The Commissioner of Income-tax, Tiruchirapalli v. Tiruchirapalli District Central Cooperative Bank Ltd
[Citation -2020-LL-0727-27]

Citation 2020-LL-0727-27
Appellant Name The Commissioner of Income-tax, Tiruchirapalli
Respondent Name Tiruchirapalli District Central Cooperative Bank Ltd.
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 27/07/2020
Assessment Year 2007-08
Judgment View Judgment
Keyword Tags mercantile system of accounting • substantial question of law • profit and loss account • concept of real income • non-performing asset • revenue recognition • loans and advances • overriding effect • accrual of income • interest accrued • interest on npa • interest income • accrued income • income accrued • specified date • loan advanced • accrual basis • doubtful debt • written off • bad debt
Bot Summary: 446 of 2018 provisions of section 43D of the Act, since the provisions of section 45Q of the 1934 Act have an overriding effect vis- -vis income recognition principles in the Companies Act, the Assessing Officer is bound to follow the RBI Directions so far as income recognition is concerned. The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same can not be defeated by any theory of real income. 446 of 2018 income can be so applied as to make, where the chances of realisation of accrued income are less, it non est. Taxmann.com 4/4 the actuality of the situation are relevant factors which go to the making up of accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. The Apex Court made a distinction with regard to Income Recognition and held that income had to be recognized in terms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 45 of the Income- tax Act. Even applying the theory of Real Income, a debit which is expressly disallowed by Explanation to section 36(1)(vii), if claimed, has got to be added back to the total income of the assessee because the said Act seeks to tax the real income which is income computed according to ordinary commercial principles but subject to the provisions of the Income-tax Act.


TCA.No.446 of 2018 IN HIGH COURT OF JUDICATURE AT MADRAS DATED : 27.7.2020 CORAM HONOURABLE MR. JUSTICE T.S.SIVAGNANAM AND HONOURABLE MRS. JUSTICE V.BHAVANI SUBBAROYAN TAX CASE APPEAL NO.446 OF 2018 (heard through video conferencing) Commissioner of Income Tax, Tiruchirapalli. ...Appellant Vs M/s.Tiruchirapalli District Central Cooperative Bank Ltd., C/O Sri.S.Sridhar, Chennai-20. ...Respondent APPEAL under Section 260A of Income Tax Act, 1961 against order dated 03.3.2017 made in ITA.No.832/Mds/2013 on file of Income Tax Appellate Tribunal, Chennai D Bench for assessment year 2007-08. For Appellant : Ms.S.Premalatha, JSC for Mr.M.Swaminathan, SSC For Respondent : Mr.A.S.Sriraman 1/35 http://www.judis.nic.in TCA.No.446 of 2018 Judgment was delivered by T.S.SIVAGNANAM,J We have heard Ms.S.Premalatha, learned Junior Standing Counsel appearing on behalf of Mr.M.Swaminathan, learned Senior Standing Counsel appearing for Revenue and Mr.A.S.Sriraman, learned counsel appearing for respondent assessee. 2. This appeal by Revenue under Section 260A of Income Tax Act, 1951 (for short, Act) is directed against order dated 03.3.2017 made in ITA.No.832/Mds/2013 on file of Income Tax Appellate Tribunal, Chennai D Bench (for brevity, Tribunal) for assessment year 2007-08. 3. appeal has been admitted on 17.7.2018 on following substantial question of law : Whether Tribunal was right in holding that overdue interest on non performing assets is not taxable on accrual basis by referring to guideline of Reserve Bank of India which had nothing to do with computation of taxability of provisions of non- performing assets under Income Tax Act, 1961? 4. assessee is cooperative bank having its head quarters in Trichy. For assessment year under consideration namely 2007-08, assessee filed their return of income dated 12.11.2007 admitting 2/35 http://www.judis.nic.in TCA.No.446 of 2018 NIL income. assessment was completed after scrutiny. Commissioner of Income Tax, in exercise of his power under Section 263 of Act, set aside assessment vide his order dated 02.3.2011 on ground that it was erroneous and prejudicial to interest of Revenue. 5. Subsequently, notice dated 29.8.2011 under Section 143(2) of Act was issued and assessee appeared through their representative and furnished details called for. One of issues was with regard to claim for deduction on loans and advances, which assessee claimed that they were not entitled for deduction by providing for bad and doubtful debts. For queries raised by Assessing Officer, assessee stated that overdue interest on investment, which would become non performing as per guidelines of Reserve Bank of India (RBI) was not recognized, that there was no certainty with regard to receipt of such income, that if interest was not received within specified date, on which, it had become due, same was treated as overdue interest and that assessee was following mercantile system of accounting and interest had to be offered on accrual basis. 