Ita/98/2010 Of The Commissioner Of Income-Tax v. M/S. Syndicate Bank

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 23 DAY OF JANUARY 20720 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE RAVI V.HOSMANL. LT.A. NO.98 OF 2010C/WLT.A. NQ.LQOQ OF 2ZO1 1LT.A. NO.98 OF 2010 BEI|WEEN 1.THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, ATTAVATA MANGALORE. 2).THE ASST. COMMISSIONER OF INCOME-TA® CIRCLE-1, UDUPI. ... APPELLANTS (By Sri. K.V. ARAVIND, ADV.) AND" M/S. SYNDICATE BANKSYNDICATE HOUSEMANIPAL ... 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 ASSESSMENTYEAR 2000-01, PRAYING TO FORMULATE THE SUBSTANTIAL|QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL|AND SET ASIDE THE ORDERS PASSED BY THE [TAT|BANGALORE IN ITA NO.1283/BNG/2007 DATED 9-10-2009|ANDCONFIRMTHE|ORDER.OF|THE|APPELLAIECOMMISSIONER CONFIRMING THE ORDER PASSED BY THE!ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1|UDUPI. 1T.A. NO.100 OF 2010 BETWEEN: 1.THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, ATTAVATA MANGALORE. 2.THE ASST. COMMISSIONER OF INCOME-TAX CIRCLE-1, UDUPI. _.. APPELLANTS (By Sri. K.V. ARAVIND, ADV.) AND" M/S. SYNDICATE BANKSYNDICATE HOUSEMANIPAL ... 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 ASSESSMENTYEAR 2001-02, PRAYING TO FORMULATE THE SUBSTANTIAL|QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL|AND SET ASIDE THE ORDERS PASSED BY THE [TAT|BANGALORE IN ITA NO.1284/BANG/2007 DATED 9-10-2009| ANDCONFIRMTHE|ORDER.OF|THE|APPELLATECOMMISSIONER 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 thefollowing substantial questions of law: (i) Whether the tribunal was correct inholding that the reversal of entry ‘reversethe interest debited to debit account and|credited to income account’ of Interest|income of Rs.6,43,22,862/- in accordancewith RBTguidelinesandaccountingemployed which had been accepted earliercannot be treated as the Income of the'aSSeSSECe? (11)Whether the Tripunel was correctin failing to appreciate Section 45D of theAct and Section36(1)(vii) read with Section36(2)(1) of the Act which contemplateqtreating the said amount as income of the assessee especially when the same had notbeen written off as bad debts and the RBTguidelinescouldnotprevailOverthestatutory provisions of the Act? 2 |ITA No.100/2010 has also been filed by therevenue, which as admitted on the following substantialquestions of law:| (1)Whether the tribunal was correct inNolding tnat the estimation of expenditure inrespect of administrative or financial cost at5% of dividend income earned by theAssessing Officer in accordance with Section14A 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 applicableto all pending matters as the same Is|Clarifactory|In|nature In|viewofthe |consistent stands taken by tne 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?| 2 |ITA No.100/2010 has also been filed by therevenue, which as admitted on the following substantialquestions of law:| (1)Whether the tribunal was correct inNolding tnat the estimation of expenditure inrespect of administrative or financial cost at5% of dividend income earned by theAssessing Officer in accordance with Section14A 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 applicableto all pending matters as the same Is|Clarifactory|In|nature In|viewofthe |consistent stands taken by tne 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 (ili)|depreciation on securities (iv) floating rate|notes of London branch (v) DICGC loans (vi)sults|filedaccounts(Vil).miscellaneousProvisioncannotbe.added|back|In|accordance witn Explanation to Section|115JA of the Act in the light of the Judgment|of the Apex Court in H.C.L. Comnet where isdiminutionIn|thevalue|ofassetsdScontended 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 andscreditedtO|Incomeaccount”ofRs.8,97,62,184/- InterestincomeIn|accordancewithRB]guidelinesand|accountingemployedwhichhadbeen 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)(vil) read with Section|36(2)(1) 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)guidelinescouldNotprevallOVertheStatutory provisions of the Act? Since, substantial questions of law Nos.5 & 6 in ITA|No.100/2010 and substantial questions of law framed inITA No.98/2010 are same, these appeals were heardanalogously and are being decided by this commonjudgment. For the facility of reference, facts from ITA.No.100/2010 are being referred to.