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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI H.S. SIDHU & SHRI L.P. SAHU
This is an appeal filed by the revenue against the order passed by Ld. CIT(A) u/s 154 r.w.s 250 of the Income Tax Act 1961 dated 10.4.2015 for the assessment year 2011-12 on the following grounds of appeals :-
1. “On the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 3,55,61,409/- made by the AO on account of interest accrued on NPA, following the judgment of CIT vs. Shoorji Vallabhdas & Co. 46 ITR 144 (SC) (1962) which stands distinguished by the judgement in the case of Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835 of Supreme Court.
2. On the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 3,55,61,409/- made by AO on account of interest on NPAs ignoring the ratio of the case of State Bank of Travancore vs. CIT reported in (1986) 158 ITR 102 (SC)”.
Brief facts of the case are that the assessee filed return of income on 14th September, 2011 declaring an income of Rs. 81,39,010/- and subsequently the return was revised on 30th March, 2013 due to wrong claim of NPA provision and resulting effect of deduction u/s 30(1)(vii) of the Income Tax Act along with some other issues. The case was taken up for scrutiny and statutory notices were issued to the assessee. The assessee is a co-operative society registered with the Registrar of Co-operative Societies, GNCT of Delhi and carrying on the banking business under license from Reserve Bank of India. During the course of scrutiny proceedings the Ld. AO observed from the balance sheet of the assessee that assessee has not recognised interest on loan from NPA’s account and issued notice u/s 142(1) to the assessee. In response to this notice assessee submitted written reply stating that the accounts have been prepared on the basis of prudential norms issued by the Reserve Bank of India. Ld. AO after considering the submissions of the assessee and Accounting Standard 9 (AS 9) and relying some case laws, added interest accrued on NPA’s account amounting to Rs. 3,55,61,409/- and completed the assessment. Feeling aggrieved from the order of the AO the assessee appealed before the Ld. CIT(A). Ld. CIT(A) passed his order on 3.11.2014 which was subsequently rectified by the Ld. CIT(A) on 10.4.2015 and deleted the addition made by the AO for the impugned assessment year. Feeling aggrieved from the order of the Ld. CIT(A) passed u/s 154/250 the revenue is in appeal before the ITAT.
During the course of hearing, none is present on behalf of the assessee, therefore, the case was heard exparte qua assessee.
Ld. Sr. DR relied on the order of the AO and he submitted that the Ld. AO has rightly added the interest on NPA’s account which has not been taken by the assessee as income for the impugned assessment year. While deleting the impugned addition the Ld. CIT(A) did not consider the order of the Hon’ble Apex Court (supra) as mentioned in the grounds of appeal. Therefore, the order of the AO should be restored.
5. After hearing the order of the lower authorities and submissions of the Ld. DR we observe that the Ld. CIT(A) has passed the rectification order u/s 154/250 after relying many judgments. The findings of the Ld. CIT(A) are as under :-
“4.2. The above facts were duly examined by me. In this case an order was passed by my predecessor for the AYs 2008-09 & 2009-10 whereby it was adjudged as under:- "1 have considered the order of the AO and the submission of the appellant and 1find considerable merit in the submission of the appellant that since the appellant has no received the income as the loan amount itself has become bad and as such the AO is not justified to treat the notional interest as income of the appellant. A perusal of the case laws cited by the appellant also supports the case of the appellant that only the real income is taxable and not the hypothetical income in view of the real income theory as no real income is received by the appellant and the same view has been held by the Hon 'ble Supreme Court in the case of CIT Vs Shoorji Vallabhdas & Co, 46ITR 144 (SC) [J962) and the headline of the case reads as under :- "Held, that the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the appellant different from what had been entered in the books of account. This was not a case of a gift by the appellant to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration that what had been agreed upon. The appellant had in fact received only the lesser amount' in spite of the the entries in the account books, and this lesser amount alone was taxable. Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book- keeping, an entry is made about a "hypothetical income", which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Decision of the Bombay High Court in Commissioner of Income-tax v. Shoorji Vallabhdas & Co. [J959} 36ITR. 25 affirmed. Commissioner of Income-tax v. Chamanlal Mangaldas & Co. [J960} 39 ITR. 8 (S.C) followed. " 4.3. It has also been held in the case of CIT Vs Motor Credit Co P Ltd. 127ITR 572 (Mad) [I 981} that only the real income is to be taxed and the head-note of the case reads as under :- "The regular mode of accounting determines only the mode of computing the taxable income and the point of time at which the tax liability is attracted. It cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted it cannot be said that income has accrued merely on the ground that the appellant had been following the mercantile system of accounting. Even if the appellant makes a debit entry TO that effect, still no income can be said to have accrued to the appellant. If no income has materialised, there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the appellant that has to be taken into account, but what should be considered is whether the income has really materialised or resulted to the appellant. The question whether real income has materialised to the appellant has to be considered with reference to commercial and business realities of the situation in which the appellant has been placed and not with reference to his system of accounting. " 4.4. Having regard to the above and the facts and submissions made by the appellant, I am of the firm view that there is considerable merit in the submission of the appellant that the interest income on NPA was not liable to tax. The appellant oppugned the order of the AO stating that the AO was not justified in making the addition as the loan mentioned above had become bad (NP A) and it was not liable to declare said interest as taxable income. The appellant maintained the books of account on the NPA and its interest on the basis of the RBI guidelines and since the income was not received by it was not justified in treating the same as income of the appellant. When the interest income would be finally recovered in future the same would be accounted for and offered as its income . Only the real income of an appellant might be taxed and not the notional income. Reliance is placed on various case laws which are as under:- i. CIT Vs Shoorji Vallabhdas & Co, 46 ITR 144 (SC) [1962] ii. CIT Vs Vasisth Chay Vyapar Ltd, 330 ITR 440 (Delhi), 2011 iii. DIT Vs Brahmaputra Capital Financial Services Ltd, 335 ITR 182 (Delhi), 2011 iv. TRO Vs Custodian, 293 ITR 369 (Del) v. Barkha Investment & Trading Co P Ltd Vs CIT, 281 ITR 31 (Guj) vi. CIT Vs Nanital Bank Ltd, 309 ITR 335 (Uttarakhand) vii. CIT Vs Elgi Finance Ltd, 293 ITR 357 (Mad) viii. CIT Vs Motor Credit Co P Ltd, 127 ITR 572 (Mad) [1981] ix. CIT Vs Coimbatore Lakshmi Inv. & Finance Co Ltd, 331 ITR 229 (MaJ) l2011] Accordingly, the addition made by the AO is deleted. 5.00. In the result, the appeal of the appellant is partly allowed.”
The assessee is engaged in the banking business and controlled by the rules and regulations for operating banking activities by the Reserve Bank of India. The accounts of the banking are prepared and finalised on the basis of directions of the RBI on the prudential norms fixed time to time, which has been followed by the assessee. For charging income tax on income, real income should exist. It is clear from the order of the Ld. CIT(A) that the assessee has relied many case laws before him which has been rightly followed by the Ld. CIT(A). The ld. CIT(A) has also followed the similar view taken in preceding assessment years 2008-09 and 2009-10. No contrary material is placed on record to show that the Revenue did not accept the orders of ld. CIT(A) for A.Yrs. 2008-09 and 2009-10.
In view of the above, there is no infirmity in the order of the Ld. CIT(A). Therefore, we dismiss the appeal of the revenue.
In the result appeal of the revenue is dismissed.
Order pronounced in the open court on 24th October, 2018.