IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 23 RD DAY OF JANUARY 2020 PRESENT HONBLE MR. JUSTICE ALOK ARADHE AND HONBLE MR. JUSTICE RAVI V. HOSMANI I.T.A. NO.98 OF 2010 C/W I.T.A. NO.100 OF 2010 I.T.A. NO.98 OF 2010 BETWEEN: 1. COMMISSIONER OF INCOME-TAX C. R. BUILDING, ATTAVATA MANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX CIRCLE-1, UDUPI. APPELLANTS (By Sri. K. V. ARAVIND, ADV.) AND: M/S. SYNDICATE BANK SYNDICATE HOUSE MANIPAL. RESPONDENT (By Sri. T. SURYANARAYANA, ADV.) 2 THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 9-10-2009 PASSED IN ITA NO.1283/BNG/2007, FOR ASSESSMENT YEAR 2000-01, PRAYING TO FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY ITAT BANGALORE IN ITA NO.1283/BNG/2007 DATED 9-10-2009 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1 UDUPI. I.T.A. NO.100 OF 2010 BETWEEN: 1. COMMISSIONER OF INCOME-TAX C. R. BUILDING, ATTAVATA MANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX CIRCLE-1, UDUPI. APPELLANTS (By Sri. K.V. ARAVIND, ADV.) AND: M/S. SYNDICATE BANK SYNDICATE HOUSE MANIPAL. RESPONDENT (By Sri. T. SURYANARAYANA, ADV.) THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 9-10-2009 PASSED IN ITA NO.1284/BANG/2007, FOR ASSESSMENT YEAR 2001-02, PRAYING TO FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY ITAT BANGALORE IN ITA NO.1284/BANG/2007 DATED 9-10-2009 3 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1 UDUPI, IN INTEREST OF JUSTICE AND EQUITY. THESE I.T.As. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT ITA No.98/2010 has been filed by revenue, which was admitted by bench of this court on following substantial questions of law: (i) Whether tribunal was correct in holding that reversal of entry reverse interest debited to debit account and credited to income account of interest income of Rs.6,43,22,862/- in accordance with RBI guidelines and accounting employed which had been accepted earlier cannot be treated as income of assessee? (ii) Whether Tribunal was correct in failing to appreciate Section 43D of Act and Section 36(1)(vii) read with Section 36(2)(i) of Act which contemplated treating said amount as income of 4 assessee especially when same had not been written off as bad debts and RBI guidelines could not prevail over statutory provisions of Act? 2. ITA No.100/2010 has also been filed by revenue, which as admitted on following substantial questions of law: (i) Whether tribunal was correct in holding that estimation of expenditure in respect of administrative or financial cost at 5% of dividend income earned by Assessing Officer in accordance with Section 14A of Act cannot be disallowed? (ii) Whether provisions of Section 14A of Act read with Rule 8D of Income Tax Rules should be made applicable to all pending matters as same is clarifactory in nature in view of consistent stands taken by department? (iii) Whether tribunal was correct in holding that estimated expenditure cannot be treated as book profit under 5 Section 115JA of ct despite explanation (f) to Section 115JA of Act? (iv) Whether tribunal was correct in holding that provisions towards (i) doubtful debts (ii) standard assets (iii) depreciation on securities (iv) floating rate notes of London branch (v) DICGC loans (vi) suits filed accounts (vii) miscellaneous provision cannot be added back in accordance with Explanation to Section 115JA of Act in light of judgment of Apex Court in H.C.L. Comnet where is diminution in value of assets as contended by assessee and in view of retrospective amendment to Explanation (g) to Section 115JA of Act? (v) Whether Tribunal was correct in holding that reversal of entry reverse interest debited to debit account and credited to income account of Rs.8,97,62,184/- interest income in accordance with RBI guidelines and accounting employed which had been 6 accepted earlier cannot be treated as income assessee? (vi) Whether Tribunal was correct in failing to appreciate Section 43D of act and section 36(1)(vii) read with Section 36(2)(i) of Act which contemplated treating said amount as income of assessee especially when same had not been written off as bad debts and RBI guidelines could not prevail over statutory provisions