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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-9, Pune dated 05-02-2016 for assessment year 2012-13. The assessee has filed cross objections in support of the aforesaid order of Commissioner of Income Tax (Appeals).
The brief facts of the case as emanating from records are: The assessee is a Co-operative Bank. During the course of scrutiny assessment proceedings, the Assessing Officer inter alia disallowed interest on Non-Performing Assets (NPAs) amounting to Rs.5,74,82,647/- claimed by assessee.
Aggrieved by the assessment order dated 09-02-2015, the assessee filed appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) following the order of Tribunal in assessee’s own case for assessment year 2010-11 in ITA No. 1376/PN/2014 decided on 08-01-2016 deleted the addition on account of interest on NPAs. Now, the Revenue is in appeal before the Tribunal. The assessee has filed cross objections supporting the order of Commissioner of Income Tax (Appeals).
Shri Mukesh Jha representing the Department vehemently supported the findings of Assessing Officer in disallowing interest on NPAs. The ld. DR submitted that the provisions of Income Tax Act override RBI guidelines. In support of his submissions, the ld. DR placed reliance on the decision of Hon’ble Supreme Court of India in the case of Southern
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Technologies Ltd. Vs. Joint Commissioner of Income Tax reported as 320 ITR 577 and the decision of Ahmedabad Bench of Tribunal in the case of The Sarangpur Co-op. Bank Ltd. Vs. DCIT in ITA Nos. 529 & 530/Ahd/2013 decided on 21-06-2013.
Per contra, Shri M.K. Kulkarni appearing on behalf of the assessee submitted that the issue relating to allowability of interest on NPAs has been considered by the Co-ordinate Bench of Tribunal in assessee’s own case in ITA No. 1376/PN/2014 for assessment year 2010-11 decided on 08-01-2016. The Commissioner of Income Tax (Appeals) deleted the addition by following aforesaid order of Tribunal. The ld. AR furnished the copy of order of Tribunal in assessee’s own case for assessment year 2010-11. The ld. AR further pointed that the Tribunal while allowing the claim of assessee has considered the decision of Hon’ble Apex Court in the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax (supra).
We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The solitary issue raised in appeal by the Department is allowing of interest accrued on NPAs. We find that identical disallowance was made in assessee’s own case in assessment year 2010-11. The issue travelled up to the Tribunal. The Department before the Tribunal in ITA No. 1376/PN/2014(supra) placed reliance on the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax (supra) and sought disallowance of interest on NPAs. The Co-ordinate Bench granted relief to the assessee by following the decision of Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Deogiri Nagari Sahakari Bank Ltd. and others reported as
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379 ITR 24 wherein the judgment of Hon’ble Apex Court in the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax (supra) has been considered and distinguished on facts. The relevant extract of the findings of Tribunal in assessee’s own in assessment year 2010-11 are as under : “9. We have considered the rival arguments made by both the sides. We find the AO made an addition of Rs.1,10,00,642/- on account of interest on NPA which according to the AO was not offered for taxation by the assessee. We find the Ld.CIT(A) following the decision of the Tribunal in the case of The Omerga Janta Sahakari Bank Ltd. (Supra) deleted the addition made by the AO. We find an identical issue had come up before the Hon’ble Bombay High Court in the case of Deogiri Nagari Sahakari Bank Ltd. and other connected appeals reported in 379 ITR 24. The Hon’ble High Court has decided the issue and dismissed the appeal filed by the Revenue by observing as under :
“3. The common issue involved in all these appeals relating to the assessment year as mentioned in the aforesaid table about the deletion of the additions on account of interest on sticky advances. In all these cases, the Assessing Officer, during the assessment proceeding has observed that the provisions of section 43D of the Income-tax Act cannot be applied to the assessee as it is not a scheduled bank but a co-operative bank. In the opinion of the Assessing Officer, considering the provisions of section 43D of the Income-tax Act, non-scheduled co-operative banks are specifically excluded from the special provisions of section 43D of the Income-tax Act, regarding interest on sticky advances. The Assessing Officer has also held that the Central Board of Direct Taxes Circular No. F. 201/ 81/84 ITA-II, dated October 9, 1984, is applicable only to banking companies and not to non -scheduled banks and co-operative banks. 4. Being aggrieved by the same, the assessee/above co-operative banks preferred appeals separately before the Commissioner of Incometax (Appeals). The Commissioner of Income-tax (Appeals), vide his orders in all the appeals has directed to delete the additions on the interest of sticky advances, on the NP A made by the Assessing Officer. 5. Being aggrieved by the order of the Commissioner of Incometax Appeals), the Revenue preferred separate appeals in each case before the Income-tax Appellate Tribunal, Pune Bench “A” Pune. The learned Income-tax Appellate Tribunal has confirmed the decision of the Commissioner of Income-tax (Appeals) and dismissed the appeals of the Revenue. Thus, the Revenue has filed the aforesaid appeals challenging the legality and correctness of the order passed by the Income-tax Appellate Tribunal. 6. The learned counsel, Mr. Alok Sharma, appearing for the appellants- Revenue submits that, the assessee in all these cases are the co-operative banks and not scheduled banks, therefore, the special provisions of section 43D of the Income-tax Act will not be applicable to them. Learned counsel further submits that, in view of the provisions of section 145 of the Income- tax Act, the assessee-co-operative banks have to follow either the mercantile system of accounting or cash system. They cannot have mixed system of account. The learned counsel also submits that, the RBI directions under the Reserve Bank of India Act are prudential norms but have nothing to do with
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the computation or taxability of the provision of the NPA under the Income-tax Act. Learned counsel further submits that though the RBI directions deviate from the accounting practice as provided by the Companies Act but they do not override the provisions of the Income-tax Act and they are operating in different fields. The learned counsel for the appellants-Revenue, lastly, submits that the learned Tribunal ought to have held that the assessee co- operative bank does not satisfy the conditions of the Central Board of Direct Taxes Circular No. F. 201/81/84/ITAT, dated October 9, 1984, and, therefore, could not avail of the benefits of the circular. On the basis of the aforesaid submissions, the learned counsel further submits that substantial question of law involved in the above appeals and, thus, the order passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961, are required to be confirmed. Learned counsel for the appellants submits that the Tribunal ought to have allowed the appeal by relying on the judgment in the matter of Southern Technologies Ltd. v. Joint CIT reported in [2010] 320 ITR 577 (SC) ; [2010] 2 SCC 548.
