2013 (6) TMI 791 - AT - Income Tax

Whether the interest on NPA is chargeable to tax - Held that Mere characterisation of an account as a NPA would not by itself be sufficient to say that there is uncertainty as regards realizability of income or interest income thereon - accrual of interest is a matter of fact, to be decided on the basis of examination of the status of each party - grounds raised by the assessee is allowed for statistical purpose disallowance of deduction u/s80P(2)(d)in respect of dividend income from co-op banks - Held that assessee is required to furnish the correct status of the bank to establish that the provisio of Section 80P(2)(d) of the Act are applicable on the assessee being a primary agriculture credit society or a rural development bank - allowed for statistical purpose

Summary

Issues:
1. Taxation of interest on non-performing assets (NPA) in the hands of the assessee.
2. Disallowance of deduction under Section 80P(2)(d) for dividend income from cooperative banks.

Issue 1: Taxation of Interest on Non-Performing Assets (NPA)

The appeals pertain to the assessment years 2007-2008 and 2009-2010, focusing on the taxation of interest on non-performing assets. The CIT(A) confirmed that interest on NPAs accrued and provided by the appellant bank is chargeable to tax. The dispute arose regarding the classification of the assessee as a scheduled bank under Section 36(1)(viia) and the applicability of Section 43D. The CIT(A) held that the assessee, a cooperative bank, does not qualify as a scheduled bank, thus not eligible for the benefits of Section 43D. Additionally, the CIT(A) directed the computation of accrued interest on NPAs at a specific amount, leading to the current appeal.

The ITAT directed the assessee to obtain a certificate to establish its status as a scheduled bank and to address the accrual of interest on NPAs. Referring to past judgments, including the Madras High Court decision in CIT Vs. Sakthi Finance Ltd., the ITAT emphasized that the accrual of interest on NPAs is a factual matter to be determined on a case-by-case basis. Consequently, the issue was remanded back to the AO for fresh consideration in line with the guidelines set forth by the Madras High Court, allowing the assessee an opportunity to present its case.

Issue 2: Disallowance of Deduction under Section 80P(2)(d) for Dividend Income

The dispute for the assessment year 2009-2010 involved the disallowance of a deduction under Section 80P(2)(d) for dividend income from a cooperative bank. The AO contended that the dividend income was not eligible for exemption under Section 10(34) or Section 80P(2)(d) and thus taxed the amount. The CIT(A) upheld this decision, stating that the AO correctly interpreted the provisions of the Act. However, the ITAT directed a reexamination of this issue, allowing the assessee an opportunity to establish the applicability of Section 80P(2)(d) by providing the correct status of the bank as approved by the prescribed authorities.

In conclusion, both appeals were treated as allowed for statistical purposes, with directions for further adjudication on the issues of interest on NPAs and the disallowance of deduction for dividend income from cooperative banks.

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