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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 23RD DAY OF JANUARY 2020
PRESENT
THE HON’BLE MR. JUSTICE ALOK ARADHE
AND
THE HON’BLE MR. JUSTICE RAVI V.HOSMANI
I.T.A. NO.98 OF 2010 C/W I.T.A. NO.100 OF 2010
I.T.A. NO.98 OF 2010
BETWEEN:
THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING, ATTAVATA
MANGALORE.
THE ASST. COMMISSIONER OF INCOME-TAX
CIRCLE-1, UDUPI. ... APPELLANTS (By Sri. K.V. ARAVIND, ADV.)
AND:
M/S. SYNDICATE BANK SYNDICATE HOUSE MANIPAL. ... RESPONDENT
(By Sri. T. SURYANARAYANA, ADV.) - - -
THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 9-10-2009 PASSED IN ITA NO.1283/BNG/2007, FOR THE ASSESSMENT YEAR 2000-01, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT BANGALORE IN ITA NO.1283/BNG/2007 DATED 9-10-2009 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1 UDUPI.
I.T.A. NO.100 OF 2010
BETWEEN:
THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING, ATTAVATA
MANGALORE.
THE ASST. COMMISSIONER OF INCOME-TAX
CIRCLE-1, UDUPI. ... APPELLANTS (By Sri. K.V. ARAVIND, ADV.)
AND:
M/S. SYNDICATE BANK SYNDICATE HOUSE MANIPAL. ... RESPONDENT (By Sri. T. SURYANARAYANA, ADV.) - - -
THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 9-10-2009 PASSED IN ITA NO.1284/BANG/2007, FOR THE ASSESSMENT YEAR 2001-02, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT BANGALORE IN ITA NO.1284/BANG/2007 DATED 9-10-2009
AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1 UDUPI, IN THE INTEREST OF JUSTICE AND EQUITY.
THESE I.T.As. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:
JUDGMENT
ITA No.98/2010 has been filed by the revenue, which was admitted by a bench of this court on the following substantial questions of law: (i) Whether the tribunal was correct in holding that the reversal of entry “reverse the interest debited to debit account and credited to income account” of interest income of Rs.6,43,22,862/- in accordance with RBI guidelines and accounting employed which had been accepted earlier cannot be treated as the income of the assessee?
(ii) Whether the Tribunal was correct in failing to appreciate Section 43D of the Act and Section36(1)(vii) read with Section 36(2)(i) of the Act which contemplated treating the said amount as income of the
assessee especially when the same had not been written off as bad debts and the RBI guidelines could not prevail over the statutory provisions of the Act?
ITA No.100/2010 has also been filed by the revenue, which as admitted on the following substantial questions of law: (i) Whether the tribunal was correct in holding that the estimation of expenditure in respect of administrative or financial cost at 5% of dividend income earned by the Assessing Officer in accordance with Section 14A of the Act cannot be disallowed?
(ii) Whether the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules should be made applicable to all pending matters as the same is clarifactory in nature in view of the consistent stands taken by the department?
(iii) Whether the tribunal was correct in holding that the estimated expenditure cannot be treated as book profit under
Section 115JA of the ct despite explanation (f) to Section 115JA of the Act?
(iv) Whether the tribunal was correct in holding that the provisions towards (i) doubtful debts (ii) standard assets (iii) depreciation on securities (iv) floating rate notes of London branch (v) DICGC loans (vi) suits filed accounts (vii) miscellaneous provision cannot be added back in accordance with Explanation to Section 115JA of the Act in the light of the judgment of the Apex Court in H.C.L. Comnet where is diminution in the value of assets as contended by the assessee and in view of the retrospective amendment to Explanation (g) to Section 115JA of the Act?
(v) Whether the Tribunal was correct in holding that the reversal of entry “reverse the interest debited to debit account and credited to income account” of Rs.8,97,62,184/- interest income in accordance with RBI guidelines and accounting employed which had been
accepted earlier cannot be treated as the income the assessee?
