DCIT, Circle-3,, Nanded v. The Omerga Janta Sahakari Bank Ltd.,, Osmanabad

ITA 350/PUN/2013 | 2007-2008
Pronouncement Date: 31-10-2013 | Result: Dismissed

Appeal Details

RSA Number 35024514 RSA 2013
Assessee PAN AAAAO0505H
Bench Pune
Appeal Number ITA 350/PUN/2013
Duration Of Justice 8 month(s) 26 day(s)
Appellant DCIT, Circle-3,, Nanded
Respondent The Omerga Janta Sahakari Bank Ltd.,, Osmanabad
Appeal Type Income Tax Appeal
Pronouncement Date 31-10-2013
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 31-10-2013
Assessment Year 2007-2008
Appeal Filed On 04-02-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES A PUNE BEFORE SHRI G.S. PANNU ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR JUDICIAL MEMBER ITA NO.350/PN/2013 (ASSESSMENT YEAR : 2007-08) ASST. COMMISSIONER OF INCOME TAX CIRCLE 3 NANDED . APPELLANT VS. THE OMERGA JANTA SAHAKARI BANK LTD. MAIN ROAD OMERGA DIST.- OSMANABAD PAN : AAAAO0505H . RESPONDENT C.O. NO.61/PN/2013 (ARISING OUT OF ITA NO.350/PN/2013) (ASSESSMENT YEAR : 2007-08) THE OMERGA JANTA SAHAKARI BANK LTD. MAIN ROAD OMERGA DIST.- OSMANABAD PAN : AAAAO0505H . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX CIRCLE - NANDED. . RESPONDENT DEPARTMENT BY : MR. P. L. PATHADE ASSESSEE BY : MR. S. N. PURANIK DATE OF HEARING : 28-10-2013 DATE OF PRONOUNCEMENT : 31-10-2013 ORDER PER G. S. PANNU AM THE CAPTIONED APPEAL BY THE REVENUE AND THE CROSS- OBJECTION BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS) AURANGABAD DATED 19.11.2012 WHICH IN TU RN HAS ARISEN FROM AN ORDER DATED 30.12.2009 PASSED BY THE ASSESSING OFFI CER U/S. 143(3) OF THE INCOME-TAX ACT 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2007-08. ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 2. IN THE APPEAL OF THE REVENUE THE SOLITARY DISPU TE RAISED IS WITH REGARD TO THE ACTION OF THE CIT(A) IN DELETING AN ADDITION OF RS.19 24 030/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST INCOME RELATING TO NON PERFORMING ASSETS (IN SHORT NPAS). 3. BRIEFLY PUT THE CONTROVERSY IN THIS APPEAL CAN BE SUMMARIZED AS FOLLOWS. THE RESPONDENT-ASSESSEE IS A CO-OPERATIVE BANK CARRYING ON BANKING BUSINESS IN TERMS OF A LICENSE ISSUED BY RE SERVE BANK OF INDIA (RBI) A COPY OF SUCH LICENSE DATED 09.09.1996 IS PLACED A T PAGE 1 OF THE PAPER BOOK FILED BEFORE US. THE ASSESSEE BEING A CO-OPER ATIVE BANK OPERATING UNDER LICENSE FROM RBI IS GOVERNED BY CIRCULARS OF RBI RELATING TO PRUDENTIAL NORMS INCOME RECOGNITION ASSET CLASSIFICATION PR OVISIONING AND OTHER RELATED MATTERS. IN TERMS OF SUCH PRUDENTIAL NORMS OF RBI ASSESSEE DID NOT ACCOUNT FOR INTEREST INCOME RELATABLE TO NPAS I.E. ADVANCES TO CUSTOMERS WHICH HAVE BEEN CLASSIFIED AS NPAS IN TERMS OF THE PRUDENTIAL NORMS OF RBI. THE ASSESSING OFFICER WAS OF THE OPINION THAT INTER EST INCOME EVEN IN RELATION TO SUCH NPAS WAS LIABLE TO BE INCLUDED ON ACCRUAL B ASIS HAVING REGARD TO THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASS ESSEE. AS PER THE ASSESSING OFFICER THE PROVISIONS OF SECTION 43D OF THE ACT WHICH PROVIDES THAT INTEREST INCOME RELATABLE TO NPAS CLASSIFIED AS PER THE RBI GUIDELINES SHALL BE CHARGED TO TAX IN THE YEAR IN WHICH IT IS ACCOUNTED FOR BY THE ASSESSEE OR ON RECEIPT WHICHEVER IS EARLIER WAS NOT APPLICABLE T O THE ASSESSEE SINCE THE ASSESSEE WAS NOT A SCHEDULED BANK. NOTABLY