1. These two appeals filed at the instance of the assessee pertain to the assessment years. 1998-99 and 1999-2000 Appeal in respect of assessment year 1998-99 arises out of the order passed by the AO Under Section 154 of the Act whereas the appeal for the asst. year 1999-2000 arises out of the order passed Under Section 143(3) of the Act. Since the assessee-bank is a Government of India Undertaking, it approached the Committee of Secretaries for grant of permission to prosecute the appeals before the Appellate Tribunal. The Committee on disputes granted permission to the State Bank of Hyderabad to pursue the appeals in ITAT only with regard to the following issues.
"Whether interest pertaining to the previous year reversed during the current year on NPAs identified as NPAs for he first time during the financial year 1998-99, is allowable as deduction? "Whether broken period interest paid on purchase of securities is revenue expenditure since the securities constitute stock in trade? 2. Though the assessee has raised several issues in the grounds of appeal, since the permission was granted to pursue the appeals only in respect of the above-mentioned issues, the other grounds urged by the assessee were not pressed by the learned counsel and accordingly they are not taken up for consideration.
3. With regard to the allowance of interest pertaining to the broken period, the case of the learned counsel for the assessee is that the assessee purchased securities are treated them as stock in trade. Since the assessee purchased securities with interest, the broken period interest is allowable as revenue expenditure. The AO as well as the CIT(A) did not dispute the fact that the securities were held as stock in trade by the assessee but the claim of deduction was rejected mainly by relying upon the decision of Supreme Court in the case of Vijaya Bank Limited (187 ITR 541) Learned counsel submitted that the CBDT has considered the decision of the Hon'ble Supreme Court in the case of Vijaya Bank Limited (supra) and clarified that the Apex Court was not directly concerned with the issue as to whether the securities form part of stock in trade or capital assets. The Board further clarified that the question whether a particular item of investment constitute a stock in trade or capital assets, is a question of fact since the banks have to generally follow the instructions of RBI, the AO was advised to determine, on the facts and circumstances of each case, whether any particular security constitute stock in trade or investment. Learned counsel has taken us through the decision of Apex Court to submit that the specific issue as to whether the securities constitute stock in trade or investment was not the subject matter of consideration by the Apex Court whereas in the case before us the tax authorities have not disputed the contention of the assessee that the securities were held as stock in trade. It was also submitted that the Circular issued by the CBDT is applicable to the instant case and the assessee having purchased securities as stock in trade, interest paid for the broken period till the date of acquisition is deductible Under Section 37 of the Act. In this regard, learned counsel relied upon the decision of Hon'ble Kerala High Court in the case of CIT v. Nedungadi Bank Ltd., (264 ITR 545) wherein the Hon'ble High Court referred to the earlier decision of Kerala High Court in the case of South Indian Bank Ltd., (241 ITR 374) which was affirmed by the Hon'ble Supreme Court in the case of CIT v. South India Bank Limited (249 ITR 304) and also referred to the decision of Apex Court in the case of Vijya Bank Limited (supra) and held that the broken period interest is allowable as deduction Under Section 37 of the Act. Learned counsel strongly relied upon the aforesaid decisions.
4. On the other hand, learned DR relied upon the orders of the tax authorities. Though it is not disputed by the learned DR that the securities are purchased and held as stock in trade, it was submitted that in the light of the decision of Apex Court in the case of Vijaya Bank Limited (supra) broken period interest has to be capitalized. It may also be noted that the learned DR was not able to point out any decision contrary to the view taken by the Kerala High Court in the case of Nedungadi Bank Limited (supra).
5. We have carefully considered the rival submissions and perused the record. The decision of Apex Court in the case of Vijaya Bank Limited was explained by the CBDT and on the same lines the Kerala High Court distinguished the decision of Apex Court to hold that if the securities were held by the Banking Company as stock-in-trade of the business, interest paid for the broken, period would constitute allowable outgo in the hands of the assesses. Admittedly, the assessee purchased securities to hold them as stock-in-trade. Under these circumstances, we are of the view that the interest paid for the broken period is allowable as deduction and accordingly direct the to accept the claim of the assessee.
