Bhind District Co Operative Central Bank Ltd. vs. Income Tax Department

THE HIGH COURT OF MADHYA PRADESH : 1 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] Gwalior, Dated:-7.3.2019 Shri Anurag Sinha, learned counsel for the appellant. Shri D.P.S Bhadoriya, learned counsel for the respondents. With the consent of learned counsel for the parties, the matter is finally heard. The substantial question of law which arises for consideration in this appeal under Section 260A of the Income Tax Act, 1961 is: “Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal is justified in law in holding that interest on non-performing assets is taxable on accrual basis looking to the guidelines of the Reserve Bank of India?” Relevant facts giving rise to the substantial question of law is delineated by Tribunal. The assessment year is 2009-10. The appellant is a non-banking institution engaged in providing financial assistance to its customers. The appellant (referred as Assessee) filed return of income on 29-09-2009 declaring total loss of Rs.4,35,21,572/-. The case was selected for scrutiny. Notices were issued under Section 143(2) and Section 142(1) of 1961 Act. Detail questionnaire was issued. On examination of computation of Profit and Loss account for the THE HIGH COURT OF MADHYA PRADESH : 2 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] financial year 2008-2009 it was revealed that the assessee has made provisions for doubtful debts amounting to Rs. 8,15,53,000/-, penal interest Rs. 1,94,00,000/- and provisions for sundry debtors amounting to Rs. 8,07,000/-. The Assessing Authority disallowed the deductions sought on the findings that they were sought on anticipation basis and the liability/ loss being not actually arisen during the year under consideration. The Assessing Authority held that provisions for doubtful debts, penal interests and provisions for sundry debtor are required to be disallowed because under Income Tax Act, 1961, a provision made in accounts for an accrued or known liability is an admissible deduction and no other provisions qualify for deduction. It held that liability/loss to be deductible must have actually been arisen or incurred and not merely anticipated as certain to occur. In appeal in respect of doubtful debts and provisions for sundry debtor were found to be admissible and disallowance was deleted. However, balance of Rs. 41,08,767/- was confirmed. In respect of disallowance of Rs. 1,94,00,000/- an interest on NPA which was claimed in view of the guidelines issued by the Reserve Bank of India were disallowed and affirmed by the Commissioner, Income Tax (Appeal) on the findings:- “6. The appellant has claimed that in view of the THE HIGH COURT OF MADHYA PRADESH : 3 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] guidelines the claim of the appellant is allowable. I have seen the copy of the P & L account furnished by the appellant. It is seen that the sum of Rs.1,94,00,000/- has been shown as 'reserve' (Kaalateet Byaz Kosh) and not as provision. Further this interest has not been written of in the books of account by appellant. Any amount which is not written of as 'bad debt' and not covered by the provisions of section 36 (1) (viia) is not admissible as deduction. Therefore, the claim of the appellant of Rs.1,94,00,000/- is disallowable. Accordingly, the appeal of the appellant is dismissed on this issue.” The Tribunal affirmed the disallowance holding that under the Act of 1960, the provisions could be made in accounts for an accrued or known liability which may qualify for deduction and there is no other provision to qualify for deduction. The Tribunal found that in respect of penal interest in a sum of Rs. 1.94 Crores, the assessee has not made any claim or deduction either under Section 36(I)(vii) or under Section 36(I)(viia) of the Act. The Tribunal held that “Non Performing Accounts are accounts of defaulters if they do not pay or no chance to pay entries made by assessee on accrual of penal interest appears to be made on mercantile system of accounting but later-on claimed deduction in P& L account on cash basis cannot be held justified.” It held that once income accrued, it has to be taxed. Both methods cannot operate together (by THE HIGH COURT OF MADHYA PRADESH : 4 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] referring Section 145 of 1960 Act). And that the RBI guidelines have been issued for administration purpose for regulating the banking business to maintain NPA account. After hearing learned counsel for the parties, we notice that the issue is squarely covered by the judgment in Principal Commissioner of Income-tax-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd., [2017] 395 ITR 324 (Gujarat), Principal Commissioner of Income-tax, Ludhiana Vs. Ludhiana Central Co-op. Bank Ltd, [2018] 99 taxmann.com81 (Punjab & Haryana), Commissioner of Income Tax Vs. Deogiri Nagari Sahakari Bank Ltd, [2017] 79 taxmann.com 396 (Bombay), Commissioner of Income-tax Vs. Vasisth Chay Vyapar Ltd, [2011] 196 Taxman 169 (Delhi). In Shri Mahila Sewa Sahakari