2015 (1) TMI 1370 - AT - Income Tax

Addition on interest income on Non-Performing Assets - Held that - Identical controversy has been considered by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. vide order 2014 (12) TMI 355 - ITAT PUNE . In the said precedent, the Tribunal considered the judgement of the Hon ble Delhi High Court in the case of M/s Vasisth Chay Vyapar Ltd. 2010 (11) TMI 88 - Delhi High Court as well as the judgement in the case of CIT vs. Sakthi Finance Ltd.(2013 (3) TMI 266 - MADRAS HIGH COURT), which had expressed divergent views with respect to the issue of accrual of interest income on NPA advances; and, following the proposition that in the absence of any judgement of the Jurisdictional High Court, there being contrary judgements of the non-jurisdictional High Courts, a decision which was favourable to the assessee was to be followed in view of the reasoning laid down in the case of CIT vs. Vegetable Products Ltd., (1973 (1) TMI 1 - SUPREME Court) and, thus the Tribunal decided the issue in favour of the assessee

Summary

Issues Involved:
1. Addition of interest income on Non-Performing Assets (NPAs) for assessment years 2009-10 and 2010-11.

Issue-wise Detailed Analysis:

1. Addition of Interest Income on NPAs:

The primary issue in both appeals concerns the addition of Rs. 11,18,203/- for the assessment year 2009-10 and Rs. 10,33,570/- for the assessment year 2010-11 by the Assessing Officer (AO) on account of interest income on NPAs. The assessee, a co-operative society engaged in banking, did not recognize this interest income following the Prudential Norms of the Reserve Bank of India (RBI). The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the AO, leading to the Revenue's appeal.

At the hearing, both parties acknowledged that a similar controversy was addressed by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. The Tribunal had considered the judgments of the Hon'ble Delhi High Court in M/s Vasisth Chay Vyapar Ltd. and the Hon'ble Madras High Court in CIT vs. Sakthi Finance Ltd., which had divergent views on the accrual of interest income on NPAs. Following the principle that, in the absence of a jurisdictional High Court judgment, a decision favorable to the assessee should be followed (as per the Hon'ble Supreme Court in CIT vs. Vegetable Products Ltd.), the Tribunal decided in favor of the assessee.

The Tribunal noted that section 43D of the Income-tax Act, 1961, which prescribes that interest income on certain bad and doubtful debts should be taxed in the year it is credited to the Profit and Loss account or received, did not apply to the assessee as it was not a scheduled bank. Therefore, the issue had to be decided on whether the impugned income had accrued during the year under consideration.

The Tribunal referred to the Visakhapatnam Bench's decision in The Durga Cooperative Urban Bank Ltd., where it was held that interest income on NPAs did not accrue to the assessee and should be taxed only on receipt basis, following RBI guidelines. The Tribunal also considered the Hon'ble Delhi High Court's decision in M/s Vasisth Chay Vyapar Ltd., which supported the non-recognition of interest income on NPAs.

Despite the Hon'ble Madras High Court's contrary view in CIT vs. Sakthi Finance Ltd., which held that interest on NPAs was taxable on an accrual basis, the Tribunal preferred the Delhi High Court's view, citing the Supreme Court's principle in CIT vs. Vegetable Products Ltd.

In conclusion, the Tribunal affirmed the CIT(A)'s orders, ruling in favor of the assessee and dismissing the Revenue's appeals. The decision was based on the precedent that, in the absence of a jurisdictional High Court ruling, a view favorable to the assessee should be adopted.

Final Judgment:

The appeals of the Revenue were dismissed, and the orders of the CIT(A) were upheld, confirming that the interest income on NPAs should not be recognized on an accrual basis but rather on receipt basis, following RBI guidelines.