Per R.C. Sharma, Accountant Member : This is appeal filed by assessee against order of CIT (Appeals)- IV, New Delhi, dated 11-10-2006 for assessment year 2003-04, in matter of order passed under section 143(3) of Income-tax Act, 1961, wherein following grounds have been taken by assessee: 1. order of CIT (Appeals) is bad and wrong in law. 2. CIT (Appeals) erred in confirming addition of Rs. 2,15,53,466 alleged to be interest income of appellant. 3. CIT (Appeals) failed to appreciate that no interest income accrued t o appellant on amount advanced in view of continuing default by loanees in respect of interest and on account of uncertainty regarding receipt of principal and interest thereon. 4. On facts of case and in law, there was no accrual of interest income having regard to principal of real income. 5. CIT (Appeals) erred in law and on facts in confirming addition of Rs. 2,15,53,466 alleging to be interest income on loans not declared by appellant. He should have appreciated submissions made by appellant that appellant being NBFC (already registered with Reserve Bank of India) has to comply with Reserve Bank of India Act, 1934. appellant has explained that provisions of section 45Q of RBI Act and provisions of Chapter III-B of said Act have overriding effect on provisions of all over Acts which includes Income-tax Act also. lower authorities did not appreciate this legal position. 5.1 In this connection appellant has also brought to notice of lower authorities, decisions reported in 91 ITD 573 (Hyd.) and 87 ITD 298 (Delhi) of Delhi Tribunal which is jurisdictional Tribunal and, therefore, binding on them and, thus, should have been followed. All these have been though noticed, lower authorities have not understood legal implications flowing there from. This has resulted in addition of Rs. 2,15,53,466 which is wrong and bad in law and has to be deleted. 6. charge of interest invoking section 234B is wrong and bad in law. 7. appellant prays that he may be permitted to add, alter, amend or delete any grounds before or at time of hearing.' 2. Rival contentions have been heard and record perused. Facts in brief are that during course of scrutiny assessment, Assessing Officer found that assessee-company had given loans amounting to Rs. 13,57,87,057 to v r i o u s bodies corporates but had not declared any interest income accrued/earned thereupon Assessing Officer further noted that in Note No. v of Annexure to Auditor Report, it was mentioned by Auditor that company has given interest bearing loans/advances in nature of loans to parties. From details called for from assessee, it was found that assessee had given interest bearing loans to following parties, which is reflected in balance sheet for period ending 31-3-2003: 1. Jindal Equipment Leasing & Consultancy Services Ltd. Rs. 7,32,72,000 2. Mansarovar Investments Ltd. Rs. 5,10,17,630 3. Goswamis Credits & Inv. Ltd. Rs. 1,14,97,427 Rs. 13,57,87,057 3. Further, it was mentioned in notes attached with return that certain loans given by company have become Non-Performing Assets (NPA) and as per NBFC Prudential Norms (RBI) Directions, 1998, interest income on NPA shall be recognized only when it is as actually realized. It has been further stated that accordingly, interest income on loans given which has become NPA has not been accounted for and same shall be offered for taxation as and when received. 4. Since, assessee had given above-mentioned loans on interest and it was following mercantile system of accounting, as per Assessing Officer, it was required to declare interest income on above loan on accrual basis only irrespective of date of actual receipt of interest and this accrued interest for year under consideration should have been declared by it as its income earned from interest in this year, which it has not done. Accordingly, it was asked to give details of NPAs (including details of deposits, when given, rate on which said loans were given on interest accrued) on which interest income was not declared. It was also asked to file copies of loan agreements and to explain and show cause as to why accrued interest on such loan should not be taken as its income for year under concern as it was maintaining its accounts on mercantile/accrual basis. It was also asked to prove with evidences that these loans have actually become NPA. In response, details of loans outstanding as on 31-3-2003 along with copies of agreements regarding loans indicating rates of interest thereupon have been filed. It has also been stated that loans to Jindal Equipment Leasing & Consultancy Services Ltd. and Mansarovar Investments Ltd. were advanced in financial year 1996-97 and assessee accrued interest on loan till financial year 1997-98. As amount of interest for financial year 1997-98 remained outstanding for more than six months, advances became NPA as per definition of NBFC's Prudential Norms (RBI) Directions, 1993. As regards loan given to Goswamis Credits & Inv. Ltd. it was stated that loan was given in financial year 1998-99 and assessee accrued interest on this loan till financial year 2000-01 and since, interest for financial year 2000-01 remained outstanding for more than six months, advances became NPA as per definition of NBFC's Prudential Norms (RBI) Directions, 1998. It has further stated that it is NBFC and has been granted certificate of registration by RBI under section 45-IA of RBI Act, 1934 and, therefore, it is bound to follow directions/instructions/guidelines issued by RBI from time to time including NBFC's Prudential Norms (RBI) Directions, 1998 and in terms of