The learned counsel for the respondent-co-operative banks submit that the issues involved in the above appeals are no more res integra in view of the decision rendered by the hon'ble Supreme Court in the case of UCO Bank v. CIT reported in [1999] 237 ITR 889 (SC) ; [1999] 4 SCC 599.
Learned counsel for respondent submits that the learned Tribunal has rightly dismissed the appeals of the Revenue by confirming the order passed by the Commissioner of Income-tax (Appeals). There is no substantial question of law involved in these appeals and, thus, all the appeals are liable to be dismissed.
The Income-tax Appellate Tribunal has referred the case of Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Delhi). In this case, the Revenue relied upon the decision of the hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra). The learned Income-tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of Southern Technologies Ltd. (supra). The assessee herein being a co-operative bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the co-operative banks. The hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) held that the provisions of section 45Q of the Reserve Bank of India Act has an overriding effect visa-vis income recognition principle under the Companies Act. Hence, section 45Q of the Reserve Bank of India Act shall have the overriding effect over the income recognition principle followed by co-operative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India Directions, 1998, as held by the hon'ble Supreme Court.
The honourable apex court in the case of UCO Bank's case (supra) had an occasion to consider the nature of the Central Board of Direct Taxes Circular and the hon'ble apex court has thus held that the Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Further, a similar issue was raised about interest accrued on a “sticky" loan which was not recovered by the assessee-bank for the last three years and transferred to the suspense account, would or would not be included in the income of the assessee for the particular assessment year. The hon'ble apex court has observed that :
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"The method of accounting which is followed by the assessee-bank is the mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues but only when it is realised. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice . . .
The assessee's method of accounting, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice ... up to the assessment year 1978- 79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier Circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978. The new procedure under the Circular of October 9, 1984, will be applicable for and from the assessment year, 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the Central Board of Direct Taxes's Circular of October 6, 1952 would be applicable; while from the assessment year 1979- 80,the Central Board of Direct Taxes's Circular of October 9, 1984 is made applicable. In the present case, the assessment was made on' the basis of the Central Board of Direct Taxes's Circular on October 9" 1984, since the assessment pertains to the assessment year 1981-82 to which the Circular of October 9, 1984, is applicable ... If, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officer's should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. The Circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. . . . In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a 'sticky' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The Circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or 'sticky' loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year
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onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received ... There is no inconsistency or contradiction between the circular so issued and section 145 of the Income- tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the department . . . The relevant circulars of Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act." 11. The learned counsel for the respondent has placed reliance in a case of Mercantile Bank Ltd. v. CIT reported in [2006] 283 ITR 84 (SC) ; [2006] 5 SCC 221, where similar question was raised before the apex court. The question was whether the assessee is liable to be taxed under the Income-tax Act, 1961, in respect of the interest on doubtful advances credited to the interest suspense account. In this case, UCO Bank's case (supra) was also referred and the hon'ble apex court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent co-operative banks, as understood by section 43C of the Income-tax Act on the scheduled bank. 12. Learned counsel for the appellants-Revenue placed reliance on the judgment in the case of Southern Technologies Ltd. v. Joint CIT reported in [2010] 320 ITR 577 (SC) ; [2010] 2 SCC 548. However, this judgment pertains to non-banking financial companies. UCO Bank's case (supra) and Mercantile Bank (supra) case squarely applies to the facts of the present case and issues involved. We, therefore, do not find it necessary to interfere in the judgment of the Appellant Tribunal. We hold that no substantial question of law arises in these appeals.”
Respectfully following the decision of the Hon’ble jurisdictional High Court and in absence of any contrary material brought to our notice by the Ld. Departmental Representative the grounds raised by the Revenue are dismissed.”
Since, the issue involved in the present appeal is identical, following the decision of Co-ordinate Bench we hold that no disallowance of interest accrued on NPAs is warranted. We do not find any infirmity in the findings of First Appellate Authority. Thus, the order of Commissioner of Income Tax (Appeals) is upheld and the appeal of Revenue is dismissed being devoid of merit.
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The assessee has filed cross objections in support of order of Commissioner of Income Tax (Appeals). Since, we have already dismissed the appeal of Revenue, the cross objections filed by the assessee have become infructuous and accordingly, the same are dismissed as such.
In the result, appeal by the Revenue and cross objections filed by the assessee are dismissed.
Order pronounced on Wednesday, the 28th day of February, 2018.
Sd/- Sd/- (डी. करुणाकरा राव/D. Karunakara Rao) (ववकास अवस्थी / Vikas Awasthy) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 28th February, 2018 RK आदेश की प्रयिलऱवऩ अग्रेवषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त (अऩीऱ) / The CIT(A)-9, Pune 3. 4. The Pr. CIT-5, Pune ववभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, “बी” बेंच, 5. ऩुणे / DR, ITAT, “B” Bench, Pune. गाडड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रयत // True Copy// आदेशानुसार / BY ORDER,
यनजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune