Shri Mukul Kr. Shrawat, J.M:— This is an appeal at the behest of the Assessee which has emanated from the order of Learned CIT (Appeals)-XVI, Ahmedabad dated 01/09/2010 passed for Assessment Year 2007-2008.

2. As per grounds of appeal, as many as five main grounds with certain sub-grounds have been raised, however, at the outset, ld. Learned Authorised Representative of the assessee Mr. S.N Divatia has stated that only ground No. 2.1 requires adjudication and rest of the grounds are either general or argumentative in nature. Keeping the said statement of the ld. AR, we confine ourselves to ground No. 2.1; reproduced hereinbelow:—

“2.1 The Ld. CIT(A) has grievously erred in law and or on facts in confirming the following disallowances/additions:—

(a) Clearing house charges : Rs. 2,56,309 (b) Services charges of F&F : Rs. 1,46,079 (c) Accrued interest on NPA : Rs. 18,35,338

2.2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought not to have confirmed the above disallowances/additions.”

Ground 2.1(a) Clearing House Charges Rs. 2,56,309/-

2.1 In respect of the addition of Rs. 2,56,309/- under the head “Clearing House Charges”, facts in brief as stated in the order passed u/s. 143(3) dated 30/12/2009 were that assessee is a Co-operative Bank engaged in banking business. During the course of assessment proceedings, the issue of allowance of expenditure made on account of MICR cheque clearing charges debited by clearing agent the Bhagyodaya Co-op. Bank Ltd. had come up. The Assessing Officer has examined the debit vouchers issued by the Bhagyodaya Co-op. Bank Ltd. for providing the services in the capacity of “Clearing House Agent”. The Assessing Officer has examined the processing charges in respect of certain branches of the assessee and it was noted that there was no deduction of tax at source on payment to the Bhagyodaya Co-op. Bank Ltd. as a “Clearing House Agent”. The Assessing Officer has found that in the Profit & Loss account, a sum of Rs. 2,56,309/- was claimed as MICR cheque processing charges, but without deduction of tax at source. This was the amount stated to be in respect of the debit vouchers issued by Bhagyodaya Co-op. Bank Ltd.

3. It was explained to the Assessing Officer that the assessee bank happened to be a sub-member of clearing house. However, the clearing agent is Bhagyodaya Co-op. Bank Ltd. The MICR clearing charges of the assessee were, therefore, recovered from the said clearing agent by the clearing house. The assessee had operated as sub-member through the said agent. It was also stated to the Assessing Officer that while making the payment of clearing house charges, the said agent had already deducted TDS in support a letter received from the said agent, i.e the Bhagyodaya Co-op. Bank Ltd. duly placed before the Assessing Officer through which was certified that the said amount of clearing house charges were recovered from the asssesse as re-imbursement charges. The Assessing Officer was not convinced with the said information and held that the payment was made without deduction of TDS, therefore, by invoking the provisions of section 40(a) of the I.T Act disallowed the said claim of expenditure. The matter was carried before the first appellate authority.

4. The Learned CIT (Appeals) has examined the facts in respect of clearing charges and thereafter held as under:—

“2.3.2 From the above it is clear that the MICR Centre manages and controls all the stage of processing of cheques from the procurement of paper to printing of the code line on cheque forms till the completion of clearing of cheques. The MICR Centre manages all the functions like accounting of the settlement, watch on the position of debits/credits in the accounts of various member banks and also looks after the over-all functioning of the clearing house and monitoring its operations on behalf of the member bank branches. Therefore it is clear that the MICR Centre completely falls within the ambit of managerial services as per the provisions of section 194J of the Income-tax Act. The AO has therefore rightly held that the assessee should have deducted TDS u/s. 194J.

2.3.3 Having said that the assessee was liable to deduct TDS u/s. 194J on its payments made for clearing charges, another argument of the appellant is considered that since the Bhagyodaya co-operative bank Ltd. has paid tax on the receipts the AO should not have again asked for tax. This argument of the appellant is not applicable because in the case of Hindustan Coca-Cola beverages private Ltd. [supra], the honorable Supreme Court was giving decision as to whether if the deductee had paid the tax, then whether the TDS can be again collected from the deductor. In the present case, the issue is of disallowance under section 40[a][ia]. The appellant was required to deduct TDS, and since it has failed to do so, the disallowance made by the AO is correct. This ground of appeal is therefore, dismissed.”

