Interest income on NPA need not to be accrued in books of account in case of Bank and NBFCs
9:09 amInterest income on NPA need not to be accrued in books of account in case of Bank and NBFCs
Citation of the Case:-West Bengal Infrastructure Development Finance Corporation vs. ACIT (ITAT Kolkata), Income tax (Appeal) no. 388 of 2008 & others, , Date of Judgment: 10/11/2015
Brief of the Case
ITAT Ahmedabad held In the case of West Bengal Infrastructure Development Finance Corporation vs. ACIT that in the case of CIT vs Vasisth Chayt Vyapar Ltd. 330 ITR 440 (Delhi) , it was held that the real income theory was still relevant and recognition of income in terms of Prudential Norms of RBI did not deviate from the mercantile system of account u/s 145 of the Income Tax Act. We are of the view that in the instant case due to uncertainty in collection there was no accrual of income having regard to the real income theory which is engrained in the RBI’s prudential norms for recognition of revenue.
Facts of the Case
ITA No.388/Kol/2008 (Assessee’s appeal)
The assessee is a Government company wholly owned by the Government of West Bengal. It is a non banking finance company registered with the Department of Non-Banking Supervision, Kolkata Regional Office of Reserve Bank of India. During the previous year relevant to A.Y.2001-02 i.e. on 18.9.2000 and 18.11.2000 the assessee paid EMI to ICICI bank in respect of term of loan taken by the assessee. The
EMI comprised of both repayment of principal and interest. The interest component on the payment of EMI was a sum of Rs.1,40,77,397/-. Due to inadvertence the interest payment had not been claimed as deduction in the profit and loss account, as the entire payment in question was mistakenly taken as re-payment of principal. This mistake was however noticed and rectified in the following financial year.
ITA No.464/Kol/2008 (Revenue’s appeal)
The assessee had not recognized as income interest that has to receive on loans that it had lent because these loans had become non-performing assets(NPA), within the meaning of the Prudential norms laid down in Non-Banking Financial Companies Prudential Norms (Reserve bank) Directions, 1998 (Prudential Norms). As per the aforesaid norms income on non- performing assets shall be recognized only when it is actually realized. The AO rejected the claim of the assessee and considered a sum of Rs.1,24,31,423/- which was interest on NPA which was not recognized by the assessee as income in the books of accounts. The AO was of the view that the prudential norms of Reserve Bank of India are not binding when it comes to computing the total income under the Income Tax Act, 1961.
Further the assessee creates sinking fund by depositing from time to time the required amounts with Banks in the form of recurring deposits of varying periods ranging from 3 to 10 years. Interest on such recurring deposits is not payable at the end of previous year but is payable only on the maturity of the period for which the respective recurring deposits have been made. Such recurring deposits are made with the sole object of having funds in hand at the time of redemption of infrastructure development bonds issued by the assessee to raise funds for the purpose of pursuing its objects of providing infrastructure finance. Since both interest and principal are due and payable only upon maturity, the assessee did not account for any interest. According to the revenue, in case of a recurring deposit, interest is received and reinvested and as such interest is required to be taxed every year and not altogether at the time of maturity.
ITA No.389/Kol/2008: (Assessee’s appeal)
The assessee has made deposits from time to time with the Pay & Accounts office of the Government of West Bengal. When these deposits were made initially, it did not carry any interest. By a letter dated 13th June. 2001 the Principal Secretary to the Government of West Bengal wrote to the Principal Accountant General (A&E) to the effect that the deposits of the Public Sector Undertaking were maintained under
Public Accounts Major Head 8342, which was an interest bearing account. However, the State Government had not been paying interest for the said deposits and the office of the Accountant General raised an objection and suggested that these accounts be transferred from Major Head 8342 to 8449, a non-interest bearing head. Accordingly, the said transfer was effected by the Principal Secretary to 8449, a non-interest bearing head.
Thereafter it was felt necessary by the State Government to maintain the deposit account of the Assessee under interest bearing head i.e. 8342 and for that reason the Principal Secretary sought for the permission for transferring the deposit of the Assessee from head 8449 to 8342. It was also decided that the State Government will pay the interest on the deposits of the Assessee at the same rate at which the State Government has been receiving the loan against the Central Plan Assistance. However, the rate at which the interest is to be paid was not decided or communicated. Further the State Government did not pay any interest according to the rate at which loan for Central Plan Assistance is allowed. However
by a letter dated 31st March, 2004 ultimately the State Government decided to pay interest on the deposits of the appellant with the Pay and Accounts Office at the rate applicable for Normal Ways and Means Advance availed by the State Government.
