Case Law Details

Case Name : ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (ITAT Pune)
Appeal Number : IT Appeal No. 795 (PUNE) of 2011
Date of Judgement/Order : 31/08/2012
Related Assessment Year : 2007- 08

ITAT PUNE BENCH ‘A’

Assistant Commissioner of Income-tax

versus

Osmanabad Janta Sah. Bank Ltd.

IT Appeal No. 795 (PUNE) of 2011
[ASSESSMENT YEAR 2007-08]

AUGUST 31, 2012

ORDER

R.S. Padvekar, Judicial Member

In this appeal the Revenue has challenged the impugned order of the CIT(A), Aurangabad, dated 04.03.2011 for the A.Y. 2007-08. Ground No. 1(5) reads as under:

“On the facts and in the circumstances of the case, the Ld. CIT(A), Aurangabad, was not justified in deleting addition made on account of sticky advances of Rs. 6,86,73,957/-. The Ld.CIT(A) erred in holding that ratio of the Honorable Apex Court’s decision in the case of UCO Bank v. CIT 237 ITR 889 (SC) (1991) is applicable to the instant case which lays down that interest on a loan whose recovery is doubtful and which has not been recovered by the assessee bank for last three years but has been kept in a suspense account and has not been brought to P & L A/c of the assessee could not be included in the income of the assessee.”

2. The assessee is a Cooperative Bank carrying on the business of banking and the provisions of Banking Regulation Act, 1949 are applicable as RBI license is issued. The assessee bank filed the return of income for the A.Y. 2007-08 declaring total income of Rs. 4,34,07,380/-. The return filed by the assessee was selected for scrutiny and assessment has been completed u/s. 143(3) of the Act. It was noticed by the Assessing Officer that the assessee bank has not considered the interest receivable on sticky advances/non-performing assets (NPA) as income and same has been directly taken to the Balance Sheet without routing through the Profit and Loss Account. The Assessing Officer has observed that the provisions of section 43D of the I.T. Act, cannot be applied to the assessee bank as it is not a scheduled bank but a cooperative bank. In opinion of the Assessing Officer, after considering the provisions of section 43D, non-scheduled cooperative banks are specifically excluded from the exemption including interest of sticky advances. The Assessing Officer also took into consideration the CBDT Circular No.F-201/21/84 ITA-II, dated 09.10.1984. In the opinion of the Assessing Officer, said Circular was issued regarding clarification about taxability of the interest accrued on doubtful/bad advances of banking companies, where such interest remains unrecovered consecutively for three years then such interest shall not form part of taxable income of the banking company in the fourth year. In sum and substance, in the opinion of the Assessing Officer, to get the benefit of the said Circular, the assessee should be the banking company and interest should have been remained unrecovered consecutively for three years. The Assessing Officer, therefore, made the addition of Rs. 6,86,73,957/- in respect of the interest on sticky advances by adding the same to the total income.

3. The assessee challenged the said addition before the Ld. CIT(A) and found favour as Ld. CIT(A) in his detailed reasoned order deleted the said addition. The reasons given by the Ld. CIT(A) for deleting the addition are as under:

4.2 “I have carefully considered the facts of the case, the assessment order of the A.O. and the submissions of the appellant and various judicial decisions relied on by the appellant and also available on the issue under appeal. The contentions raised by the A.O. for making the addition of Rs. 6,86,73,957/- in respect of interest on sticky loans are first considered and dealt with as under-

