Case Law Details

Case Name : The Suvikas Peoples’ Co-op. Bank Ltd. Vs. ACIT (ITAT Ahemdabad)
Appeal Number : ITA No. 1288/Ahd/2014
Date of Judgement/Order : 30/11/2017
Related Assessment Year : 2010- 11
Courts : All ITAT (5167) ITAT Ahmedabad (372)

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”).

2. Heard both parties. Case file perused. It emerges from both lower authorities’ respective orders that they have followed their respective finding in Asst. Year 2009-10 making two impugned additions after concluding that since the assessee is unscheduled bank section 43D provision would not be applicable in its case, and as a result, it had to recognize its income on the NPAs on question on accrual basis.

3. Both parties invited our attention to the case record containing a co-ordinate Bench’s order in assessee’s case itself, ITA No. 2182/Ahd/2013 decided on 5.9.2016 adjudicating both instant issue against Revenue as under:

“3. The assessee is in the business of banking activities following mercantile system of accounting. During the course of the scrutiny assessment proceedings, the assessee was asked to furnish the details of interest accrued on non-performing assets. The assessee furnished necessary details. Simultaneously, the assessee claimed that it has to follow the Circulars/ guidelines issued by the Reserve Bank of India and one of the guideline of the RBI is that interest income in respect of restructured accounts classified as “standard assets” will be recognized on accrual basis and that in respect of the account classified as “non-performing assets” will be recognized as cash basis. It was explained that because of these mandatory guidelines, the assessee has not recognized interest on non performing assets on accrual basis. This contention of the assessee was dismissed by the A.O. who was of the opinion that since the assessee is following mercantile system of accounting, it should have recognized interest on NPA on accrual basis as per the provisions of the Income Tax Act. The A.O. accordingly,, made the addition of Rs. 15.50 lacs.

4. 4. Aggrieved by this, the assessee carried the matter before the Id. but without any success.

5. Before us, the Id. counsel for the assessee stated that this issue is no more res Integra as it has been decided by the Honorable Jurisdictional High Court in the case of Shri Mahila Sewa Sahakari Bank Ltd. in Tax Appeal No. 531 of 2015 dated 05.08.2016 in favour of the assessee and against the The Id. D.R. could not. bring any distinguishing decision in favour of the revenue.

6. We have carefully considered the orders of the authorities below. We find force in the contention of the-ld. counsel. The Hon’ble High Court (supra) was seized with the following substantial question of law:-

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law and on facts in holding that interest on non performing assets is not taxable on accrual basis looking to the guidelines of the Reserve Bank of India?”

7. The Hon’ble High Court considered the following facts:-

5.1 The Assessing Officer was of the opinion that interest on the NPA had accrued to the assessee, even if it was not actually realized, as it was following the mercantile system of accounting and accordingly added a sum of of Rs.1,72,73,000/-to the total income of the assessee. The assessee carried the matter in appeal before the Commissioner (Appeals), who upheld the order passed by the Assessing Officer. The assessee challenged the order of the Commissioner (Appeals) before the Tribunal, which allowed the appeal by deleting the interest. Being aggrieved, the revenue is in appeal.

22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36(1) (vii) or section 37 of the Act, then in the computation,of income, the RBI Guidelines would have no role to play, and hence, an add back. Insofar as income recognition is concerned, the Supreme Court has held thus: “Applicability of Section 145

57. At the outset, we may state that in 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.

8. And held as under:-

23. 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.

9. Respectfully following the decision of the Hon’ble Jurisdictional High Court (supra), we set aside the findings of the Id. CIT(A) and direct the A.Q. to delete the addition of Rs. 15.50 lacs which also includes the addition of Rs. 1,30,864/-.”

4. Revenue is fair enough in not drawing any distinction on law and on facts. We therefore adopt consistency to accept both the above stated substantial grounds raised at assessee’s behest. This assessee’s appeal is allowed.

In the result, appeal of the assessee is allowed.

Order pronounced in the Court on 30th November, 2017.

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