According to the Assessee the point of time when interest income can be considered as crystalized is when the State Government by its letter dated 28.2.2005 ultimately quantified the interest payable to the Assessee. Till such time it cannot be said that interest income had accrued to the Assessee. The AO however did not accept the plea of the Assessee and he held that interest income had accrued to the Assessee and quantified the same at Rs.50.31 Crores which was quantified by the Comptroller and Auditor General in his comments u/s.619(4) of the Companies Act, 1956 on the accounts of the Assessee. Accordingly a sum of Rs. 50.31 Crores was added to the total income of the Assessee
Further the assessee reversed interest income of Rs.26,43,24,776/- accounted for in earlier financial years since the assets concerned became NPA during the previous year ended March 31, 2003 relevant to the assessment year 2003-04 according to RBI’s prudential norms. The assessee having accounted for such interest income in the earlier years wrote it off as irrecoverable. The debtors on account of accrued interest were reduced to the extent of Rs.26,43,24,776/- and the same amount was reduced from the interest income credited to the profit and loss account.The assessee having written off the debt which had become bad as irrecoverable in its accounts, it claimed deduction in respect thereof under section 36(1 )(vii).
ITA No.604/Kol/2011 (Revenue’s Appeal)
The assessee filed its original return on November 30, 2006 showing a total income of Rs.495.03 crores and a sum of Rs.6.12 crores as refundable . The said return was processed under section 143(1) on May 30, 2007. The statutory audit was completed on March 24, 2008 and the CAG audit on April 28, 2008. The accounts were adopted at the annual general meeting held on August 14, 2008. Thereafter, in course of the assessment proceedings on October 22, 2008 the assessee submitted a revised computation of income along with audited accounts showing an income of Rs.228.83 crores and claiming a refund of Rs.95.l5 crores. In the said revised statement, the assessee mentioned interest of Rs.56,87,807/- payable under section 234C. The AO computed the assessee’s income as per the revised computation of income. However, he charged interest under section 234C of Rs.62,13,902/- on the basis of the income figures shown in the return submitted on November 30, 2006.
ITA No.1283/Kol/2012 Revenue’s Appeal
The Assessee had added back an amount of Rs.55,92,B96/- u/s 14A read with Rule BD. The Assessing Officer, however, recomputed the disallowance u/s 14A read with Rule BD at an amount of RS.1,04,60,946/-. Therefore, the Assessing Officer made an addition of Rs.48,68,050/- on this account. While computing the quantum of disallowance u/s 14A, the Assessee did not consider an aggregate sum of Rs. 198,80,09,710/- (Rs. 194,61,95,7101- in 1% Cumulative Preference Shares of Haldia Petrochemicals Ltd (HP L) and Rs. 4,18,14,000/- in Equity Shares of the Calcutta Stock Exchange Association Ltd (CSEAL)), being investments made by the Appellant pursuant to the directions desire of the Government of West Bengal, as investments for the purpose of Rule 8D. Since till date the Assessee Company had not received any amount as dividend on such Preference Shares. Accordingly, investments in Preference Shares of HPL had not been considered by the Assessee investment for the purpose of Rule 8D.
Contention of the Assessee
ITA No.388/Kol/2008 (Assessee’s appeal)
The ld counsel of the assessee submitted that the requirement of debit in the profit and loss account of interest expenses is not required and in this regard made reference to the decision of the Hon’ble Calcutta High Court in the case of Associated Pigments Ltd. Vs CIT 234 ITR 589 (Cal). With regard to the assessee not having filed the revised return of income, the ld. Counsel for the assessee referred to the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. Vs CIT 284 ITR 323 (SC) and submitted that the aforesaid decision only bars a claim being considered by AO without filing of a revised return of income and that such bar does not extent to the appellate authorities under the Act.
Further the ld counsel of the assessee relied on the below judgments : (i) Universal Subscription Agency P. Ltd. Vs. JCIT 293 ITR 244 (All) (ii) CIT vs Pruthvi Brokers & Shareholders (P) Ltd 349 ITR 366 (Bom) (iii)CIT vs. Sam Global Securities Ltd. 360 ITR 682 (Del) (iv)CIT vs. Rajasthan Fasteners P. Ltd. 363 ITR 271 (Raj) He also submitted that in remand report submited by the AO before CIT(A), the AO has accepted the fact that the interest payment in question was allowable u/s 43B in A.Y.2001-02 but cannot be allowed because of absence of a valid return or revised return making such a claim.