(i) The main contention of the A.O. is that “the exemption available u/s 43D cannot be extended to Non-Scheduled Co-operative Bank in view of overriding provisions of section 43D, Non-Scheduled Co-operative Banks are specifically excluded from the exemption regarding interest on sticky advances” and “the bank has contravened the provisions of section 43D therefore the interest on sticky advances is liable to be considered as income.” This contention of the A.O. is apparently incorrect as section 43D does not grant any exemption to assessees. This section lays down that interest in relation to Non-Performing Assets/Bad or Doubtful Debts shall be chargeable to tax in the previous year in which it is credited to profit & loss account or actually received whichever is earlier. This section is applicable to Scheduled Banks, Public Financial Institutions, Companies etc. and not to Non-Scheduled Co-operative Banks and Non-Banking Financial Companies (NBFC). This does not mean that interest income on NPA/Bad or Doubtful Debt which is doubtful of recovery and which is not taxable unless actually recovered in the hands of scheduled bank etc. carrying on banking business, shall be taxable in the hands of Non-Scheduled Banks who are also carrying on banking business under the license of Reserve Bank of India. Section 43D has in fact recognized the principle that, the income never accrues when the principal amount itself is non-performing or doubtful and as such its taxability needs to be postponed till actual realization of interest. The above contentions of the A.O. are, therefore, erroneous and hence rejected.

(ii) The A.O. has also contended that the decision in the case of UCO Bank v. CIT 154 CTR 88 (SC) is not applicable to the appellant bank as the decision is in the case of commercial bank. In this decision the Honorable Apex Court has laid down that interest on a loan whose recovery is doubtful and which has not been recovered by the assessee bank for last three years but has been kept in a suspense account and has not been brought to profit & loss account of the assessee could not be included in the income of the assessee. Though the assessee is a Non-Scheduled Bank, the ratio laid down by the Hon’ble Apex Court in the case of UCO Bank is certainly applicable to the Non-Scheduled Banks carrying on banking business under the license issued by RBI. The contention raised by the A.O. is, therefore, not correct.

(iii) The A.O. has also contended that CBDT Circular No.F-201/21/84 ITA-II, dated 09/10/1984 is not applicable to the appellant as the appellant is not a Banking Company and the interest has not remained unrecovered for three previous years. Relevant portion of the Circular reads as under-

“Interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and on wards”.

However, if there is a recovery in the fourth year or later the actual amount recovered only will be subject to tax in the respective years. Apparently, the period of three consecutive accounting years would have been mentioned on the basis of the RBI guidelines. Hence, this period may vary with the change in RBI guidelines. Though the appellant is not a banking company but is a Non-Scheduled Bank, the ratio laid down by the above circular is also applicable to the cases of the Non-Scheduled Banks including the appellant. It cannot be assumed or held that the income which is not taxable in the hands of the banks which are banking companies carrying on business of banking, shall become taxable in the hands of Non-Scheduled Banks carrying on business of banking under the license issued by RBI. Therefore, the above contention of the appellant is also incorrect and hence rejected.

4.3 On the other hand, the contention of the appellant that the interest on Non-Performing Assets/Bad or Doubtful Debts, which is not likely to be recovered is not liable to tax is supported by-

(i) The ratio laid down by the CBDT Circular No.F-201/21/84 ITA-II, dated 09/10/1984.

(ii) The interest on NPA/Bad or Doubtful Debts cannot be said to have accrued to the assessee as per the provisions of Income Tax Act particularly section-5 of the Act.

(iii) By virtue of Master Circular of RBI in respect of Prudential Norms on Income Recognition, asset Classification and Provisioning pertaining to advances, interest on Non-Performing Advances has been credited to NPA Interest Receivable Account and brought to tax in the year in which actually received.

(iv) The appellant bank followed Accounting Standard-9 (AS-9): Revenue Recognition prescribed by the Institute of Chartered Accountants of India. In accordance with the said Accounting Standard, where there is an uncertainty about the collection of revenue, recognition of income or such revenue is postponed to the extent of uncertainty involved. In such cases, recognition of revenue shall be made on only receipt basis or only when it is reasonably certain that, the ultimate collection will be made. In view of AS-9, appellant bank recognized revenue (interest income) on advances classified as NPA on actual receipt basis, because the certainty of recovery of interest was not known to the bank as per the RBI Norms.

(v) The appellant bank consistently followed the said system of accounting in respect of interest on NPA as per Prudential Norms of Recognition of Income and Asset Classification since beginning. This is in consonance with the provisions of section 145 of the Act. It is well settled law that the method of accounting regularly followed and which is regularly accepted by the revenue while assessing income of the earlier years has to be accepted by the A. O. while assessing income of the subsequent years.

