Citation Codes

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Case Number

ITA No. 511.Vizag/2010, Assessment Year: 2007-08

Advocates

Appellant by: Shri T.H Lucas Peter, CIT (DR)
Respondent by: Shri Y. Surya Chandra Rao, CA

Judges

Sunil Kumar Yadav, J.M
B.R Baskaran, A.M

Acts

RESERVE BANK OF INDIA ACT
Companies Act. Hence Sec. 45 Q of the RBI Act
section 45 sic. 145 of the Income Tax Act.
SECTION 56 BANKING REGULATION ACT
SECTION 145 INCOME TAX ACT
INCOME TAX ACT
SECTION 5 INCOME TAX ACT
COMPANIES ACT 1956

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Smart Summary

Tribunal Opinion Summary — Appeal by Revenue (Assessment Year 2007-2008)

Factual and Procedural Background

The appeal is by the revenue against the order dated 14.09.2010 passed by the learned Commissioner of Income Tax (Appeals), Vijayawada, relating to assessment year 2007-2008. The sole question raised by the grounds of appeal is whether the learned CIT(A) was justified in holding that interest income relating to non-performing assets (NPA) is not includible in the total income of the assessee.

Facts stated in the opinion (as given):

The assessee is a co-operative bank governed by directions issued by the Reserve Bank of India (RBI).
The assessee carries on banking business and filed its return of income for the year under consideration on 31.10.2007 declaring a total income of Rs. 1.61 crore.
During scrutiny, the Assessing Officer noticed that interest of Rs. 18,26,306 relating to NPA advances was not included in income.
The assessee explained that, following RBI prudential norms for income recognition and asset classification, accrued interest on non-performing advances was debited to an interest receivable account and credited to an Overdue Interest Reserve; interest was recognized only when actually realized.
The AO examined Section 43D (which applies to certain financial institutions) and held it inapplicable to the assessee; applying mercantile accounting principles, the AO concluded the interest had accrued and added Rs. 18,26,306 to the assessee's income.
The assessee appealed to the learned CIT(A), who deleted the addition. Revenue is in further appeal before the Tribunal.

Legal Issues Presented

Whether the learned CIT(A) was justified in holding that interest income relating to non-performing assets (NPA) did not accrue to the assessee and therefore was not includible in the total income for assessment year 2007-2008.

Arguments of the Parties

Revenue's Arguments

The Assessing Officer's position: the provisions of Section 43D (which prescribe tax treatment for interest on certain bad or doubtful debts) do not apply to the assessee, but under mercantile accounting interest on NPA had accrued and was taxable; hence the AO was right to make the addition of Rs. 18,26,306.
Before the Tribunal, the Departmental Representative relied on the decision of the Hon'ble Supreme Court in Southern Technologies Ltd. v. ACIT (320 ITR 577) to contend that prudential norms prescribed by the Reserve Bank of India cannot override the provisions of the Income Tax Act and that the addition by the AO was correct; accordingly the CIT(A)'s order should be reversed.