of Act? Since, substantial questions of law Nos.5 & 6 in ITA No.100/2010 and substantial questions of law framed in ITA No.98/2010 are same, these appeals were heard analogously and are being decided by this common judgment. For facility of reference, facts from ITA No.100/2010 are being referred to. 2. Facts giving rise to filing of these appeals briefly stated are that assessee filed return of income declaring net taxable income of Rs.48,479/- and 7 also declared income of Rs.264,42,23,548/- under Section 115JB of Income Tax Act, 1961 (hereinafter referred to as Act , for short). return was processed under Section 143(1) of Act and order of refund for amount of Rs.67,13,062/- was issued to assessee. Thereafter, notice under Section 143(2) of Act was issued to assessee. order of assessment was passed on 29.03.2004 for Assessment Year 2001-2002. Assessing Officer held that from perusal of Audit Report, it is evident that assessee during year had reversed total interest of Rs.45,38,22,618/- and had also reversed interest of Rs.8,97,62,184/- relating to previous year. It was further held that in fact, assessee has reduced income already declared in previous year by debiting reversal in present year s profit and loss account and Section 43D of Act does not permit reduction of income, which is already credited to profit and loss account. It was further held that method of 8 accounting of assessee is as per guidelines issued by Reserve Bank of India on interest reversal and is in conflict with provisions of Income Tax Act, 1961 and in such situation provisions of Act will prevail. 3. Being aggrieved, assessee filed appeal. Commissioner of Income Tax (Appeals) by order dated 08.10.2007 held that interest is not chargeable under Section 243C of Act on tax payable under Section 115JB of Act. Accordingly, appeal preferred by assessee was partly allowed. Being aggrieved, assessee filed two appeals for Assessment Years 2000-2001 and 2001-2002. revenue also filed appeal in relation to assessment year 2001-2002 before Income Tax Appellate Tribunal (hereinafter referred to as tribunal for short). tribunal by impugned order dated 09.10.2009 inter alia held that assessee is bound to follow Reserve Bank of India Guidelines and method of accounting followed by assessee was accepted by revenue. It 9 was further held that since reversal of entry was made as per guidelines issued by Reserve Bank of India, no fault can be found. In result, appeals preferred by assessee were allowed, whereas, appeals preferred by revenue were dismissed. 4. Learned counsel for revenue submitted that Reserve Bank of India guidelines do not override provision of Act. In support of aforesaid submission, reference has been made to decision of Supreme Court in SOUTHERN TECHNOLOGIES LTD., JT. CIT 2010 320 ITR 577. It is also submitted that income by assessee cannot be altered with reference to Section 43D of Act and there is no express finding recorded by tribunal that debt in question is bad debt. In support of his submissions, learned counsel for revenue has invited our attention to para Nos.31 & 33 to decision in case of SOUTHERN TECHNOLOGIES SUPRA. It is also urged that assessee cannot be permitted return filed by 10 him for making claim for deduction other than by filing revised return. In support of aforesaid submission, reference has been made to decision of Supreme Court in GOETZE (INDIA) LTD. VS. COMMISSIONER OF INCOME-TAX, (2006) 157 TAXMAN 1 (SC). 5. On other hand, learned counsel for assessee submitted that loan advanced by bank had become Non Performing Asset and assessee follows Mercantile system of accounting. Therefore, interest component was required to be shown as income. It is further submitted that in fact, aforesaid amount had never accrued to assessee and therefore, same could not have be treated as income. It is further submitted that under Section 43D of Act, interest component has to be taxed on cash basis. In support of his submissions, learned counsel for assessee has placed reliance on decision of Division bench of Delhi High Court in COMMISSIONER OF INCOME TAX. VS. VASISTH 11 CHAY VYAPAR LTD., (2011) 196 TAXMAN 169 (DELHI) and