(vi) The assessee is a co-operative bank and it has to follow the Reserve Bank of India’s Guidelines issued from time to time. Through ‘Master Circular on Income Recognition, Asset Classification, Provisionary and other related matters -UCBS,’ the Reserve Bank has issued following Guidelines for income recognition on NPA Accounts.

“The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take to income account interest on non-performing asset on accrual basis.”

Hence, according to the guidelines assessee recognizes the income on NPA Account on actual receipt basis and has to offer the same for taxation in the year in which it is actually received and the assessee has followed the same.

(vii) The theory of only real income is to be taxed is settled law and it has been held by various Courts that notwithstanding that an assessee may be following the mercantile system of accounting, the assessee could only be taxed on real income and not on any hypothetical/illusory income. This proposition of law is supported by following decisions –

(a) UCO Bank v. CIT 237 ITR 889 (SC)

(b) CIT v. Shorji Vallabhdas and Co. 46 ITR 144 (SC)

(c) Godhra Electricity Co. Ltd. v. CIT 225 ITR 746 (SC)

(d) The Honorable Delhi High Court’s consolidated decision dated 29/11/2010 in the cases of CIT v. Vasisth Chay Vyapar Ltd. (itatonline.org – Nov.2010)

(viii) The contention of the appellant in respect of interest on NPA/Bad or Doubtful Debts is supported by the ratio laid down in the following decisions-

(a) United Bank of India v. DCIT 64 TTJ 432 (Cal. ITAT)

(b) ANZ Grindley Bank v. CIT 250 ITR 125 (Cal.)

(c) American Express International Banking Corporation v. CIT 258 ITR 601 (Bom.)

(d) CIT v. Bank of America NT & SA 262 ITR 504 (Bom.)

(e) State Bank of India v. IAC 23 TTJ 492 (Mum.)

(f) Bank of Maharashtra v. ITO 16 ITD 113 (Pune)

(g) Second ITO v. Maharashtra State Finance Corporation Ltd. 28 TTJ 386 (Bom.)

(h) ITO v. Orissa State Financial Corporation 39 TTJ 603(Cuttack)

(ix) Further, the Honorable jurisdictional bench of Honorable ITAT Pune, in its order dated 31/01/2008, in the case of Western Maharashtra Development Corporation Ltd. v. DCIT ,[2008] 114 TTJ (Pune) 54, has elaborately considered a similar situation where recoveries of interest on seed money loan given by the assessee company was extremely low and possibilities of recovering these amounts was somewhat remote, the Honorable ITAT has observed that, no doubts, there is a legal right to receive the interest but there are also ground realities which do not permit 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 the assessee. The Honorable ITAT has observed as under:

“In our considered opinion, any other view of the matter will result in distortion in the financial results disclosed by the books of account maintained by the assessee. It is also important to remain alive to the fact that the provisions of s. 145(1) are subject to, inter alia, mandate to AS-I which also prescribed that ‘Accounting policies adopted by the assessee should be such so as to represents a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented by on the basis of such accounting policies. In the name of compliance with s. 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. Therefore, even under the mercantile method of accounting, and, on peculiar facts of this case, the assessee is justified in following the policy of not recognizing these interest revenue till the point of time when the uncertainty to realize the revenue vanishes.”

(x) The Honorable Delhi High Court in the cases of M/s Vasisth Chay Vyapar Ltd. and M/s Ted Co. Investment & Financial Services (P) Ltd. bearing ITA Nos. ITA 552/2005, ITA 565/2005, ITA 1191/2007, ITA 139/2008, ITA 466/2008, ITA 537/2008, ITA 408/2003 dated 29/11/2010 has decided the similar issue in favour of the assessees in the case of Non-Banking Financial Companies which can be regarded as at par with Non-Scheduled Co-operative Bank. In this case, the A.O. and the CIT(Appeals) have held that the assessee was following mercantile system of accounting and as per provisions of section-5 of the Income Tax Act, 1961, interest income had accrued to the assessee. In their view, Provisions of Reserve Bank of India Act, 1934 or the directions of RBI issued under the said Act could not override the provisions of the Income Tax Act. The Honorable ITAT has decided the issue in favour of the assessee. The Honorable Delhi High Court has dismissed the appeals of the Revenue observing/holding as under-

