2013 (9) TMI 1083 - AT - Income Tax

Interest received from bad and doubtful debts (NPA) on actual receipt basis as per RBI guidelines as held by CIT(A) - Held that - Admittedly, assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit & Loss Account. Moreover, the issue of the taxability of the interest on the sticky losses/advances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Cooperative Urban Bank Ltd., Vijayawada (2011 (3) TMI 1552 - ITAT VISAKHAPATNAM ) and Karnavati Cooperative Bank Ltd. (2011 (11) TMI 367 - ITAT AHMEDABAD ). We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue s ground is dismissed. Forfeited amount of the dividend - as per CIT(A) it is not an income of the assessee u/s.28 - Held that - not controverted before us by the Ld. DR that the dividend which is forfeited was provided from the business profit which has already suffered the tax. In our opinion, as rightly held by the Ld.CIT(A), the provisions of section 41(1) are not applicable to the issue before us as the said provision operate in the different situation TDS provisions not applicable in case the payment already made before 31-03-2009 - Held that - This ground is to go against the assessee by the decision of the Hon ble High Court of Kolkata in CIT Vs. Crescent Export Syndicate 2013 (5) TMI 510 - CALCUTTA HIGH COURT in which the decision of the Hon ble Special Bench of the Tribunal in Merilyn Shipping and Transport 2012 (4) TMI 290 - ITAT VISAKHAPATNAM has been reversed.

Summary

Issues Involved:
1. Taxability of interest on Non-Performing Assets (NPA) for a cooperative bank.
2. Taxability of forfeited dividend as income under Section 28 of the Income Tax Act.
3. Applicability of TDS provisions on payments made before the end of the financial year.

Issue-wise Detailed Analysis:

1. Taxability of Interest on Non-Performing Assets (NPA):
The primary issue was whether the interest received from bad and doubtful debts (NPA) can be offered on an actual receipt basis as per RBI guidelines, despite the assessee following the mercantile system of accounting. The Revenue argued that the accrued interest on NPA should be taxed under the mercantile system. However, the CIT(A) deleted the addition by following the decision of ITAT, Pune in the case of Osmanabad Janata Sahari Bank Ltd., which relied on the ITAT Visakhapatnam Bench's decision in DCIT, Vijayawada vs. The Durga Cooperative Urban Bank Ltd. and the Hon'ble Delhi High Court's decision in Vashist Chay Vyapar Ltd. The Tribunal concluded that interest income on NPA advances did not accrue to the assessee. The Tribunal upheld the CIT(A)'s decision, confirming that the interest on sticky advances/NPA advances cannot be brought to tax, aligning with the principle of real income and RBI guidelines.

2. Taxability of Forfeited Dividend:
The second issue was whether the forfeited amount of dividend constitutes income under Section 28 of the Income Tax Act. The AO included the forfeited dividend amount as income, arguing it should be taxed under "income from other sources" since it was not exempt under Section 10(34). However, the CIT(A) deleted the addition, noting that the dividend liability arose from profits already taxed and that the unclaimed dividend was essentially an excess provision reversed by the assessee. The CIT(A) relied on the ITAT Delhi decision in Gulshan Mercantile Urban Cooperative Bank Ltd., which supported the assessee's stance. The Tribunal upheld the CIT(A)'s decision, confirming that the forfeited dividend, which was already subjected to tax, should not be taxed again under Section 41(1).

3. Applicability of TDS Provisions:
The third issue involved the applicability of TDS provisions on payments made before the end of the financial year. The AO disallowed an amount under Section 40(a)(ia) due to non-deduction of TDS on Pigmy commission payments. The CIT(A) deleted the disallowance, following the decision in Merilyn Shipping and Transport vs. ACIT, which stated that TDS provisions do not apply to amounts not outstanding at year-end. However, the Tribunal reversed this decision, citing the Kolkata High Court's ruling in CIT vs. Crescent Export Syndicate, which overturned the Merilyn Shipping and Transport decision. Consequently, the Tribunal allowed the Revenue's ground, reinstating the disallowance.

Conclusion:
The Tribunal's judgment addressed three key issues: the taxability of interest on NPAs, the treatment of forfeited dividends, and the applicability of TDS provisions. The Tribunal upheld the CIT(A)'s decisions on the first two issues, confirming the non-taxability of interest on NPAs and forfeited dividends. However, it reversed the CIT(A)'s decision on the third issue, reinstating the disallowance for non-deduction of TDS. The Revenue's appeal was thus partly allowed.