reversed during financial year 1998-99 can not be allowed.' learned CIT(A) having affirmed order of Assessing Officer, assessee is in appeal before us. 7. Learned counsel submitted that as per RBI norms, interest on NPAs should not be treated as accrued and if such interest is already shown as income in preceding year, Bank can make suitable provision in subsequent year. Since assessee has followed norms prescribed by RBI, same has to be allowed as deduction from total income. In other words, without reducing interest on NPAs, true and correct profits cannot be deduced and hence claim of assessee is in order. Learned counsel relied upon decision of ITAT-B-Bench, Hyderabad in case of TCI Finance Ltd. v. Asstt. CIT [2004] 91 ITD 573 and in particular para 29 of order of Tribunal to submit that reversal entries were approved by Tribunal. He also relied upon following decisions in support of his contention that in year of reversal of entry, amount referable to such reversal entries should be deducted from total income. (i) Bank of Madura Ltd. v. CIT [2003] 261 ITR 749 (Mad.). (ii) CIT v. MP Financial Corporation [1997] 227 ITR 888 (MP). Learned counsel has given note dated 22-12-2003 (page-1 of paper book) to explain reasons for passing such reversal entries. case of assessee is that as per RBI norms 180 days yardstick has to be applied for identifying asset as standard or NPA. When 180 days falls beyond balance-sheet date, it is technically not possible for bank to foresee conduct of account subsequent to balance-sheet date and ignore income on such NPAs since bank cannot be asked to comply with act of impossibility. When income is booked on wrong premise, Bank is entitled to reverse it by passing necessary entries during next financial year. By deducting interest, which had not been accrued in earlier year, bank has merely complied with norms of RBI. It is also case of assessee that Assessing Officer was not justified in asking bank to claim amount as bad-debt in view of fact that interest component on NPAs accounts has never accrued and received by bank and therefore there is no question of write off under section 36(1)(vii) of Act. It was submitted that write off would be possible only if amount is recognised. 8. On other hand, learned DR submitted that there is no provision under IT Act to claim deduction from total income by passing reversal entry and in this regard he relied upon decision of ITAT, Jaipur Bench in case of Bank of Rajasthan v. IAC [1999] 68 ITD 69. 9. We have carefully considered rival submissions and perused record. In case of TCI Finance Ltd. (supra) issue as to whether non- recognition of income by following RBI norms can be considered as recognized method of accounting, was considered in detail and held as if assessee follows RBI norms consistently same has to be accepted and interest income on NPAs need not be recognised. With regard to income already recognized in earlier year Bench observed, in para-29 of order, that department has already accepted claim made as per reversal entries. Since issue is confined to non-recognition of income and not with regard to reversal of entries, Bench had no occasion to consider this issue with regard to claim of deduction of amount referable to reversal of entries. In case of Bank of Madura Ltd. (supra), Hon'ble Madras High Court was concerned with peculiar case of bank declaring higher income by charging excess interest from one of its customers and on higher income by charging excess interest from one of its customers and on realisation of same, excess interest which was charged and collected was claimed as liability in year of realizing mistake and credited to account of customer. Court held that claim of deduction in year realization of mistake is in order. It may be noted here that it was case of excess collection of interest and there was duty cast upon bank to refund excess interest whereas in instant case interest on NPAs was earlier declared as income on accrual basis and though it has not become bad in all respects, entry was sought to be reversed only because of RBI guidelines. assessee has furnished circular letter of RBI containing consolidated instructions/guidelines on matters relating to prudential norms on income recognition. In circular dated 4th July, 2002 RBI has consolidated all instructions issued earlier. Paras 3.2, 3.2.1 and 3.2.2, of Circular read as under: '3.2 Reversal of income 3.2-1 If any advance, including bills purchased and discounted, becomes N P as at close of any year, interest accrued and credited to income account in corresponding previous year, should be reversed or provided for if same is not realized. This will apply to Government guaranteed accounts also. 3.2.2. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in current period and should be reversed or provided for with respect to past periods, if uncollected.' As per Circular if interest is shown as accrued in earlier year but in subsequent year advance becomes NPA interest accrued and credited into income account should be reversed or provided for in corresponding previous year. mode of claiming deduction under Income- tax Act was obviously not mentioned in instruction. 10. Income-tax Act in self-contained code and in order to claim deduction, it is for assessee to show that Act provides for such deduction. It could be seen from note given by assessee, during relevant period, 180 days yardstick was prescribed for identifying asset as standard or NPA. For example, if advance is given on 1-1-1998 clear picture as to whether it has become NPA or not emerges on 30-6-1998. Let us further presumed that interest payable by party for period of 6 months is Rs. 6 lakhs. As on 31-3-1998 it cannot be predicted that it would become NPA and thus assessee accounts for interest of Rs. 3 lakhs for three months ending on 31-3-1998. Such interest is assessable to tax in assessment year 1998-99. However, if assessee has not received any interest during previous year relevant to assessment year 1999-2000, on expiry of 30-6- 1998 assessee bank can treat it as NPA and interest for period of three months if already credited in books as income, such entry should be reversed in later part of accounting year and for balance period of 9 months of previous year 1998-99 assessee need not recognise income of Rs. 9 lakhs. If assessee has other income to tune of Rs. 20 lakhs, can assessee claim that only Rs. 17 lakhs has to be treated as income, on ground that interest to tune of Rs. 3 lakhs payable by another party was wrongly declared as income in earlier year and thus it needs to be set off in year under consideration. Non recognition of income is permissible by applying real income principle and income which is already accounted for in first part of year but reversed in later part of year also need not be declared as income, by applying same principle, because in computation of income of particular year, income of that year has to be taken into consideration. However, once income of that year is properly recorded assessee cannot reduce income from subsequent years computation on ground that in earlier year income was shown on accrual basis wrongly and thus income of this year gets reduced if set off is permitted. In given example, it could be seen that assessee is not claiming any expenditure against current year's income but seeking reduction of current year's income though even according to assessee such income accrued in year under consideration. In our considered opinion, such claim is not permissible. In immediately preceding year assessee having declared income on accrual basis, only course open to assessee to derecognise that income is to treat same as bad-debt by following RBI norms. Our view is supported by decision of Apex Court in case of State Bank of Travancore v. CIT [1986] 158 ITR 102 as well as decision of ITAT, Delhi Bench in case of Poysha Oxygen (P.) Ltd. v. Dy. CIT [2004] 91 ITD 616. Admittedly, assessee has not written off impugned sum as bad-debt under section 36(1)(vii) of Act and in fact case of assessee is that there is no question of write off under section 36(1)(vii) of Act. Such being case, we are of view that claim of assessee is contrary to law and accordingly, we reject contention of assessee. 11. In result, both appeals are allowed in part. *** STATE BANK OF HYDERABAD v. JOINT COMMISSIONER OF INCOME TAX
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