(1) The Honorable ITAT is of the view that the provisions of section 45Q of the RBI Act shall override the provisions of the Income Tax Act and the assessee is justified in not crediting income from the loan advanced following the RBI Act and prudential norms issued there under. The Honorable ITAT has also held that in terms of section 145 of the Act, no addition could be made in the hands of the assessee in respect of such unrealized interest when the loan was admittedly NPA.

(2) The section 45Q of the RBI Act which starts with non obstante clause, reads as under –

“Chapter IIIB to override other laws.

45Q. The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

The assessee company in that case being NBFC is governed by provisions of RBI Act and hence in view of provisions of section 45Q of the RBI Act and the prudential norms issued by the RBI in exercise of its statutory powers, it cannot be said that interest in respect of NPA accrued to the assessee.

The above proposition is supported by the judgment of the Honorable Apex Court in the case of TRO v. Custodian, Special Court Act, 1934 reported in 293 ITR 369 (SC) wherein it was held that where an Act makes a provision with non obstante clause that would override the provisions of other Acts.

(3) The assessee is bound to follow Accounting Standard-9 issued by ICAI wherein it has been laid down that the revenue which is doubtful of recovery/where recovery of income is uncertain, the revenue need not be recognized.

(4) Even under the provisions of Income Tax Act, interest which is doubtful of recovery cannot be said to have “accrued”. The real income can only be taxed and if unrecoverable interest on NPA is considered as income true and fair view as per books of account and final statements of accounts would not be reflected.

(5) The decision in the case of Southern Technology Ltd. v. JCIT 320 ITR 577 (SC) is not applicable to the facts of the case of the assessee as in the said case the issue about allow ability of claim of deduction in terms of section 36(l)(vii) of the Act has been decided. In the said case, the Honorable Apex Court made distinction with regard to “income recognition” and held that income had to be recognized in terms of prudential norms even though the same deviated from mercantile system of accounting and/or section 145 of the Income Tax Act.

(6) The issue has been decided in para-17 which is reproduced below –

“17. In this scenario, we have to examine the strength in the submission of learned counsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of Income Tax Act was, therefore, eligible to tax. Our answer is in the negative and we give the following reasons in support:-

(1) First of all we would discuss the matter in the light of the provisions of Income Tax Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee. It is stated at the cost of repetition that admitted position is that the assessee had not received any interest on the said ICD placed with Shaw Wallace since the assessment year 1996-97 as it had become NPAs in accordance with the Prudential norms which was entered in the books of account as well. The assessee has further successfully demonstrated that even in the succeeding assessment years, no interest was received and the position remained the same until the assessment year 2006-07. Reason was adverse financial circumstances and the 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 an uncertainty in so far as recovery of interest was concerned, as a result of the aforesaid precarious financial position of Shaw Wallance. What to talk of interest, even the 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 the 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 the instant case, the assessee company being NBFC is governed by the provisions of RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. (emphasis supplied)

4.4 In view of the above facts and discussion, circulars issued by RBI and CBDT, the ratio laid down by the various decisions relied on by the appellant and also the decisions referred to in earlier para, I am of the considered view that the A.O. is not justified in making this addition. The A.O. is directed to delete the addition. The A.O. is also directed to obtain the following details from the A.O.

(a) The details of NPA accounts with NPA statements of banks submitted to RBI.

(b) The detail of interest accrued during the year on NPA accounts.

(c) The detail of interest actually received during the year on NPA accounts.

(d) The detail of interest received or accrued during the year on NPA accounts and credited to profit and loss account.

