2014 (4) TMI 1118 - AT - Income Tax

Addition made on account of provision for interest on NPAs - Held that - Similar issue of allowability of the provision made on account of interest in the case of The Omerga Janta Sahakari Bank Ltd. (2014 (12) TMI 355 - ITAT PUNE) held that the interest on NPA advance cannot be treated as accrued to the assessee. In Commissioner of Income tax Versus Vasisth Chay Vyapar Ltd. & others 2010 (11) TMI 88 - Delhi High Court it was held that 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 - thus, there was no infirmity with the decision of the CIT(A) in holding that the interest income relatable on NPA advances did not accrue to the assessee Decided against revenue. Addition invoking section 40(a)(ia) - failure to deduct the requisite tax at source - Held that -As contended by assessee that as per the second proviso to section 40(a)(ia) of the Act inserted by Finance Act, 2012 w.e.f. 01.04.2013 no disallowance is to be made u/s 40(a)(ia) of the Act if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the Act. It was submitted that the applicability of the aforesaid proviso be considered retrospectively in the same manner as was considered in the case of the first proviso to section 40(a)(ia) of the Act which was inserted by the Finance Act, 2010 w.e.f. 01.04.2010 but it has been understood as retrospective on the reasoning that it is clarificatory in nature by the Hon ble Calcutta High Court in the case of CIT vs. Virgin Creations 2011 (11) TMI 348 - CALCUTTA HIGH COURT . The Pune Bench of the Tribunal in the case of M/s Gaurimal Mahajan & Sons. (2015 (3) TMI 770 - ITAT PUNE ) considered the aforesaid plea and since the same was being raised for the first time by the assessee before the Tribunal, it was restored back to the Assessing Officer to decide afresh following the decision of the Cochin Bench of the Tribunal in the case of Antony D. Mundackal vs. ACTi 2013 (12) TMI 67 - ITAT COCHIN . Therefore, respectfully following the decision of the Cochin Bench of the Tribunal cited (Supra) and in the interest of justice, we restore this issue to the file of the Assessing Officer with a direction to examine the above contention of the assessee and decide the issue afresh and in accordance with law.

Summary

Issues Involved:
1. Disallowance of interest accrued on Non-Performing Assets (NPA).
2. Disallowance of expenditure on Pigmy Commission due to non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Accrued on Non-Performing Assets (NPA):

The first ground of appeal involves the addition of Rs. 7,82,267/- by the Assessing Officer (AO) concerning interest income related to NPAs. The assessee, a Co-operative Bank operating under the license from the Reserve Bank of India (RBI), did not account for interest income on NPAs as per the Prudential Norms prescribed by RBI. The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] held that interest income on NPAs should be accounted for on an accrual basis, following the mercantile system of accounting, leading to the addition of Rs. 7,82,267/- to the returned income.

During the hearing, it was noted that an identical issue had been addressed by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. The Tribunal had considered judgments from the Hon'ble Delhi High Court and the Hon'ble Madras High Court, which had differing views on the accrual of interest income on NPAs. The Tribunal decided in favor of the assessee, following the principle that in the absence of a judgment from the Jurisdictional High Court, a decision favorable to the assessee should be followed, as established by the Hon'ble Supreme Court in CIT vs. Vegetable Products Ltd.

The Tribunal concluded that since the facts and circumstances in the present case were identical to those in the case of The Omerga Janta Sahakari Bank Ltd., the addition of Rs. 7,82,267/- should be deleted. Therefore, the order of the CIT(A) was set aside, and the AO was directed to delete the addition.

2. Disallowance of Expenditure on Pigmy Commission Due to Non-Deduction of TDS:

The second ground of appeal pertains to the disallowance of Rs. 72,815/- representing expenditure on Pigmy commission, which was disallowed by the AO under section 40(a)(ia) of the Income-tax Act due to the failure of the assessee to deduct the requisite tax at source.

The assessee raised a plea based on a recent decision of the Pune Bench of the Tribunal in the case of ITO vs. M/s Gaurimal Mahajan & Sons, where it was contended that the second proviso to section 40(a)(ia) of the Act, inserted by the Finance Act, 2012, should be considered retrospectively. This proviso states that no disallowance is to be made if the assessee is not deemed to be an assessee in default under the first proviso to section 201(1) of the Act.

Since this plea was being raised for the first time before the Tribunal and had not been examined by the lower authorities, the Tribunal decided to remand the issue back to the AO for fresh examination. The AO was directed to consider the applicability of the second proviso to section 40(a)(ia) retrospectively, following the precedent set in the case of M/s Gaurimal Mahajan & Sons, and to decide the issue afresh in accordance with the law, after affording the assessee an opportunity of being heard.

Conclusion:

The appeal was partly allowed. The addition of Rs. 7,82,267/- related to interest income on NPAs was deleted, and the issue of disallowance of Rs. 72,815/- on Pigmy commission was remanded back to the AO for fresh examination. The order was pronounced in the open Court on 28th April 2014.