4.1 From the side of the assessee, ld. AR Mr. S.N Divatia appeared and stated that no bank charges were directly paid by the assessee to Bank of Baroda. The bank charges were paid by the Bhagyodaya Co-op. Bank Ltd. and therefore TDS was deducted by the said Bank on payment of MICR charges to Bank of Baroda. The assessee was only required to reimburse the bank charges to the Bhagyodaya Co-op. Bank Ltd. For this proposition, he has placed reliance on the following case laws:—

Sl. No(s) Decision in the case of… Reported in… 1. KLM Royal Dutch Airlines v. Asst. CIT (1998) 62 TTJ (Del) 268 2. Expeditors International (India) (P) Ltd. v. Addl. CIT (2008) 118 TTJ (Del) 652

5. From the side of the Revenue, ld. DR Mr. B.L Yadav appeared and placed reliance on the orders of the authorities below.

6. On hearing, the rival submissions, we have noticed that the admitted factual position was that the assessee was only a sub-member of the clearing house. The assessee has availed the services of MICR clearing from a member of the clearing house; namely, the Bhagyodaya Co-op. Bank Ltd. As far as the legal position of deduction of TDS is concerned, there is no dispute that TDS is required to be deducted from MICR charges. Due to this reason, since the Bhagyodaya Co-op. Bank Ltd. was directly dealing with the Bank of Baroda, a clearing agent, therefore on payment of MICR charges to Bank of Baroda; TDS was deducted by the Bhagyodaya Bank Co-op. Ltd. Consequent thereupon, the assessee was required to reimburse the bank MICR charges to Bhagyodaya Bank. The said reimbursement charges were inclusive of TDS as well. In confirmation thereto, a letter has been placed on record issued by the Bhayodaya Co-op. Bank Ltd. therein it was affirmed that the said reimbursement charges were inclusive of TDS, salient features as follows:—

“THE BHAGYODAYA CO-OP. BANK LTD.

Date: 13/08/2010

The General Manager

The Karnavati Co-op. Bank Ltd.

Ahmedabad — 382350

Dear Sir,

Clearing Charges during the year 2006-2007

We have to inform you that you were sub-member of our bank for the clearing purposes during the above period. We presented your outward and inward clearing with our clearing cheques to the Cheque Processing Centre of Bank of Baroda, Ahmedabad. As per the agreement, you were maintaining Fixed Deposit as security for the above service rendered by us. Further, the overdraft facility was allowed by us to your bank against the said fixed deposit.

Further, Bank of Baroda was charging fixed processing charges for inward and outward clearing to our bank. Accordingly, we had debited Rs. 256309/- in your overdraft account during the year 2006-2007 being the clearing processing, handling, cheque returning, ecs and other miscellaneous clearing charges.

6.1 From the above Certificate, it is thus clear that as far as the payment by the assessee was concerned, it was nothing but in the nature of reimbursement of bank charges. In this regard, the legal proposition as settled by the Co-ordinate Bench “E” Delhi in the case of KLM Royal Dutch Airlines v. Asstt. CIT, (1998) 62 TTJ 268 (Del) were that in a situation where the assessee is reimbursing its employees' conveyance expenditure, then non-inclusion of the said reimbursement in salary for the purpose of TDS u/s. 192 was held as a bona fide belief that on the said reimbursement amount no TDS was required to be deducted. The Respected Bench has held that there was no material to indicate that the conduct of the assessee was not bona fide. Our attention has also been drawn on an another decision of ITAT Delhi “F” Bench in the case of Expeditors International (India) (P) Ltd. reported in 118 TTJ 652 (Del), wherein certain charges were reimbursed by the assessee-company to its parent company. After considering the facts, it was held that those charges were not in the nature of fee for technical services and being reimbursed therefore not liable for deduction at source, hence, the invocation of the provisions of section 40(a)(i) were held as not sustainable. We, therefore, conclude that since the MICR charges were merely reimbursed by the assessee and that there was no payment by member of the bank to clearing agent as far as the assessee is concerned, therefore the assessee was not required to deduct the TDS on payment of reimbursement. Otherwise also, it would tantamount to double deduction of TDS on the same payment of MICR bank charges. In the result, we hereby reverse the findings of the authorities below and direct not to disallow the claim of reimbursement of charges merely for non-deduction of TDS. This part of the ground is, therefore, allowed.