ITA No.1283/Kol/2012 Revenue’s Appeal
It was submitted on behalf of the Assessee that as against dividend income of Rs.41,02,847/-, the assessee offered Rs.55,92,89-6/- for disallowance [increased to Rs.63,22,363/- before CIT(A)]. The AO did not specify a single reason as to why the assessee’s claim of expenditure was not acceptable and straightaway embarked upon computing disallowance under rule 8D. Such action of the AO is wholly unsustainable in view of the judgments of the Hon’ble Calcutta High Court in GA No.2290 of 2013, ITAT No.157 of 2013, v Shri Ashish Jhunjhunwala decided on January 8,2014 and in GA No.3022 of 2013,, ITAT No.161 of 2013, CIT v REI Agro Ltd. Decided on December 23,2013.
Furthe submittted that the disallowance u/s.14A cannot be made as there was no dividend received on the preference shares and in any event the disallowance u/s.14A of the Act cannot be in excess of the dividend income earned by the Assessee. For the proposition that when there is no dividend income no disallowance u/s.14A of the Act is called for, the he has placed reliance on the following decisions: CIT Vs. Winsome Textile Industries Ltd. 319 ITR 204 (P & H), CIT Vs. Corrtech Energy (P) Ltd. 372 ITR 97 (Guj.), CIT Vs. Shivam Motors Pvt. Ltd. 545 Taxmann.com 262 (All) ,Order dated 26.2.2009 of the Hon’ble Bombay High Court in ITA No.110 of 2009 in the case of CIT Vs. Delite Enterprise , Ortder dated 12.9.2014 of the Bangalore ITAT in the case of M/S.Alliance Infrastructure Projects Pvt.Ltd. ITA No.220,2324, 1043 and 1217/Bang/2013. CIT Vs. Holcim India Pvt. Ltd. 57 Taxmann.com 28 (Del).
Contention of the Revenue
ITA No.388/Kol/2008 (Assessee’s appeal)
The ld counsel of the revenue relied on the order of CIT (A).
ITA No.464/Kol/2008 (Revenue’s appeal)
It was contended on behalf of the revenue that the RBI directives had no binding effect on the Income Tax Act. It was also contended that under the mercantile system income had to· be booked· as soon as it accrued and the question of taxability was to be decided according to principles of law and not accountancy practice. Reliance in this behalf was placed on the judgment of the Hon’ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd., (1997) 227 ITR 172 (sc), State Bank of Travancore v CIT (1986) 158 ITR 102 (SC) and CIT v Shiv Prakash Janak Raj & Co.Pvt. Ltd. (1996) 222 ITR 583 (SC).
On the matter of interst on recurring deposits, the ld counsel of the assesee placed reliane on the judgment of the Hon’ble Supreme Court in CIT v T.N.K. Govindarajulu Chetty, (1987) 165 ITR 231 (SC). That case related to interest on land acquisition compensation and it was held that such interest accrued on year to year basis. In the instant case, there was no accrual since the interest was neither due nor receivable until maturity. The decision of the Hon’ble Supreme Court in CIT v. A.Gajapathy Naidu, (1964) 53 ITR 114 (SC) sought to be relied upon on behalf of the revenue actually supports the plea of the assessee in its contention that interest income is taxable only upon maturity when the right to receive
interest accrued to the assessee. In Laxmipat Singhania v CIT, (1969) 72 ITR 291 (SC), relied upon on behalf of the revenue it was held that where the amount had escaped assessment on accrual basis it could not be taxed in another year on the basis of receipt. No such situation has arisen in the instant case inasmuch as accrual of interest is only upon maturity and there is no question of any income escaping assessment on accrual basis.
Held by CIT (A)
ITA No.388/Kol/2008 (Assessee’s appeal)
CIT(A) rejected the claim of the assessee on the ground that the amount in question was not debited in the profit and loss account and no revised return was filed by the assessee nor was the interest expenses in question shown as allowable or disallowable u/s 43B.
ITA No.464/Kol/2008 (Revenue’s appeal)
CIT(A) following the decision of the Hon’ble ITAT in assessee’s own case for A.Y.2002-03 in ITANo.395/Kol/2006 order dated 25.08.2006 deleted the addition made by the AO.
ITA No.389/Kol/2008: (Assessee’s appeal)
The CIT(A) was of the view that the letter dated 13.6.2001 of the Principal Secretary, Government of West Bengal actually decided the rate of interest and therefore interest income should be deemed to have accrued to the Assessee as and from the said date. According to the CIT(A) the letter dated 5.3.2004 and 31.3.2204 was only a confirmation of what was already decided and was not a letter which creates liability of the Government to pay interest and the right of the Assessee to receive interest. On such reasoning, the order of the AO was confirmed by the CIT(A).