3/35 http://www.judis.nic.in TCA.No.446 of 2018 6. Assessing Officer held that exception available under Section 43D of Act was available only to public financial institutions and not to cooperative societies, as cooperative societies came to be included only by Finance Act, 2017 with effect from 01.4.2018. Accordingly, Assessing Officer completed assessment by rejecting stand taken by assessee, by order dated 30.12.2011. 7. Aggrieved by said order of assessment dated 30.12.2011, assessee filed appeal before Commissioner of Income Tax (Appeals), Trichy [hereinafter called CIT(A)]. We find that CIT(A) did not give independent reasons, but verbatim extracted findings rendered by Assessing Officer and conveyed his approval by order dated 26.2.2013. As against same, assessee carried matter on appeal to Tribunal, which, by impugned order, allowed appeal filed by assessee. Aggrieved by that, Revenue is before us. 8. issue before us is no longer res integra and has been decided in various decisions of other Hon ble High Courts, some of which were affirmed by Hon ble Supreme Court. Though there are several decisions, it may be sufficient to refer to decision of Punjab & Haryana High Court in case of PCIT, Ludhiyana Vs. Ludhiyana Central Cooperative Bank [reported in (2018) 99 4/35 http://www.judis.nic.in TCA.No.446 of 2018 Taxmann.com 81] wherein identical question came up for consideration. In said decision, after taking note of decisions on issue and findings rendered by Assessing Officer in case on hand, it has been held in favour of assessee. relevant portions read thus : 30. In all fairness to learned counsel for revenue, contention that Section 43D of Act itself recognises taxability of such interest and that when specific provision in nature of section 43D of 7/10/2020 www.taxmann.com 15/15 Act has been made, and entities like assessee are excluded from purview thereof, assessee cannot indirectly claim benefit which would amount to benefit similar to that under section 43D of Act, requires to be discussed. In this regard, it may be noted that benefit claimed by assessee is not under any provision of Act. assessee being bound by RBI Guidelines which are issued under provisions of 1934 Act has not shown interest on NPA as income. By virtue of provisions of section 45Q of 1934 Act, provisions of Chapter IIIB thereof have overriding effect over other laws. Therefore, notwithstanding 5/35 http://www.judis.nic.in TCA.No.446 of 2018 provisions of section 43D of Act, since provisions of section 45Q of 1934 Act have overriding effect vis- -vis income recognition principles in Companies Act, Assessing Officer is bound to follow RBI Directions so far as income recognition is concerned. interest on principal loan amount which has been classified as NPA cannot be held to have "accrued" so as to tax them under Act. contention that assessee cannot indirectly claim benefit which would amount to benefit similar to that under section 43D of Act, therefore, does not merit acceptance. 31. similar issue was considered in Shri Mahila Sewa Sahakari Bank Ltd.'s case(supra)in case of Cooperative Banks by Gujarat High Court where issue was decided in favour of assessee through detailed judgment. Against judgment of Gujarat High Court, Apex Court approving said decision dismissed C.A.No.8977 of 2017 filed by revenue on 13.12.2017. It may further be noticed that Parliament has amended Section 43D of Act by Finance Act, 2017 effective from 1.4.2018 whereby specifically including "a 6/35 http://www.judis.nic.in TCA.No.446 of 2018 cooperative bank other than primary agricultural credit society or primary cooperative agricultural and rural development bank" in said provision. 9. Ms.Premalatha, learned Junior Standing Counsel for appellant Revenue has placed reliance on decision of Hon ble Supreme Court in case of State Bank of Travancore Vs. CIT [reported in (1986) 24 Taxmann 337] wherein it had been held that concept of real income theory had to be applied. In fact, in decision of Punjab & Haryana High Court in case of Ludhiyana Central Cooperative Bank, very same contention was considered and answered against Revenue in following terms : 28. concept of reality of income and actuality of situation are relevant factors which go to making up of accrual of income but once accrual takes place and income accrues, same can not be defeated by any theory of real income. Reference may be made to Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC). 29. Three decisions, two of Madras High Court and one of Punjab and Haryana High Court, which shall presently be noticed, were pressed into service on behalf of assessee to suggest that concept of real 7/35 http://www.judis.nic.in TCA.No.446 of 2018 income can be so applied as to make, where chances of realisation of accrued income are less, it non est. 10. In decision of Hon ble Supreme Court in case of CIT Vs. Jamnagar District Cooperative Bank Ltd. [reported in (2018) 256 Taxmann 212], Hon ble Supreme Court dismissed appeal filed by Revenue and affirmed decision of Gujarat High Court in case of PCIT Vs. Kutch District Cooperative Bank Ltd. [reported in (2018) 94 Taxmann.com 298]. 11. In decision in case of Kutch District Cooperative Bank Ltd., identical question was considered by Division Bench of Gujarat High Court and after taking note of decisions in case of (i) CIT Vs. Vasisth Chay Vyapar Ltd. [reported in (2011) 330 ITR 440 (Delhi)], (ii) CIT Vs. Deogiri Nagar Sahakari Bank Ltd. [reported in (2015) 379 ITR 24 (Bombay)] and (iii) PCIT-5 Vs. Shri Mahila Sewan Sahakari Bank Ltd. [reported in (2016) 72 Taxmann.com 117 (Gujarat)], Court answered substantial question of law in favour of assessee. In fact, in said decision, Court also pointed out that decision of Hon ble Supreme Court in case of Southern Technologies Ltd. 8/35 http://www.judis.nic.in TCA.No.446 of 2018 Vs. JCIT [reported in 320 ITR 577] was also taken note of in decision of Delhi High Court in case of Vasisth Chay Vyapar Ltd. 12. In fact, before us, learned Junior Standing Counsel appearing for Revenue has referred to decision in case of Southern Technologies Ltd., and this decision is answer to said submission. 13. similar question was decided in favour of assessee in decision of Madhya Pradesh in case of Bhind District Cooperative Central Bank Ltd. Vs. ITD [reported in (2019) 109 Taxmann.com 396] wherein relevant portions are extracted as hereunder : 11. After hearing learned counsel for parties, we notice that issue is squarely covered by judgment in Pr. CIT v. Shri Mahila Sewa Sahakari Bank Ltd. [2016] 72 taxmann.com 117/242 Taxman 60/[2017] 395 ITR 324 (Gujarat), Pr. CIT v. Ludhiana Central Co-op. Bank Ltd., [2018] 99 taxmann.com 81/[2019] 410 ITR 72 (Punj. & Har.), CIT v. Deogiri Nagari Sahakari Bank Ltd, [2017] 79 taxmann.com 396/[2015] 379 ITR 24 (Bombay), CIT v. Vasisth Chay Vyapar Ltd., 9/35 http://www.judis.nic.in TCA.No.446 of 2018 [2010] 8 taxmann.com 145/[2011] 196 Taxman 169/330 ITR 440 (Delhi). 12. In Shri Mahila Sewa Sahakari Bank Ltd (supra) it was held that Co-operative Banks were acting under directives of Reserve Bank of India with regard to prudential norms set out. And that taxing interest on NPA cannot be justified on real income theory. decision in Shri Mahila Sewa Sahakari Bank Ltd (supra) was subjected to challenge before Supreme Court in Principal CIT v. Mahila Sahakari Bank Ltd. [Civil Appeal No.8977/2017, by Revenue, which was dismissed on 13-12-2017]. 13. Similarly, decision in Vasisth Chay Vyapar Ltd (supra) wherein it was held "the assess being NBFC was governed by provisions of RBI Act. In such case, interest income could not be said to have accrued to assessee having regard to provisions of section 45Q of RBI Act and Prudential Norms issued by RBI in exercise of its statutory powers. As per these Norms, ICDs had become 7/10/2020 www.taxmann.com 3/3 NPA and on such NPA where interest was not received and possibility of recovery was almost nil, interest 10/35 http://www.judis.nic.in TCA.No.446 of 2018 could not be treated to have been accrued in favour of assessee" was also upheld by Supreme Court in CIT v. Vasisth Chay Vyapar Ltd., [2018] 90 taxmann.com 365/253 Taxman 401/[2019] 410 ITR 244. 14. Recently Division Bench of High Court of Bombay in Pr. CIT v. Solapur District Central Co-op. Bank Ltd. [2019] 102 taxmann.com 440/261 Taxman 476 in seisin with similar issue as crops up for consideration in present case, observed: '5 Having heard learned Counsel for parties, we notice that issue is squarely covered by judgments 0 f Gujarat High Court and Punjab & Haryana High Courts. Gujarat High Court in case of Pr.CIT v. Shri Mahila Sewa Sahakari Bank Ltd. 395 ITR 324 had undertaken detailed exercises to examine identical situation. Court held that, Cooperative Banks were acting under directives of Reserve Bank of India with regard to prudential norms set out. Court was of opinion that, taxing interest on NPA cannot be justified on real income theory. decision of Gujarat High Court in Shri Mahila Sewa Sahakari Bank Ltd., (supra) was carried in Appeal by 11/35 http://www.judis.nic.in TCA.No.446 of 2018 Revenue to Supreme Court and such appeal was dismissed. Later on, similar issue came up before Gujarat High Court in case of Pr. CIT v. Sarangpur Cooperative Bank Ltd. 406 ITR 302, Court followed earlier decision in case of Shri Mahila Sewa Sahakari Bank Ltd., (supra) and dismissed Revenue's appeal. Once again, issue was carried to Supreme Court by Revenue. Appeal was dismissed by order dated 28th April, 2018. 