7. Ground No. 2.1(b) Services charges of F&F — Rs. 1,46,079/-

7.1 In respect of the impugned addition under the head “Services Charges”, the assessee has claimed an expenditure of Rs. 1,46,079/- which was stated to be in the nature of building maintenance and furniture and fixture charges. By the very description of the expenditure, the Assessing Officer was of the view that the assessee was required to deduct the tax. The Assessing Officer has disallowed the claim and the matter was carried before the first appellate authority.

8. Before the ld. CIT(A), it was contended that the appellant had paid service charges and maintenance charges of one of the its branch and the payment was below Rs. 1,20,000/- to each person, therefore, the provisions of section 194-I was not attracted and consequentially the disallowance u/s. 40(a)(ia) was also incorrect. However, ld. CIT(A) was not convinced and held that in terms of the contract for cleaning, etc; the said amount was paid and the amount paid by each of the branch was more than Rs. 50,000/-, therefore TDS was required to be deducted.

9. Having heard the submissions of both the sides, we are of the view that since the payment was in respect of service charges may be utilized by the branches of the bank but being connected to the part of the fixtures of the rented property, therefore, the assessee was required to deduct the tax on payment of service charges as it was held by the Revenue Authorities as “rent”. Under these circumstances, we are not convinced with the argument that the payment being for availing the services of furniture and fixture, etc. was not part of the rent, hence according to us, the disallowance was rightly made. This part of the ground is therefore dismissed.

10. Ground No. 2.1(c) Accrued interest on NPA — Rs. 18,35,338/-

10.1 The observation of the Assessing Officer was that on one hand, the assessee had followed mercantile system of accounting but on the other hand, no interest on accrual basis was offered on Non-Performing Assets (in short ‘NPA’). The explanation of the assessee was that there was no chargeability of accrued interest on NPA of Rs. 12,16,703/-. It was clarified that the said amount of interest was neither debited to borrower's account nor credited to the interest income. It has further been clarified that even the interest was not shown under ‘suspense-account’. On one hand, the Revenue has stated that the decision of State Bank of Travancore v. CIT reported in (1986) 158 ITR 102 (SC) is to be applied where it was held that interest accrued is chargeable to tax. On the other hand, the assessee has placed reliance on a subsequent decision of Hon'ble Supreme Court in the case of Uco Bank, Calcutta v. Commissioner Of Income Tax, W.B ., (1999) 237 ITR 889 (SC), wherein a Circular issued by the Board was considered and held that in respect of doubtful debts even in the case of banks it is not required to credit the interest though maintaining mercantile system of accounting. The Assessing Officer was not convinced and held that in terms of Section 5 of IT Act the scope of total income is defined that all income from whatever source which is received or deemed to be received or accrues or arises, or deemed to accrue or to arise to an assessee. The Assessing Officer has also referred Section 43D of the I.T Act for the proposition that in spite of anything contained in any other provisions of the Act, in the case of a bank, the income by way of interest in relation to bad or doubtful debts having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the Bank to its Profit & Loss account. As per Assessing Officer, the assessee was required to credit the accrued interest to its Profit & Loss account, however failed to do so, therefore, the assessee has infringed the said section. The Assessing Officer has also discussed a decision of Special Bench Delhi in the case of New India Industries Ltd., 18 SOT Page 51 (1 DTR 247) for the proposition that whether a bad debt claimed as business expenditure by making a provision for non-performing assets of NBFC which were in accordance with the prudential norms issued by Reserve Bank of India is allowable. In that case, it was held that the provision made in the accounts of the assessee in respect of NPA should not be treated as sufficient compliance with the provisions of section 36(1)(vii) of the I.T Act so as to allow the provision for bad or doubtful debts as a permissible deduction. A conclusion was drawn by the Assessing Officer which is reproduced verbatim:—