said directions/norms, advances on which interest remained outstanding for more than six months were required to be treated as NPA, as defined in para 2(xii) of RBI Act. It has been further stated that as per para 3 of said Act, interest/ discount or any other charges, on NPA shall be recognized only when it is actually realized. It has further stated that non- recognition of interest income on loans/advances is in accordance with aforesaid norms and directions issued by RBI and since, it is bound by aforesaid directions, it did not recognize interest income on advances which has been classified as NPA in accordance with said norms. It has further cited section 45Q (Chapter III-B) of RBI Act to emphasize that provisions of this Chapter will have overriding effect on any other law and, thus, interpreted it as having overriding effect on Income-tax Act also. It has also cited section 45JA of RBI Act to state that that RBI has been empowered to determine policy and issue directions from time to time to all or any of NBFCs relating to income recognition and accounting standards, etc., and on basis of it, stated that NBFC is bound to follow policy determined by RBI, which has issued NBFC's Prudential Norms (RBI) Directions, 1998, according to which interest or any other charges on NPA shall be recognized only when it is actually realized. In support of its contention, assessee-company has further cited decisions of Tribunals in cases of T.C.I. Finance Ltd. v. Asstt. CIT [2004] 91 ITD 573 (Hyd.) and TEDCO Investment & Financial Services (P.) Ltd. v. Dy. CIT [2003] 87 ITD 298 (Delhi) to emphasize that non-recognition of income on ground that income had not really accrued as realisability of principal outstanding itself was doubtful, is legally correct under mercantile system of accounting. Being not convinced with submissions of assessee, Assessing Officer added interest accrued, in total income of assessee. 5. By impugned order, CIT(A) confirmed action of Assessing Officer by further stating that as per provisions of section 145, interest income accrued to assessee, even though not actually received, since assessee was following mercantile system of accounting. However, without referring to any material on record, CIT (Appeals) also stated that assessee- company and borrowing company are known to each other, auditor of lender and borrowing company are same and that assessee-company was not following directions of RBI. 6. We have considered rival contentions carefully gone through orders of authorities below and deliberated on various case laws cited by lower authorities in their respective orders, as well as cited by learned AR and DR during course of hearing before us. Facts in brief are that assessee is non-banking financial company, during course of its business of advancing loans, it has granted loans to various companies. During course of scrutiny assessment, Assess ing Officer found that in respect of loans given to M/s. Jindal Equipments, Mansarover Investment and Goswami Credit & given to M/s. Jindal Equipments, Mansarover Investment and Goswami Credit & Investment, assessee has not credited any interest income in its books of account. Assessing Officer observed that these advances were given at fixed rate of interest in terms of mercantile system of accounting being followed by assessee, interest income accrued in favour of assessee, but same has not been accounted for. Accordingly, he added same in income of assessee. It was submitted by assessee before Assessing Officer that in financial year 1996-97, loan was advanced to M/s. Jindal Equipment and Mansarover Investment, assessee accrued interest on said loans till financial year 1997-98, since amount of interest for financial year 1997-98 remained outstanding for more than six months, as per NPA Norms of NBFC's Prudential Loans (Reserve Bank) Directions, 1998, loans itself became NPA. Likewise, loans given to M/s. Goswami Credits & Investment in financial year 1998-99 and interest income thereon was accrued in books of account till financial year 2000-01, and since amount of interest on this loan for financial year 2000-01, remained outstanding for more than six months, advance became NPA. Accordingly, it was pleaded that assessee did not account for interest in relevant assessment year under consideration, in view of continuing default in respect of interest and on account of uncertainty regarding receipt of principles and interest thereon. Since recoverability of principle amount of loan itself was doubtful, decision was taken as prudent businessman and interest income was not accounted for in books of account. As per assessee, under these circumstances, there was no real accrual of interest and interest was not taxable in hands of assessee having regard to principles of real income. It was also submitted before lower authorities that even in accordance with accounting standard AS-9, issued by Institute of Chartered Accountants of India dealing with effect of uncertainty on revenue recognition, guidance note on Accrual Basis of Accounting issued by ICAI according to which where ultimate collection with reasonable certainty is lacking, revenue recognition is to be postponed to extent of uncertainty involved. Accordingly, it was also vehemently argued by learned AR during course of hearing before us that in situation where there is uncertainty regarding ultimate collection of interest, at time of raising claim, recognition of income on that account should be postponed, and in terms of AS-9 and guidance note on accrual basis of accounting, it is appropriate to recognise revenue in such cases only when it became reasonably certain that ultimate collection will be made. However, in present case, in view of fact that principal and interest remained unpaid as per accepted accounting principle, revenue should be recognized only in period in which it is reasonably certain that ultimate collection will be made. Postponement of recognition of such revenue pending certainty of ultimate collection, as per pronouncement of ICAI is in accordance with accrual basis of accounting. He further submitted that assessee being non-banking financial company, having been granted certificate of registration by RBI under section 45-IA of RBI Act, 1934, assessee is bound to follow directions/instructions/ guidelines issued by RBI from day-to-day including NBFC's Prudential Loan (RB) Directions, 1998. 