Assessee's Arguments

The assessee (before the CIT(A)) contended that under Section 5 of the Income Tax Act only "real income" is taxable, and interest on NPA is notional and therefore not taxable.
The assessee relied on the Banking Regulation Act (Section 56 as cited in the opinion) and the RBI prudential norms, submitting that those norms require classification of advances into performing and non-performing assets and recognition of interest on NPAs only on realization; therefore the interest on NPAs had not accrued.
Before the Tribunal, the authorised representative relied on the decision of the Hon'ble Delhi High Court in Commissioner of Income Tax v. M/s Vasisth Chay Vyapar Ltd. (order dated 29.11.2010), which held that interest on NPA assets does not accrue to the assessee. It was further submitted that Southern Technologies was not directly on point because it dealt with the admissibility of deduction for provisions, not with taxability of interest on NPAs.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
TCI Finance Ltd. v. ACIT (2004) 91 ITD 573 (Hyd)	Tribunal observed that non-recognition of income where realisability of principal is doubtful is legally correct under mercantile accounting.	CIT(A) relied on this decision to support the view that interest on NPAs did not accrue to the assessee; the Tribunal noted this authority as part of the CIT(A)'s reasoning.
Commissioner of Income-Tax v. Annamalai Finance Ltd. (2005) 275 ITR 451 (Mad)	Held that when the principal amount itself is doubtful of recovery, it cannot be said that any interest accrued on such principal amount.	CIT(A) relied on this Madras High Court decision to conclude interest on NPAs had not accrued; the Tribunal noted this reliance and upheld the outcome.
Southern Technologies Ltd. v. ACIT (320 ITR 577) (Supreme Court)	Explained distinction between (a) income recognition principles governed by RBI Directions (which, by virtue of Sec. 45Q of RBI Act, can have overriding effect in respect of income recognition) and (b) computation of taxable income (permissible deductions governed by the Income Tax Act). Held that Section 145 has no role insofar as income recognition is governed by RBI Directions; but RBI Directions do not determine admissibility of deductions under the IT Act.	The Department relied on this decision. The Tribunal analyzed Southern Technologies and applied its distinction: because the question here is of income recognition (not of admissibility of a deduction), the RBI Directions' effect on income recognition (via Sec. 45Q) supports treating the assessee's RBI-compliant accounting practice as controlling for accrual of interest. The Tribunal therefore found Southern Technologies supportive of applying RBI directions to income recognition for the assessee.
Commissioner of Income Tax v. M/s Vasisth Chay Vyapar Ltd. (Delhi High Court, order dated 29.11.2010)	Held that interest on NPA assets does not accrue to the assessee; court considered Sec. 45Q of the RBI Act and Accounting Standard (AS-9) on Revenue Recognition in reaching this conclusion.	The Tribunal treated this decision as directly applicable and followed the Delhi High Court's conclusion that interest on NPAs had not accrued; this formed a principal basis for upholding the CIT(A)'s deletion.
CIT v. Elgi Finance Ltd., 293 ITR 357 (Mad)	Cited by the Delhi High Court in the Vasisth Chay Vyapar Ltd. decision (as an authority taken into account).	Used by the Delhi High Court as part of the body of authority considered in concluding that interest on NPAs is not accrued; the Tribunal noted that Vasisth relied on this and similar precedents.
CIT v. KKM Investments (Cal); SLP dismissed by Supreme Court (310 ITR 4)	Listed among authorities considered by the Delhi High Court in Vasisth Chay Vyapar Ltd.	Noted by the Tribunal as part of the precedential background relied upon by the Delhi High Court in reaching its conclusion on accrual.
CIT v. Motor Credit Co. (P) Ltd., 127 ITR 572 (Mad)	Listed among authorities considered by the Delhi High Court in Vasisth Chay Vyapar Ltd.	Noted by the Tribunal as part of the precedential background relied upon by the Delhi High Court.
UCO Bank v. CIT, 237 ITR 889 (SC)	Listed among authorities considered by the Delhi High Court in Vasisth Chay Vyapar Ltd.	Referred to by the Delhi High Court and noted by the Tribunal as part of the supporting judicial material considered in Vasisth.
CIT v. Shoorji Vallabhdas & Co., 46 ITR 144 (SC)	Listed among authorities considered by the Delhi High Court in Vasisth Chay Vyapar Ltd.	Noted by the Tribunal as one of the authorities the Delhi High Court examined in concluding on accrual of interest.
Godhra Electricity Co. Ltd. v. CIT, 225 ITR 746	Listed among authorities considered by the Delhi High Court in Vasisth Chay Vyapar Ltd.	Noted as part of the body of authorities reviewed by the Delhi High Court and recorded by the Tribunal.
CIT v. Goyal M.G Gases (P) Ltd., 303 ITR 159 (Del)	Listed among authorities considered by the Delhi High Court in Vasisth Chay Vyapar Ltd.	Referred to by the Delhi High Court and thus noted by the Tribunal in its consideration of Vasisth.
CIT v. Eicher Ltd., ITA No. 431/2009 dated 15.7.2009 (Del)	Listed among authorities considered by the Delhi High Court in Vasisth Chay Vyapar Ltd.	Included by the Delhi High Court in its survey of relevant jurisprudence; relied upon as part of the precedent base noted by the Tribunal.

