I.t.a v. Income Taxdepartment And Others

THE HIGH COURT OF MADHYA PRADESH : 1 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] Gwalior, Dated:-7.3.2019 Shri Anurag Sinha, learned counsel for the appellant. Shri D.P.S Bhadoriya, learned counsel for the respondents. With the consent of learned counsel for the parties, the matteris finally heard. The substantial question of law which arises for consideration in this appeal under Section 260A of the Income Tax Act, 1961 is: “Whether on the facts and circumstances of the case, theIncome Tax Appellate Tribunal is justified in law inholding that interest on non-performing assets is taxableon accrual basis looking to the guidelines of the ReserveBank of India?” Relevant facts giving rise to the substantial question of law isdelineated by Tribunal. The assessment year is 2009-10. The appellant is a non-banking institution engaged in providingfinancial assistance to its customers. The appellant (referred as Assessee) filed return of income on29-09-2009 declaring total loss of Rs.4,35,21,572/-. The case wasselected for scrutiny. Notices were issued under Section 143(2) andSection 142(1) of 1961 Act. Detail questionnaire was issued. Onexamination of computation of Profit and Loss account for the THE HIGH COURT OF MADHYA PRADESH : 2 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] financial year 2008-2009 it was revealed that the assessee has madeprovisions for doubtful debts amounting to Rs. 8,15,53,000/-, penalinterest Rs. 1,94,00,000/- and provisions for sundry debtorsamounting to Rs. 8,07,000/-. The Assessing Authority disallowed thedeductions sought on the findings that they were sought onanticipation basis and the liability/ loss being not actually arisenduring the year under consideration. The Assessing Authority heldthat provisions for doubtful debts, penal interests and provisions forsundry debtor are required to be disallowed because under IncomeTax Act, 1961, a provision made in accounts for an accrued or knownliability is an admissible deduction and no other provisions qualify fordeduction. It held that liability/loss to be deductible must haveactually been arisen or incurred and not merely anticipated as certainto occur. In appeal in respect of doubtful debts and provisions for sundrydebtor were found to be admissible and disallowance was deleted.However, balance of Rs. 41,08,767/- was confirmed. In respect of disallowance of Rs. 1,94,00,000/- an interest onNPA which was claimed in view of the guidelines issued by theReserve Bank of India were disallowed and affirmed by theCommissioner, Income Tax (Appeal) on the findings:- “6. The appellant has claimed that in view of the THE HIGH COURT OF MADHYA PRADESH : 3 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] guidelines the claim of the appellant is allowable. I haveseen the copy of the P & L account furnished by theappellant. It is seen that the sum of Rs.1,94,00,000/- hasbeen shown as 'reserve' (Kaalateet Byaz Kosh) and notas provision. Further this interest has not been written ofin the books of account by appellant. Any amountwhich is not written of as 'bad debt' and not covered bythe provisions of section 36 (1) (viia) is not admissibleas deduction. Therefore, the claim of the appellant ofRs.1,94,00,000/- is disallowable. Accordingly, theappeal of the appellant is dismissed on this issue.” The Tribunal affirmed the disallowance holding that under theAct of 1960, the provisions could be made in accounts for an accruedor known liability which may qualify for deduction and there is noother provision to qualify for deduction. The Tribunal affirmed the disallowance holding that under theAct of 1960, the provisions could be made in accounts for an accruedor known liability which may qualify for deduction and there is noother provision to qualify for deduction. The Tribunal found that in respect of penal interest in a sum ofRs. 1.94 Crores, the assessee has not made any claim or deductioneither under Section 36(I)(vii) or under Section 36(I)(viia) of the Act.The Tribunal held that “Non Performing Accounts are accounts ofdefaulters if they do not pay or no chance to pay entries made byassessee on accrual of penal interest appears to be made on mercantilesystem of accounting but later-on claimed deduction in P& L accounton cash basis cannot be held justified.” It held that once incomeaccrued, it has to be taxed. Both methods cannot operate together (by THE HIGH COURT OF MADHYA PRADESH : 4 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] referring Section 145 of 1960 Act). And that the RBI guidelines havebeen issued for administration purpose for regulating the bankingbusiness to maintain NPA account. After hearing learned counsel for the parties, we notice that theissue is squarely covered by the judgment in Principal Commissionerof Income-tax-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd., [2017]395 ITR 324 (Gujarat), Principal Commissioner of Income-tax,Ludhiana Vs. Ludhiana Central Co-op. Bank Ltd, [2018] 99taxmann.com81 (Punjab & Haryana), Commissioner of Income TaxVs. Deogiri Nagari Sahakari Bank Ltd, [2017] 79 taxmann.com 396(Bombay), Commissioner of Income-tax Vs. Vasisth Chay VyaparLtd, [2011] 196 Taxman 169 (Delhi). In Shri Mahila Sewa Sahakari Bank Ltd (supra) it was heldthat the Co-operative Banks were acting under the directives of theReserve Bank of India with regard to prudential norms set out. Andthat the taxing interest on NPA cannot be justified on the real incometheory. The decision in Shri Mahila Sewa Sahakari Bank Ltd (supra)was subjected