ACIT, BIJAPUR vs. THE SINDAGI URBAN CO-OP BANK LTD.,, SINDAGI

should be considered as accrued according to the mercantile system of accounting and was taxable as such. The benefit of exception from the said Supreme Court's decision was given through section 43D to--public financial institutions as defined in section 4A of the Companies Act, 1956,-scheduled banks as per Expln. (ii) to Section 36(1)(viia) of the Act, -State financial corporations established under section 3 or 3A of the State Financial Corporations Act, 1951 and institutions notified under section 46 of the said Act, and -State industrial investment corporations which are Government companies as per section 617 of the Companies Act, 1956 and which are engaged in providing long term finance for industrial projects and approved by the Central Government under Sec.36(1)(viii) of the Act. As per section 43D in the cases of above said institutions interest on sticky advances [falling under Health Codes 4 to 8] as per the guidelines issued by the Reserve Bank of India will be charged to tax either in the year in which the relevant interest is credited to the profit and loss account or the year of actual receipt of interest, whichever is earlier. Thus, so long as the interest is not received and so long as credits in respect of such interest are confined to interest suspense account", such interest amounts will not be treated as income of the assessee in view of the non- obstante clause of section 43D even though the assessee is following mercantile system of accounting.

“Sec. 43D is in contrast with the fundamental principle of accountancy. The cardinal principle of mercantile system of accountancy is that an income is to be shown in the books of account on accrual basis. The principle is that it is immaterial whether it was actually received or not, but if an income is expected to be received, then it should be brought to books of account as an income accrued to the assessee. Contrary to this recognized principle, this section has prescribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is actually received. The Act says that the incidence of ‘credit’ or "actually received", whichever is earlier is to be taken into account for the purpose of chargeability of income by way of interest. Simultaneously, it is noteworthy that this section is an overriding section because the opening words are "notwithstanding anything to the contrary contained in any other provisions of this Act". Therefore, in spite of anything contained in the Act, the provisions of this section shall override those provisions. Once the statute has categorically made a law in respect of public financial institutions that interest is chargeable to tax either in the year in which credited or actually received, whichever is earlier, then it is compulsory to abide by the said rule. No scope is left with the Revenue authorities to ignore these provisions due to unambiguous use of language in the section. As far as the status of the assessee is concerned, the AO has stated that the assessee-bank is a co-operative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an Expln. (d) r/w s. 36(1)(viia) annexed to s. 43D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, it is hereby held that the assessee is covered by one of the entities, hence the provisions of s. 43D are to be applied. Next issue is that whether a circular having effect of relaxing rigour of law can be treated as inconsistent with the provisions of a statute. In order to aid proper determination of the income of moneylenders and banks, the CBDT has issued a Circular dt. 6th Oct., 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee’s taxable income, provided the ITO is satisfied that recovery is practically improbable. The CBDT under s. 119 has power to issue circulars in exercise of its statutory powers. If the Board considers it necessary to lay down certain rules and then direct the sub-ordinate authorities, such directions are required to be followed and such circular would be binding on the Department unless and until held as ultra vires by a Court of law. The Board has powers to relax the severity or the strictness of law and the authorities are required to follow those instructions. As of now the law as laid down is that in terms of CBDT circular the interest is to be added as income only when actually received or credited in respect of the "sticky advances" while making assessment for a financial institution. It can safely be concluded that by the insertion of a special provision to tax interest income in the case of public financial institution, etc. s. 43D has to be applied in its letter and spirit.”

10. Besides the above, the Bangalore Bench of the ITAT in the case of Shiva Sahakari Bank Niyamitha (supra) has held as follows : "8. Having heard both the parties and having considered their rival contentions, we find that undisputedly the assessee is in the banking business and is also governed by the Banking regulations. Whether the interest accrued on NPA’s which are doubtful of being recovered, should be recognized as assessee’s income on accrual or on receipt basis is the question before us. Let us first consider the applicability of the decisions relied upon by the learned DR. The Hon’ble Supreme Court in the case of Southern Technologies Ltd was considering the issue of allowability of provisions of NPA u/s 36(1)(vii) of the Income-tax Act while the case before us is with regard to the accrual of interest on NPA’s and recognition of the same on receipt basis and not on accrual basis. Further, the Hon’ble Supreme Court, while holding that the RBI directions are only norms and act in a different field as against the Income-tax Act, has also observed that collectability of a receipt is different from accrual and hence in each case, the assessee has to prove that interest is not recognized or taken into account due to uncertainty in calculation of the income and it is for the AO accept the claim of the assessee under the IT Act or not to accept it, in which case there will be added- back even under the real income theory. It was also observed that the Income-tax Act is tax on real income i.e the profits arrived at on commercial principles subject to the provisions of Act but a provision for doubtful debts is only a notional expense which is a debit to the P & L account which is expressly disallowed by explanation to sec.

36(1)(vii) which if claimed has got to be added back to the total income of the assesse because Act seeks to tax the real income and for this purpose write off is a condition for allowance. It is, therefore, clear that the facts of the case before the Apex Court are entirely on a different set of facts and hence its finding on non-allowability of the provisions of NPA’s cannot be applied to the facts of the case before us but its observation that for recognizing the interest income on NPA’s, AO has to consider the facts of each case has relevance to the case before us. In view of the same, we hold that the decision of the Hon’ble Supreme Court is on a different set of facts. The second decision relied upon by the learned DR is that of Chennai Bench of the Tribunal in the case of India Equipment Leasing Ltd., which is on the same set of facts as before us, as it was held in favour of the Revenue. Coming to the decisions relied upon the learned AR, we find that the decision of the Jurisdictional High Court in the case of Canfin Homes Ltd., is also on the same set facts as before us and is binding on this tribunal. In the said decision, at para 8 of the order, the Hon’ble High Court has held as under : “Therefore, it is clear if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount; accrued was not realized immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated that though a particular income is due to him but is not possible to recover the same, then it cannot be said to have been accrued and the said amount cannot be brought to tax. In the instant case we are concerned with a non performing asset. As the definition of non performing asset shows an asset becomes non performing when it ceases to yield income. Non performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non performing asset then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy ITA No.257/B/12 guidelines issued by the National Housing Bank, the income from non performing asset should be recognized only when it is actually received. That is what the Tribunal held in the instant case. Therefore, the contention of the revenue that in respect of non performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. In that view of the matter, the second substantial question framed is answered against the revenue and in favour of the assessee.”