7. On other hand, learned DR submitted that in view of decision of ITAT, Special Bench in case of New India Industries Ltd. v. Asstt. CIT [2007] 18 SOT 51 (Delhi), provisions of section 45JA of RBI Act, 1934, is not having overriding effect, over provisions of Income-tax Act, 1961. He drawn our attention to relevant observations made by Special Bench in case of New India Industries Ltd. (supra) wherein it was observed that provisions contained in RBI Act for NBFC are basically for regulating working of NBFC only. Both RBI Act and Income-tax Act, 1961 are separate, there is no inconsistency in provisions of section 45JA of RBI Act vis-a-vis provisions of Income-tax Act, 1961 for allowing claim of bad debts under section 36(1)(vii) of Income - Tax Act, 1961. Accordingly, assessee was held to be not entitled to claim deduction in respect of provisions for doubtful debts so long as it does not fulfil conditions prescribed in section 36(1)(vii) of Income-tax Act, 1961. In view of these observations of ITAT, Special Bench, learned DR submitted that lower authorities were justified in adding interest income which had accrued to assessee in view of mercantile system of accounting followed by it. 8. We have carefully deliberated on rival contentions raised by learned AR and DR. controversy here revolves around chargeability of interest income to tax which even though technically accrued as per mercantile system of accounting being followed by assessee, but same was not accounted for as income in view of peculiar facts and circumstances o f case wherein there was uncertainty regarding ultimate collection of interest. There is no dispute to well-settled legal proposition that Income-tax Act levies charge of income-tax on total income as per section 4. Section 5 of Act defines scope of total income. provisions of section 145(1) defines that income chargeable under head 'Profit and gain of business or profession' or 'Income from other sources', shall subject to provisions of section 145(2) be computed in accordance with either cash or mercantile system of accounting regularly employed by assessee. Thus, provisions of section 145(1) are subject to provisions of section 145(2), which, in turn, provide that Accounting Standard, as may be notified by Central Government from time to time, are to be followed by class of assessee or in respect of any class of income and to that extent, notified accounting standard as AS-1, stipulating that irrespective of whatever be method of accounting employed by assessee, it is sine qua non that financial statements prepared on basis of such method of accounting must represent true and fair view of state of affairs of business based on policy of prudence. Therefore, improvised method of mercantile or cash method of accounting, which may result from such blending of considerations of prudence with strict principles of mercantile or cash method of accounting, meets requirements of section 145. From reading of section 145 in conjunction with charging provisions contained in section 4, scope of total income as defined in section 5 and other relevant provisions, in various judgments discussed herein below, provisions of section 145 cannot override section 5 of Act. If income has neither actually accrued nor received within meaning of section 5 of Act, whatever section 145 may say, such income cannot be charged to tax even though book keeping entry may have been made recognizing such hypothetical income, which in law and in fact did not really accrue or arise or received in previous year. provisions of section 145 of Act determine method of computing taxable income, it does not effect range of taxable income or ambit of taxation. computation provisions cannot enlarge or restrict contents of taxable income. Accordingly, range of taxable income or ambit of taxation is to be determined in accordance with charging provisions. Even where assessee is following mercantile system of accounting, it is only accrual of real income which is chargeable to tax, that accrual is matter to be decided on commercial belief having regard to nature of business of assessee and character of transaction. Accordingly, for purpose of determining whether there has been accrual of real income or not, recourse is to had to business character of transaction and realities and peculiarities of situations. Interest income on sticky loans, which has theoretically accrued in favour of assessee, but has not factually resulted or materialized at all to assessee during accounting year, should be regarded as hypothetical income and not real. There is no reason as to why factum of sticky nature of loans operating not only throughout accounting period but also in preceding years, not on basis of mere ipse dixit of assessee, but on being objectively established by showing deteriorating financial position of concerned debtor and history of their accounts, should not, have effect on preventing accrual of interest thereon as real income to assessee. Thus, stickiness of advances or loans objectively established is sufficient to prevent accrual of real interest thereon as real income and would have effect of rendering such income hypothetical and same cannot be brought to tax. Under Income-tax Act, 1961, in order that income should accrue it should not merely fall due or become legally recoverable, but should also be factual and practically realizable. Factual or practical unrealisibility thereof, may prevent its accrual depending upon facts and circumstances attending upon transaction. 