6. The second issue which is relevant to the assessment year 1999-00 only is with regard to the claim of deduction of interest income, pertaining to the previous year, which was reversed during the current year. The case of the assessee is that certain advances borrowings have become non-performing assets. As per the guidelines issued by the RBI interest on NPAs was quantified and such interest was deducted/reversed in the subsequent year when NPAs are identified after the end of the accounting year. It was pleaded that interest on NPAs is not recognizable as income in accordance with the guidelines of the RBI and thus such interest has been deducted/reversed to ensure that real interest, accrued to the bank, is charged to tax. The AO as well as the CIT(A) rejected the contention of the assessee. The case of the revenue is that income of the preceding year is not expenditure for earning of interest income of current year. Therefore, netting of interest income is not proper. Reliance was placed upon the decision of ITAT, Jaipur Bench in the case of Bank of Rajasthan Limited (68 ITD 69) to hold that the total income or the loss of an assessee has to be computed in accordance with the provisions of the Act and procedure laid down by the RBI cannot be followed while computing the income under the IT Act.
In paras 2.4 and 2.5 of the order, the AO observed as under.
"2.4. The contention of the assessee cannot be accepted. The assessee is following reversal of interest on NPAs as per RBI norms without any sanction under the I.T. Act. As the advances have become NPA, the same could have been claimed as bad debts Under Section 36(1)(vii). To allow the claim of bad debts Under Section 36(1)(vii) there are two conditions. First, the debt should be bad and second, the amount of bad debt should be written off in the accounts of the assessee. In the assessee's case, it is merely reversing the entries i.e., debiting the interest income and crediting to the suspense account. The assessee has to establish that above sum has become bad in the light of ITAT, Delhi Bench decision in the case of DCIT v. India Thermal Corporation Ltd., reported in 56 ITD 307.
2.5 Further, it is not known whether the bad debts written off during the year are inclusive of the NPAs or not. In the absence of any details with regard to bad debts written off and interest on NPAs reversed, the assessee's claim for a deduction of Rs. 4,48,06,822/- being unrealized interest income of FY 97-98 reversed during the FY 98-99 can not be allowed." The learned CIT(A) having affirmed the order of the AO, the assessee is in appeal before us.
7. Learned counsel submitted that as per the RBI norms, interest on NPAs should not be treated as accrued and if such interest is already shown as an income in the preceding year, the Bank can make suitable provision in subsequent year. Since the assesses has followed the norms prescribed by the RBI, the same has to be allowed as deduction from the total income. In other words, without reducing the interest on NPAs, true and correct profits cannot be deduced and hence the claim of the assessee is in order. Learned counsel relied upon the decision of the ITAT- B- Bench, Hyderabad in the case of TCI (91 ITD 573) and in particular para-29 of the order of the Tribunal to submit that the reversal entries were approval by the Tribunal. He also relied upon the following decisions in support of his contention that in the year of reversal of the entry, the amount referable to such reversal entries should be deducted from the total income.
Learned counsel has given a note dated 22-12-03 (page-1 of the paper book) to explain the reasons for passing such reversal entries. The case of the assessee is that as per the RBI norms 180 days yardstick has to be applied for identifying an asset as standard or NPA. When 180 days falls beyond the balance-sheet date, it is technically not possible for the bank to foresee the conduct of the account subsequent to the balance-sheet date and ignore the income on such NPAs since the bank cannot be asked to comply with an act of impossibility. When the income is booked on a wrong premise, the Bank is entitled to reverse it by passing necessary entries during the next financial year. By deducting interest, which had not been accrued in the earlier year, the bank has merely complied with the norms of the RBI. It is also the case of the assessee that the AO was not justified in asking the bank to claim the amount as bad-debt in view of the fact that the interest component on NPAs accounts has never accrued and received by the bank and therefore there is no question of write off Under Section 36(1)(vii) of the Act. It was submitted that the write off would be possible only if the amount is recognised.
8. On the other hand, learned DR submitted that there is no provision under the IT Act to claim deduction from the total income by passing a reversal entry and in this regard he relied upon the decision of ITAT, Jaipur Bench in the case of Bank of Rajasthan (68 ITD 69).