“In view of the above legal position the contention of the assessee is not accepted and the interest of Rs. 12,16,703/- accrued on the NPA which is not credited by the assessee in the Profit & Loss account and not offered for taxation is added to assessee's total income. The amount of Rs. 12,16,703/- is the opening balance of accrued interest on NPA account as on 01.04.2006 Rs. 6,18,635/- is accrued interest on NPA accounts of Rs. 104.80 lacs for the FY 2006-2007 has also not been offered to tax and hence, total mount of Rs. 18,35,338/- (Rs. 12,16,703 + Rs. 6,18,635) is added to income as per provisions of section 5 r.w.s of the I.T Act, 1961. Penalty proceedings for furnishing inaccurate particulars of income are hereby initiated.”

11. Being aggrieved the matter was carried before the first appellate authority. It was noted by the Learned CIT (Appeals) that the decision of Uco Bank, Calcutta v. Commissioner Of Income Tax, W.B ., (1999) 237 ITR 889 (SC) [supra] was wrongly relied upon by the assessee because the said decision was prior to the amendment in the statute through which the provisions of section 43D were introduced on 01/04/1991. It has also been held by the Learned CIT (Appeals) that the RBI Act and Income tax Act operate in different fields. The Learned CIT (Appeals) has also made an observation that it cannot be held that the provisions made in the accounts of the assessee in respect of NPA should be treated as sufficient compliance with the provisions of section 36(1)(vii) of the I.T Act so as to allow the provision for bad or doubtful debts as a permissible deduction. The Learned CIT (Appeals) has concluded that the assessee-bank had considered certain loans as NPA merely when second or third installment could not be recovered. In his opinion those loans should not be claimed as sticky or bad loans. He has also held that the assessee-company a Co-operative therefore not covered by the provisions of IT Act applicable on scheduled banks. The action of the Assessing Officer was confirmed.

12. From the side of the assessee, ld. AR Mr. S.N Divatia appeared and his first plank of argument was that the provisions of section 43D of the I.T Act do apply on the assessee because as per the language only that interest income is chargeable to tax which is either credited to the Profit & Loss account of a bank or actually received, which ever is earlier. The ld. AR has, therefore, pleaded that neither the interest was received nor it was credited to Profit & Loss account, therefore in terms of the provisions of 43D not subject to tax in the hands of the assessee. Ld. AR has stated that the issue in this appeal relates to accrual of interest on NPA accounts and not in respect of the deductibility of provisions of NPA amount as debt u/s. 36 I.T Act. Reliance was placed on the following decisions:—

Sl. No(s) Decision in the case of … Reported in … 1. Vasisth Chay Vyapar 330 ITR 440 (Delhi) 2. CIT v. Eicher Ltd. 320 ITR 410 (Del.) 3. Southern Technologies Ltd. v. JCIT 320 ITR 577 (SC)

13. From the side of the Revenue, ld. DR Mr. B.L Yadav appeared and stated that in the case of New India Industries Ltd. (18 SOT 51) [supra], even the NPA was not considered as a sufficient compliance of the provisions of section 36(1)(vii) of the I.T Act to allow as a bad or doubtful debt therefore in consequence thereof, the loans and advances were the assets on which the assessee had to show interest on accrual basis. The ld. DR has also placed heavy reliance on the decision of State Bank of Travancore, (1986) 158 ITR 102 (SC) [supra] for the legal proposition that the assessee-company, a bank-company, following mercantile system of accounting, should have debited interest on NPA and should have brought such accrued interest to its Profit & Loss account. He has therefore concluded that the action of the Revenue Authorities should be affirmed.