On the matter of bad-debt written off as irrecoverable under section 36( 1)( vii) , CIT(A) dismissed the assessee’s ground relying upon the decision of the Hyderabad Bench of Hon’ble Tribunal in State Bank of Hyderabad v DCIT, (2005) 94 ITD 219 observing that the assessee had not written off the amount as bad debt under section 36(1)(vii) and that the case of the assessee was that there is no question of writing off under section 36(1)(vii).
ITA No.604/Kol/2011 (Revenue’s Appeal)
The CIT(A) following his predecessor’s order for the assessment year 2004-05 granted relief to the assessee. He held that interest under section 234C was to be charged on the basis of the revised computation which was accepted for the purpose of making the assessment. He held that interest under section 234C was compensatory in nature and when there was lesser liability for payment of advance tax on the basis of the accepted revised computation, no interest under section 234C can be charged on the
ground that the income shown in the original return was higher. Thus, the AO was directed to charge interest under section 234C on the basis of revised computation as per the past practice of charging interest with reference to the accepted basis of assessment.
ITA No.1283/Kol/2012 Revenue’s Appeal
CIT(A), agreed with the submissions of the Assessee. It was held that The appellant has not made the investments as investments of RS.194.62 crores into Preference Shares of HPL. It has given it as a loan and as per the instructions of the West Bengal Government looking into the financial position of the debtor and the policy of the Government; the same was converted as preference shares. The debtor is still incurring losses and no dividend what so ever has been received ever by the appellant. The interest was also not received since long as discussed supra. Therefore, in these facts and circumstances where a loan as a compulsion is converted into preference shares which has not yielded any dividend, the plea of the appellant on equity principle is accepted that the expenses under rule 80(2)(iii) should not be disallowed on the said amount of RS.194.62 crores worth of preference shares of HPL.
Held by ITAT
ITA No.388/Kol/2008 (Assessee’s appeal)
From a perusal of the remand report of the AO filed by the assessee, it is clear that the AO does not dispute the fact that an amount of Rs.1,40,77,397/- was interest on term loan which was paid to ICICI during the previous year relevant to A.Y.2001-02. It is also not in dispute that the provision of section 43B will apply to such interest payment and therefore the interest expenditure in question cannot be claimed by the assessee as deduction in any other assessment year in view of the specific bar contained in section 43B(d). In other words irrespective of the method of accounting following by the assessee, interest, expenses of the nature referred to section 43B(d) can be allowed as a deduction only in the year in which such interest are actually paid. The debit to the profit and loss account of an amount which is claimed as deduction u/s 43B is not a requirement and the decision of the Hon’ble Calcutta High Court in the case of Associated Pigments Ltd. Vs CIT supports the plea of the assessee in this regard.
Whether in the absence of a revised return of income making claim for interest expenses, the deduction can be allowed
In the case of Goetze India Ltd. wherein it has laid down that the AO cannot consider a claim made by an Assessee before him, in the absence of such claim being made in the return of income or a revised return of income. As rightly contended by the ld. Counsel for the assessee, such a bar does not extend to the appellate authorities under the Act. The decisions referred squarely support the stand of the assessee in this regard. We, therefore, hold that a sum of Rs..1,40,77,397/- should be allowed as deduction.
ITA No.464/Kol/2008 (Revenue’s appeal)
The Hon’ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577 (SC) no doubt took a view that the Prudential Norms of Reserve Bank of India regarding NPA will not be applicable when it comes to computing the total income under the Income Tax Act. The aforesaid decision of the Hon’ble Supreme Court was however considered by the Hon’ble Delhi High Court in the case of CIT vs Vasisth
Chayt Vyapar Ltd. 330 ITR 440 (Delhi) and it was held that the real income theory was still relevant and recognition of income interms of Prudential Norms did not deviate from the mercantile system of account u/s 145 of the Act. Therefore the Prudential Norms for recognition of revenue by NBFC was held to have been recognized by the Hon’ble Supreme Court.
It is also seen that section 43D of the Act is applicable in assessee’s case. In terms of section 43D of the Act interest in respect of non-performing assets is chargeable to tax in the year in which such interest is credited to the profit and loss account or the year in which this is actually received whichever is earlier. The categories of bad or doubtful debts interest in respect of which is covered by section 43D have been prescribed by rule 6EA of the IT Rules 1962. The assessee’s NPA falls within the purview of Rule 6EA. It is also pertinent to mention that the entire interest on NP A was offered to tax in the assessment year 2006-07.
