CIT Vs Industrial Finance Corporation Of India Ltd. (Delhi High Court)- During the Assessment Year 2000-01, in which the issue arises, the assessee had returned Rs. 144 Crores receivable from Non-Performing Assets in accordance with the guidelines by reversing its income accounted for and offered for tax in earlier years. Such reversal of income resulted in reduction of total income which was not accepted by the AO on the ground that provisions of Section 43D of the Act, nowhere permits for reversal of income which has already been recognised on accrual basis and has been offered for tax in the earlier years. The AO further found that since the company was not following the RBI norms, the interest income on certain NPAs was rightly declared by the assessee in those years.
CIT(A) upheld this order, which has been reversed by the Tribunal in the following manner:
“7. We have considered the rival contentions and gone through the records. The RBI guidelines in relation to income recognition, clearly provides that financial institutions should not charge and take to income account interest on any NPA. NPA is defined as a credit or loan facility in respect of which interest has remained „past due‟ for a period of four quarters during the year ending 31st March 1994; three quarters during the year ending 31-3- 1995; and two quarters during the year ending 31-3-1996 and on wards. In respect of all NPAs, interest accrued and other charges like fees and commission credited to income account during the previous accounting year but which have not been actually realised, should be reversed or provided for in the current accounting period. That means, if any interest which has not been actually realised and which was offered to tax, requires to be reversed in the current accounting period. The assessee in this case being a financial institution, is governed by these guidelines issued by the RBI and has therefore correctly reversed the interest from NPA and it is not the case of revenue that the assessee has realized any part of the interest which it has credited to the P & L A/c in the earlier years to the extent the interest remains unrealised the same is really in the nature of bad debt and could have been claimed u/s 36(1)(vii) of the Act. As held by the Hon‟ble Supreme Court in the case of Arunachalam Vs. CIT 4 ITR 173, the loss of stock in trade is always a trading loss irrespective of the method of accounting followed by an assessee. The assessee being a financial institution, is duty bound to follow the guidelines of the RBI. This position has been subject matter of detailed discussion by the Tribunal in the case of Ted-co Investment and Financial Services (P) Ltd.(supra). The functioning of the financial institution is monitored by the RBI, an apex bank. Overriding of mandate of those guidelines cannot be accepted. It cannot be seen that the assessee on one hand in its functioning violates that mandates of the accounting norms prescribed by the regulatory authority, like RBI. In these circumstances, the reversal of the income which is strictly in accordance with the guidelines cannot be ignored. The consequence of the same is a reduction of income. After all, the income of the financial institution has to be determined in accordance with the norms of accounting guidelines which are applicable to it. In the light of these decisions, the claim of the assessee deserves to be accepted and we direct accordingly.”
It may not be necessary to go into the validity of the reasons given by the Tribunal as in any case, the assessee was entitled to this deduction. If the income which is earlier recognised is not to be allowed to be reversed in the subsequent assessment years, in any case it is permissible for the assessee to write off such an income in the concerned assessment years when it was found that the amount was not recoverable. Reference in this connection can be made to the judgments of the Supreme Court in the case of Vijaya Bank Vs. Commissioner of Income Tax and Another (323 ITR 166] and T.R.F. Ltd. Vs. Commissioner of Income Tax (323 ITR 397].