Bhagini Nivedita Sahakari Bank Ltd.,, ... vs Assessee

Bhagini Nivedita Sahakari Bank Dy. Commissioner of Income Tax, Ltd., 387/388, Narayan Peth, Circle 1(1), Pune. Vs. Rashtrabhasha Bhavan, Pune-30. (Appellant) (Respondent) PAN No.AAAAB0289K

Assessee By: Smt. Deepa Khare Revenue By: Shri Pankaj Garg

Date of hearing : 08-04-2015 Date of pronouncement : 29-05-2015

ORDER

PER VIKAS AWASTHY, JM:-

The appeal has been filed by the assessee impugning the order of

Commissioner of Income Tax (Appeals)-I, Pune dated 31.10.2013 for the

assessment year 2010-11.

2. In appeal, the assessee has raised the following grounds :-

"1. The learned CIT(A) erred in law and on facts in confirming the addition of Rs.68,50,765/- towards disallowance of deduction under section 36(1)(viia).

2. The learned CIT(A) erred in law and on facts in directing the Assessing Officer for verifying the interest on NPA of Rs.63,98,459/- as to examine realisability of interest on each NPA account and ignoring the RBI guidelines as also the consistent precedents of the Hon'ble Pune Tribunal.

3. The learned CIT(A) erred in law and on facts in confirming the addition of Rs.1,77,500/- towards disallowance of amortization of premium on HTM securities."

2 ITA No.136/PN/2014, A.Y. 2010-11 3. The brief facts of the case as emanating from records are: The

assessee is a co-operative society registered under Maharashtra Co-

operative Societies Act and is engaged in the business of banking. The

assessee filed its return of income for the assessment year 2010-11 on

27.09.2010 declaring total income of Rs.8,44,80,270/-. The case of the

assessee was selected for scrutiny and notice under section 143(2) of the

Income Tax Act, 1961 (in short "the Act") was issued on 20.09.2011. The

Assessing Officer vide order dated 30.11.2012 made certain

additions/disallowance.

Aggrieved by the assessment order dated 30.11.2012, the assessee

preferred an appeal before the Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) vide impugned order partly

accepted the appeal of the assessee.

Now, the assessee has come in second appeal impugning the order

of the First Appellate Authority.

4. Smt. Deepa Khare appearing on behalf of the assessee submitted

that the Commissioner of Income Tax (Appeals) has erred in confirming

disallowance of deduction claimed under section 36(1)(viia) of the Act.

The assessee is carrying on banking activities. Admittedly, all the

branches of the assessee are in urban area and as such, there are no

rural branches of the assessee. In the earlier assessment years, the

assessee was allowed deduction under section 36(1)(viia) of the Act. In

the present assessment year, there has been no change in the

accounting principles followed by the assessee or change in any business

activity, however, the Revenue has disallowed the claim of assessee

under section 36(1)(viia) of the Act in an arbitrary manner. The 3 ITA No.136/PN/2014, A.Y. 2010-11

authorities below have followed the decision of the Hon'ble Supreme

Court of India rendered in the case of Catholic Syrian Bank Ltd. vs. CIT

reported as 343 ITR 270 (SC). The case of the assessee is

distinguishable from the said case. The provisions of section 36(1)(viia)

of the Act have two distinct limbs. The first limb of clause (viia) states

that any provision for bad and doubtful debts made by any scheduled

bank/co-operative bank should not exceed 7.5% of the total income

before making any deduction under this clause and Chapter VIA. The

second limb of clause (viia) deals with the rural branches of the bank.

According to which provision for bad and doubtful debts in respect of

rural branches should not exceed 10% of aggregate advances. The case

of the assessee is covered by the first limb of section 36(1)(viia) of the

Act.

The Ld. Counsel for the assessee referred to page 36 of Paper

Book, wherein the computation of total income for the assessment year

2010-11 has been given. The Ld. Counsel pointed out that the assessee

has created Provision of bad debts to the tune of Rs.1,00,00,000/- and

the amount deducible according to the first limb of the provisions of

section 36(1)(viia) of the Act is Rs.68,50,765/-. Thus, the assessee has

claimed deduction within the permissible limits. The Ld. Counsel for the

assessee in order to strengthen her arguments further placed reliance on

Board Circular No.464 dated 18.07.1986 which explains the amendment

made by Income Tax (Amendment) Act, 1986 with respect to section

36(1)(viia) of the Act.