to challenge before the Supreme Court in PrincipalCommissioner of Income Tax 5 Ahemdabad Vs. Mahila SahakariBank Ltd. (Civil Appeal No.8977/2017) by the Revenue, which wasdismissed on 13/12/2017. Similarly, the decision in Vasisth Chay Vyapar Ltd (supra) THE HIGH COURT OF MADHYA PRADESH : 5 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] wherein it was held “the assess being an NBFC was governed by theprovisions of the RBI Act. In such a case, interest income could notbe said to have accrued to the assessee having regard to theprovisions of section 45Q of the RBI Act and Prudential Normsissued by the RBI in exercise of its statutory powers. As per theseNorms, the ICDs had become NPA and on such NPA where theinterest was not received and possibility of recovery was almost nil,interest could not be treated to have been accrued in favour of theassessee” was also upheld by Supreme Court in Commissioner ofIncome Tax Vs. Vasisth Chay Vyapar Ltd., [2018] 253 Taxman 401(SC). Recently a Division Bench of High Court of Bombay in I.T.Appeal No. 1000/2016 (Principal Commissioner of Income Tax Vs.Solapur District Central Co-op. Bank Ltd.,) decided on 29/01/2019,in seisin with the similar issue as crops up for consideration in presentcase, observed:- “5 Having heard the learned Counsel for the parties,we notice that the issue is squarely covered by thejudgments of Gujarat High Court and Punjab & HaryanaHigh Courts. The Gujarat High Court in case of Pr.CITv/s. Shri Mahila Sewa Sahakari Bank Ltd., reported in395 ITR 324 had undertaken the detailed exercises toexamine an identical situation. The Court held that, the THE HIGH COURT OF MADHYA PRADESH : 6 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] Recently a Division Bench of High Court of Bombay in I.T.Appeal No. 1000/2016 (Principal Commissioner of Income Tax Vs.Solapur District Central Co-op. Bank Ltd.,) decided on 29/01/2019,in seisin with the similar issue as crops up for consideration in presentcase, observed:- “5 Having heard the learned Counsel for the parties,we notice that the issue is squarely covered by thejudgments of Gujarat High Court and Punjab & HaryanaHigh Courts. The Gujarat High Court in case of Pr.CITv/s. Shri Mahila Sewa Sahakari Bank Ltd., reported in395 ITR 324 had undertaken the detailed exercises toexamine an identical situation. The Court held that, the THE HIGH COURT OF MADHYA PRADESH : 6 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] Cooperative Banks were acting under the directives ofthe Reserve Bank of India with regard to the prudentialnorms set out. The Court was of the opinion that, taxinginterest on NPA cannot be justified on the real incometheory. The decision of the Gujarat High Court in ShriMahila Sewa Sahakari Bank Ltd., (supra) was carried inAppeal by the Revenue to the Supreme Court and suchappeal was dismissed. Later on, similar issue came upbefore Gujarat High Court in case of Pr. CIT v/s.Sarangpur Cooperative Bank Ltd., reported in 406 ITR302, the Court followed the earlier decision in case ofShri Mahila Sewa Sahakari Bank Ltd., (supra) anddismissed the Revenue's appeal. Once again, the issuewas carried to the Supreme Court by the Revenue. TheAppeal was dismissed by an order dated 28th April,2018. 6 Identical issue was also examined by the Punjanb& Haryana High Court in case of Pr. CIT v/s. LudhianaCentral Coop. Bank Ltd., reported in 410 ITR 72. Thedecision of the Gujarat High Court in Shri Mahila SewaSahakari Bank Ltd., (supra) was cited before the Court.The Court noted that appeal against such judgment of theHigh Court, was dismissed by the Supreme Court. TheCourt concluded as under: “Adverting to the factual matrix, it may be noticedthat the Tribunal while relying upon the variouspronouncements had decided the issue regardingtaxability of interest on NPA in favour of the THE HIGH COURT OF MADHYA PRADESH : 7 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] assessee as being taxable in the year of receipt.The Tribunal had upheld the deletion made by theCIT(A) on account of addition of Rs.3,02,82,000regarding interest accrued on NPA. No illegality orperversity could be demonstrated by learnedcounsel for the Revenue in the aforesaid findingsrecorded by the Tribunal.” 7 The issue is thus, covered by the decisions of two HighCourts as noted above wherein identical situation cameup for consideration. Against the judgment of the GujaratHigh Court, the appeals have been dismissed by theSupreme Court. Thus, the Supreme Court can be seen tohave approved the decision of the Gujarat High Court incase of Shri Mahila Sewa Sahakari Bank Ltd., (supra).We, therefore, do not see any reason to entertain theseAppeals, since no question of law can be stated to havearisen.” The issue in the case at hand is also not different as was in thecase of Shri Mahila Sewa Sahakari Bank Ltd (supra). The appellant-assessee acting under the directives of the Reserve Bank of Indiawith regard to prudential norms set out, taxing interest on NPA,therefore, cannot be justified on the real income theory. In view whereof, the substantial question of law is answered in favour of the appellant-assessee. The order passed by the AssessingOfficer, Appellate Authority and Tribunal are set aside. The THE HIGH COURT OF MADHYA PRADESH : 8 : I.T.A.No.8/2014 [Bhind District Cooperative Central Bank Ltd. Vs. Income TaxDepartment and others ] deduction as claimed for on the uncharged interest on NPA isallowed to the extent above. No costs. Pawar/- (Sanjay Yadav) Judge (Vivek Agarwal)Judge ASHISH PAWAR 2019.03.11 11:56:31 +05'30'