6 Identical issue was also examined by Punjab & Haryana High Court in case of Pr. CIT v. Ludhiana Central Coop. Bank Ltd. 410 ITR 72. decision of Gujarat High Court in Shri Mahila Sewa Sahakari Bank Ltd., (supra) was cited before Court. Court noted that appeal against such judgment of High Court, was dismissed by Supreme Court. Court concluded as under: "Adverting to factual matrix, it may be noticed that Tribunal while relying upon various pronouncements had decided issue regarding taxability of interest on NPA in favour of assessee as being taxable in year of receipt. Tribunal had upheld deletion made by CJT(A) on account of 12/35 http://www.judis.nic.in TCA.No.446 of 2018 addition of Rs.3,02,82,000 regarding interest accrued on NPA. No illegality or perversity could be demonstrated by learned counsel for Revenue in aforesaid findings recorded by Tribunal." 7 issue is thus, covered by decisions of two High Courts as noted above wherein identical situati6n came up for consideration. Against judgment of Gujarat High Court, appeals have been dismissed by Supreme Court. Thus, Supreme Court can be seen to have approved me decision of Gujarat High Court in case of Shri Mahila Sewa Sahakari Bank Ltd., (supra). We, therefore, do not see any reason to entertain these Appeals, since no question of law can be stated to have arisen.' 15. issue in case at hand is also not different as was in case of Shri Mahila Sewa Sahakari Bank Ltd (supra). appellant-assessee acting under directives of Reserve Bank of India with regard to prudential norms set out, taxing interest on NPA, therefore, cannot be justified on real income theory. 16. In view whereof, substantial question of law is answered in favour of appellant-assessee. order passed by 13/35 http://www.judis.nic.in TCA.No.446 of 2018 Assessing Officer, Appellate Authority and Tribunal are set aside. deduction as claimed for on uncharged interest on NPA is allowed to extent above. In aforementioned decision, Court had taken into consideration that assessee therein, as in case of assessee before us, was acting under directives of RBI with regard to prudential norms set out and therefore, taxing interest on NPA could not be charged on real income theory. 14. earliest among decisions on said point in favour of assessee is by High Court of Karnataka in case of CIT Vs. Canfin Homes Ltd. [reported in (2012) 347 ITR 382]. In fact, contentions now advanced by Ms.Premalatha, learned Junior Standing Counsel were also advanced before Karnataka High Court and matter was decided in favour of assessee in following terms : 4. In order to appreciate this contention, it is necessary to look into said section as it stands today. 145. Method of accounting. (1) Income chargeable under head "Profits and gains of business or profession" or 'Income from other sources" shall, subject to provisions of sub-section (2), be computed in accordance with either cash or mercantile 14/35 http://www.judis.nic.in TCA.No.446 of 2018 system of accounting regularly employed by assessee. (2) Central Government may notify in Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where Assessing Officer is not satisfied about correctness or completeness of accounts of assessee, or where method of accounting provided in sub-section (1) or accounting standards as notified, under sub-section (2), have not been regularly followed by assessee Assessing Officer may make assessment in manner provided in section 144. 5. reading of aforesaid provision makes it very clear that section 145(1) is subject to provisions of sub-section (2). Sub-section (2) provides that Central Government may notify in Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. Therefore, it is clear requirement of complying with cash or mercantile system of accounting is subject to directions to be issued by Central 15/35 http://www.judis.nic.in TCA.No.446 of 2018 Government in matter of accounting standards. After amendment to section 145 Board has issued accounting standards to be followed by way of Notification No. SO 69(E), dated 25-1-1996. Clause (4) of accounting standards reads as under: 4. 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 on basis of such accounting policies. For this purpose, major considerations governing selection and application of accounting policies are prudence, substance over form and materiality. 6. Clause 6 defines 'accrual' for purpose of paragraphs (1) to (5) in said accounting standards. 