Court's Reasoning and Analysis

The Tribunal's analysis (as presented in the opinion) proceeded along the following lines, based strictly on the text:

The Tribunal identified that the assessee is a co-operative bank governed by the Reserve Bank of India; therefore RBI directions with regard to prudential norms apply to the assessee just as they apply to companies registered under the Companies Act.
The Tribunal reviewed the competing authorities. It noted that the question of taxability of interest on NPAs had been considered by the Hon'ble Delhi High Court in Vasisth Chay Vyapar Ltd., which in turn had taken into account Section 45Q of the Reserve Bank of India Act (which gives Chapter IIIB directions an overriding effect) and Accounting Standard (AS-9) on Revenue Recognition.
The Tribunal extracted the AS-9 principles (as set out by the Delhi High Court) that: revenue recognition requires reasonable certainty of ultimate collection; where the ability to assess ultimate collection is lacking, recognition of revenue is postponed; when uncertainty arises after recognition, a provision is more appropriate than adjusting recognized revenue.
The Tribunal observed that the Delhi High Court had considered a body of case law (listed in the opinion) and, upon that basis together with AS-9 and Section 45Q, held that interest on NPAs cannot be treated as accrued to the assessee.
The Tribunal addressed the revenue's reliance on Southern Technologies Ltd. (Supra). It reviewed Southern Technologies' distinction between (i) income recognition — where RBI Directions (via Section 45Q) may have overriding effect vis-à-vis Companies Act income recognition principles — and (ii) computation of taxable income (permissible deductions), which is governed by the Income Tax Act. The Tribunal noted that Southern Technologies recognizes that RBI Directions form a code in respect of income recognition and that Section 145 has no role where RBI Directions apply to income recognition.
Applying Southern Technologies and the decision of the Delhi High Court in Vasisth Chay Vyapar Ltd., the Tribunal concluded that, because the issue here concerned income recognition and the assessee followed RBI prudential norms by not recognizing interest on NPAs until realization, the interest income did not accrue to the assessee in the relevant year.
On that basis the Tribunal found no infirmity in the CIT(A)'s deletion of the addition of Rs. 18,26,306 and upheld the CIT(A)'s order.

Holding and Implications

Holding: The appeal of the revenue is dismissed.

Implications and direct consequences:

The Tribunal upheld the deletion by the learned CIT(A) of the addition of Rs. 18,26,306 made by the Assessing Officer in respect of interest relatable to non-performing assets; accordingly, that interest is not includible in the assessee's total income for assessment year 2007-2008.
The Tribunal applied existing authority (including the decision of the Hon'ble Delhi High Court in Vasisth Chay Vyapar Ltd. and the Supreme Court's analysis in Southern Technologies Ltd.) to conclude that RBI prudential norms govern income recognition for the assessee in this context. The Tribunal did not purport to lay down a new legal principle; it applied and followed prior judicial pronouncements.

Note: This summary is confined to the content and reasoning expressly contained in the provided opinion. No material beyond the opinion text has been added or inferred.

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Dy. Commissioner Of Income Tax Circle-1(1) Vijayawada () v. The Durga Co-Operative Urban Bank Ltd., Vijayawada ().

Shri B.R Baskaran, A.M:— The appeal of the revenue is directed against the order dated 14.09.2010 passed by learned CIT(A), Vijayawada and it relates to the assessment year 2007-2008.

2. The grounds of appeal raised by the revenue give rise to a single issue viz., whether the learned CIT(A) is justified in holding that the interest income relating to non performing assets (here in after “NPA”) is not includible in the total income of the assessee.

3. The facts relating to the issue are stated in brief. The assessee is a co-operative bank and it is governed by the directions issued by the Reserve Bank of India. The assessee society is generating income by carrying on banking business by providing credit facility to its Members. The assessee society enjoyed exemption under section 80P of the Act up to the assessment year 2006-2007. Consequent to the amendment made to Section 80P, the profit of assessee society from banking business became taxable. Accordingly the assessee filed its return of income for the year under consideration on 31.10.2007 declaring a total income of Rs. 1.61 crore. During the course of scrutiny proceedings, the Assessing Officer noticed that the assessee did not include the interest of Rs. 18,26,306/-, being the relatable to the NPA advances. When questioned, the assessee submitted its reply as under:

“Reserve Bank of India has prescribed Prudential Norms in respect of income recognition Asset Classification, Provisioning and other related matters and thereby issued guidelines regarding accounting of accrued interest on borrowal accounts which are treated as non-performing advances. The copy of the circular issued by Reserve Bank of India is enclosed herewith for your perusal. Accordingly, accrued interest in respect of non-performing advances was debited to interest Receivable Account and corresponding amount credited to Overdue Interest Reserve Account. Subsequently, if any interest is actually received, the realized interest was credited to interest account. The bank has been following the same policy since the issue of RBI guidelines and the amount shown under Overdue Interest Reserve account represents the non realized accrued interest on non-performing advances for several years”.

