2016 (6) TMI 1129 - HC - Income Tax

Interest paid to members of a Co-operative Bank - whether added to tax or not? - TDS liability - Held that - As decided in Commissioner of Income Tax and another vs. The Bagalkot District Central Co-operative Bank 2016 (7) TMI 748 - KARNATAKA HIGH COURT the Ministry of Finance Government of India vide Circular No.19/2015 in F.No.142/14/2015- TPL has held that the Co-operative Banks are not required to deduct tax at source on time deposits of its members paid or credited on or before 1.7.2015. Whether the gratuity payable to its employees is available for deduction? - Held that - The counsel for the assessee would be quick to point out that even if it is not permissible to make a deduction in such an event on making payment as provided under Section 43-B (b) it would be permissible if the actual payment is made and these sections are mutually exclusive and therefore the Karnataka Electricity Board case 1991 (6) TMI 19 - KARNATAKA High Court is no longer relevant by virtue of the amendment to Section 40-A(7). Under Section 43-B the assessee had not merely made a provision but payment was actually made and therefore was entitled to deduction would also answer this question as to whether the payment made towards a gratuity fund could be deducted. Whether interest receivable from non-performing as sets bad and doubtful debts though the actual expression used is interest payable and not reflected in the profit and loss account could be deducted? - Held that - The mere nomenclature adopted with reference to the bad loans and advances receivable would refer to all non-performing assets of any nature of whatever category it was placed as a non-performing asset an d therefore the decision of this court in Canfin Homes 2011 (8) TMI 178 - KARNATAKA HIGH COURT would squarely apply wherein held . Once a particular asset is shown to be a non-performing asset then the assumption is it is not yielding any revenue. When it is not yielding any revenue the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the National Housing Bank the income from non-performing asset should be recognised only when it is actually received. That is what the Tribunal held in the instant case. Therefore the contention of the Revenue that in respect of non- performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting he has to pay tax on the revenue which has accrued notionally is without any basis. In that view of the matter the second substantial question framed is answered against the Revenue and in favour of the assesse. Accordingly the above question of law also stands answered.

Summary

Issues:
1. Tax treatment of interest paid to members of a Co-operative Bank above ?10,000.
2. Deductibility of gratuity payable to employees.
3. Deduction of interest receivable from non-performing assets, bad, and doubtful debts.

Issue 1: Tax treatment of interest paid to Co-operative Bank members:
The judgment refers to a circular stating that the exemption from tax deduction on interest paid by a co-operative bank to its members does not apply to interest on time deposits post-June 1, 2015. This resolves the question of whether such interest should be added to tax.

Issue 2: Deductibility of gratuity payable to employees:
The Tribunal's decision allowing deduction of gratuity is supported by a Division Bench judgment citing that even if gratuity does not fall under Section 36(1)(iv), it can be claimed under Section 37(1) if requirements are met. The judgment highlights cases where statutory gratuity liabilities were allowed as deductions. The argument revolves around the amendment to Section 40(A)(7) and the relevance of Section 43-B in allowing deductions for actual payments made towards gratuity funds.

Issue 3: Deduction of interest receivable from non-performing assets:
A judgment is cited where income from non-performing assets should only be recognized when actually received. The definition of non-performing assets includes various overdue scenarios, and the judgment clarifies that income from such assets should not be taxed until realized. The argument involves whether non-performing assets cover all categories of bad loans and advances, with reference to prudential norms for asset classification by banks.

The judgment concludes that the nomenclature used for bad loans and advances would encompass all non-performing assets, making the decision applicable to all such cases. The appeals are disposed of based on the resolutions provided for each issue.