2015 (4) TMI 1100 - AT - Income Tax

Addition on account of interest on NPA u/s.43D - Held that - By the insertion of a special provision to tax interest income in the case of public financial institution, etc. section 43-D has to be applied in its letter and spirit. It is pertinent to mention that later on, in the case of CIT vs. Bank of America S.A. 2003 (3) TMI 84 - BOMBAY High Court the question of interest on sticky loans was decided in favour of the assessee and held that the question is to be answered in favour of the assessee following the decision of UCO Bank reported at(1999 (5) TMI 3 - SUPREME Court ). Likewise, in an another case of CIT vs. State Bank of India (2003 (3) TMI 88 - BOMBAY High Court ) again it was held that the amount credited to the interest suspense account was not taxable following the decision pronounced in the case of UCO Bank (supra). No infirmity in the order of the CIT(A) directing the AO to delete the addition on account of interest receivable on NPA on accrual basis. - Decided in favour of assessee Disallowance u/s 14A - Held that - No disallowance u/s.14A is required when the assessee earns tax free dividend income on investments which are held as stock in trade of the assessee. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition on account of interest on Non-Performing Assets (NPA) under Section 43D of the Income Tax Act.
2. Disallowance under Section 14A for expenses related to earning tax-free income.
3. Deduction under Section 36(1)(viia) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Interest on NPA Under Section 43D:
The primary issue was whether the interest accrued on NPAs should be treated as income since the assessee follows the mercantile system of accounting. The AO added Rs. 2,88,00,000 to the total income of the assessee, arguing that the assessee, being neither a Scheduled Bank nor a Financial Institution, was not entitled to deductions under Section 43D. The AO relied on the Supreme Court decision in Southern Technologies Ltd. However, the CIT(A) deleted this addition, citing the Pune Tribunal's decision in Osmanabad Janata Sahakari Bank Ltd., which held that interest on NPAs should only be taxed upon actual recovery. The Tribunal upheld the CIT(A)'s decision, affirming that interest on NPAs did not accrue to the assessee and should not be taxed on an accrual basis.

2. Disallowance Under Section 14A for Expenses Related to Earning Tax-Free Income:
The AO disallowed Rs. 5,21,005 under Section 14A, asserting that the assessee had claimed dividend/exempt income without incurring any expenditure. The assessee argued that the investments yielding tax-free income were stock in trade, and no specific expenditure was incurred to earn this income. The Tribunal referred to the decision in Shri Apoorva Patni, which held that if investments yielding tax-free income are stock in trade, no disallowance under Section 14A is warranted. Consequently, the Tribunal ruled in favor of the assessee, allowing the appeal and negating the disallowance under Section 14A.

3. Deduction Under Section 36(1)(viia):
The assessee challenged the CIT(A)'s order, which confirmed the disallowance of Rs. 1,41,23,785 under Section 36(1)(viia). The Tribunal noted that the issue was already decided against the assessee in the case of Mahalaxmi Cooperative Bank Ltd. and dismissed this ground of the Cross Objection (CO).

Conclusion:
The Tribunal dismissed the Revenue's appeal, upheld the CIT(A)'s deletion of the addition on account of interest on NPAs, and allowed the assessee's CO in part by negating the Section 14A disallowance. The Tribunal dismissed the ground related to the deduction under Section 36(1)(viia) following the precedent set in Mahalaxmi Cooperative Bank Ltd. The judgment was pronounced in the open court on 24-04-2015.