| 2.|Facts giving rise to filing of these appealsbriefly stated are that the assessee filed a return ofincome declaring net taxable income of Rs.48,479/- and also deciared income of Rs.264,42,23,548/- UnderSection 115JB of the Income Tax Act, 1961 (hereinafterreferred to as ‘the Act’, for short). The return wasprocessed under Section 143(1) of the Act and an orderof refund for an amount of Rs.67,13,062/- was issued tothe assessee. Thereafter, a notice under Section 143(2)of the Act was issued to the assessee. An order ofassessment.WaSpassed|on29.03.7004|for.theAssessment Year 2001-2002. The Assessing Officer held.that from perusal of Audit Report, it is evident thatassessee during the year had reversed total interest ofRs.45,38,22,618/- and had also reversed interest ofRs.8,97,62,184/- relating to previous year. It wasfurther held that in fact, the assessee has reduced theincome already declared in the previous year by debitingreversal in the present year’s profit and loss account andSection 43D of the Act does not permit reduction of theincome, which is already credited to profit and lossaccount. It was further held that the method of accounting of the assessee Is as per guidelines issued byReserve Bank of India on interest reversal and is in.conflict with provisions of the Income Tax Act, 1961 andin such a situation the provisions of the Act will prevail. accounting of the assessee Is as per guidelines issued byReserve Bank of India on interest reversal and is in.conflict with provisions of the Income Tax Act, 1961 andin such a situation the provisions of the Act will prevail. 3.Being aggrieved, the assessee filed anappeal. The Commissioner of Income Tax (Appeals) byan order dated 08.10.200/7 hnela that tnterest Is nochargeable under Section 243C of the Act on the taxpayable under Section 115JB of the Act. Accordingly,the appeal preferred by the assessee was partly allowed.Being aggrieved, the assessee filed two appeals forAssessment Years JOOO-2001 and 2JO0O1-7002. Therevenue also filed an appeal in relation to assessmentyear 2001-2002 before Income Tax Appellate Tribunal(hereinafter referred to as ‘the tribunal’ for short). Thetribunal by impugned order dated 09.10.2009inter aliaheld that the assessee Is bound to follow Reserve Bankof India Guidelines and the method of accountingfollowed by the assessee was accepted by revenue. It was furtner held that since reversal of entry was madeas per guidelines issued by Reserve Bank of India, no-fault can be found. In the result, the appeals preferredby the assessee were allowed, whereas, the appealspreferred by the revenue were dismissed. 4Learned counsel for the revenue submittedthat the Reserve Bank of India guidelines do notoverride the provision of the Act. In support of aforesaidSubmission, reference has been made to decision ofSupreme Court in °SOUTHERN TECHNOLOGIES LTD.’,JT. CIT 2ZO1O 3320 ITR 5. It Ig also submitted that|the income by an assessee cannot be altered withreference to Section 43D of the Act and there Is noexpress 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 ofSOUTHERN TECHNOLOGIES SUPRA. It is also urgedthat the assessee cannot be permitted a return filed by nim for making a claim for deduction other than by filinga revised return. In support of aforesaid submission,reference has been made to decision of the SupremeCourt tn ‘GOETZE (INDIA) LTD. VS. COMMISSIONEROF INCOME-TAX’, (2006) 157 TAXMAN 1 (SC). 5.