THE, ACIT, GUNTUR vs. THE GUNTUR DISTRICT CO-OPERATIVE CENTRAL BANK LTD., TENALI

PER D.S. SUNDER SINGH, Accountant Member:

This appeal filed by the revenue is directed against order of the

Commissioner of Income Tax (Appeals)-1, {CIT(A)}, Guntur vide ITA

No.97/CIT(A)-1/GNT/2014-15 dated 30.9.2015 for the assessment year

2008-09. The cross objection filed by the assessee is in support of the

order passed by the CIT(A).

on account of provision for overdue interest. In this case, the

assessment was completed u/s 143(3) of the Income Tax Act, 1961

(hereinafter called as 'the Act') on 12.11.2002 determining the total

income of ` 1,89,85,700/-. Subsequently, the Commissioner of Income

Tax(CIT), Guntur has taken up the case for revision u/s 263 of the Act

and set aside the order passed u/s 143(3) dated 18/11/2010 of the Act

with a direction to examine the taxability of provision for overdue

interest. The A.O. given effect to the order of the Ld. CIT(A) by order

u/s 143(3) r.w.s. 263 of the Act by an order dated 27.3.2014 and in the

cited order, the A.O. made the addition of ` 24,49,34,000/- relating to

the provision for overdue interest.

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali 3. The assessee debited a sum of ` 24,49,34,000/- towards provision

for overdue interest. The overdue interest is related to the interest

accrued on loans and advances given by the assessee bank which

became Non performing Asset(NPA). The assessee credited the interest

to profit & loss account as income and the reversed the same and

debited to the profit & loss account as provision for overdue interest, as

the interest was not realized from the debtors who became defaulters.

In effect, the assessee has not offered the interest income accrued or

Non-performance assets (NPA) in the year under consideration. The

A.O. was of the view that as per the system of accounting followed by

the assessee, it has rightly offered the overdue interest as income by

crediting to the P&L account. The A.O. was of the view that it is

incorrect to debit the provision for over due interest to profit and loss

account and the same is not allowable within the scope of section 36 or

37 of the Act, hence, disallowed and added back to the income.

before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee

following the real income theory and the decision of Hon’ble Supreme

Court in the case of UCO bank Vs. CIT 237 ITR 889. The Ld. CIT(A)

held that concept of real income is certainly applicable in judging

whether there has been income or not, whether the income is really 3

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali accrued or arisen to the assessee must be in the light of the reality of

situation. The tax must be on the real income but not on the notional

income. Hence, mere making credit to the overdue interest to the P&L

account as income on overdue interest based on debt waiver scheme

announced by the Government of India and adding the overdue interest

to the notional income is not at all justifiable because no income has

been received on date and tax must be on the real income but not on

the notional income. Accordingly, the Ld. CIT(A) deleted the addition

made by the A.O., hence, the revenue filed appeal before this Tribunal.

Co-operative Bank following the prudential norms issued by the Reserve

Bank of India (RBI) for recognizing the income. As per the prudential

norms of RBI, the interest on NPA is recognised on actual receipt basis

but not on accrual basis. The Ld. A.R. argued that it is the practice of

the bank and approved by the RBI in the prudential norms to debit

interest to the individual debtor and derecognize the income accordingly.

The assessee further stated that it has accounted the interest

subsequently on receipt basis and offered the same to the income. The

Ld. A.R. also submitted that the assessee is following the same method

of accounting for so many years, which has been accepted by the

department. The Ld. A.R. relied on the orders of this Tribunal in the 4

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali case of District Co-operative Central Bank, Eluru Vs. ITO Ward-2, Eluru

in ITA Nos.49 & 50/Vizag/2012, the coordinate bench of this Tribunal

allowed the appeal of the assessee following the decision of Hon’ble

High Court of Gujarat in the case of Principal Commissioner of Income

Tax Vs. Mahila Seva Sahakari Bank Ltd. 140 DTR 113. Per contra the

Ld.DR supported the order of the AO.

on record and gone through the orders of the authorities below. The

assessee is a District Central Co-operative Bank, which is governed by

the RBI directions. As per the RBI prudential norms, the assessee is not

recognizing the income relating to the NPA. NPA is a debt, in which

there is no repayment of instalments for specified period of time. In this

case, the recovery of principal also doubtful. Therefore, the RBI has

issued directions as stated by the Ld. A.R. to debit the interest to the

individual debtor and derecognize the income. The same practice is

being followed by the Co-operative banks through out the country.

relating to the overdue interest in the case of District Co-operative

Central Bank, Eluru Vs. ITO Ward-2, Eluru in the order cited (supra)

following the decision of. Hon’ble High Court of Gujarat in the case of

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali Principal Commissioner of Income Tax Vs. Mahila Seva Sahakari Bank

Ltd. 140 DTR 113. Hon’ble High court with regard to recognition

of income in para No.19 to 23 held as under:

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali the RBI Directions, 1998 does not recognise "income from NPA" and, therefore, directs a provision to be made in that regard and hence an "add back". It is important to note that "add back" is there only in the case of provisions." [Emphasis supplied] 22. Therefore, in terms of the above decision, where an assessee makes provision for NPA and seeks deduction of such amount under section 36(1)(vii) or section 37 of the Act, then in the computation of income, the RBI Guidelines would have no role to play, and hence, an add back. Insofar as income recognition is concerned, the Supreme Court has held thus: "Applicability of Section 145 57. At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued by RBI under Chapter III-B 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 45-Q, an overriding effect is given to the RBI Directions, 1998 vis-à-vis"income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these RBI Directions, 1998 and the IT Act operate in different areas. These RBI 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 the 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 RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute." Thus, insofar as income recognition is concerned, the court has held that even the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act and that as far as income recognition is concerned, section 145 of the Income-tax Act, has not role to play. 23. In the light of the above discussion what emerges is that while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition of income in terms of the recognised accounting principles and after such income is recognised, the computation thereof, in terms of the provisions of the Income-tax Act, 1961. Insofar as the computation of taxability is concerned, the same is solely governed by the provisions of the Income-tax Act and the accounting principles have no role to play. However, recognition of income stands on a different footing. Insofar as income recognition is concerned, it would be the RBI Directions which would prevail in view of the provisions of section 45Q of the RBI Act and section 145 would have no role to play. Hence, the Assessing Officer has to follow the RBI Directions.