The Assessing Officer examined the reply of the assessee vis-à-vis Section 43D of the Act. The said section provides that the interest income for such categories of bad or doubtful debts shall be charged with tax in the previous year in which it is credited. However, the said section was applicable only to public financial institutions or a scheduled bank or a state financial corporation. Since the assessee does not fall in that category, the Assessing Officer held that the provisions of Section 43D are not applicable to the assessee. Since the assessee is following mercantile system of accounting, the Assessing Officer opined that the interest on NPA advances accrued to the assessee and accordingly he added the interest relating to NPA advances, i.e Rs. 18,26,306/- to the total income of the assessee.

4. The assessee carried the matter in appeal before the learned CIT(A) and inter alia, contended as under:

a) Under section 5 of the Income Tax Act, only real income needs to be taxed. Since the interest on NPA is a notional income, the same need not be taxed.

b) As per Section 56 of Banking Regulation Act, the prudential norms issued by the Reserve Bank of India are necessarily to be followed by the assessee. The norms prescribed by the RBI for income recognition and asset classification (here in after “Prudential norms”) have been issued by the Reserve Bank of India in the public interest and to regulate banking policies.

c) As per the prudential norms issued by Reserve Bank of India, all the assets “Advances given by the assessee” have to be classified as performing assets (PA) and non performing assets (NPA), in accordance with the methodology prescribed under prudential norms. As per the said norms, an asset shall be classified as NPA when it seizes to generate income.

The contention of the assessee before Learned CIT(A) was that the interest on NPA advances cannot be said to have been accrued to it.

5. The learned CIT(A) reexamined the issue in the light of contentions made by the assessee and took the view that the interest on NPA did not accrue to the assessee and hence the addition made by the Assessing Officer is not sustainable. Accordingly he deleted the impugned addition with the following observations:

“4. The only issue for adjudication in this appeal is the issue of accrual of interest on NPAs. This issue has been a subject matter of appeal before the Hon'ble ITAT, Hyderabad Division Bench in the case of TCI Finance Ltd. v. ACIT (2004) 91 ITD 573 (Hyd). The Hon'ble Tribunal, after going through guidelines issued by the Reserve Bank of India and the accountings standards notified by the Central Government in pursuance of Sec. 145 of the Act observed that non-recognition of income on the ground that the income had not really accrued as the realisability of the principal outstanding itself was doubtful, is legally correct under the mercantile system of accounting. Once there is a doubt regarding the realisibility of the principal amount itself, it cannot be said that the interest on such amount accrued to the assessee even under the mercantile system of accounting. The Hon'ble Madras High Court in the case of Commissioner Of Income-Tax v. Annamalai Finance Ltd. (2005) 275 ITR 451 (Mad) held that when the principal amount itself is doubtful of recovery, it cannot be said that any interest accrued on such principal amount. As the appellant is following an established method of accounting and recognizing the interest income on NPAs at the time of realization and in the light of the decision cited above wherein the accounting principles mandated by the Reserve Bank of India have not been found to be contrary to the accounting standards notified by the Central Government in pursuance of Sec. 145(2) of the Act, following the above judicial pronouncements, I am of the view that the interest income did not accrue to the appellant on non-performing assets during the year. In view of the above, the addition of Rs. 18,26,306/- is not sustainable in law and, therefore, is deleted”.

6. Aggrieved by the order of the learned CIT(A), the revenue is in appeal before us. The learned Departmental Representative, by placing reliance on the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. v. ACIT (320 ITR 577) submitted that the prudential norms prescribed by Reserve Bank of India cannot override the provisions of Income tax act. Accordingly he contended that the interest relatable to NPA was rightly assessed by the Assessing Officer and accordingly pleaded that the order of the learned CIT(A) be reversed.