We are of the view that in the instant case due to uncertainty in collection there was no accrual of income having regard to the real income theory which is engrained in the RBI’s prudential norms for recognition of revenue as held by the Hon’ble Delhi High Court in Vasisth Chay Vyapar Ltd. We are of the view that the CIT(A) was justified in coming to the conclusion that interest on NPA need not be recognized as income by the Assessee.
On the matter of interest accrued on recurring deposits, we find that the Hon’ble Kerala High Court in CIT v Federal Bank Ltd., (2008) 301 ITR 188 (Ker) has held that interest in respect of securities became due and receivable only upon maturity and there was no entitlement to interest prior to maturity. It is also pertinent to mention that the entire interest was accounted for and offered to tax by the assessee in the assessment year 2005-06. We are of the view that none of the decisions relied upon by the ld counsel of the revenue is of any assistance to the revenue since there is no accrual of interest prior to maturity. Accordingly, we uphold the order of the CIT(A).
ITA No.389/Kol/2008 (Assessee’s appeal)
It is clear from the various communications that the quantum of interest receivable for the previous year ended March 31, 2003 got finalised and crystallised only upon sanction in February 2005. By the communications of March 2004, a different rate of interest than that proposed in the letter dated June 13, 2001 was decided to be applied with retrospective effect. The sanction was finally given in respect of the amounts quantified in February 2005. The assessee in fact accounted for such interest in its accounts for the financial year ended March 31, 2005. In the light of the factual background as above, we are of the view that there was no accrual of interest income in the previous year relevant to AY 2003-04 and the addition made by the AO and confirmed by the CIT(A) cannot be sustained.
On the matter of bad-debt written off as irrecoverable under section 36( 1)( vii), we are of the view that that if there is a write off the interest amount in question in the debtors account, than the deduction should be allowed. The facts show that there was a debit to the profit and loss account of a sum of Rs.26,43,24,776 because the credit side of interest income shown in the profit and loss account was reduced to this extent and this has the effect of a debit to the profit and loss account. However as to whether the debtors account was reduced to the extent of Rs.26,43,24,776 by way of write off of interest to that extent is a matter which requires verification by the AO and if factually it is found that there was such a write off than the deduction claimed by the Assessee had to be allowed as deduction as the conditions for allowability of such deduction laid down u/s.36(1)(vii) are satisfied.
ITA No.604/Kol/2011 (Revenue’s Appeal)
Interest u/s.234C is charged for deferment of advance tax and is charged with reference to tax due on returned income. “Tax due on returned Income” has been defined in explanation to 234C(1) as tax chargeable on the total income declared in the return of income furnished by the assessee for the assessment year commencing on the 1st day of April immediately following the financial year in which the advance tax is paid or payable. The plea of the Assessee that the charging of interest u/s.234C of
the Act should be with reference to the tax on total income declared in a revised computation of income filed and not on the tax payable on the total income declared in the original return of income is contrary to the provisions of explanation to Sec.234C(1).
Charging of interest is mandatory and if there are good ground of waive of interest than it is for the Assessee to seek appropriate remedies open to it in law. The CIT(A)’s order in our view is contrary to the provisions of law and cannot be sustained. Accordingly, the appeal of the revenue is allowed.
ITA No.1283/Kol/2012 Revenue’s Appeal
The preference shares have to be considered to determine the average value of investments is not in dispute. The fact that a loan was converted into preference share consequent to direction of State Government can be no ground not to treat preference share as investment which are likely to yield tax free income. The dividend earned on such preference shares would certainly be claimed as deduction. In such circumstances, we are of the view that the conclusions of the CIT(A) cannot be accepted.
The learned counsel for the Assessee has however argued that since no dividend was received on Preference shares the investment in preference share should not be considered for the purpose of determining Average Value of Investments u/rule 8D(2)(iii) of the rules. We are unable to agree with such a proposition. The decisions relied upon by the learned counsel for the Assessee do not lay down such proposition of breaking up individual investments and see whether those investments yielded tax free income and exclude those invesments for the purpose of working out average value of investments under Rule 8D(2)(iii) of the Rules. We are however of the view that the disallowance under Sec.14A of the Act cannot be in excess of the tax free income earned by the Assessee during the previous year. We therefore hold that the disallowance u/s.14A of the Act be restricted to the tax free income earned by the Assessee. The direction given above will result in relief to the Assessee than what was given by the CIT(A). The relevant grounds of the revenue are accordingly treated as dismissed.
Accordingly all appeal disposed of.
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TCA Deepak Aggarwal
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