'Accrual' refers to assumption, that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in financial statements of periods to which they relate. Relying on this definition in accounting standard, revenue contends it is immaterial whether any revenue is actually received or not. If it is 16/35 http://www.judis.nic.in TCA.No.446 of 2018 shown to accrued that is sufficient to charge said income. In this context it is also necessary to take note of guidelines dated 28-4-1995 issued by National Housing Bank with reference to non-performing asset which is subject-matter of these proceedings. It states policy on income recognition to be objective should be based on record of recovery. Income from non- performing asset (NPA) may not be recognized merely on basis of accrual. asset becomes non-performing when it ceases to yield income. income from NPAs, therefore, should be recognized only when it is actually received. NPA is asset in respect of which interest has remained unpaid and has become 'past due'. amount is to be treated as 'past due' when it remains unpaid for 30 days beyond due date. Interest on NPAs should not be booked as income if such interest has remained outstanding for more than six months on and from March 31, 1995. In fact this question arose for consideration before Apex Court in case of State Bank of Travancore v. CIT [1996] 158 ITR 102 / 24 Taxman 337 where it has been held that, concept of reality of income and 17/35 http://www.judis.nic.in TCA.No.446 of 2018 7/10/2020 www.taxmann.com 4/4 actuality of situation are relevant factors which go to making up of accrual of income but once accrual takes place and income accrues, same cannot be defeated by any theory of real income. concept of real income cannot be so used as to make accrued income non-income simply because after event of accrual, assessee neither decides to treat it as bad debt nor claims deduction under section 36(2) of Act, but still enters same with diminished hope of recovery in suspense account. Extension of concept of real income to this field to negate accrual after amount had become payable is contrary to postulates of Act. 7. Again Apex Court in case of UCO Bank v. CIT [1999] 237 ITR 889 / 104 Taxman 547 held that, under accounting practice, interest which is transferred to suspense account and not brought to profit and loss account of company is not treated as income. question whether in given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, Board has considered it necessary to lay down 18/35 http://www.judis.nic.in TCA.No.446 of 2018 general test for deciding what is doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of income of assessee until realized, this direction by way of circular cannot be considered as travelling beyond powers of Board under section 119 of Income-tax Act. Such circular is binding under section 119. Such circulars are meant for ensuring proper administration of statute and, they are designed to mitigate rigours of application of particular provision of statute in certain situations by applying beneficial interpretation of provision in question. 8. Therefore, it is clear, if assessee adopts mercantile system of accounting and in his accounts he shows particular income as accruing, whether that amount is really accrued or not is liable to bring said income to tax. His accounts should reflect true and correct statement of affairs. Merely because said amount accrued was not realised immediately cannot be ground to avoid payment of tax. But, if in his account it is clearly stated though particular income is due to him but it is not possible to recover 19/35 http://www.judis.nic.in TCA.No.446 of 2018 same, then it cannot said to have been accrued and said amount cannot be brought to tax. In Instant case we are concerned with non-performing asset. As definition of non-performing asset shows asset becomes non-performing when it ceases to yield income. Non-performing asset is asset in respect of which interest has remained unpaid and has become past due. Once particular asset is shown to be non- performing asset, then assumption is it is not yielding any revenue. When it is not yielding any revenue, question of showing that revenue and paying tax would not arise. As is clear from policy guidelines issued by National Housing Bank, income from non-performing asset should be recognised only when it is actually received. That is what, Tribunal held in instant case. Therefore, contention of revenue that in respect, of non-performing assets even though it does not yield any income as assessee has adopted mercantile system of accounting, he has to pay tax on revenue which has accrued notionally is without any basis. In that view of matter, second substantial question framed is answered 20/35 http://www.judis.nic.in TCA.No.446 of 2018 against, revenue and in favour of assessee. 9. For aforesaid reasons we do not see any merit in appeal. Accordingly, appeals is dismissed. In aforementioned decision, Court aptly pointed out that contention of Revenue that in respect of non performing assets, even though it does not yield any income, as assessee adopted mercantile system of accounting, he has to pay tax on Revenue, which accrued notionally, was without any basis. 