The Ld. Counsel for the assessee submitted that the Explanation-2

to section 36(1)(vii) of the Act inserted by the Finance Act, 2013, makes it

abundantly clear that the provision for bad and doubtful debts would be 4 ITA No.136/PN/2014, A.Y. 2010-11

treated as single account related to all types of advances i.e. rural or

otherwise. Thus, it can be safely construed that deduction is allowable

in case of provision for non-rural advances also. On interpretation of

statutes, the assessee placed reliance on the judgement of the Hon'ble

Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT

reported as (2010) 328 ITR 81 (Bom).

5. The second issue in the appeal relates to interest on NPA

accounts. The Ld. Counsel submitted that similar issue was raised

before the Tribunal in bunch of appeals, one of which is ITA

No.387/PN/2014 for the assessment year 2010-11 decided on

28.11.2014. The Co-ordinate Bench of the Tribunal has decided the

issue in favour of the assessee.

6. The third issue in this appeal relates to amortization of premium

paid on Govt. Securities held under HTM category. The Ld. Counsel for

the assessee contended that similar issue was raised by the assessee in

the assessment year 2009-10 in ITA No.690/PN/2013 decided on

27.11.2013. The Co-ordinate Bench of the Tribunal placed reliance on

the decision in the case of Nashik Merchants Co-operative Bank Ltd. in

ITA No.1254/PN/2011 and decided the issue in favour of the assessee.

7. On the other hand, Shri Pankaj Garg representing the Department

vehemently supported the finding of the Commissioner of Income Tax

(Appeals). The Ld. Departmental Representative submitted that the

assessee is not entitled to claim the benefit of section 36(1)(viia) of the

Act in view of the judgement of the Hon'ble Supreme Court of India in

the case of Catholic Syrian Bank Ltd. vs. CIT (supra). The Hon'ble

Supreme Court in the said judgement has unambiguously held that the 5 ITA No.136/PN/2014, A.Y. 2010-11

provisions of clause (viia) apply only to rural advances. It is an admitted

case of the assessee that assessee is not having any rural branches,

therefore, the assessee is not entitled to claim any deduction whatsoever

under the provisions of section 36(1)(viia) of the Act.

So far as, the other two grounds raised by the assessee in its

appeal, the Ld. Departmental Representative placed reliance on the

findings of the CIT(A).

8. We have heard the submissions made by the Representatives of

both sides and have perused the orders of the authorities below. We

have also examined the decisions on which the Ld. Counsel for the

assessee has placed reliance. It is an undisputed fact that the assessee

is not having any rural branches. The contention of the assessee is that

the provisions of section 36(1)(viia) of the Act has two distinct

independent components. The case of the assessee is covered by the

provisions contained in first limb of clause (viia). The second limb of

clause (viia) relates to rural branches which is not applicable in the case

of the assessee. The Ld. Counsel for the assessee has tried to create

distinction between the instant case and Catholic Syrian Bank Ltd. vs.

CIT (supra).

9. Before we proceed further, it is essential to recapitulate the

provisions of section 36(1)(vii) and (viia) of the Act, which reads as

under :-

"36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -

6 ITA No.136/PN/2014, A.Y. 2010-11 (vii) subject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year]:

[Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.] [Explanation 1. -- For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;] [Explanation 2. -- For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;] [(viia) [in respect of any provision for bad and doubtful debts made by--

(a) a scheduled bank [not being [* * *] a bank incorporated by or under the laws of a country outside India] or a non-

scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding [ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :

[Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:] [Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten per cent" had been substituted :] [Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:

7 ITA No.136/PN/2014, A.Y. 2010-11 Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession." ] [Explanation.--For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;]"

10. A bare reading of clause (vii) & (viia) would show that both clauses

deal with the different items. The provisions of clause (vii) deal with 'bad

debts', whereas, provisions of clause (viia) deals with 'provision for bad

and doubtful debts'. The distinction which the Ld. Counsel for the

assessee has tried to create by dividing the provisions of clause (viia) into

two parts is merely self-drawn. Both the parts of clause (viia) are joined

with conjunction "and". Therefore, both the limbs of clause (viia) have to

be read together and not as alternate. The Hon'ble Supreme Court of

India in the case of Catholic Syrian Bank Ltd. vs. CIT (supra) has

categorically held that the provisions of section 36(1)(vii) deals with

general deduction available to a bank and even non-banking business.