SECTI ON 43D PRESCRIBES THAT IN CASE OF PUBLIC FINANCIAL INSTITUTION OR A SCHEDULE D BANK OR A STATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPOR ATION INCOME BY WAY OF INTEREST IN RELATION TO SUCH CATEGORIES OF BAD OR D OUBTFUL DEBTS AS MAY BE PRESCRIBED HAVING REGARD TO THE GUIDELINES ISSUED B Y THE RBI OR IN CASES OF PUBLIC COMPANIES INCOME BAY WAY OF INTEREST IN REL ATION TO SUCH CATEGORIES OF DEBTS AS MAY BE HAVING REGARD TO THE GUIDELINES ISS UED BY THE NATIONAL HOUSING BANK SHALL BE CHARGEABLE TO TAX IN THE PREV IOUS YEAR IN WHICH SUCH ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 INCOME IS CREDITED BY THE AFORESAID PRESCRIBED ENTI TIES TO THEIR PROFIT AND LOSS ACCOUNTS OR IN THE YEAR WHEN IT IS ACTUALLY RECEIVE D WHICHEVER IS EARLIER. THE ASSESSING OFFICER NOTED THAT ASSESSEE WAS NOT AN EN TITY PRESCRIBED IN SECTION 43D OF THE ACT SINCE IT WAS FOLLOWING THE MERCANTIL E SYSTEM OF ACCOUNTING IT DID NOT HAVE THE OPTION OF ACCOUNTING FOR INTEREST INCOME RELATING TO NPAS ADVANCES ON RECEIPT BASIS. THEREFORE ACCORDING TO THE ASSESSING OFFICER INCOME BY WAY OF INTEREST ON NPAS ACCRUED TO THE AS SESSEE AND ACCORDINGLY HE BROUGHT TO TAX SUCH INTEREST INCOME OF RS.19 24 303/-. 4. THE CIT(A) HAS DELETED THE ADDITION AND DISAGREE D WITH THE ASSESSING OFFICER FOR THE FOLLOWING REASONS : - (I) THAT INTEREST ON NPAS CANNOT BE SAID TO HAVE AC CRUED TO THE ASSESSEE AS PER THE PROVISIONS OF SECTION 5 OF THE ACT AND IN THE LIGHT OF THE CBDT CIRCULAR NO.F-201/81/84 ITA-II DA TED 09.10.1984; (II) THAT IN TERMS OF RBI CIRCULAR IN RESPECT OF PR UDENTIAL NORMS INCOME RECOGNITION ETC. THE INTEREST ON NPAS WAS T O BE CREDITED IN THE YEAR IN WHICH SUCH INCOME WAS ACTUA LLY RECEIVED; (III) THAT FOLLOWING THE ACCOUNTING STANDARD-9 ISS UED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA INCOME/REVENUE I S TO BE RECOGNIZED DEPENDING ON THE CERTAINTY OF COLLECTION OF SUCH REVENUE; AND BECAUSE OF THE CLASSIFICATION BY RBI AS NPAS THE CERTAINTY OF RECOVERY OF INTEREST IN SUCH CASES COU LD NOT BE ASCERTAINED; (IV) THAT THE ASSESSEE WAS CONSISTENTLY FOLLOWING T HE SYSTEM OF RECOGNIZING INTEREST INCOME ON NPAS AS PER THE PRUD ENTIAL NORMS OF RBI AND SUCH SYSTEM HAS BEEN ACCEPTED BY T HE REVENUE IN THE PAST; AND ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 (V) THAT IN VIEW OF THE RBI GUIDELINES ASSESSEE WA S REQUIRED TO RECOGNIZE THE INCOME OF NPAS ON ACTUAL RECEIPT BASI S AND THE TAXABILITY OF SUCH INCOME WAS TO BE DECIDED ON THE BASIS OF REAL INCOME THEORY AND SUCH INCOME COULD NOT BE BROUGHT TO TAX IN THE YEAR UNDER CONSIDERATION AS IT CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE. 5. APART FROM THE AFORESAID THE CITA(A) HAS RELIED UPON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF WESTE RN MAHARASHTRA DEVELOPMENT CORPORATION LTD. VS. DCIT (2008) 114 T TJ 54 (PUNE) AND ALSO THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN TH E CASE OF M/S VASISTH CHAY VYAPAR LTD. 330 ITR 440 (DEL) TO HOLD THAT INTERES T INCOME ON NPAS WAS NOT TAXABLE ON ACCRUED BASIS. THE CIT(A) HAS ALSO REFE RRED TO AND RELIED UPON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF OSMANABAD JANTA SAH. BANK LTD. VS. ACIT ITA NO.795/PN/2011 DATED 3 1.08.2012 WHEREIN FOLLOWING THE DECISION OF THE VISAKHAPATNAM BENCH O F THE TRIBUNAL IN THE CASE OF DCIT VS. THE DURGA COOPERATIVE URBAN BANK LTD. I N ITA NO. 511/VIZAG/2010 DATED 10.03.2011 ON A SIMILAR CONTRO VERSY IT HAS BEEN HELD THAT INTEREST INCOME RELATABLE TO NPAS IS NOT TAXAB LE ON ACCRUAL BASIS. 