(e) The detail of interest received or accrued during the year and debited to Profit and Loss account on account of Provision for Overdue Interest Reserve or Interest on NPA Accounts.

and then the following interest, if any, on NPA should be added to the total income of the assessee.

(a) Interest on NPA accounts actually received during the year.

(b) Interest actually received or accrued on NPA accounts and first credited and then debited to Profit and Loss account on Provision for Overdue Interest Reserve or interest on NPA accounts.

Ground No. 1 is allowed accordingly.”

4. In sum and substance the Ld. CIT(A) on principle accepted the plea of the assessee that provisions of section 43D are applicable to the assessee company. In the decision of the Honorable Supreme Court in the case of UCO Bank v. CIT [1999] 104 Taxman 547 is applicable even to the non-scheduled bank like assessee. Now the Revenue is in appeal before us.

5. We heard the rival submissions of the parties and perused the record. We find that the identical issue has been considered by the ITAT, Visakhapatnam Bench, in the case of Dy. CIT v. Durga Co-operative Urban Bank Ltd., [IT Appeal No. 511/Vizag/2010, dated 10-3-2011. In the said case also, it was noticed by the Assessing Officer that assessee did not include the interest of Rs. 18,26,306/- on the NPA advances. – Again the issue of applicability of section 43D was considered to the non-scheduled banks. The Tribunal placed its heavy reliance on-the decision of the Honorable High Court of Delhi in the case of CIT v. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 in which the Honorable Delhi High Court has considered the decision in the case of Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577. The Tribunal finally held that the interest income relatable to NPA advances did not accrue to the assessee.

6. An identical view has been taken by the ITAT, Ahmedabad Bench in the case of Karnavati Co-op. Bank Ltd. v. Dy.CIT [2012] 134 ITD 486. In the case of Karnavati Co-op. Bank Ltd. (supra), the Tribunal has considered the provisions of section 43D and its application to the non-scheduled banks. The reasons given by the Tribunal in the case of Karnavati Co-op. Bank Ltd. (supra) for holding that interest on the sticky advances/NPA advances cannot be brought to tax by following the decision in the case of UCO Bank (supra), which is as under:

“15.1 On careful analysis of this section our first observation is that Section 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The words “credited” and “actually received” has been highlighted herein above while reproducing the section in question. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is actually received. The Act says that the incidence of ‘credit’ or “actually received”, whichever is earlier is to be taken into account for the purpose of charge ability of income by way of interest. Simultaneously, it is noteworthy that this section is an overriding section because the opening word is “notwithstanding anything to the contrary contained in any other provisions of this Act”. Therefore, in spite of anything contained in the Act, the provisions of this section shall override those provisions. Once the Statute has categorically made a law in respect of public financial institutions that interest is chargeable to tax either in the year in which credited or actually received, whichever is earlier, then it is compulsory to abide by the said Rule. According to us, no scope is left with the Revenue Authorities to ignore these provisions due to unambiguous use of language in the Section.

(ii) Status of assessee for the purpose of application Section 43-D.

As far as the status of the assessee is concerned, the Assessing Officer has stated that the assessee- bank is a cooperative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an Explanation (d) r.w.s. 36(l)(viia) annexed to section 43-D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, we hereby hold that the assessee is covered by one of the entities, hence the provisions of section 43-D are to be applied.

(iii) Applicability of CBDT Circular.

Next issue is that whether a Circular having effect of relaxing rigor of law can be treated as inconsistent with the provisions of a statute. In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes has issued a Circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee’s taxable income, provided the Income tax Officer is satisfied that recovery is practically improbable. The CBDT u/s.119 of the I.T. Act has power to issue Circulars in exercise of its statutory powers. If the Board consider it necessary to lay down certain Rules and then direct the subordinate authorities, such directions are required to be followed and such Circular would be binding on the Department unless and until held as ultra vires by a court of law. The Board has powers to relax the severity or the strictness of law and the authorities are required to follow those instructions as held in the case of C.B. Gautam v. Union of India 108 CTR 304 (SC) & 110 CTR 179 (SC); Navnitlal C. Zaveri 56 ITR 198 (SC) and K.P. Varghese 131 ITR 597 (SC).