15. In decision of Delhi High Court in case of Vasisth Chay Vyapar Ltd., following was substantial question of law, which was answered : Whether ITAT erred in law and on merits by deleting additions of income made as interest earned/acquired on loan advanced to M/s Shaw Wallace by considering interest as doubtful and unrealisable? Court, after taking note of all decisions on point, including decisions referred to by Revenue namely Southern Technologies Ltd., held as hereunder : 15. We have considered respective submissions in their proper perspective. Before 21/35 http://www.judis.nic.in TCA.No.446 of 2018 we embark on discussion on these arguments, it would be useful to extract relevant provisions of RBI Act and NBFCs Prudential Norms (Reserve Bank) Directions, 1998. Section 45Q of RBI Act, which starts with non obstante clause, reads as under : "45Q. Chapter IIIB to override other laws. provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for time being in force or any instrument having effect by virtue of any such law." 16. It is not in dispute that on application of aforesaid provisions of RBI and directions, ICD advanced to M/s Shaw Wallace by assessee herein had become NPA. It is also not in dispute that assessee company being NBFC is bound by aforesaid provisions. Therefore, under aforesaid provisions, it was mandatory on part of assessee not to recognize interest on ICD as income 7/11/2020 www.taxmann.com 6/8 having regard to recognized accounting principles. accounting principles which assessee is indubitably bound to follow are AS-9. Relevant portion of said accounting stand reads as 22/35 http://www.judis.nic.in TCA.No.446 of 2018 under : "9. Effect of Uncertainties on Revenue Recognition. 9.1 Recognition of revenue requires that revenue is measurable and that at time of sale or rendering of service it would not be unreasonable to expect ultimate collection. 9.2 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. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at time of sale or rendering of service even though payments are made by instalments. 9.3 When uncertainty relating to collectability arises subsequent to time of sale or rendering of service, it is more appropriate to make separate provision to reflect uncertainty rather than to adjust amount of revenue originally recorded. 23/35 http://www.judis.nic.in TCA.No.446 of 2018 9.4 essential criterion for recognition of revenue is that consideration receivable for sale of goods, rendering of services or from use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to effect of uncertainties, it is considered as revenue of period in which it is properly recognized." 17. In this scenario, we have to examine strength in submission of learned counsel for Revenue that whether it can still be held that income in form of interest though not received had still accrued to assessee under provisions of Income-tax Act and was, therefore, exigible to tax. Our answer is in negative and we give following reasons in support : (1) First of all we would discuss matter in light of provisions of Income- tax Act and to examine as to whether in given circumstances, interest income has accrued to assessee. It is stated at cost of repetition that admitted position is that 24/35 http://www.judis.nic.in TCA.No.446 of 2018 assessee had not received any interest on said ICD placed with Shaw Wallace since assessment year 1996-97 as it had become NPAs in accordance with prudential norms which was entered in books of account as well. assessee has further successfully demonstrated that even in succeeding assessment years, no interest was received and position remained same until assessment year 2006-07. Reason was adverse financial circumstances and financial crunch faced by Shaw Wallace. So much so, it was facing winding up petitions which were filed by many creditors. These circumstances, led to uncertainty insofar as recovery of interest was concerned, as result of aforesaid precarious financial position of Shaw Wallace. What to talk of interest, even principal amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not "accrued". We are in agreement with submission of Mr. Vohra on this count, supported by various decisions of different High Courts including this court which has already been referred to above. (2) In instant case, assessee 25/35 http://www.judis.nic.in TCA.No.446 of 2018 company being NBFC is governed by provisions of RBI Act. In such case, interest income cannot be said to have accrued to assessee having regard to provisions of section 45Q of RBI and Prudential Norms issued by RBI in exercise of its statutory powers. As per these norms, ICD had become NPA and on such NPA where interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of assessee. 