14. We have heard both the sides at some length. It was noticed by the Assessing Officer that on NPA the assessee has not disclosed the interest on accrual basis. As per Assessing Officer, the assessee bank has maintained its books of account on mercantile basis. As far as quantum in question is concerned, it was noticed by the Assessing Officer that accrued interest of Rs. 12,16,703/- was the opening balance as on 1/4/2006 on non-performing accounts and further a sum of Rs. 6,18,635/- was the accrued interest on the NPA account of Rs. 104.80 lacs for the Financial Year 2006-2007 (Assessment Year under consideration 2007-2008). The Assessing Officer has held that in terms of the provisions of Section 5 of IT Act, since the interest income had accrued to the assessee therefore assessable to tax in its hands. Reliance was placed on State Bank of Travancore reported in 158 ITR 102 (SC). The Assessing Officer has also mentioned that by the substitution in the provisions of Section 43D of the I.T Act since the assessee being neither a public financial institution nor a scheduled bank or state financial corporation, therefore accrued interest should have been offered to tax. The Assessing Officer has placed reliance on New India Industries Ltd. reported in 18 SOT 01 (1 DTR 247) (SB), wherein the issue was about the claim of bad debt and it was held that the non-banking financial corporations (in short ‘NBFC’) are not entitled for allowance of “bad debt” so long as the amount of claim is not debited to Profit & Loss account, but only a provision in respect of NPA is made. The Assessing Officer has therefore held that the assessee has merely made the provision of bad debt as per the advisory guidelines issued by the RBI and since it was held that the claim of bad debt is not admissible, therefore there was an element of accrual of interest on those debts which should be taxed in the hands of the assessee.

At this juncture it is worth to mention that a pertinent argument was raised by Ld. DR Mr. Yadav that if a provision of doubtful-debt, on account of prudential norms of RBI, though made and that provision is not allowable, as held by the courts, then meaning thereby, that the debts are treated as recoverable so in consequence interest ought be shown on accrual basis. Even the first appellate authority has held that those loans could not be called as sticky or bad because certain installments of interest were received, hence for the year under consideration accrued interest should have been credited in the books of account. The Learned CIT (Appeals) was also of the view that the assessee is being not a schedule bank therefore the provisions of section 43D of the I.T Act were not applicable.

15. With this factual and legal background, as also on due consideration of the arguments raised by both the sides certain questions are required to be addressed by us and point-wise the same are adjudicated upon hereinbelow:—

(i) Applicability of the provisions of section 43-D of the I.T Act.

This section reads as follows:—

43D. Notwithstanding anything to the contrary contained in any other provision of this Act,—

(a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, 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 Reserve Bank of India in relation to such debts;

(b) in the case of a public company, 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 National Housing Bank in relation to such debts,

shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. (words emphasized)

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 hereinabove 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 chargeability 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 co-operative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an explanation (d) r.w.s 36(1)(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 rigour 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 sub-ordinate 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, Calcutta v. Commissioner Of Income Tax, W.B ., (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 Hon'ble 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 realised. It credited the interest to a separate account known as “interest suspense account”. On reference, the Hon'ble 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 Hon'ble Apex Court while pronouncing the judgment of the said State Bank of Travancore v. CIT reported in (1986) 158 ITR 102 (SC), there were Hon'ble three Judges presiding the Court, out of which Hon'ble 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 Hon'ble 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 Hon'ble 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 chargeability 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 subserve 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 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) Judgement 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 hereinabove so as to unfold the controversy. In the said decision of the Tribunal, viz. Commissioner Of Income-Tax v. India Equipment Leasing Ltd. 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 onwards, 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 co-operative 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 Hon'ble 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 Hon'ble 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(1)(vii) of the I.T 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(1)(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 he 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 Hon'ble 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 Hon'ble 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 Hon'ble Madras High Court has relied upon an another decision of the same High Court pronounced in the case of Commissioner Of Income-Tax v. India Equipment Leasing Ltd. Leasing Ltd., 293 ITR 350.

To conclude the issue, we deem it important to discuss the decision of India Equipment Leasing Ltd. (293 ITR 350) for the sake of completeness of our judgement. In that appeal, the assessee was doing the business of hire purchase transaction and leasing of Plant & Machinery. The interest on “sticky loans” not being brought into the Profit & Loss account but being taken to the suspense account was held by the Court as an accepted mode of treatment of notional income in accounting practice. The Court has said that the Circular-9 of October-1984 serve a practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to suspense account is, in fact, arising in respect of a doubtful or sticky loan. This was done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan, but if after three years the payment of interest is not received, from the 4 year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. Following the UCO Bank (237 ITR 889) [Supreme Court], the said appeal of the Revenue was dismissed. This part of the ground thus goes in favour of the assessee.

16. In the result, the appeal of the Assessee is partly allowed.