9. We have carefully considered the rival submission and perused the record. In the case of TCI Finance ( supra) the issue as to whether non-recognition of income by following RBI norms can be considered as a recognized method of accounting, was considered in detail and held as if an assessee follows the RBI norms consistently the same has to be accepted and interest income on NPAs need not be recognized. With regard to the income already recognized in the earlier year the Bench observed, in para-29 of the order, that the department has already accepted the claim made as per the reversal entries. Since the issue is confined to non-reocognition of income and not with regard to the reversal of entries, the Bench had no occasion to consider this issue with regard to the claim of deduction of the amount referable to the reversal of the entries. In the case of bank of Madura (supra), the Hon'ble Madras High Court was concerned with the peculiar case of a bank declaring higher income by charging excess interest from one of its customers and on realization of the same, the excess interest which was charged and collected was claimed as liability in the year of realizing the mistake and credited to the account of the customer. The Court held that the claim of deduction in the year of realization of mistake is in order. It may be noted here that it was a case of excess collection of interest and there was a duty cast upon the bank to refund the excess interest whereas in the instant case interest on NPAs way earlier declared as income on accrual basis and though it has not become bad in all resects, the entry was sought to be reversed only because of RBI guidelines. The assessee has furnished the circular letter of the RBI containing consolidated instructions/guidelines on matter relating to prudential norms on income recognition. In the circular dated 4th July 2002 the RBI has consolidated all the instructions issued earlier. Paras 3.2, 3.2.1 and 3.2.2., of the Circular read as under.
3.2.1 If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realized. This will apply to Government guaranteed accounts also.
3.2.2. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected." As per the Circular if the interest is shown as accrued in the earlier year but in the subsequent years the advance becomes NPA the interest accrued and credited into income account should be reversed or provided for in the corresponding previous year. The mode of claiming deduction under the IT Act was obviously not mentioned in the instruction.
10. Income-tax Act in a self contained code and in order to claim a deduction, it is for the assesses to show that the Act provides for such a deduction. It could be seen from the note given by the assessee, during the relevant period, 180 days yardstick was prescribed for identifying an asset as standard or NPA. For example, if an advance is given on 1^st January, 1998 the clear picture as to whether it has become NPA or not emerges on 30^th June, 1998. Let us further presume that the interest payable by the party for a period of 6 months is Rs. 6 lakhs. As on 31-3-98 it cannot be predicted that it would become NPA and thus the assessee accounts for interest of Rs. 3 lakhs for three months ending on 31-3-98. Such interest is assessable to tax in the assessment year 1998-99. However, if the assessee has not received any interest during the previous year relevant to the assessment year 1999-00, on the expiry of 30^th day of June, 1998 the assessee bank can treat it as NPA and interest for the period of three months if already credited in the books as income, such entry should be reversed in the later part of the accounting year and for the balance period of 9 months of the previous year 1998-99 the, assessee need not recognize the income of Rs. 9 lakhs. If the assessee has other income to the tune of Rs. 20 lakhs, can the assessee claim that only Rs. 17 lakhs has to be treated as income, on the ground that interest to the tune of Rs. 3 lakhs payable by another party was wrongly declared as income in the earlier year and thus it needs to be set off in the year under consideration?. Non recognition of income is permissible by supplying the real income principle and the income which is already accounted forin the first part of the year but reversed in the later part of the year also need not be declared as income, by applying the same principle, because in the computation of income of a particular year, the income of that year has to be taken into consideration. However, once the income of that year is properly recorded the assessee cannot reduce the income from the subsequent years computation on the ground that in the earlier year income was shown on accrual basis wrongly and thus the income of this year gets reduced if set off is permitted. In the given example, it could be seen that the assessee is not claiming any expenditure against the current year's income but seeking reduction of current year's income though even according to the assessee such income accrued in the year under consideration. In our considered opinion, such a claim is not permissible. In the immediately preceding year the assessee having declared income on the accrual basis, the only course open to the assessee to derecognise that income is to treat the same as bad-debt by following the RBI norms. Our view is supported by the decision of Apex Court in the case of State Bank of Travancore (158 ITR 102) as well as the decision of ITAT, Delhi Bench in the case of Poysha Oxygen (P) Ltd., (91 ITD 616). Admittedly, the assessee has not written off the impugned sum as bad-debt Under Section 36(1)(vii) of the Act and in fact the case of the assessee is that there is no question of write off Under Section 36(1)(vii) of the Act. Such being the case, we are of the view that the claim of the assessee is contrary to law and accordingly we reject the contention of the assesses.