CIT vs. Deogiri Nagari Sahakari Bank Ltd (Bombay High Court)
August, 26th 2015
The assessee, a cooperative bank, claimed that the interest on sticky advances was not chargeable to tax. This was rejected by the AO on the ground that Section 43D of The Income-tax Act applied only to scheduled Banks and not to cooperative banks. The Assessing officer has also held that CBDT circular No.F201/81/84 ITAII dated 09.10.1984 is applicable only to banking companies and not to non-scheduled banks and cooperative banks. This was reversed by the ITAT. On appeal by the department to the High Court HELD dismissing the appeal:
The assessee herein being a Cooperative Bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the Cooperative banks. The provisions of Section 45Q of Reserve Bank of India Act has an overriding effect vis-à-vis income recognition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India directions 1998. In UCO Bank the Supreme Court considered the nature of CBDT circular and held that the Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Further a similar issue was raised about interest accrued on a ‘sticky’ loan which was not recovered by the assessee bank for the last three years and transferred to the suspense account, would or would not be included in the income of the assessee for the particular assessment year (Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, Coimbtore reported in 2010 (2) SCC 548, Mercantile Bank Ltd., Bombay Vs. The Commissioner of Income Tax, (2006) 5 SCC 221 and Vasisth Chay Vyapar Limited 330 ITR 440 (Delhi) followed).