ORDER
G.S. Pannu, Accountant Member - The captioned appeal by the Revenue and the cross-objection by the assessee is directed against an order of the Commissioner of Income Tax (Appeals), Aurangabad dated 19.11.2012 which, in turn, has arisen from an order dated 30.12.2009 passed by the Assessing Officer u/s. 143(3) of the Income-tax Act, 1961 (in short "the Act"), pertaining to the assessment year 2007-08.
2. In the appeal of the Revenue, the solitary dispute raised is with regard to the action of the CIT(A) in deleting an addition of Rs.19,24,030/- made by the Assessing Officer on account of interest income relating to 'Non Performing Assets' (in short "NPAs").
3. Briefly put, the controversy in this appeal can be summarized as follows. The respondent-assessee is a Co-operative Bank carrying on banking business in terms of a license issued by Reserve Bank of India (RBI), a copy of such license dated 09.09.1996 is placed at page 1 of the Paper Book filed before us. The assessee being a Co-operative Bank operating under license from RBI, is governed by Circulars of RBI relating to Prudential Norms, Income Recognition, Asset Classification, Provisioning and other related matters. In terms of such Prudential Norms of RBI, assessee did not account for interest income relatable to NPAs i.e. advances to customers which have been classified as NPAs in terms of the Prudential Norms of RBI. The Assessing Officer was of the opinion that interest income even in relation to such NPAs was liable to be included on accrual basis having regard to the mercantile system of accounting followed by the assessee. As per the Assessing Officer, the provisions of section 43D of the Act which provides that interest income relatable to NPAs classified as per the RBI guidelines shall be charged to tax in the year in which it is accounted for by the assessee or on receipt, whichever is earlier, was not applicable to the assessee, since the assessee was not a 'scheduled bank'. Notably, section 43D prescribes that in case of public financial institution, or a scheduled bank or a State financial corporation or a State industrial investment corporation, 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 or in cases of public companies, income bay way of interest in relation to such categories of debts as may be having regard to the guidelines issued by the National Housing Bank shall be chargeable to tax in the previous year in which such income is credited by the aforesaid prescribed entities to their Profit and Loss accounts or in the year when it is actually received, whichever is earlier. The Assessing Officer noted that assessee was not an entity prescribed in section 43D of the Act since it was following the mercantile system of accounting, it did not have the option of accounting for interest income relating to NPAs advances on receipt basis. Therefore, according to the Assessing Officer, income by way of interest on NPAs accrued to the assessee and accordingly, he brought to tax such interest income of Rs.19,24,303/-.
4. The CIT(A) has deleted the addition and disagreed with the Assessing Officer for the following reasons : -
(i)
that interest on NPAs cannot be said to have accrued to the assessee as per the provisions of section 5 of the Act and in the light of the CBDT Circular No.F-201/81/84 ITA-II dated 09.10.1984;
(ii)
that in terms of RBI Circular in respect of Prudential Norms, Income Recognition, etc. the interest on NPAs was to be credited in the year in which such income was actually received;
(iii)
that following the Accounting Standard-9, issued by the Institute of Chartered Accountants of India, income/revenue is to be recognized depending on the certainty of collection of such revenue; and, because of the classification by RBI as NPAs, the certainty of recovery of interest in such cases could not be ascertained;
(iv)
that the assessee was consistently following the system of recognizing interest income on NPAs as per the Prudential Norms of RBI and such system has been accepted by the Revenue in the past; and,
(v)
that in view of the RBI guidelines, assessee was required to recognize the income of NPAs on actual receipt basis and the taxability of such income was to be decided on the basis of real income theory, and such income could not be brought to tax in the year under consideration, as it cannot be said to have accrued to the assessee.
5. Apart from the aforesaid, the CITA(A) has relied upon the decision of the Pune Bench of the Tribunal in the case of Western Maharashtra Development Corporation Ltd. v. Dy. CIT [2008] 22 SOT 13 and also the judgement of the Hon'ble Delhi High Court in the case of Commissioner Of Income Tax v. M/S Vasisth Chay Vyapar Ltd…. [2011] 330 ITR 440/196 Taxman 169/[2010] 8 taxmann.com 145 to hold that interest income on NPAs was not taxable on accrued basis. The CIT(A) has also referred to and relied upon the decision of the Pune Bench of the Tribunal in the case of Asstt. CIT v. Osmanabad Janta Sah. Bank Ltd. [2013] 32 taxmann.com 229 wherein following the decision of the Visakhapatnam Bench of the Tribunal in the case of Dy. CIT v. Durga Cooperative Urban Bank Ltd. [IT Appeal No. 511(Vizag) of 2010, dated 10.03.2011 on a similar controversy, it has been held that interest income relatable to NPAs is not taxable on accrual basis.
