O/TAXAP/324/2017 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 324 of 2017 With TAX APPEAL NO. 325 of 2017 TO TAX APPEAL NO. 326 of 2017 PRINCIPAL COMMISSIONER OF INCOME TAX - 5 Appellant(s) Versus SARANGPUR, CO.OP. BANK LTD Opponent(s) Appearance: MR MANISH BHATT for MRS MAUNA M BHATT, ADVOCATE for Appellant(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Date : 05/06/2017 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These appeals arise in common background. Facts may be noticed from Tax Appeal No. 324 of 2017. 2. appeals are filed by revenue challenging judgement of Income Tax Appellate Tribunal dated 27.7.2016. following questions are presented for our consideration. (A) Whether Appellate Tribunal is right in law and on facts in confirming order of CIT(A) which held that assessee bank is not liable to be taxed on notional interest on Page 1 of 7 HC-NIC Page 1 of 7 Created On Wed Jun 21 09:49:57 IST 2017 O/TAXAP/324/2017 ORDER non performing assets based upon accrual accounting theory and thereby deleting addition of Rs.1,16,77,000/- on account of accrued interest on NPAs? (B) Whether Appellate Tribunal is right in law and on facts in deciding that interest on NPAs is not taxable on accural basis without appreciating fact that Hon ble Madras High Court in case of CIT-Coimbatore v. Sakthi Finance Ltd. (2013) 352 ITR 102, following decision of Hon ble Supreme Court in case of Southern Technologies Ltd. 320 ITR 577, has decided that interest on NPAs is taxable on accrual basis? 3. Respondent-assessee is co-operative bank. issue pertains to taxing notional interest on non- performing assets of bank on accrual basis. revenue contends that since respondent-assessee follows mercantile system of accounting, moment interest on advances accrue, they become taxable. Bank on other hand contends that recovery of principal sum itself is doubtful accounts have become non-performing therefore there is no question of receiving any interest on such NPAs. 4. We would have considered question as presented by revenue but for fact that this very question came to be considered at length and decided by Division Bench of this Court in case of Principal Commissioner of Income-tax-5 v. Shri Mahila Sewa Page 2 of 7 HC-NIC Page 2 of 7 Created On Wed Jun 21 09:49:57 IST 2017 O/TAXAP/324/2017 ORDER Sahakari Bank Ltd. reported in (2016) 242 Taxman 60 wherein this Court in conclusion held as under: 30. As can be seen from assessment order, before Assessing Officer assessee had inter alia submitted that interest on NPA was not charged as mandatorily stipulated under Income Recognition and Asset Classification norms of Reserve Bank of India. It has also been submitted that CBDT circular bearing F.No.201/21/84-ITA-II dated 9.10.1984 issued under section 119 of Act for all banking and non banking financial companies stating that if interest has not been received for three years, same will not be taxed as income even on accrual basis even if interest has been credited to Interest Suspense Account would be applicable in its case. Assessing Officer brushed aside submission based upon circular of 1984, on ground that same is applicable only to banking companies and not to cooperative banks, on misconception of law that cooperative bank is not banking company. In this regard it may be noted that expression banking company has been defined under section 5(c) of Banking Regulation Act, 1949 to mean any company which transacts business of banking in India. Part V of Banking Regulation Act Page 3 of 7 HC-NIC Page 3 of 7 Created On Wed Jun 21 09:49:57 IST 2017 O/TAXAP/324/2017 ORDER bears heading Application of Act to Co- operative Societies. Section 56 thereof provides that provisions of Act, as in force for time being, shall apply to, or in relation to co- operative societies as they apply to, or in relation to banking companies subject to modifications stated thereunder. Clause (a) of section 56, to extent same is relevant for present purpose, provides that throughout Act, unless context otherwise requires, - (i) references to banking company or company or such company shall be construed as references to co- operative bank. Section 2(i) of RBI Act provides that co-operative bank, co-operative credit society, director, primary agricultural credit society, primary co-operative society and primary credit society shall have meanings respectively assigned to them in Part V of Banking Regulation Act, 1949. Evidently therefore, expression banking company would take within its sweep co-operative bank. Assessing Officer has thereafter entered into discussion on provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which provides for enforcement of security interest of banks and Page 4 of 7 HC-NIC Page 4 of 7 Created On Wed Jun 21 09:49:57 IST 2017 O/TAXAP/324/2017 ORDER financial institutions and has observed that in instant case, no material has been brought on record by assessee to prove its efforts made in bid to recover such debts which are classified as NPA and other categories. Assessing Officer has also entered into discussion as regards quality of management, etc., without even examining as to whether or not there was any probability of interest being received on NPAs. Commissioner (Appeals) has placed reliance upon decision of Supreme Court in case of Southern Technologies Limited (supra) and held that there is no merit in contention of assessee that under commercial accounting, interest on NPAs cannot be charged. On question of applicability of CBDT Circular dated 9.10.1984, Commissioner (Appeals) held that same would not be applicable for reason that provisions of section 43D of Act are clear and cannot be overridden through delegated legislation viz. circulars and notifications. Commissioner (Appeals) was further of opinion that statutory provisions were brought on Act much later than said circular (which was issued in 1984) and therefore said circular would not Page 5 of 7 HC-NIC Page 5 of 7 Created On Wed Jun 21 09:49:57 IST 2017 O/TAXAP/324/2017 ORDER have any effect or binding force upon Assessing Officer. view adopted by Assessing Officer and Commissioner (Appeals) is clearly contrary to view expressed by this court hereinabove. Tribunal was therefore, wholly justified in setting aside order passed by Commissioner (Appeals) confirming assessment order. 5. Learned counsel Mr.Manish Bhatt for revenue however drew our attention to observations made by Supreme Court in paragraphs 30 and 31 in case of Southern Technologies Ltd. v. Joint Commissioner of Income-Tax reported in (2010) 320 ITR 577 (SC) to contend that RBI directives enabling NBFC to adjust provision for possible diminution in value of asset or provision for doubtful debts and show only net figure in balance-sheet would not govern taxability of income. In other words he argued that irrespective of such directives of RBI, interest even on NBFCs can be taxed on accruable basis. 6. We noticed that this contention was raised before Division Bench in case of Principal Commissioner of Income-tax-5 v. Shri Mahila Sewa Sahakari Bank Ltd. and considered by Court. 7. In view of above, these Tax Appeals do not give rise to any substantial questions of law and they are Page 6 of 7 HC-NIC Page 6 of 7 Created On Wed Jun 21 09:49:57 IST 2017 O/TAXAP/324/2017 ORDER dismissed. (AKIL KURESHI, J.) (BIREN VAISHNAV, J.) SMITA Page 7 of 7 HC-NIC Page 7 of 7 Created On Wed Jun 21 09:49:57 IST 2017 Principal Commissioner of Income-tax - 5 v. Sarangpur Co.Op. Bank Ltd