9. Under Income-tax Act, 1961, income chargeable to tax is income received or due to be received in India in previous year, or income that accrues or arises or is deemed to accrue or arise in India during such year. computation of such income is to be made in accordance with method of accounting regularly employed by assessee. No doubt, Income-tax Act, 1961 takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipt; but substance of matter is income. If income does not result at all, there cannot be tax, even though book keeping entry is made about hypothetical income which does not materialize. instant case is on more better footing, wherein after realizing and establishing bad financial position of debtors and no chance of realization of interest income, assessee had not even passed any entry in books of account for such interest. guidance note on accrual basis on accounting issued by ICAI lays down that where ultimate collection with reasonable certainty is lacking, revenue recognition is to be postponed to extent of uncertainty involved. Following observations of guidance note are relevant for this purposes: ' 3.4 When recognition of revenue is postponed due to effect of uncertainties, it is considered as revenue for period in which it is properly recognized according to principles discussed herein. 3.5 Where ability to assess ultimate collection with reasonable certainty is lacking at time of raising any claim, e.g., for escalation of price, export incentives, interest, etc., revenue recognition is postponed to extent of uncertainty involved. It is possible that uncertainty of collection may be either in respect of entire transaction or part thereof. For that part in respect of which there is no uncertainty of collection, revenue is immediately recognized and for remaining part, recognition of revenue is postponed. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that ultimate collection will be made. It is necessary to disclose circumstances in which revenue recognition has been postponed pending resolution of significant uncertainties.' 10. In view of above, in situation where there is uncertainty regarding ultimate collection of interest, at time of raising claim, recognition of income on that account should be postponed. In terms of guidance note, it is appropriate to recognize revenue in such cases only when it becomes reasonably certain that ultimate collection will be made. It is undisputed fact that in instant case till date both principal and interest remained unpaid, accordingly as per accepted accounting principle, revenue should be recognized only in period it is reasonably ascertained that ultimate collection will be made. After decision of Hon'ble Supreme Court dated 18-11-1986, in case of State Bank of Travancore v. CIT [1986] 158 ITR 102, Hon'ble Supreme Court in its decision in case of UCO Bank v. CIT [1999] 237 ITR 889 vide its order dated 30-5-1999 had considered concept of accrual of income and hold that what could be brought to tax was only real income accrued to assessee and that there could be no levy of tax on any hypothetical or illusory income. In this case also, income was not accounted for in respect of interest on sticky advances of banking company, Hon'ble Supreme Court held that even though assessee was following mercantile system of accounting, but interest pertaining to doubtful loans was not real income in year in which it accrues but only when it was realized. In instant case also, it is matter of record that till date no interest has been received by assessee nor any amount was received towards refund of principal. Hon'ble Supreme Court in case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and in case of Godhara Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, reiterated that income-tax is not leviable on hypothetical income. Though Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipts, but substance of matter is income. If income does not result at all, there cannot be tax, even though in book keeping entry is made about 'hypothetical income' which did not materialise. Therefore, instant case before us under consideration is on better footing wherein assessee has not made any entry in books of account with regard to such interest which was not realizable at all. After considering material placed on record, we find that neither any interest nor any principle could be recovered by assessee till date. observations made by CIT (Appeals) to effect that both assessee-company and borrowing company are known to each other and, therefore, interest income is bound to accrue and assessee should have accounted for same as income, is of no substance, insofar as mere knowing each other will not be sufficient to render financial position of borrowing company better so as to increase likelihood of interest payment to