has pointed out that aforesaid decision has been affirmed by Supreme Court. It is further submitted that income has to be recognized in terms of prudential norms even though same aviated from Mercantile system of accounting. It is further submitted that decision rendered in SOUTHERN TECHNOLOGIES SUPRA has already been considered by Division Bench of High Court and aforesaid decision has been upheld by Supreme Court. Therefore, issue involved in this appeal has to be answered in favour of assessee. It is argued that if income, which is earlier recognized is not to be allowed to be reversed in subsequent assessment years when it was found that amount was not recoverable, in any case, it is permissible for assessee to write off such income. In this connection, reliance has been placed on decision of division bench of high Court of Delhi in case of and decision of Supreme Court in 12 VIJAYA BANK VS. COMMISSIONER OF INCOME- TAX , (2010) 190 TAXMNA 257 (SC), COMMISSIONER OF INCOME-TAX VS. INDUSTRIAL FINANCE CORPORATION OF INDIA LTD., (2011) 12 TAXMANN.COM 268 (DELHI). 6. We have considered submissions made on both sides and have perused record. It is not in dispute that as per Reserve Bank of India guidelines, it is mandatory on part of assessee not to recognize interest, which has not accrued to it. assessee had not received any interest during relevant assessment year. Even in succeeding assessment year, no interest had accrued to it. Act imposes tax on real income i.e., profits arrived at on commercial principles subject to provisions of Act. Therefore, before levy of tax it has to be ascertained that income has accrued to assessee. Admittedly, in instant case, income had not accrued to assessee. Supreme Court in case 13 of SOUTHERN TECHNOLOGIES SUPRA has made distinction with regard to income recognition and has held that income has to be recognized in terms of prudential norms even though same deviated from mercantile system of accounting or Section 145 of Act. Thus, Supreme Court has approved real income theory, which is in built in prudential norms for recognition of revenue by Non Banking Financial Company. Thus, it is evident that income tax is levied on income whether mercantile system of accountancy is maintained or on cash basis. If income does not accrue to assessee, there cannot be any levy of tax and assessee cannot be subjected to any hypothetical / illusory income. 7. This distinction was also noticed by division bench of Delhi High Court in case of VASISTH CHAY VYAPAR LTD. , SUPRA and while taking note of decision rendered in SOUTHERN TECHNOLOGIES SUPRA, it has been held that Non Banking Financial 14 Company s Prudential Norms (Reserve Bank) Directions, 1998 have nothing to do with accounting treatment or taxability of income under Act and directions operate in different fields. aforesaid decision of Delhi High Court has been upheld by Supreme Court of India in COMMISSIONER OF INCOME TAX. VS. VASISTH CHAY VYAPAR LTD., (2018) 90 TAXMANN.COM 365 (SC). 8. Supreme Court in VIJAYA BANK VS. CIT, (2010) 323 ITR 166 has held that if income, which is earlier recognized is not to be allowed to be reversed during subsequent years, in any case, it is permissible for assessee to write off such income in concerned assessment years where it was found that amount was not recoverable. Division Bench of High Court of Delhi in INDUSTRIAL FINANCE CORPORATION LTD., SUPRA has held that assessee being financial institution is duty bound to follow guidelines of Reserve Bank of India and income 15 of financial institutions has to be determined in accordance with norms of accounting guidelines, which are applicable to it. 9. Learned counsel for parties jointly submitted that substantial questions of law Nos.1 to 4 in ITA No.100/2010 are covered by judgment of this Court dated 17.10.2020 in ITA No.97/2010. Accordingly, same are answered. substantial questions of law in ITA No.98/2010 and substantial questions of law Nos.5 & 6 in ITA No.100/2010 are answered in view of preceding analysis in favour of assessee. Accordingly, appeals are disposed of. Sd/- JUDGE Sd/- JUDGE ss CIT, Mangalore / ACIT, Circle-1, Udupi v. Syndicate Bank