6. FOR ALL THE ABOVE REASONS THE CIT(A) DELETED TH E ADDITION OF RS.19 24 030/- MADE BY THE ASSESSING OFFICER. AGAI NST THE AFORESAID DECISION REVENUE IS IN APPEAL BEFORE US. 7. BEFORE US THE LEARNED DEPARTMENTAL REPRESENTATI VE HAS PLACED RELIANCE ON THE JUDGEMENT OF THE HONBLE SUPREME CO URT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. ACIT (2010) 320 ITR 577 (SC) SUBMITTED THAT THE INCOME ON NPAS IS LIABLE TO BE TAXED IN TERMS O F THE MERCANTILE SYSTEM OF ACCOUNTING ADOPTED BY THE ASSESSEE AND THAT THE TAX ABILITY OF SUCH INCOME WOULD NOT BE GOVERNED BY THE PRUDENTIAL NORMS PRESC RIBED BY RBI BECAUSE ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 RBI GUIDELINES CANNOT OVERRIDE THE PROVISIONS OF TH E ACT. ACCORDINGLY IT WAS CONTENDED THAT INTEREST INCOME RELATABLE TO NPAS WA S RIGHTLY ASSESSED BY THE ASSESSING OFFICER AND IT WAS CONTENDED THAT THE ORD ER OF THE CIT(A) AND ALSO THE PRECEDENTS NOTED BY THE CIT(A) IN HIS ORDER. T HE LEARNED COUNSEL ALSO POINTED OUT THAT THEREIN SO FAR AS THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) R ELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THE SAME HAS BEEN DIST INGUISHED BY THE CIT(A) FOLLOWING THE JUDGEMENT OF THE HONBLE DELHI HIGH C OURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA). THE LEARNED COUN SEL HAS ALSO REFERRED TO THE PAPER BOOK TO POINT OUT THAT THOUGH THE ASSESSE E WAS NOT A SCHEDULED BANK YET IT WAS OPERATING UNDER A LICENSE GRANTED B Y RBI AND IT WAS BOUND AND GOVERNED BY THE PRUDENTIAL NORMS ISSUED BY RBI FOR INCOME RECOGNITION ASSET CLASSIFICATION PROVISIONING AND OTHER RELATE D MATTERS AND A COPY OF SUCH RBI CIRCULAR DATED 01.07.2008 PLACED AT PAGES 23 TO 42 OF THE PAPER BOOK. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IN SO FAR AS THE APPLICABILITY OF SECTION 43D OF THE ACT TO THE ASSE SSEE IS CONCERNED THERE IS A CONVERGENCE OF OPINION BETWEEN THE ASSESSEE AND THE REVENUE TO THE EFFECT THAT THE SAME IS NOT APPLICABLE TO THE ASSESSEE. O STENSIBLY ASSESSEE IS A CO-OPERATIVE BANK CARRYING ON BANKING BUSINESS IN T ERMS OF A LICENSE GRANTED BY RBI AND IS NOT A SCHEDULED BANK INCLUDED IN SE COND SCHEDULE OF RBI SO AS TO FALL WITHIN THE SCOPE OF SECTION 43D OF THE ACT. NOTABLY SECTION 43D OF THE ACT PRESCRIBES THAT INTEREST INCOME ON SUCH CATEGOR IES OF BAD AND DOUBTFUL DEBTS AS PRESCRIBED BY THE RBI GUIDELINES SHALL BE CHARGEABLE TO TAX IN THE YEAR IN WHICH SUCH INTEREST INCOME IS CREDITED BY T HE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT OR IN THE YEAR OF ACTUAL RECEIPT WHICHEVER IS EARLIER. SINCE ASSESSEE IS NOT AN ENTITY COVERED WITHIN THE SCOPE OF SECTION 43D OF THE ACT THE PRESENT CONTROVERSY CANNOT BE ADJUDICATED IN TH E LIGHT OF SECTION 43D OF THE ACT AND IT IS LIABLE TO BE DECIDED ON GENERAL PRIN CIPLES AS TO WHETHER THE ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 IMPUGNED INCOME HAS ACCRUED TO THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. 