The provisions of section 36(1)(vii) operate in their own field and are not

restricted by the limitation of section 36(1)(viia) of the Act. After giving

detailed findings and elaborating the provisions of both the clauses, the

Hon'ble Apex Court concluded as under :-

"To conclude, we hold that the provisions of section 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to section 36(1)(vii) will relate to 36(2)(v) of the Act. Thus, the proviso would not permit the benefit of double deduction, operating with reference to rural loans while, under section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, 8 ITA No.136/PN/2014, A.Y. 2010-11

would be subject to satisfaction of the requirements contemplated under section 36(2)."

11. The Hon'ble Apex Court while considering the issue, has also

examined the Board Circular No.464 (supra). The Hon'ble Court in

course of interpreting the provisions of section and the amendments

thereto and the explanations and clarifications given by circulars

observed :-

"Thus, this court would be more inclined to give an interpretation to these provisions which would serve the legislative object and instant, rather than to subvert the same."

Thus, in view of the judgement of the Hon'ble Supreme Court of

India in the case of Catholic Syrian Bank Ltd. vs. CIT (supra), we do not

find any infirmity in the findings of the Commissioner of Income Tax

(Appeals) on this issue. Accordingly, the first ground raised by the

assessee in its appeal is rejected.

12. The next ground raised by the assessee in appeal is with respect to

interest on NPA. The assessee bank has been consistently following the

practice of crediting interest accrued on NPA accounts to Overdue

Interest Reserve as per the guidelines issued by Reserve Bank of India.

The interest actually recovered on such accounts is credited to Profit &

Loss Account and due tax is paid thereon.

The Authorized Representative for the assessee has placed reliance

on the decision of Tribunal in the case of ACIT vs. Ratanchand Shah

Sahakari Bank Ltd. vide ITA No.387/PN/2014 for assessment year

2010-11 decided on 28.11.2014. We find that Co-ordinate Bench of the

Tribunal has decided bunch of petitions vide single order, wherein the 9 ITA No.136/PN/2014, A.Y. 2010-11

issue relating to interest on Non-Performing Assets (NPA) was dealt with.

The findings of the Tribunal on the issue are as under :-

"7. At the time of hearing, it was a common point between the parties that an identical controversy has been considered by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order in ITA No.350/PN/2013 dated 31.10.2013. In the said precedent, the Tribunal considered the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd., 330 ITR 440 (Del) as well as the judgement of the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances. In the absence of any judgement of the Jurisdictional High Court, a view which was favourable to the assessee was followed by the Tribunal and the issue was decided in favour of the assessee in view of the reasoning laid down by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC). The relevant discussion in the order of the Tribunal dated 31.10.2013 (supra) is reproduced as under :-

"8. We have carefully considered the rival submissions. In so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Ostensibly, assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a 'scheduled bank' included in second schedule of RBI so as to fall within the scope of section 43D of the Act. Notably, section 43D of the Act prescribes that interest income on such categories of bad and doubtful debts as prescribed by the RBI guidelines shall be chargeable to tax in the year in which such interest income is credited by the assessee in the Profit and Loss account or in the year of actual receipt, whichever is earlier. Since assessee is not an entity covered within the scope of section 43D of the Act, the present controversy cannot be adjudicated in the light of section 43D of the Act, and it is liable to be decided on general principles as to whether the impugned income has accrued to the assessee during the year under consideration.