In the land-mark decision, the Hon’ble Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 (SC) has therefore held, first, that a beneficial circular is not to be treated as inconsistent with the provisions of statute and binding on the authorities. Second, that in respect of interest on “sticky advances” interest income is to be taxed only when actually received as prescribed by CBDT Circular.

However, in the past an interesting turn had taken place by an order of the Honorable Kerala High Court in the case of State Bank of Travancore reported in 110 ITR 336 (Ker.), wherein it was held that the assessee, a banking company, did not credit in its account the interest that had accrued on “sticky advances” because the assessee felt that the interest could not to be realized. It credited the interest to a separate account known as “interest suspense account”. On reference, the Honorable Court has held that there was an accrual of income liable to income-tax and the assessee was not justified in not crediting the interest income on such “stick advances” it its accounts. However, later on at the Honorable Apex Court while pronouncing the judgment of the said State Bank of Travancore v. CIT reported in [1986] 158 ITR 102 (SC), there were Honorable three Judges presiding the Court, out of which Honorable two Judges were in the opinion that the interest on “sticky advances” was rightly treated as income which had accrued to the appellant. There was a descending note by one of the Honorable Judge and commented that whether an income on receipt basis or on accrual basis, it is the real income and not any hypothetical income which may have theoretically accrued, i.e. subject to tax under the Act. Nevertheless, that decision was not followed while deciding the appeal of UCO Bank (supra) by the Honorable three Judges of the Supreme Court, already discussed by us supra. We, therefore summarize that as of now the law as laid down in UCO Bank is that in terms of CBDT Circular the interest is to be added as income only when actually received or credited in respect of the “sticky advances” while making assessment for a financial institution.

(iv) Interpretation of the language of the statute :

We have reproduced verbatim the provisions of section 43-D of the I.T. Act and expressed an opinion that if the statute has used the terminology for the charge ability of interest on the basis when “credited” or “actually received”, then in our opinion no ambiguity has been left by the Statute. If the statute is so clear that an interpretation can easily be made, then that exact meaning should be given to the language of the Section. For this legal proposition we place reliance on Keshavji Ravji and Company v. CIT 183 ITR 01 (SC), wherein it was held as under:

“As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to whittle down the statutory language which is other-wise unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature.

When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in subsequent legislation in the same or similar context.

To say that the court could not resort to the so-called “equitable construction” of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to sub-serve the object of the legislation, another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes.”

We can therefore safely draw a conclusion that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. section 43-D has to be applied in its letter and spirit. It is pertinent to mention that later on, in the case of CIT v. Bank of America S.A. 262 ITR 504 (Bom) the question of interest on “sticky loans” was decided in favour of the assessee and held that the question is to be answered in favour of the assessee following the decision of UCO Bank reported at 237 ITR 889(SC) :: 240 ITR 355 (SC). Likewise, in an another case of CIT v. State Bank of India 262 ITR 662 (Bom.) again it was held that the amount credited to the interest suspense account was not taxable following the decision pronounced in the case of UCO Bank (supra).

(V) Judgment in favour of Revenue :