Bank Ltd (supra) it was held that the Co-operative Banks were acting under the directives of the Reserve Bank of India with regard to prudential norms set out. And that the taxing interest on NPA cannot be justified on the real income theory. The decision in Shri Mahila Sewa Sahakari Bank Ltd (supra) was subjected to challenge before the Supreme Court in Principal Commissioner of Income Tax 5 Ahemdabad Vs. Mahila Sahakari Bank Ltd. (Civil Appeal No.8977/2017) by the Revenue, which was dismissed on 13/12/2017. Similarly, the decision in Vasisth Chay Vyapar Ltd (supra) THE HIGH COURT OF MADHYA PRADESH : 5 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] wherein it was held “the assess being an NBFC was governed by the provisions of the RBI Act. In such a case, interest income could not be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI Act and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these Norms, the ICDs had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, interest could not be treated to have been accrued in favour of the assessee” was also upheld by Supreme Court in Commissioner of Income Tax Vs. Vasisth Chay Vyapar Ltd., [2018] 253 Taxman 401 (SC). Recently a Division Bench of High Court of Bombay in I.T. Appeal No. 1000/2016 (Principal Commissioner of Income Tax Vs. Solapur District Central Co-op. Bank Ltd.,) decided on 29/01/2019, in seisin with the similar issue as crops up for consideration in present case, observed:- “5 Having heard the learned Counsel for the parties, we notice that the issue is squarely covered by the judgments of Gujarat High Court and Punjab & Haryana High Courts. The Gujarat High Court in case of Pr.CIT v/s. Shri Mahila Sewa Sahakari Bank Ltd., reported in 395 ITR 324 had undertaken the detailed exercises to examine an identical situation. The Court held that, the THE HIGH COURT OF MADHYA PRADESH : 6 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] Cooperative Banks were acting under the directives of the Reserve Bank of India with regard to the prudential norms set out. The Court was of the opinion that, taxing interest on NPA cannot be justified on the real income theory. The decision of the Gujarat High Court in Shri Mahila Sewa Sahakari Bank Ltd., (supra) was carried in Appeal by the Revenue to the Supreme Court and such appeal was dismissed. Later on, similar issue came up before Gujarat High Court in case of Pr. CIT v/s. Sarangpur Cooperative Bank Ltd., reported in 406 ITR 302, the Court followed the earlier decision in case of Shri Mahila Sewa Sahakari Bank Ltd., (supra) and dismissed the Revenue's appeal. Once again, the issue was carried to the Supreme Court by the Revenue. The Appeal was dismissed by an order dated 28th April, 2018. 6 Identical issue was also examined by the Punjanb & Haryana High Court in case of Pr. CIT v/s. Ludhiana Central Coop. Bank Ltd., reported in 410 ITR 72. The decision of the Gujarat High Court in Shri Mahila Sewa Sahakari Bank Ltd., (supra) was cited before the Court. The Court noted that appeal against such judgment of the High Court, was dismissed by the Supreme Court. The Court concluded as under: “Adverting to the factual matrix, it may be noticed that the Tribunal while relying upon the various pronouncements had decided the issue regarding taxability of interest on NPA in favour of the THE HIGH COURT OF MADHYA PRADESH : 7 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] assessee as being taxable in the year of receipt. The Tribunal had upheld the deletion made by the CIT(A) on account of addition of Rs.3,02,82,000 regarding interest accrued on NPA. No illegality or perversity could be demonstrated by learned counsel for the Revenue in the aforesaid findings recorded by the Tribunal.” 7 The issue is thus, covered by the decisions of two High Courts as noted above wherein identical situation came up for consideration. Against the judgment of the Gujarat High Court, the appeals have been dismissed by the Supreme Court. Thus, the Supreme Court can be seen to have approved the decision of the Gujarat High Court in case of Shri Mahila Sewa Sahakari Bank Ltd., (supra). We, therefore, do not see any reason to entertain these Appeals, since no question of law can be stated to have arisen.”

The issue in the case at hand is also not different as was in the case of Shri Mahila Sewa Sahakari Bank Ltd (supra). The appellant -assessee acting under the directives of the Reserve Bank of India with regard to prudential norms set out, taxing interest on NPA, therefore, cannot be justified on the real income theory. In view whereof, the substantial question of law is answered in favour of the appellant-assessee. The order passed by the Assessing Officer, Appellate Authority and Tribunal are set aside. The THE HIGH COURT OF MADHYA PRADESH : 8 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income Tax Department and others ] deduction as claimed for on the uncharged interest on NPA is allowed to the extent above. No costs. (Sanjay Yadav) (Vivek Agarwal) Judge Judge Pawar/- ASHISH PAWAR 2019.03.11 11:56:31 +05'30'