2015 (11) TMI 1626 - AT - Income Tax

Accrual of interest - additions made towards interest on NPAs - Held that - Interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank, but has been kept in a suspense account and has not been brought to the P&L a/c of the assessee, could not be included in the income of the assesse. The CIT(A) rightly deleted the additions towards interest on NPAs. There is no error or infirmity in the order of CIT(A). Accordingly, we direct the A.O. to delete the additions made towards interest on NPAs. See DCIT Vs. Durga Co-operative Urban Bank Ltd. 2011 (3) TMI 1552 - ITAT VISAKHAPATNAM

Issues Involved:
1. Deletion of addition of interest on Non-Performing Assets (NPAs).
2. Applicability of Section 43D of the Income-Tax Act, 1961.
3. Compliance with Board's Instruction No.17 of 2008.
4. Relevance of RBI guidelines versus Income Tax Act provisions.
5. Reliance on ITAT decision in the case of T.C.I. Finance Ltd.
6. Interest recognition under mercantile system of accounting.

Detailed Analysis:

1. Deletion of Addition of Interest on NPAs:
The revenue appealed against the CIT(A)'s decision to delete the addition made by the assessing officer concerning interest on NPAs. The CIT(A) had deleted the additions after considering the explanations provided by the assessee, which were based on RBI guidelines and established judicial precedents.

2. Applicability of Section 43D of the Income-Tax Act, 1961:
The revenue argued that the CIT(A) erred in law by not considering Section 43D, which mandates that interest income on certain bad and doubtful debts should be recognized on receipt basis for certain institutions. The CIT(A) held that interest on NPAs should be recognized on receipt basis, aligning with the RBI guidelines rather than Section 43D.

3. Compliance with Board's Instruction No.17 of 2008:
The revenue contended that the CIT(A) did not adhere to the Board's Instruction No.17 of 2008, which required banks to follow the mercantile system of accounting. The CIT(A) dismissed this argument by emphasizing the precedence of RBI guidelines for cooperative banks.

4. Relevance of RBI Guidelines versus Income Tax Act Provisions:
The revenue cited the Supreme Court's decision in Southern Technologies Ltd. to argue that RBI guidelines do not override the Income Tax Act provisions. However, the CIT(A) and ITAT decisions highlighted that RBI guidelines have an overriding effect on income recognition principles for cooperative banks, as supported by judicial precedents like the Delhi High Court's decision in Vasisth Chay Vyapar Ltd.

5. Reliance on ITAT Decision in the Case of T.C.I. Finance Ltd.:
The CIT(A) relied on the ITAT decision in T.C.I. Finance Ltd., where it was held that interest on NPAs should not be recognized on an accrual basis if the principal amount itself is doubtful of recovery. The revenue's appeal against this decision was still pending, but the CIT(A) found it applicable to the present case.

6. Interest Recognition under Mercantile System of Accounting:
The revenue argued that since the assessee followed the mercantile system, all incomes, including interest on NPAs, should be recognized on an accrual basis. The CIT(A) and ITAT decisions, however, upheld that cooperative banks should follow RBI guidelines for recognizing interest on NPAs on a receipt basis, considering the doubtful recovery of the principal amount.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the addition of interest on NPAs, emphasizing the precedence of RBI guidelines over the Income Tax Act provisions for cooperative banks. The ITAT referenced multiple judicial precedents, including the Supreme Court's decision in UCO Bank and the Delhi High Court's ruling in Vasisth Chay Vyapar Ltd., to support the conclusion that interest on NPAs should be recognized on a receipt basis due to the doubtful recovery of the principal amount. The appeal filed by the revenue was dismissed, affirming the CIT(A)'s order.

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