Addition of Interest on NPA on accrual basis not justified as banks to recognise such income on Cash basis

The Suvikas Peoples’ Co-op. Bank Ltd. Vs. ACIT (ITAT Ahemdabad)

Essence the RBI Directions, 1998 are prudential/ provisioning norms issued by RBI under Chapter IlI-B of the RBI Act, 1934. These norms deal essentially with income recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect “true and correct” profits. By virtue of Section 45-Q, an overriding effect is given to the RBI Directions, 1998 vis-a-vis “income recognition” principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 1998 and the IT Act operate in different areas. These RBI Directions, 1998′ have’ nothing’ to do with computation of taxable income. These Directions cannot overrule the “permissible deductions” or “their exclusion” under the IT Act. The inconsistency between these Directions and the Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the accounting policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute.” Thus, insofar as income recognition is concerned, the court has held that even the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and that as far as income recognition is concerned, section 145 of the Income Tax Act, has not role to play.

 In the light of the above discussion what emerges is that while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition of income in terms of the recognized accounting principles and after such income is recognized, the computation thereof, in terms of the provisions of the Income Tax Act, 1961. Insofar as the computation of taxability is concerned, the same is solely governed by the provisions of the Income Tax Act and the accounting principles have no role to play. However, recognition of income stands on a different footing. Insofar as income recognition is concerned, it would be the RBI Directions which would prevail in view of the provisions of section 45 Q of the RBI Act and section 145 would have no role to play. Hence, the Assessing Officer has to follow the RBI Directions.

Full Text of the ITAT Order is as follows:-

This assessee’s appeal for Asst. Year 2010-11 arose against ld.CIT(A)-XVI’s, Ahmedabad order dated 3.2.2014 passed in case No. CIT(A)-XVI/ACIT(OSD)/Cir. 10/258/12-13 upholding Assessing Officer’s action interalia making addition on accrued interest on non-performing assets (“NPA”) and interest income actually received in the impugned assessment year involving amounts of Rs. 13.29 lakhs and Rs. 9,10,893/-; respectively in proceedings under section 143(3) of the Income Tax Act, 1961 (in short “the Act”).

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