From the side of the Revenue an order of the Tribunal has been vehemently relied upon and this is the basic reason of the elaborate discussion made herein above so as to unfold the controversy. In the said decision of the Tribunal, viz. Jt.CIT v. India Equipment Leasing Ltd. [2008] 111 ITD 37 (Chennai), the Respected Co-ordinate Bench has expressed that quote ” Prior to insertion of section 43D with effect from 1-4-1991, recognition of income was on the basis of circular of 9-10-1984. It said that for first three years the income may be taken on accrual basis and from 4th year on wards, the income in respect of doubtful debts was to be recognized on receipt basis. Since the income was to be assessed for first three years on accrual basis, provisions of section 43D were inserted in the Act. Circular No. 621, dated 19-12-1991 gives the legislative intention stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc., so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or credited to the profit and loss account. This benefit was extended with effect from 1-4-2000 in the case of public companies engaged in long-term financing of housing projects approved by National Housing Banks. The Legislature in their wisdom did not extend the same benefit to NBFCs which has been given to scheduled banks, public financial institutions, etc. The provisions of section 43D as stood at relevant time contained an expression ‘the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the Guidelines issued by the RBI in relation to such debts’. This expression continues to exist in the newly substituted section 43D applicable with effect from 1-4-2000. This shows that the RBI Guidelines in respect of scheduled banks, public financial institutions etc., were not sufficient for recognition of income on cash basis for the purposes of income-tax. The income of such assessees was determined as per circular dated 9-10-1984. Because of this reason, section 43D was inserted in the statute. RBI Guidelines in case of NBFC are for the purpose of control and supervision with respect to public interest and viability of the NBFC. The Guidelines never intended for taking the interest income accrued as per section 5 out of the scope of the Act. If the contention of assessee was accepted, it would amount to insertion of NBFC’ in section 43D, that too by a Guideline issued for different purposes by an authority other than the Parliament. In other words, the doctrine of ‘Casus Omissus’ will deem to have been applied which is contrary to law of land. “Unquote. The basic reason for directing to assess the accrued interest on NPA was the RBI guidelines issued only for scheduled banks, public financial institutions and not for NBFC. The observation of the Respected Tribunal was that if the contention of the assessee was to be accepted, then it would amount to insertion of “NBFC” in section 43-D of the I.T. Act. As against that, as far as the assessee is concerned, it is an accepted fact that the assessee is a cooperative bank and not a non-banking financial company and this noteworthy distinction has already been appreciated by us in one of the paragraphs above.

“There is one more decision of the Hon’ble Apex Court which is yet to be mentioned while discussing the arguments raised from the side of the Revenue. A decision in the case of Southern Technologies Ltd. v. Jt. CIT 320 ITR 577 (SC) has been cited but the fundamental difference is that the issue before the Honorable Court was in respect of provision for NPA and debited to P&L Account by a NBFC. The said provision was undisputedly made by the said NBFC as per the prudential norms made by the Reserve Bank. Therefore we want to make it clear that the question for consideration before the Honorable Court was that if a provision for doubtful debt is made then what will be the legal position of the applicability of Explanation to section 36(l)(vii) of the IT. Act. For the sake of ready reference, relevant paragraph from the held portion is reproduced below:

“The income-tax is a tax on “real income”, i.e., the profits arrived at on commercial principles subject to the provisions of the Act. Therefore, if by the Explanation to section 36(l)(vii) a provision for doubtful debt is kept out of the ambit of bad debt which is written off, then one has to take into account the Explanation in computing the total income under the Income-tax Act failing which one cannot ascertain the real profits. The provision for non-performing assets debited in the profit and loss account under the Reserve Bank Directions of 1998 is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the Income-tax Act.”

Therefore the distinction can easily be drawn that in the appeal before us the question is accrual of interest income on sticky loan but in this cited decision the question before the Apex court was about the admissibility of provision made in respect of doubtful debts.

(vi) Concept of real income approved in the case of banking business:

Before us, the theory of “real income” has also been argued and in support a decision of Honorable Court pronounced in the case of CIT v. Godhra Electricity Co.225 ITR 746 (SC). In short, the view expressed was that if income does not result at all, there cannot be any tax and that if an income has not materialized, then merely an entry made about a hypothetical income by following book keeping methods, the liability to tax cannot be attracted.

Now at present the situation is that the Honorable Madras High Court in the case of CIT v. Elgi Finance Ltd. 293 ITR 357 (Mad.) has taken a view that the assessee is a company engaged in the business of lease, finance and hire purchase and that the principle of accrual comes into play without income was recognized and that the assessee had classified its assets on the basis of notification issued by R.B.I, and found that certain assets came under the category of NPA and that from such NPA the assessee had not recognized any income in consonance with the notification issued by RBI and AS-9 issued by ICAI and that the assessee was justified in not recognizing such income. The Court had further expressed that there was no occasion to consider whether the principle of accrual would arise or not, nevertheless, the interest from such NPA would be taxed in the appropriate assessment year on the basis of actual receipt. It is worth to mention that for this decision, the Honorable Madras High Court has relied upon an another decision of the same High Court pronounced in the case of Jt.CIT v. India Equipment Leasing Ltd. 293 ITR 350.”