9. IN THIS CONNECTION WE FIND THAT THE VISAKHAPATN AM BENCH OF THE TRIBUNAL IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL CONTROVERSY. THE ASSESSEE BEFORE THE VISAKHAPATNAM BENCH WAS A CO-OPERATIVE BANK OPERATING UNDER A LIC ENSE ISSUED BY RBI BUT WAS NOT A SCHEDULED BANK SO AS TO FALL WITHIN THE SCOPE OF SECTION 43D OF THE ACT. THE ISSUE RELATED TO TAXABILITY OF INTEREST I NCOME RELATING TO NPAS WHICH AS PER THE REVENUE WAS LIABLE TO BE TAXED ON ACCRUA L BASIS IN LINE WITH MERCANTILE SYSTEM OF ACCOUNTING ADOPTED BY THE ASSE SSEE THEREIN. THE ASSESSEE ON THE OTHER HAND CONTENDED THAT HAVING REGARD TO THE GUIDELINES ISSUED BY RBI REGARDING ACCOUNTING OF INTEREST ON N PAS NO INTEREST INCOME ACCRUED IN RESPECT OF NPAS AND THAT THE SAME WAS TO BE TAXED ONLY ON RECEIPT BASIS. THE TRIBUNAL OBSERVED THAT THE QUESTION OF TAXABILITY OF INTEREST ON NPAS CLASSIFIED BY RBI WAS CONSIDERED BY THE HONB LE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) WHEREI N AFTER CONSIDERING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F SOUTHERN TECHNOLOGIES LTD. (SUPRA) IT WAS HELD THAT INTEREST INCOME RELAT ABLE TO NPAS WAS NOT INCLUDIBLE IN TOTAL INCOME ON ACCRUAL BASIS SINCE T HE SAME DID NOT ACCRUE TO THE ASSESSEE. THE FOLLOWING DISCUSSION BY THE VISAKHAP ATNAM BENCH OF THE TRIBUNAL IN THE CASE OF THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) IS WORTHY OF NOTICE :- 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFUL LY PERUSED THE RECORD. THE QUESTION OF TAXABILITY OF INTEREST ON N PAS HAS BEEN CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF M/S VAS ISTH CHAY VYAPAR LTD (SUPRA); WHEREIN THE HON'BLE DELHI HIGH COURT TOOK INTO ACCOUNT THE DECISION RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE O F SOUTHERN TECHNOLOGIES LTD (SUPRA). IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD THE ASSESSEE THEREIN WAS A NON BANKING FINANCIAL COMPANY AND IT WAS ALSO BOUND BY THE PRUDENTIAL NORMS DIRECTIONS ISSUED BY THE RESERVE BANK OF IND IA FOR INCOME RECOGNITION AND ASSET CLASSIFICATION. THE ASSESSEE DID NOT INCL UDE THE INTEREST INCOME RELATABLE TO NPA ASSETS IN ITS TOTAL INCOME. THE AS SESSING OFFICER HOWEVER ADDED THE SAID INTEREST AS THE INCOME OF THE ASSESS EE BY HOLDING THAT IT HAD ACCRUED TO THE ASSESSEE EVEN IT WAS NOT REALIZED AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE LEAR NED CIT (A) AFFIRMED THE ORDER OF THE ASSESSING OFFICER. HOWEVER THE ITAT D ELETED THE AFORESAID ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 INCOME. HENCE THE REVENUE PREFERRED APPEAL BEFORE T HE HON'BLE DELHI HIGH COURT. 8.1 AFTER HEARING THE RIVAL SUBMISSIONS THE HON'BL E DELHI HIGH COURT TOOK NOTE OF SEC.45Q OF RESERVE BANK OF INDIA ACT WHICH READS AS UNDER: CHAPTER IIIB TO OVERRIDE OTHER LAWS. 45Q. THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFE CT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CON TAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY IN STRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. THE HIGH COURT TOOK NOTE OF THE FACT THAT THE PROVI SION OF 45Q OF RESERVE BANK OF INDIA HAS OVERRIDING EFFECT OVER ANY OTHER LAW. THEN THE HON'BLE HIGH COURT ALSO CONSIDERED ACCOUNTING STANDARD AS-9 ON REVE NUE RECOGNITION AND ALSO EXTRACTED FOLLOWING RELEVANT PORTION FROM THE SAID ACCOUNTING STANDARD: 9. EFFECT OF UNCERTAINTIES ON REVENUE RECOGNITION 9.1 RECOGNITION OF REVENUE REQUIRES THAT REVENUE IS A MEASURABLE AND THAT AT THE TIME OF SALE OR THE