9. In this connection, we find that the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) has considered an identical controversy. The assessee before the Visakhapatnam Bench was a Co-operative Bank operating under a license issued by RBI but was not a 'scheduled bank' so as to fall within the scope of section 43D of the Act. The issue related to taxability of interest income relating to NPAs, which as per the Revenue was liable to be taxed on accrual basis in line with mercantile system of accounting adopted by the assessee therein. The assessee, on the other hand, contended that having regard to the guidelines issued by RBI regarding accounting of interest on NPAs, no interest income accrued in respect of NPAs and that the same was to be taxed only on receipt basis. The Tribunal observed that the question of taxability of interest on NPAs classified by RBI, was considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) wherein after considering the decision of the 10 ITA No.136/PN/2014, A.Y. 2010-11

Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) it was held that interest income relatable to NPAs was not includible in total income on accrual basis since the same did not accrue to the assessee. The following discussion by the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd. (supra) is worthy of notice :-

"8. We have heard the rival contentions and carefully perused the record. The question of taxability of interest on NPAs has been considered by the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd (Supra); wherein the Hon'ble Delhi High Court took into account the decision rendered by the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). In the case of M/s Vasisth Chay Vyapar Ltd, the assessee therein was a non banking financial company and it was also bound by the "Prudential norms directions" issued by the Reserve Bank of India for Income recognition and asset classification. The assessee did not include the interest income relatable to NPA assets in its total income. The Assessing Officer, however, added the said interest as the income of the assessee by holding that it had "accrued" to the assessee even it was not realized as the assessee was following mercantile system of accounting. The learned CIT (A) affirmed the order of the Assessing Officer. However, the ITAT deleted the aforesaid income. Hence the revenue preferred appeal before the Hon'ble Delhi High Court.

8.1 After hearing the rival submissions, the Hon'ble Delhi High Court took note of sec.45Q of Reserve Bank of India Act which reads as under:

"Chapter IIIB to override other laws.

45Q. The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law".

The High Court took note of the fact that the provision of 45Q of Reserve Bank of India has overriding effect over any other law. Then the Hon'ble High Court also considered accounting standard "AS-9" on "Revenue recognition" and also extracted following relevant portion from the said accounting standard:

9. Effect of uncertainties on Revenue Recognition

9.1 Recognition of revenue requires that revenue is a measurable and that at the time of sale or the rendering of the service, it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale or rendering of service even though payments are made by installments.

11 ITA No.136/PN/2014, A.Y. 2010-11 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized".

8.2 The Delhi High Court also considered the decision rendered in the following cases:

i) CIT vs. Elgi Finance Ltd., 293 ITR 357 (Mad)

ii) CIT vs. KKM Investments (Cal) - SLP dismissed by Supreme Court (310 ITR 4)

iii) CIT vs. Motor Credit Co (P) Ltd., 127 ITR 572 (Mad)

iv) UCO Bank vs. CIT 237 ITR 889 (SC)

v) CIT vs. Shoorji Vallabhdas & Co 46 ITR 144 (SC)

vi) Godhra Electricity Co. Ltd., Vs.CIT 225 ITR 746

vii) CIT vs. Goyal M G Gases (P) Ltd., 303 ITR 159 (Del)

viii) CIT vs. Eicher Ltd., ITA No.431/2009 dated 15.7.2009 (Del)

8.3 After considering the Accounting Standard 9 and the various case law listed above, the Hon'ble Delhi High Court held that the interest on NPA advance cannot be treated as "accrued" to the assessee.

8.4 Before the Delhi High Court, the revenue took support of the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (Supra). The Delhi High Court considered the said decision of Hon'ble Apex Court and explained the same as under:

"We have already held that even under the Income Tax Act, interest income had not accrued. Moreover, this submission of Mr. Sabharwal is based entirely on the judgment of the Supreme Court in the case of Southern Technology (Supra). No doubt, in first blush, reading of the judgment gives an indication that the Court has held that Reserve Bank of India Act does not override the provisions of the Income Tax Act. However, when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the Apex Court contained in that very judgment, we find that the proposition advanced by Mr.Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited Rs.81,68,516 as provision against NPA in the profit and loss account, which was claimed as deduction in terms of Section 36(1) (vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a 12 ITA No.136/PN/2014, A.Y. 2010-11

reserve, and thus not deductible under section 36(i)(vii) of the Act. The Assessing Officer, however, did not bring to tax Rs.20,34,605/- as income (being income accrued under the mercantile system of accounting). The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the Reserve Bank of India Act, their Lordships of the Apex Court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefore under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to "Income Recognition"

and held that income had to be recognized in terms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 45 (sic. 145) of the Income Tax Act. It can be said, therefore, that the Apex Court approved the 'real income' theory which is engrained in the Prudential Norms for recognition of revenue by NBFC".