7. The learned Authorised Representative submitted that the decision rendered by Hon'ble Delhi High Court, vide its order dated 29.11.2010 in the case of Commissioner Of Income Tax v. M/S Vasisth Chay Vyapar Ltd. 552/2005 and others) is directly applicable to the instant issue raised by the revenue. The Hon'ble Delhi High Court has held that the interest on NPA assets does not accrue to the assessee. While rendering the said decision, the Delhi High Court has duly considered the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (Supra). He further submitted that the issue in the case of Southern Technologies Ltd., was not related to the taxability of interest on NPA. The issue there is was about the admissibility of deduction claimed towards the “Provision made on NPA assets”. The said company had debited its Profit and Loss account with the said provision, as per the prudential norms prescribed by Reserve Bank of India. Accordingly, it claimed the said provision on NPA assets as a deduction under section 36(1)(vii) of the Act. The Assessing Officer rejected the said claim as the said claim was found to be not in accordance with the Income Tax Act. The Hon'ble Supreme Court approved the decision of the Assessing Officer. It is pertinent to note that in that case, no addition was made in respect of the interest relatable to NPA. Accordingly he submitted that the decision of Hon'ble Apex court rendered in the case of Southern Technologies Ltd. is not applicable to the facts of the instant case and only the decision rendered by Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd., (Supra) is squarely applicable.

8. We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (Supra); wherein the Hon'ble Delhi High Court took into account the decision rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (Supra). In the case of Vasisth Chay Vyapar Ltd., the assessee therein was a non banking financial company and it was also bound by the “Prudential norms directions” issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The Assessing Officer, however, added the said interest as the income of the assessee by holding that it had “accrued” to the assessee even it was not realized as the assessee was following mercantile system of accounting. The learned CIT(A) affirmed the order of the Assessing Officer. However, the ITAT deleted the aforesaid income. Hence the revenue preferred appeal before the Hon'ble Delhi High Court.

8.1 After hearing the rival submissions, the Hon'ble Delhi High Court took note of sec. 45Q of Reserve Bank of India Act which 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 High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon'ble High Court also considered accounting standard “AS-9” on “Revenue recognition” and also extracted following relevant portion from the said accounting standard:

9. Effect of uncertainties on Revenue Recognition

9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g, for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by instalments.

9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized”.

8.2 The Delhi High Court also considered the decision rendered in the following cases:

i) CIT v. Elgi Finance Ltd., 293 ITR 357 (Mad)

ii) CIT v. KKM Investments (Cal) - SLP dismissed by Supreme Court (310 ITR 4)

iii) CIT v. Motor Credit Co. (P) Ltd., 127 ITR 572 (Mad)

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

v) CIT v. Shoorji Vallabhdas & Co. 46 ITR 144 (SC)

vi)Godhra Electricity Co. Ltd. v. CIT 225 ITR 746

vii) CIT v. Goyal M.G Gases (P) Ltd., 303 ITR 159 (Del)

viii) CIT v. Eicher Ltd., ITA No. 431/2009 dated 15.7.2009 (Del)

8.3 After considering the Accounting Standard 9 and the various case law listed above, the Hon'ble Delhi High Court held that the interest on NPA advance cannot be treated as “accrued” to the assessee.

8.4 Before the Delhi High Court, the revenue took support of the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (Supra). The Delhi High Court considered the said decision of Hon'ble Apex Court and explained the same as under:

“We have already held that even under the Income Tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirely on the judgment of the Supreme Court in the case of Southern Technology (Supra). No doubt, in first blush, reading of the judgment gives an indication that the Court has held that Reserve Bank of India Act does not override the provisions of the Income Tax Act. However, when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the Apex Court contained in that very judgment, we find that the proposition advanced by Mr. Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited Rs. 81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of Section 36(1)(vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve and thus not deductible under section 36(i)(vii) of the Act. The Assessing Officer, however, did not bring to tax Rs. 20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to “Income Recognition” and held that income had to be recognized in terms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 45 sic. 145 of the Income Tax Act. It can be said, therefore, that the Apex Court approved the ‘real income’ theory which is engrained in the Prudential Norms for recognition of revenue by NBFC”.

9. The Hon'ble Supreme Court in the case of Southern Technologies Ltd. (Supra) dissected the matter into two parts viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-à-vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon'ble Supreme Court are extracted below:

“Applicability of Section 145

40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB 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 45Q, an overriding effect is given to the Directions 1998 vis-à-vis “Income Recognition” principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These 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 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 Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute”.

10. Turning to the facts of the case before us, the assessee herein is a co-operative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd. (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-à-vis income recognition principle under the Companies Act. Hence Sec. 45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by co-operative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court.

10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant:

“What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not “accrued”.

The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT(A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order.

11. In the result the appeal of the revenue is dismissed.

Dy. Commissioner Of ... v. The Durga Co-Operati...