7. In the case before us, admittedly, assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit 8s Loss Account. Moreover, the issue of the taxability of the interest on the sticky losses/advances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Co-operative Urban Bank Ltd., (supra) and Karnavati Co-op. Bank Ltd. (supra). We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue’s ground is dismissed.

8. The next effective Ground is in respect of dis allowance of carried forward losses which reads as under:

On the facts and in the circumstances of the case, the Ld.CIT(A), Aurangabad, was not justified in allowing the dis allowance of carried forward losses at Rs. 2,39,37,185/-on the ground

(a) That the case does not fall under the provisions of Sec. 14A of the Act, as the conditions of the said Section are not satisfied.

(b) That the losses are forming part of total income in view of Sec. 14A as the same is result of profits and gains of business or profession.

(c) That the said losses are part of total income as per Sec. 2(45) and Sec. 5 of the Act.

(d) That section 80P is about deductions from total income and it is not meant for exempt income.

9. We have heard the rival submissions of the parties. The Assessing Officer has observed that the bank has claimed the set off of carried forward losses of earlier years of Rs. 2,39,37,185/-. In the opinion of the Assessing Officer, provisions of section 14A are applicable. The Assessing Officer has observed that up to A.Y. 2006-07, income of cooperative bank was wholly exempt u/s.80P and hence, loss was incurred because of expenditure for earning the wholly exempt income and hence, no benefit of set off can be given. The Assessing Officer made the dis allowance of entire loss of Rs. 2,39,37,185/-. The assessee carried the issue before the Ld. CIT(A). The Ld. CIT(A) directed the Assessing Officer to allow the set off of the brought forward losses of the earlier year. Now Revenue is in appeal before us.

10. We find that the Honorable High Court of Delhi in the case of CIT v. Kribhco [2012] 23 taxmann.com 312 judgment dated 18.07.2012, has explained the scope of section 14A in the context of the exempt income as well as the deduction allowable under Chapter VI-A of the Act. The operative part of the judgment of the Honorable High Court is as under:

“31. It can be urged (though it was not specifically argued by the Revenue) that in case of complete or entire deduction of the gross amount, Section 14A will be applicable, and Section 14A will not apply in case only the net amount (as stipulated in several Sections in Chapter VI-A of the Act) is allowable as a deduction. There will be a fallacy in this argument. Even were partial or net amount is to be allowed as a deduction, the figure can be minus or in a loss. Logically, as a squiter, it will follow that in case the assessee has a negative/minus figure as per the computation made any of the provisions of Chapter VI A the expenditure incurred cannot allowable under Section 37 of the Act, in view of Section 14A. The said position cannot be accepted. Income will include negative income or a loss. The corollary is that the entire income is included under the provisions of the Act by firstly including the entire receipts or incomes as stipulated in the charging section but after excluding the income stipulated in Chapter III. Thereafter, total income is computed under the Act by applying provisions of Chapter IV, V and VI’. From this income, deductions are permitted and allowed in terms of Chapter VI-A. Deductions do not mean that deduction allowed has the effect that the income, on which deduction is allowed, ceases to be part of the total income. This is not the scheme, effect and purport of the Act. The expression “income which does not form part of the total income” refers to the nature, character or type of income and not the quantum.

32. Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VI-A has to be excluded for the purpose of the said Section. The words “do not form part of the total income under this Act” is significant and important. As noticed above, before allowing deduction under Chapter VI-A we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VI-A does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced.”

11. We, therefore, respectfully following the principle laid down in the case of Kribhco (supra), confirm the order of the Ld. CIT(A) and accordingly the relevant ground taken by the Revenue is dismissed.

12. In the result, Revenue’s appeal is dismissed.

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