RENDERING OF TH E SERVICE IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIMATE COLLECTION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLEC TION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAIS ING ANY CLAIM E.G. FOR ESCALATION OF PRICE EXPORT INCENTIVES INTEREST ET C. REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES IT MAY BE APPROPRIATE TO RECOGNIZE REVENUE ONLY WHEN I T IS REASONABLY CERTAIN THAT THE ULTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAINTY AS TO ULTIMATE COLLECTION REVENUE IS R ECOGNIZED AT THE TIME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENT S ARE MADE BY INSTALMENTS. 9.3 WHEN THE UNCERTAINTY RELATING TO COLLECTABILITY ARISES SUBSEQUENT TO THE TIME OF SALE OR THE RENDERING OF THE SERVICE IT IS MORE APPROPRIATE TO MAKE A SEPARATE PROVISION TO RE FLECT THE UNCERTAINTY RATHER THAN TO ADJUST THE AMOUNT OF REV ENUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RECOGNITION OF R EVENUE IS THAT THE CONSIDERATION RECEIVABLE FOR THE SALE OF GOODS THE RENDERING OF SERVICES OR FROM THE USE OF OTHERS OF ENTERPRISE RE SOURCES IS REASONABLY DETERMINABLE. WHEN SUCH CONSIDERATION IS NOT DETERMINABLE WITHIN REASONABLE LIMITS THE RECOGNIT ION OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO THE EFFECT OF UNCERTAINTIES IT IS CONSIDERED AS REVENUE OF THE P ERIOD IN WHICH IT IS PROPERLY RECOGNIZED. 8.2 THE DELHI HIGH COURT ALSO CONSIDERED THE DECISI ON RENDERED IN THE FOLLOWING CASES: I) CIT VS. ELGI FINANCE LTD. 293 ITR 357 (MAD) II) CIT VS. KKM INVESTMENTS (CAL) SLP DISMISSED B Y SUPREME COURT (310 ITR 4) III) CIT VS. MOTOR CREDIT CO (P) LTD. 127 ITR 572 (MAD) IV) UCO BANK VS. CIT 237 ITR 889 (SC) V) CIT VS. SHOORJI VALLABHDAS & CO 46 ITR 144 (SC) VI) GODHRA ELECTRICITY CO. LTD. VS.CIT 225 ITR 746 VII) CIT VS. GOYAL M G GASES (P) LTD. 303 ITR 159 (DEL) VIII) CIT VS. EICHER LTD. ITA NO.431/2009 DATED 15 .7.2009 (DEL) ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 8.3 AFTER CONSIDERING THE ACCOUNTING STANDARD 9 AND THE VARIOUS CASE LAW LISTED ABOVE THE HON'BLE DELHI HIGH COURT HELD THA T THE INTEREST ON NPA ADVANCE CANNOT BE TREATED AS ACCRUED TO THE ASSES SEE. 8.4 BEFORE THE DELHI HIGH COURT THE REVENUE TOOK S UPPORT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHER N TECHNOLOGIES LTD (SUPRA). THE DELHI HIGH COURT CONSIDERED THE SAID D ECISION OF HON'BLE APEX COURT AND EXPLAINED THE SAME AS UNDER: WE HAVE ALREADY HELD THAT EVEN UNDER THE INCOME TA X ACT INTEREST INCOME HAD NOT ACCRUED. MOREOVER THIS SUBMISSION O F MR. SABHARWAL IS BASED ENTIRELY ON THE JUDGMENT OF THE SUPREME CO URT IN THE CASE OF SOUTHERN TECHNOLOGY (SUPRA). NO DOUBT IN FIRST BLUSH READING OF THE JUDGMENT GIVES AN INDICATION THAT THE COURT HAS HELD THAT RESERVE BANK OF INDIA ACT DOES NOT OVERRIDE THE PRO VISIONS OF THE INCOME TAX ACT. HOWEVER WHEN WE EXAMINE THE ISSUE INVOLVED THEREIN MINUTELY AND DEEPLY IN THE CONTEXT IN WHICH THAT HAD ARISEN AND CERTAIN OBSERVATIONS OF THE APEX COURT CONTAINED IN THAT VERY JUDGMENT WE FIND THAT THE PROPOSITION ADVANCED BY MR.SABHARWAL MAY NOT BE ENTIRELY CORRECT. IN THE CASE BEFORE THE SUPREME COURT THE ASSESSEE A NBFC DEBITED RS.81 68 516 AS PROVISION A GAINST NPA IN THE PROFIT AND LOSS ACCOUNT WHICH WAS CLAIMED A S DEDUCTION IN TERMS OF SECTION 36(1) (VII) OF THE ACT. THE