Supreme Court in the case of Southern Technologies and held that

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali section 45Q of the RBI Act shall have overriding effect over the income

recognition. The Hon’ble High Court has considered the issue with

regard to the method of accounting applied for recognizing the income

and held that the method of accounting followed by the assessee is in

accordance with the accounting practice.

Bombay in the case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd. (2015)

128 DTR (Bom) 0209 head notes, which reads as under:

Income-Accrual-Interest on sticky advances-Assessee being a co-operative bank also governed by the RBI and thus the directions with regard to the prudential norms issued by the RBI are equally applicable to the co- operative banks-Tribunal was therefore justified in deleting addition on account of interest on sticky advances – UCO Bank Vs. CIT(1999) 154 CTR (SC) 88:(1999)4SCC 599 and Mercantile Bank Ltd. Vs. CIT (2006) 202 CTR (SC) 457 : (2006) 5 SCC 221 followed.

Limited in ITA No.469/Vizag/2012 dated 30.11.2015 has considered the

similar issue and allowed the interest on non-performing assets. The

relevant extract of this Tribunal in para No.7 to 10 is extracted as under:

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali 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 Honible 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.”

Bench in the case of Vaidyanath Urban Co-op. Bank Ltd. Vs. CIT in ITA

No.413/PN/2014 dated 31.3.2015, wherein the ITAT under similar set of

facts held as under:

“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 9

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali 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.

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."

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.”

interest in the case of District Co-operative Central Bank, Eluru Vs. ITO

Ward-2, Eluru in the order cited (supra) following the decision of.

Hon’ble High Court of Gujarat in the case of Principal Commissioner of

Income Tax Vs. Mahila Seva Sahakari Bank Ltd. 140 DTR 113 as under:

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali aside the orders of the lower authorities and delete the addition. The appeal of the assessee on this ground is allowed.

by this Tribunal, we hold that the addition cannot be made on overdue

interest relating to the NPA. Accordingly, we uphold the order of the

CIT(A) and allow the appeal of the assessee.

40(a)(ia) of the Act. The CIT in the revision u/s 263 of the Act, found

that the assessee has made the payment of ` 21,46,000/- to M/s. D.Y.

Systems, Hyderabad and ` 3,79,000/- to M/s. Techno Demo Office

Automation Systems, Guntur. Both the payments were made for

computerization. But the assessee has not deducted the TDS, which

required to be deducted u/s 194C of the Act. Therefore, the CIT has

directed the A.O. to examine the issue with regard to the payment made

for computerizing records. The A.O. while passing the order u/s 143(3)

r.w.s. 263 of the Act made the addition u/s 40(a)(ia) of the Act.

before the CIT(A) and the Ld. CIT(A) following the order of the special

bench of this Tribunal, Visakhapatnam in M/s. Merilyn Shipping and

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali Transports and allowed the appeal of the assessee. Aggrieved by the

order of the Ld. CIT(A), the revenue is in appeal before this Tribunal.

on record and gone through the orders of the authorities below. In this

case, the assessee has made the payments for computerization to the

extent of ` 21,46,000/- to M/s. D.Y. Systems, Hyderabad and `

3,79,688/- to M/s. Techno Demo Office Automation Systems, Guntur.

The assessee required to deduct the TDS u/s 194C of the Act but failed

to deduct the tax at source. Therefore, the A.O. made addition u/s

40(a)(ia) of the Act and the Ld. CIT(A) deleted the addition following the

decision of special bench in the case of M/s. Merilyn Shipping and

Transports, Visakhapatnam Vs. Addl. CIT Range-1, Visakhapatnam.

Now the issue is settled by by the Hon’ble Supreme Court in the case of Palam Gas Service v.Commissioner of Income-tax, [2017] 81

taxmann.com 43 (SC) and held that the Word 'payable'

occurring in section 40(a)(ia) not only covers cases where

amount is yet to be paid but also those cases where amount

has actually been paid. Therefore, we set aside the order of the

CIT(A) and allow the appeal of the revenue.

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali Cross Objection No.36/Vizag/2016:

interest. Since we have already dismissed the appeal of the revenue,

the cross objection filed by the assessee is sustained.

of the Act. Since we allowed the appeal of the revenue in the preceding

paragraphs, the cross objection of the assessee on this issue is

dismissed.

the cross objection filed by the assessee is also partly allowed.

The above order was pronounced in the open court on 6th Apr’18.

Sd/- Sd/- (वी. दुगा�राव) ( ड.एस. . . . सु�दर "संह) (V. DURGA RAO) (D.S. SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER #वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 06.04.2018 VG/SPS

ITA No.75 /Vizag/2016 M/s. The Guntur District Co-Op. Central Bank,Tenali

आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-