18. As noted above, Mr. Sabharwal, argued that case of assessee was to be dealt with for purpose of taxability as per provisions of Act and not RBI Act which was accounting method that assessee was supposed to follow. We have already held that even under Income-tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirely on judgment of Supreme Court in case of Southern Technologies Ltd.'s (supra). No doubt, in first blush, reading of judgment gives indication that Court has held that RBI Act does not override 7/11/2020 www. Taxmann. 26/35 http://www.judis.nic.in TCA.No.446 of 2018 com 7/8 provisions of Income-tax Act. However, when we examine issue involved therein minutely and deeply in context in which that had arisen and certain observations of Apex Court contained in that very judgment, we find that proposition advanced by Mr. Sabharwal may not be entirely correct. In case before Supreme Court, assessee NBFC debited Rs. 81,68,516 as provision against NPA in profit and loss account, which was claimed as deduction in terms of section 36(1)(vii) of Act. Assessing Officer did not allow deduction claimed as aforesaid on ground that provision of NPA was not in nature of expenditure or loss but more in nature of reserve, and thus not deductible under section 36(1)(vii) of Act. Assessing Officer, however, did not bring to tax Rs. 20,34,605 as income (being income accrued under mercantile system of accounting). dispute before Apex Court centered around deductibility of provision for NPA. After analyzing provisions of RBI Act, their Lordships of Apex Court observed that insofar as permissible deductions or exclusions under Act are concerned, 27/35 http://www.judis.nic.in TCA.No.446 of 2018 same are admissible only if such deductions/exclusions satisfy relevant conditions stipulated therefor under Act. To that extent, it was observed that Prudential Norms do not override provisions of Act. However, Apex Court made distinction with regard to "Income Recognition" and held that income had to be recognized in terms of Prudential Norms, even though same deviated from mercantile system of accounting and/or section 45 of Income- tax Act. It can be said, therefore, that Apex Court approved 'real income' theory which is engrained in Prudential Norms for recognition of revenue by NBFC. following passage from judgment of Apex Court would bring out distinction noticed by Apex Court between permissible deductions/ exclusions, on one hand, and income recognition on other : "31. Before concluding on this point, we need to emphasise that 1998 Directions has nothing to do with accounting treatment or taxability of "income" under Income-tax Act. two, viz., Income-tax Act and 1998 Directions operate in different fields. As stated above, under mercantile 28/35 http://www.judis.nic.in TCA.No.446 of 2018 system of accounting, interest/hire charges income accrues with time. In such cases, interest is charged and debited to account of borrower as "income" is recognized under accrual system. However, it is not so recognized under 1998 Directions and, therefore, in matter of its Presentation under said Directions, there would be add back but not under Income-tax Act necessarily. It is important to note that collectability is different from accrual. Hence, in each case, assessee has to prove, as has happened in this case with regard to sum of Rs. 20,34,605, that interest is not recognized or taken into account due to uncertainty in collection of income. It is for Assessing Officer to accept claim of assessee under IT Act or not to accept it in which case there will be add back even under real income theory as explained hereinbelow. 38. point to be noted is that Income-tax Act is tax on "real income", i.e., profits arrived at on commercial principles subject to provisions of Income-tax Act. Therefore, if by Explanation to section 36(1)(vii) provision for doubtful debt is kept out of ambit of bad debt which is 29/35 http://www.judis.nic.in TCA.No.446 of 2018 written off then, one has to take into account said Explanation in computation of total income under Income-tax Act failing which one cannot ascertain real profits. This is where concept of "add back" comes in. In our view, provision for NPA debited to Profit and Loss Account under 1998 Directions is only notional expense and, therefore, there would be add back to that extent in computation of total income under IT Act. 39. One of contentions raised on behalf of NBFC before us was that in this case there is no scope for "add back" of Provision against NPA to taxable income of assessee. We find no merit in this contention. Under IT Act, charge is on Profits and Gains, not on gross receipts (which, however, has Profits embedded in it). Therefore, subject to requirements of Income-tax Act, profits to