ASSESSING OFFICER DID NOT ALLOW THE DEDUCTION CLAIMED AS AFORESAID ON THE GRO UND THAT THE PROVISION OF NPA WAS NOT IN THE NATURE OF EXPENDITU RE OR LOSS BUT MORE IN THE NATURE OF A RESERVE AND THUS NOT DEDUCTIBLE UNDER SECTION 36(I)(VII) OF THE ACT. THE ASSESSING OFFICER HOWEVER DID NOT BRING TO TAX RS.20 34 605/- AS INCOME (BEING INCOME ACCRU ED UNDER THE MERCANTILE SYSTEM OF ACCOUNTING). THE DISPUTE BEFORE THE APEX COURT CENTERED AROUND DEDUCTIBILITY OF PROVISION FO R NPA. AFTER ANALYZING THE PROVISIONS OF THE RESERVE BANK OF IND IA ACT THEIR LORDSHIPS OF THE APEX COURT OBSERVED THAT IN SO FAR AS THE PERMISSIBLE DEDUCTIONS OR EXCLUSIONS UNDER THE ACT ARE CONCERNED THE SAME ARE ADMISSIBLE ONLY IF SUCH DEDUCTIONS/EXCLUSIONS SATISFY THE RELEVANT CONDITIO NS STIPULATED THEREFORE UNDER THE ACT. TO THAT EXTENT IT WAS OBS ERVED THAT THE PRUDENTIAL NORMS DO NOT OVERRIDE THE PROVISIONS OF THE ACT. HOWEVER THE APEX COURT MADE A DISTINCTION WITH REG ARD 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 ( SIC. 145) OF THE INCOME TAX ACT. IT CAN BE SAID THEREFORE THAT THE APEX COURT APPROVED THE REAL INCOME THEORY WHICH IS ENGRAINE D IN THE PRUDENTIAL NORMS FOR RECOGNITION OF REVENUE BY NBFC. 9. THE HON'BLE SUPREME COURT IN THE CASE OF M/S SOU THERN TECHNOLOGIES LTD (SUPRA) DISSECTED THE MATTER INTO TWO PARTS VIZ . A) INCOME RECOGNITION AND B) PERMISSIBLE DEDUCTION/EXCLUSIONS UNDER THE I NCOME TAX ACT. IN SO FAR AS INCOME RECOGNITION IS CONCERNED THE HON'BLE SUP REME COURT HELD THAT SECTION 145 OF THE INCOME TAX ACT HAS NO ROLE TO PL AY AND THE ASSESSING OFFICER HAS TO FOLLOW RESERVE BANK OF INDIA DIRECTI ONS 1998 SINCE BY VIRTUE OF 45Q OF THE RESERVE BANK OF INDIA ACT AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS OF RESERVE BANK OF INDIA VIS--VIS INCOM E RECOGNITION PRINCIPLES IN THE COMPANIES ACT 1956. IN SO FAR AS COMPUTATION OF INCOME UNDER THE INCOME TAX ACT IS CONCERNED (WHICH INVOLVES DEDUCT ION OF PERMISSIBLE DEDUCTIONS AND EXCLUSIONS) THE ADMISSIBILITY OF SUC H DEDUCTIONS SHALL BE GOVERNED BY THE PROVISIONS OF THE INCOME TAX ACT. T HE RELEVANT OBSERVATIONS OF THE HON'BLE SUPREME COURT ARE EXTRACTED BELOW: APPLICABILITY OF SECTION 145 40. AT THE OUTSET WE MAY STATE THAT IN ESSENCE RBI DIRECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UND ER CHAPTER IIIB OF THE RBI ACT 1934. THESE NORMS DEAL ESSENTIALLY WIT H INCOME RECOGNITION. THEY FORCE THE NBFCS TO DISCLOSE THE A MOUNT OF NPA IN ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 THEIR FINANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO R EFLECT TRUE AND CORRECT PROFITS. BY VIRTUE OF SECTION 45Q AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS 1998 VIS--VIS INCOME RECO GNITION PRINCIPLES IN THE COMPANIES ACT 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER THESE DIRECTIONS 1998 AN D THE IT ACT OPERATE IN DIFFERENT AREAS. THESE DIRECTIONS 1998 H AVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THESE DIRECTIONS CANNOT OVERRULE THE PERMISSIBLE DEDUCTIONS OR THEIR EXC LUSION UNDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND COMPANIES ACT IS ONLY IN THE MATTER OF INCOME RECOG NITION AND PRESENTATION OF FINANCIAL STATEMENTS. THE ACCOUNTIN G POLICIES ADOPTED BY AN NBFC CANNOT DETERMINE THE TAXABLE INCOME. IT IS WELL SETTLED THAT THE ACCOUNTING POLICIES FOLLOWED BY A COMPANY CAN B E CHANGED UNLESS THE AO COMES TO THE CONCLUSION THAT SUCH CHANGE WOU LD RESULT IN UNDERSTATEMENT OF PROFITS. HOWEVER HERE IS THE CASE WHERE THE AO HAS TO FOLLOW THE RESERVE BANK OF INDIA DIRECTIONS 1998 IN VIEW OF SECTION 45Q OF THE RESERVE BANK OF INDIA ACT. HENCE AS FAR AS INCOME RECOGNITION IS CONCERNED SECTION 145 OF THE IT ACT HAS NO ROLE TO PLAY IN THE PRESENT DISPUTE. 