(vi) Whether the Tribunal was correct in failing to appreciate Section 43D of the act and section 36(1)(vii) read with Section 36(2)(i) of the Act which contemplated treating the said amount as income of the assessee especially when the same had not been written off as bad debts and the RBI guidelines could not prevail over the statutory provisions of the Act?
Since, substantial questions of law Nos.5 & 6 in ITA No.100/2010 and substantial questions of law framed in ITA No.98/2010 are same, these appeals were heard analogously and are being decided by this common judgment. For the facility of reference, facts from ITA No.100/2010 are being referred to.
Facts giving rise to filing of these appeals briefly stated are that the assessee filed a return of income declaring net taxable income of Rs.48,479/- and
also declared income of Rs.264,42,23,548/- under Section 115JB of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short). The return was processed under Section 143(1) of the Act and an order of refund for an amount of Rs.67,13,062/- was issued to the assessee. Thereafter, a notice under Section 143(2) of the Act was issued to the assessee. An order of assessment was passed on 29.03.2004 for the Assessment Year 2001-2002. The Assessing Officer held that from perusal of Audit Report, it is evident that assessee during the year had reversed total interest of Rs.45,38,22,618/- and had also reversed interest of Rs.8,97,62,184/- relating to previous year. It was further held that in fact, the assessee has reduced the income already declared in the previous year by debiting reversal in the present year’s profit and loss account and Section 43D of the Act does not permit reduction of the income, which is already credited to profit and loss account. It was further held that the method of
accounting of the assessee is as per guidelines issued by Reserve Bank of India on interest reversal and is in conflict with provisions of the Income Tax Act, 1961 and in such a situation the provisions of the Act will prevail.
Being aggrieved, the assessee filed an appeal. The Commissioner of Income Tax (Appeals) by an order dated 08.10.2007 held that interest is not chargeable under Section 243C of the Act on the tax payable under Section 115JB of the Act. Accordingly, the appeal preferred by the assessee was partly allowed. Being aggrieved, the assessee filed two appeals for Assessment Years 2000-2001 and 2001-2002. The revenue also filed an appeal in relation to assessment year 2001-2002 before Income Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal’ for short). The tribunal by impugned order dated 09.10.2009 inter alia held that the assessee is bound to follow Reserve Bank of India Guidelines and the method of accounting followed by the assessee was accepted by revenue. It
was further held that since reversal of entry was made as per guidelines issued by Reserve Bank of India, no fault can be found. In the result, the appeals preferred by the assessee were allowed, whereas, the appeals preferred by the revenue were dismissed.
Learned counsel for the revenue submitted that the Reserve Bank of India guidelines do not override the provision of the Act. In support of aforesaid submission, reference has been made to decision of Supreme Court in ‘SOUTHERN TECHNOLOGIES LTD.’, JT. CIT 2010 320 ITR 577. It is also submitted that the income by an assessee cannot be altered with reference to Section 43D of the Act and there is no express finding recorded by the tribunal that the debt in question is a bad debt. In support of his submissions, learned counsel for the revenue has invited our attention to para Nos.31 & 33 to the decision in the case of SOUTHERN TECHNOLOGIES SUPRA. It is also urged that the assessee cannot be permitted a return filed by
him for making a claim for deduction other than by filing a revised return. In support of aforesaid submission, reference has been made to decision of the Supreme Court in ‘GOETZE (INDIA) LTD. VS. COMMISSIONER OF INCOME-TAX’, (2006) 157 TAXMAN 1 (SC).