9. The Hon'ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz., a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-à-vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon'ble Supreme Court are extracted below:

"Applicability of Section 145

40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct"

profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis-à-vis "Income Recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the 'permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of Income Recognition and presentation of Financial Statements. The Accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the Accounting Policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement 13 ITA No.136/PN/2014, A.Y. 2010-11

of profits. However, here is the case where the AO has to follow the Reserve Bank of India Directions 1998 in view of Section 45Q of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute".

10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-à-vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court.

10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant:

"What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not "accrued".

The said decision of the Hon'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order."

10. Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs.

11. So, however, the learned Departmental Representative has submitted that the Hon'ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd., (2013) 31 taxmann.com 305 (Madras) has differed with the judgement of the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) on a similar issue, i.e. relating to interest income on NPAs. The learned Departmental Representative further pointed out that the Hon'ble Madras High Court followed the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) in holding that interest on NPAs was assessable to tax on accrual basis. We have carefully considered the submissions put-forth by the learned Departmental Representative based on the judgement of the Hon'ble Madras High Court in the case of Sakthi Finance Ltd. (supra). The controversy before the Hon'ble Madras High Court related to non-recognition of interest income on NPAs by the assessee following the RBI guidelines. The Hon'ble Madras High Court took the 14 ITA No.136/PN/2014, A.Y. 2010-11

view that the judgement of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) also applied to the Income Recognition Norms provided by RBI and therefore it held the interest income on NPAs is liable to be taxed on accrual basis and not in terms of RBI's guidelines. But the Hon'ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. (supra) has taken a view that Southern Technologies Ltd. (supra) case did not apply to the Income Recognition Norms prescribed by RBI. Ostensibly, there is divergence of opinion between the Hon'ble Delhi High Court and the Hon'ble Madras High Court as noted by the Hon'ble Madras High Court in its order.

12. In so far as, present case is concerned there is no judgment of the Jurisdictional High Court. We are faced with two contrary judgments of the non-jurisdictional High Court. In such a situation, we are inclined to prefer a view which is favourable of the assessee following the judgement of the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC).

13. Therefore, in view of the aforesaid discussion, we are inclined to follow the decision of our co-ordinate Bench in the case of The Durga Cooperative Urban Bank Ltd. (supra) and accordingly the order of the CIT(A) is liable to the affirmed. We hold so.

14. In the result, the appeal of the Revenue is dismissed."

8. It was also a common point between the parties before us that the facts and circumstances in the present case are identical to those considered by us in the case of The Omerga Janta Sahakari Bank Ltd. (supra) and, thus following the said precedent the present claim of the assessee deserves to be upheld. Thus, the order of the CIT(A) is hereby affirmed and the Revenue has to fail on this aspect."

13. The issue raised in the present appeal is identical to one already

decided by the Co-ordinate Bench in the case of ACIT vs. Ratanchand

Shah Sahakari Bank Ltd. (supra). We do not find any reason to deviate

from the consistent view taken by the Tribunal on this issue. The Ld.

Departmental Representative has not been able to controvert the

findings of the Tribunal. Accordingly, the second ground of appeal is

accepted.

14. The third and last ground raised by the assessee is disallowance of

amortization of premium paid on Govt. Securities held under HTM

category.

15 ITA No.136/PN/2014, A.Y. 2010-11

We observe that this issue has already been decided in assessee's

own case in assessment year 2009-10. There has been no change in

facts and circumstances of the case in impugned assessment year. The

Ld. Departmental Representative has not been able to refute the findings

of the Tribunal in immediately preceding assessment year. Thus, the

addition of Rs.1,77,500/- towards disallowance of amortization of

premium on Govt. Securities held under HTM category is deleted.

15. In the result, the appeal of the assessee is partly allowed in the

aforesaid terms.

Order pronounced on Friday, the 29th day of May, 2015

at Pune.

Sd/- Sd/- (R.K. PANDA) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Pune, Dated: 29th May, 2015

Sujeet

Copy to

1 Assessee 2 Department 3 The CIT(A)-I, Pune 4 The CIT-I, Pune 5 The DR, ITAT, "B" Bench, Pune. 6 Guard file.

By Order

//True Copy//

Sr. Private Secretary Income Tax Appellate Tribunal, Pune