10. TURNING TO THE FACTS OF THE CASE BEFORE US THE ASSESSEE HEREIN IS A COOPERATIVE BANK AND IT IS NOT IN DISPUTE THAT IT I S ALSO GOVERNED BY THE RESERVE BANK OF INDIA. HENCE THE DIRECTIONS WITH RE GARD TO THE PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDIA ARE EQUAL LY APPLICABLE TO THE ASSESSEE AS IT IS APPLICABLE TO THE COMPANIES REGIS TERED UNDER THE COMPANIES ACT. THE HON'BLE SUPREME COURT HAS HELD IN THE CASE OF SOUTHERN TECHNOLOGIES LTD (SUPRA) THAT THE PROVISION OF 45Q OF RESERVE BANK OF INDIA ACT HAS AN OVERRIDING EFFECT VIS--VIS INCOME RECOG NITION PRINCIPLE UNDER THE COMPANIES ACT. HENCE SEC.45 Q OF THE RBI ACT SHALL HAVE OVERRIDING EFFECT OVER THE INCOME RECOGNITION PRINCIPLE FOLLOWED BY C OOPERATIVE BANKS ALSO. HENCE THE ASSESSING OFFICER HAS TO FOLLOW THE RESER VE BANK OF INDIA DIRECTIONS 1998 AS HELD BY THE HON'BLE SUPREME COU RT. 10.1 BASED ON THE PRUDENTIAL NORMS THE ASSESSEE HE REIN DID NOT ADMIT THE INTEREST RELATABLE TO NPA ADVANCES IN ITS TOTAL INC OME. THE HON'BLE DELHI HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD (SUPRA ) HAS HELD THAT THE INTEREST ON NPA ASSETS CANNOT BE SAID TO HAVE ACCRU ED TO THE ASSESSEE. IN THIS REGARD THE FOLLOWING OBSERVATIONS OF HON'BLE DELHI HIGH COURT IN THE ABOVE CITED CASE ARE RELEVANT: WHAT TO TALK OF INTEREST EVEN THE PRINCIPLE AMOUN T ITSELF HAD BECOME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LEGITI MATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NOT ACCRUED. THE SAID DECISION OF THE HON'BLE DELHI HIGH COURT I S EQUALLY APPLICABLE TO THE ISSUE IN OUR HANDS. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY WITH THE DECISION OF THE LEARNED CIT (A) IN HOLDING THAT THE INTEREST INCOME RELATABLE ON NPA ADVANCES DID NOT ACCRUE TO THE ASSESSEE. ACCORDINGL Y WE UPHOLD HIS ORDER. 10. FOLLOWING THE AFORESAID DISCUSSION WHICH HAS BEEN RENDERED ON AN IDENTICAL ISSUE UNDER SIMILAR CIRCUMSTANCES WE FIN D NO REASONS TO INTERFERE WITH THE ULTIMATE CONCLUSION OF THE CIT(A) IN DELET ING THE IMPUGNED ADDITION RELATING TO INTEREST INCOME IN RESPECT OF NPAS. 11. SO HOWEVER THE LEARNED DEPARTMENTAL REPRESENT ATIVE HAS SUBMITTED THAT THE HONBLE MADRAS HIGH COURT IN THE CASE OF C IT VS. SAKTHI FINANCE LTD. ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 (2013) 31 TAXMANN.COM 305 (MADRAS) HAS DIFFERED WIT H THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) ON A SIMILAR ISSUE I.E. RELATING TO INTEREST INCOM E ON NPAS. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER POINTED OUT THA T THE HONBLE MADRAS HIGH COURT FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) IN HOLDING THAT INTEREST ON NPAS WAS ASSESSABLE TO TAX ON ACCRUAL BASIS. WE HAVE CAREFU LLY CONSIDERED THE SUBMISSIONS PUT-FORTH BY THE LEARNED DEPARTMENTAL R EPRESENTATIVE BASED ON THE JUDGEMENT OF THE HONBLE MADRAS HIGH COURT IN T HE CASE OF SAKTHI FINANCE LTD. (SUPRA). THE CONTROVERSY BEFORE THE HONBLE M ADRAS HIGH COURT RELATED TO NON-RECOGNITION OF INTEREST INCOME ON NPAS BY THE A SSESSEE FOLLOWING THE RBI GUIDELINES. THE HONBLE MADRAS HIGH COURT TOOK THE VIEW THAT THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHER N TECHNOLOGIES LTD. (SUPRA) ALSO APPLIED TO THE INCOME RECOGNITION NORM S PROVIDED BY RBI AND THEREFORE IT HELD THE INTEREST INCOME ON NPAS IS LI ABLE TO BE TAXED ON ACCRUAL BASIS AND NOT IN TERMS OF RBIS GUIDELINES. BUT TH E HONBLE DELHI HIGH COURT IN THE CASE OF M/S VASISTH CHAY VYAPAR LTD. (SUPRA) HA S TAKEN A VIEW THAT SOUTHERN TECHNOLOGIES LTD. (SUPRA) CASE DID NOT APP LY TO THE INCOME RECOGNITION NORMS PRESCRIBED BY RBI. OSTENSIBLY T HERE IS DIVERGENCE OF OPINION BETWEEN THE HONBLE DELHI HIGH COURT AND TH E HONBLE MADRAS HIGH COURT AS NOTED BY THE HONBLE MADRAS HIGH COURT IN ITS ORDER. 12. IN SO FAR AS PRESENT CASE IS CONCERNED THERE I S NO JUDGMENT OF THE JURISDICTIONAL HIGH COURT. WE ARE FACED WITH TWO C ONTRARY JUDGMENTS OF THE NON-JURISDICTIONAL HIGH COURT. IN SUCH A SITUATION WE ARE INCLINED TO PREFER A VIEW WHICH IS FAVOURABLE OF THE ASSESSEE FOLLOWING THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. VEGETA BLE PRODUCTS LTD. (1973) 88 ITR 192 (SC). ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 13. THEREFORE IN VIEW OF THE AFORESAID DISCUSSION WE ARE INCLINED TO FOLLOW THE DECISION OF OUR CO-ORDINATE BENCH IN THE CASE O F THE DURGA COOPERATIVE URBAN BANK LTD. (SUPRA) AND ACCORDINGLY THE ORDER O F THE CIT(A) IS LIABLE TO THE AFFIRMED. WE HOLD SO. 14. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. 15. IN THE CROSS-OBJECTION PREFERRED BY THE ASSESSE E IT IS SOUGHT TO BE MADE OUT THAT THE ASSESSING OFFICER ERRED IN MAKING AN ADDITION OF RS.19 24 030/- ON ACCOUNT OF INTEREST ON NPAS WHER EAS THE CORRECT AMOUNT OF INTEREST ON NPAS RELATABLE TO THE YEAR UNDER CONSID ERATION WAS ONLY RS.7 06 084/-. THUS AS PER ASSESSEE IF AT ALL AN ADDITION WAS REQUIRED TO BE MADE IT SHOULD HAVE BEEN ONLY OF RS.7 06 084/-. T HE LEARNED COUNSEL POINTED OUT THAT THE ADDITION OF RS.19 24 030/- HAS BEEN MA DE BY THE ASSESSING OFFICER BY ADOPTING THE FIGURE OF INTEREST ON NPAS AS STATED IN THE BALANCE- SHEET WHICH WAS A CUMULATIVE FIGURE INCLUSIVE OF SUCH INTEREST PERTAINING TO EARLIER YEARS ALSO. 16. THE LEARNED COUNSEL SUBMITTED THAT IF THE AFORE SAID MISTAKE IS CORRECT THAN THE APPEAL EFFECT IN THE CASE OF THE ASSESSEE IS BELOW THE MAXIMUM LIMIT PRESCRIBES BY CBDT FOR FILING OF THE APPEAL BEFORE THE TRIBUNAL AND IN THAT LIGHT THE CAPTIONED APPEAL OF THE REVENUE WOULD BECOME NO N-MAINTAINABLE. 17. WITH RESPECT TO THE AFORESAID OBJECTION WE ONL Y SAY THAT THE SINCE THE APPEAL OF THE REVENUE HAS BEEN DISMISSED BY US THE SAID CROSS-OBJECTION OF THE ASSESSEE HAS BECOME ACADEMIC AND THE ISSUE RAIS ED IS KEPT OPEN AND IS RENDERED INFRUCTUOUS. 18. IN THE RESULT THE APPEAL OF THE REVENUE AND TH E CROSS-OBJECTION OF THE ASSESSEE ARE DISMISSED AS ABOVE. ITA NO.350/PN/2013 C.O. NO.61/PN/2013 A.Y. 2007-08 ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST OCTOBER 2013. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: 31 ST OCTOBER 2013 SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A) AURANGABAD; 4) THE CIT AURANGABAD; 5) THE DR A BENCH I.T.A.T. PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T. PUNE