6. For all the above reasons, the CIT(A) deleted the addition of Rs.19,24,030/- made by the Assessing Officer. Against the aforesaid decision, Revenue is in appeal before us.
7. Before us, the learned Departmental Representative has placed reliance on the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. v. Jt. CIT, [2010] 320 ITR 577/187 Taxman 346 submitted that the income on NPAs is liable to be taxed in terms of the mercantile system of accounting adopted by the assessee and that the taxability of such income would not be governed by the Prudential Norms prescribed by RBI because RBI guidelines cannot override the provisions of the Act. Accordingly, it was contended that interest income relatable to NPAs was rightly assessed by the Assessing Officer and it was contended that the order of the CIT(A) and also the precedents noted by the CIT(A) in his order. The learned counsel also pointed out that therein so far as the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) relied upon by the learned Departmental Representative, the same has been distinguished by the CIT(A) following the judgement of the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra). The learned counsel has also referred to the Paper Book to point out that though the assessee was not a scheduled bank yet it was operating under a license granted by RBI and it was bound and governed by the Prudential Norms issued by RBI for Income Recognition, Asset Classification, Provisioning and other related matters and a copy of such RBI Circular dated 01.07.2008 placed at pages 23 to 42 of the Paper Book.
8. We have carefully considered the rival submissions. In so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Ostensibly, assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a 'scheduled bank' included in second schedule of RBI so as to fall within the scope of section 43D of the Act. Notably, section 43D of the Act prescribes that interest income on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consideration.
9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Co-operative Bank operating under a license issued by RBI but was not a 'scheduled bank' so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The assessee, on the other hand, contended that having regard to the guidelines issued by RBI regarding accounting of interest on NPAs, no interest income accrued in respect of NPAs and that the same was to be taxed only on receipt basis. The Tribunal observed that the question of taxability of interest on NPAs classified by RBI, was considered by the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) wherein after considering the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in the case of Durga Cooperative Urban Bank Ltd. (supra) is worthy of notice :—
"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 M/s 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 M/s 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 cooperative 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 cooperative 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."
10. Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs.
11. So, however, the learned Departmental Representative has submitted that the Hon'ble Madras High Court in the case of CIT v. Sakthi Finance Ltd. [2013] 31 taxmann.com 305/214 Taxman 21/352 ITR 102 (Mad.) has differed with the judgement of the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) on a similar issue, i.e. relating to interest income on NPAs. The learned Departmental Representative further pointed out that the Hon'ble Madras High Court followed the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis. We have carefully considered the submissions put-forth by the learned Departmental Representative based on the judgement of the Hon'ble Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon'ble Madras High Court related to non-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Hon'ble Madras High Court took the view that the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) also applied to the Income Recognition Norms provided by RBI and therefore it held the interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI's guidelines. But the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon'ble Delhi High Court and the Hon'ble Madras High Court as noted by the Hon'ble Madras High Court in its order.
12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) .
13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in the case of The Durga Cooperative Urban Bank Ltd. (supra) and accordingly the order of the CIT(A) is liable to the affirmed. We hold so.
14. In the result, the appeal of the Revenue is dismissed.
15. In the cross-objection preferred by the assessee, it is sought to be made out that the Assessing Officer erred in making an addition of Rs.19,24,030/- on account of interest on NPAs, whereas the correct amount of interest on NPAs relatable to the year under consideration was only Rs.7,06,084/-. Thus, as per assessee, if at all an addition was required to be made, it should have been only of Rs.7,06,084/-. The learned counsel pointed out that the addition of Rs.19,24,030/- has been made by the Assessing Officer by adopting the figure of interest on NPAs as stated in the Balance-Sheet, which was a cumulative figure, inclusive of such interest pertaining to earlier years also.
16. The learned counsel submitted that if the aforesaid mistake is correct than the appeal effect in the case of the assessee is below the maximum limit prescribes by CBDT for filing of the appeal before the Tribunal and in that light the captioned appeal of the Revenue would become non-maintainable.
17. With respect to the aforesaid objection, we only say that the since the appeal of the Revenue has been dismissed by us, the said cross-objection of the assessee has become academic and the issue raised is kept open and is rendered infructuous.
18. In the result, the appeal of the Revenue and the cross-objection of the assessee are dismissed, as above.