On the other hand, learned counsel for the assessee submitted that the loan advanced by the bank had become a Non Performing Asset and the assessee follows Mercantile system of accounting. Therefore, the interest component was required to be shown as income. It is further submitted that in fact, the aforesaid amount had never accrued to the assessee and therefore, the same could not have be treated as income. It is further submitted that under Section 43D of the Act, the interest component has to be taxed on cash basis. In support of his submissions, learned counsel for the assessee has placed reliance on the decision of the Division bench of Delhi High Court in ‘COMMISSIONER OF INCOME TAX. VS. VASISTH
CHAY VYAPAR LTD.’, (2011) 196 TAXMAN 169 (DELHI) and has pointed out that the aforesaid decision has been affirmed by the Supreme Court. It is further submitted that the income has to be recognized in terms of prudential norms even though the same aviated from the Mercantile system of accounting. It is further submitted that the decision rendered in the SOUTHERN TECHNOLOGIES SUPRA has already been considered by Division Bench of High Court and the aforesaid decision has been upheld by the Supreme Court. Therefore, the issue involved in this appeal has to be answered in favour of the assessee. It is argued that if the income, which is earlier recognized is not to be allowed to be reversed in subsequent assessment years when it was found that the amount was not recoverable, in any case, it is permissible for the assessee to write off such an income. In this connection, reliance has been placed on decision of division bench of high Court of Delhi in the case of and decision of Supreme Court in
‘VIJAYA BANK VS. COMMISSIONER OF INCOME- TAX’, (2010) 190 TAXMNA 257 (SC)’, ‘COMMISSIONER OF INCOME-TAX VS. INDUSTRIAL FINANCE CORPORATION OF INDIA LTD.’, (2011) 12 TAXMANN.COM 268 (DELHI).
We have considered the submissions made on both the sides and have perused the record. It is not in dispute that as per Reserve Bank of India guidelines, it is mandatory on the part of the assessee not to recognize interest, which has not accrued to it. The assessee had not received any interest during the relevant assessment year.
Even in succeeding assessment year, no interest had accrued to it. The Act imposes tax on real income i.e., the profits arrived at on commercial principles subject to the provisions of the Act. Therefore, before levy of tax it has to be ascertained that income has accrued to assessee. Admittedly, in the instant case, the income had not accrued to the assessee. The Supreme Court in the case
of SOUTHERN TECHNOLOGIES SUPRA has made a distinction with regard to income recognition and has held that income has to be recognized in terms of prudential norms even though the same deviated from mercantile system of accounting or Section 145 of the Act. Thus, the Supreme Court has approved the real income theory, which is in built in prudential norms for recognition of revenue by Non Banking Financial Company. Thus, it is evident that the income tax is levied on income whether mercantile system of accountancy is maintained or on cash basis. If the income does not accrue to an assessee, there cannot be any levy of tax and an assessee cannot be subjected to any hypothetical / illusory income.
This distinction was also noticed by division bench of Delhi High Court in the case of VASISTH CHAY VYAPAR LTD.’, SUPRA and while taking note of the decision rendered in SOUTHERN TECHNOLOGIES SUPRA, it has been held that Non Banking Financial
Company’s Prudential Norms (Reserve Bank) Directions, 1998 have nothing to do with the accounting treatment or taxability of income under the Act and the directions operate in different fields. The aforesaid decision of Delhi High Court has been upheld by the Supreme Court of India in ‘COMMISSIONER OF INCOME TAX. VS. VASISTH CHAY VYAPAR LTD.’, (2018) 90 TAXMANN.COM 365 (SC).
The Supreme Court in ‘VIJAYA BANK VS. CIT’, (2010) 323 ITR 166 has held that if the income, which is earlier recognized is not to be allowed to be reversed during the subsequent years, in any case, it is permissible for the assessee to write off such an income in the concerned assessment years where it was found that amount was not recoverable. A Division Bench of High Court of Delhi in INDUSTRIAL FINANCE CORPORATION LTD., SUPRA has held that assessee being a financial institution is duty bound to follow the guidelines of the Reserve Bank of India and the income
of the financial institutions has to be determined in accordance with the norms of accounting guidelines, which are applicable to it.
Learned counsel for the parties jointly submitted that substantial questions of law Nos.1 to 4 in ITA No.100/2010 are covered by judgment of this Court dated 17.10.2020 in ITA No.97/2010. Accordingly, the same are answered. The substantial questions of law in ITA No.98/2010 and substantial questions of law Nos.5 & 6 in ITA No.100/2010 are answered in view of the preceding analysis in favour of the assessee.
Accordingly, the appeals are disposed of.
Sd/- JUDGE
Sd/- JUDGE