|On the other hand, learned counsel for theassessee submitted tnat the loan advanced by the bankhad become a Non Performing Asset and the assesseefollows Mercantile system of accounting. Tnerefore, tneinterest component was required to be shown asincome. It is further submitted that in fact, the aforesaidamount nad never accrued to tne assessee andtherefore, the same could not have be treated asincome. I[t is further submitted that under Section 43Dof tne Act, the interest component has to be taxed oncash basis. In support of his submissions, learnedcounsel for the assessee has placed reliance on thedecision of the Division bench of Delhi Hign Court inFCOMMISSIONER 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 furthersubmitted that the income has to be recognized in termsof prudential norms even though the same aviated from.the Mercantile system of accounting. It is furtherSubmitted that the decision rendered in theSOUTHERNTECHNOLOGIES SUPRAhas already been consideredby Division Bench of High Court and the aforesaiddecision has been upheld by the Supreme Court.Therefore, the issue involved in this appeal has to beanswered in favour of the assessee. It is argued that ifthe income, which is earlier recognized is not to beallowed to be reversed in subsequent assessment yearswhen it was found that the amount was not recoverable,in any case, it is permissible for the assessee to write offsuch an income. In this connection, reliance has beenplaced on decision of division bench of high Court ofDelhi in the case of and decision of Supreme Court in ‘VIJAYA BANK VS. COMMISSIONER OF INCOME-TAX’,(2010)190|TAXMNA257(SC),|‘COMMISSIONER OF INCOME-TAX VS. INDUSTRIALFINANCE CORPORATION OF INDIA LTD.’, (2011)12 TAXMANN.COM 268 (DELHI). 6.|We have considered the submissions madeon both the sides and Nave perused the record. It is notin dispute that as per Reserve Bank of India guidelines,|it is mandatory on the part of the assessee not torecognize interest, wnich nas not accrued to it. Tneassessee had not received any interest during therelevant.assessmentYedl.EVeDNIn|succeedingassessment year, no interest nad accrued to it. Tne Actimposes tax on real income i.e., the profits arrived at oncommercial principles subject to the provisions of theAct. Therefore, before levy of tax it has to beascertained that Income has accrued to assessee.—Admittedly, in the instant case, the income had notaccrued to the assessee. The Supreme Court in the case OT SOUTHERN TECHNOLOGIES SUPRANas made a distinction with regard to income recognition and has.held that income has to be recognized in terms ofprudential norms even though the same deviated frommercantile system of accounting or Section 145 of the.Act. Thus, the Supreme Court has approved the realincome theory, which is in built in prudential norms forrecognition of revenue by Non Banking FinancialCompany. Thus, it is evident that the income tax isleviedON|income|whether|mercantile systemofaccountancy is maintained or on cash basis. If theincome does not accrue to an assessee, there cannot beany levy of tax and an assessee cannot be subjected toany hypothetical / illusory income.| JThis distinction was also noticed by divisionbench of Delhi High Court in the case ofVASISTHCHAY VYAPAR LTD.*, SUPRAand while taking note ofthe decision rendered inSOUTHERN TECHNOLOGIESSUPRA, It has been held that Non Banking Financial Company's Prudential Norms (Reserve Bank) Directions,1998 have nothing to do with the accounting treatmentor taxability of income under the Act and the directionsoperate in different fields. The aforesaid decision ofDelhi High Court has been upheld by the Supreme Court.of India in ‘COMMISSIONER OF INCOME TAX. VS.|VASISTHCHAYVYAPARLTD.’, (2018)90|TAXMANN.COM 365 (SC). 8.|Tne Supreme Court in |VIJAYA BANK VS.|CIT’, (2010) 323 ITR 166has 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 incomein the concerned assessment years where it was foundthat amount was not recoverable. A Division Bench of |HighCourt|ofDelhl|In|INDUSTRIALFINANCECORPORATION LTD., SUPRAhas held that assessee|being a financial institution is duty bound to follow theguidelines of the Reserve Bank of India and the income of tne financial institutions nas to pe determined in/accordance with the norms of accounting guidelines,|which are applicable to it. 9 |Learnedcounsel]fortnepartiesjointly|submitted that substantial questions of law Nos.1 to 4 inITA No.100/2010 are covered by judgment of this Courtdated 17.10.2020 in ITA No.97/2010. Accordingly, theSame are answered. The substantial questions of law inITA No.98/2010 and substantial questions of law Nos.5—& 6 in ITA No.100/2010 are answered in view of thepreceding analysis in favour of the assessee.| Accordingly, the appeals are disposed of. SS| Sd/-JUDGE Sd/-|JUDGE