be assessed under Income-tax Act have got to be Real Profits which have to be computed on ordinary principles of commercial accounting. In other words, profits have got to be computed after deducting Losses/Expenses incurred for business, even though such losses/expenses may not be admissible under sections 30 to 43D of 30/35 http://www.judis.nic.in TCA.No.446 of 2018 Income-tax Act, unless such Losses/Expenses are expressly or by necessary implication disallowed by Act. Therefore, even applying theory of Real Income, debit which is expressly disallowed by Explanation to section 36(1)(vii), if claimed, has got to be added back to total income of assessee because said Act seeks to tax "real income" which is income computed according to ordinary commercial principles but subject to provisions of Income-tax Act. Under section 36(1)(vii) read with Explanation, "write off" is condition for allowance. If "real profit" is to be computed one needs to take into account concept of "write off" in contradistinction to "provision for doubtful debt". 7/11/2020 www.taxmann.com 8/8 40. Applicability of section 145. At outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of RBI Act, 1934. These Norms deal essentially with Income Recognition. They force NBFCs to disclose amount of NPA in their financial accounts. They force NBFCs to reflect "true and correct" profits. By virtue of section 45Q, overriding effect is given to Directions 31/35 http://www.judis.nic.in TCA.No.446 of 2018 1998 vis-a-vis "income recognition" principles in Companies Act, 1956. These Directions constitute code by itself. However, these Directions 1998 and Income-tax Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule "permissible deductions" or "their exclusion" under Income-tax Act. inconsistency between these Directions and Companies Act is only in matter of Income Recognition and presentation of Financial Statements. Accounting Policies adopted by NBFC cannot determine taxable income. It is well settled that Accounting Policies followed by company can be changed unless Assessing Officer comes to conclusion that such change would result in understatement of profits. However, here is case where Assessing Officer has to follow RBI Directions 1998 in view of section 45Q of RBI Act. Hence, as far as Income Recognition is concerned, section 145 of Income-tax Act has no role to play in present dispute." (Emphasis supplied) 19. We have also noticed other line of cases wherein Supreme Court itself has 32/35 http://www.judis.nic.in TCA.No.446 of 2018 held that when there is provision in other enactment which contains non obstante clause, that would override provisions of Income-tax Act. Custodian appointed under Special Court Act, 1992's case (supra) is one such case apart from other cases of different High Courts. When judgment of Supreme Court in Southern Technologies Ltd.'s case (supra) is read in manner we have read, it becomes easy to reconcile ratio of Southern Technologies Ltd. (supra) with Custodian appointed under Special Court Act, 1992 (supra). 20. Thus viewed from any angle, decision of Tribunal appears to be correct in law. question of law is thus decided against revenue and in favour of assessee. As result, all these appeals are dismissed. 16. Revenue, in said case, raised identical contentions as raised before us stating that case of assessee was to be dealt with for purpose of taxability as per provisions of Act and not as per provisions of RBI Act, which was accounting method that assessee was supposed to follow. contention was rejected on ground that even under Act, interest income had 33/35 http://www.judis.nic.in TCA.No.446 of 2018 not accrued. Court further noted that submission of Revenue was entirely based on judgment of Hon ble Supreme Court in case of Southern Technologies Ltd., and proceeded to explain as to what was decision and effect of said decision with regard to assessee/cooperative bank in paragraph quoted above. above mentioned decision in case of Vasisth Chay Vyapar Ltd., was affirmed by Hon ble Supreme Court in decision reported in (2019) 410 ITR 244. In light of above discussion, substantial question of law framed in this case has to be necessarily answered in favour of assessee and against Revenue. 17. Accordingly, above tax case appeal is dismissed and substantial question of law framed for consideration is answered against Revenue and in favour of assessee. No costs. 27.7.2020 RS 34/35 http://www.judis.nic.in TCA.No.446 of 2018 T.S.SIVAGNANAM, J AND V.BHAVANI SUBBAROYAN, J RS Speaking Order Index/Internet : Yes To Income Tax Appellate Tribunal, Chennai D Bench. TCA.No.446 of 2018 27.7.2020 35/35 http://www.judis.nic.in Commissioner of Income-tax, Tiruchirapalli v. Tiruchirapalli District Central Cooperative Bank Ltd
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