assessee-company. observations of CIT (Appeals) to effect that assessee was not following directions of RBI for converting loans to non- performing assets, is also incorrect, insofar as balance sheet and other relevant document placed on record clearly indicate that full effect has been given by assessee with regard to classification of assets as NPA in terms of prudential norms of RBI. Merely on conjecture and surmises, CIT (Appeals) has stated that lender and borrowing company have their own scheme to play. 11. ITAT Pune Bench, vide its order dated 31-1-2008, in case of Western Maharashtra Development Corpn. Ltd. v. Dy. CIT [2008] 22 SOT 13, had elaborately considered similar situation where recoveries of interest on seed money loan given by assessee-company were extremely low and possibility of recoveries of these amounts was somewhat remote, ITAT observed that no doubt, there is legal right to receive interest, there are also ground realities which do not permit such strict enforcement of this right. While holding that such interest even though accrued as per mercantile system of accounting but did not give real income to assessee, ITAT observed as under: ' In our considered opinion, any other view of matter will result in distortion in financial results disclosed by books of account maintained by assessee. It is also important to remain alive to fact that provisions of section 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that 'Accounting policies adopted by assessee should be such so as to represent true and fair view of state of affairs of business, profession or vocation in financial statements prepared and presented by on basis of such accounting policies'. In name of compliance with section 145(1), it cannot be open to anyone to force adoption of accounting policies which result in distorted view of affairs of business. We, therefore, uphold claim of assessee that even under mercantile method of accounting, and, on peculiar facts of this case, assessee is justified in following policy of not recognizing these interest revenues till point of time when uncertainty to realize revenues vanishes'. 12.Lower authorities had relied on decision in case of State Bank of Travancore (supra) wherein assessee credited interest income to interest suspense account with corresponding debit to account of debtor, and claimed that no interest income accrued. It was held by Hon'ble Supreme Court that after debiting debtor's account and not reversing that entry - but taking interest merely in suspense account cannot be such evidence to show that no real income has accrued to assessee or treated as such by assessee. However, instant case is quite distinguishable where neither interest income was credited to suspense account nor corresponding debit entry was passed in account of debtors. Furthermore, Hon'ble Supreme Court in its later decision in case of UCO Bank (supra) held that what could b e brought to tax was only real income accrued to assessee and that there could be no levy on hypothetical or illusory income. Interest income on sticky advances which was not accounted for by assessee, Hon'ble Supreme Court held that even though assessee was following mercantile system of accounting but interest pertaining to doubtful loans was not real income in year tax authorities has treated it as accrued but only when it is actually realized. After discussing in great detail theory of accrual, ITAT Hyderabad Bench in case of T.C.I. Finance Ltd. (supra), held that accrual of interest income on NPA account has to be judged from realistic point of view. Non- recognition of interest income on ground that interest had not really accrued as realisability of principal outstanding itself was doubtful, was held to be legally correct under mercantile system of accounting. In case of New India Industries Ltd. (supra), as relied on by learned DR, ITAT Special Bench considered provisions of RBI Act with regard to claim of bad debts on NPA account and held that there are specific provisions under Income-tax Act, 1 9 6 1 which govern conditions for allow ability of claim under section 36(1)(vii), according to which there must be actual writing of bad debts in books of account and nor merely making provision for same. It has also held that both RBI Act and Income-tax Act, 1961 work independently in their respective fields and section 45JA of RBI Act had no overriding effect over Income-tax Act, 1961. However, in instant case before us issue relate to accrual of interest income on loans and advances wherein realisability of principal itself is doubtful, there is no any issue/ground for allowing any claim of bad debts which is governed by section 36(1)(vii) and specific conditions had been laid down therein for this purpose. scope of total income is defined under section 5, provisions of section 145 determines method of computing taxable income, it does not effect range of taxable income or ambit of taxation. If income has neither actually accrued nor received within meaning of section 5, whatever section 145 may say, such income cannot be charged to tax. Thus, facts of ITAT Special Bench is of no help to revenue. 13. In view of above discussion and considering entire material placed on record and facts and circumstances of case vis-a-vis case laws discussed hereinabove, we are inclined to hold that assessee was justified in not showing notional interest income, which did not actually materialized during year under consideration. 14. In result, appeal of assessee is allowed. *** BRAHAMPUTRA CAPITAL & FINANCIAL SERVICES LTD. v. INCOME TAX OFFICER