2012 (9) TMI 1024 - AT - Income Tax

Concept of real income approved in the case of banking business - whether Assessee can offer his interest received from bad and doubtful debts (NPA) on actual basis as per RBI guidelines even though assessee is following mercantile systems of accounting - section 43D applicability - Held that - We find that this issue stands squarely covered in favour of the assessee by the decision of the ITAT, A Bench, Pune, in the case of CIT, Cir 3, Nanded Vs. Osmanabad Janta Sahakari Bank Ltd. 2015 (3) TMI 886 - ITAT PUNE .

Summary

Issues Involved:
1. Whether the assessee, a Co-operative Bank, can offer interest received from bad and doubtful debts (NPA) on an actual basis as per RBI guidelines despite following the mercantile system of accounting.
2. Applicability of Section 43D to the assessee.

Issue-wise Detailed Analysis:

1. Interest on Bad and Doubtful Debts (NPA):
The primary issue was whether the assessee, a Co-operative Bank, could recognize interest income from bad and doubtful debts (NPA) on an actual receipt basis as per RBI guidelines, despite following the mercantile system of accounting. The Assessing Officer (A.O) contended that the assessee must recognize interest income on an accrual basis unless such assets are written off in the books of account, leading to additions of Rs. 1,07,22,346/- for A.Y. 2007-08 and Rs. 4,06,81,251/- for A.Y. 2008-09. The CIT(A) deleted these additions, and the Revenue appealed this decision.

2. Applicability of Section 43D:
The A.O argued that Section 43D does not allow Non-Scheduled Banks or Co-operative Banks to recognize income on bad and doubtful assets on an actual receipt basis. However, the Tribunal found that this issue was already covered in favor of the assessee by previous decisions, including the ITAT, Pune Bench in the case of Osmanabad Janta Sahakari Bank Ltd., and the ITAT, Visakhapatnam Bench in the case of DCIT, Vijayawada vs. The Durga Cooperative Urban Bank Ltd. These cases held that interest income on NPA advances did not accrue to the assessee and should not be taxed on an accrual basis.

The Tribunal also referenced the decision of the Hon'ble High Court of Delhi in Vashist Chay Vyapar Ltd., which supported the view that interest on NPA advances should only be taxed when actually received. The Tribunal emphasized that Section 43D is an overriding section, meaning its provisions take precedence over other provisions in the Act, thereby allowing the assessee to follow RBI guidelines for recognizing interest income on NPAs.

Conclusion:
The Tribunal concluded that the interest on NPA advances should not be taxed on an accrual basis for the Co-operative Bank, following the decisions of various benches and the principles laid down in UCO Bank and other relevant cases. The Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeals, affirming that the assessee's method of recognizing interest income on an actual receipt basis was correct and in line with the RBI guidelines and judicial precedents.

Judgment:
The Revenue's appeals for both assessment years were dismissed, and the order was pronounced in the open Court on 28th September 2012.