2013 (9) TMI 1178 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest on Non-Performing Assets (NPA).
2. Disallowance u/s 14A by applying Rule 8D.

Summary:

Issue 1: Taxability of Interest on Non-Performing Assets (NPA)
The Revenue challenged the deletion of an addition of Rs. 22,41,586/- made on account of interest on NPAs. The assessee, a cooperative society engaged in banking, did not include Rs. 40,40,930/- as interest on NPAs in its income, following the mercantile system of accounting. The AO added this amount, relying on the decision in Southern Technologies Ltd. Vs. JCIT 320 ITR 577 (SC). The CIT(A) deleted the addition, and the Tribunal upheld this decision, referencing the case of Osmanabad Janata Sahakari Bank Ltd., which established that Section 43D applies to cooperative banks. The Tribunal emphasized that interest on NPAs should not be taxed on a notional basis if it is not routed through the profit and loss account or actually received, aligning with the principle of "real income."

Issue 2: Disallowance u/s 14A by Applying Rule 8D
The assessee contested the disallowance of Rs. 4,03,590/- u/s 14A by applying Rule 8D. The Tribunal noted that an identical issue had been resolved in favor of the assessee for A.Y. 2008-09, where the addition was deleted. Following the same reasoning, the Tribunal deleted the addition for A.Y. 2009-10 as well.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, confirming that interest on NPAs is not taxable on a notional basis and disallowance u/s 14A by applying Rule 8D was not justified. The judgment was pronounced on 27th September 2013.