2017 (1) TMI 1533 - AT - Income Tax

Taxability of interest on loans categorized as NPA s/sticky loans - whether on accrual basis as contended by the Revenue or on receipt basis as claimed by the assessee? - Held that - In the case of The Ludhiana Central Co-op. Bank Ltd. (2015 (6) TMI 1100 - ITAT CHANDIGARH), the decision rendered therein would squarely apply to the present cases, following which we hold that the interest on sticky loans/NPA s has to be taxed on receipt basis. We, therefore, uphold the order of the CIT(A) and dismiss the ground raised by the Revenue.

Summary

Issues Involved:
1. Taxability of interest on loans categorized as Non-Performing Assets (NPAs) or sticky loans on an accrual basis versus receipt basis.

Issue-wise Detailed Analysis:

1. Taxability of Interest on NPAs/Sticky Loans:

Background:
The assessee, a Co-operative Society operating as a non-Scheduled Bank, followed the mercantile system of accounting but did not recognize interest income on NPAs, arguing it should be accounted for on a receipt basis per Accounting Standard-9 and RBI guidelines. The Assessing Officer (AO) disagreed, adding the computed interest on NPAs to the assessee's income on an accrual basis.

CIT(A) Decision:
The CIT(A) allowed the assessee’s appeal, referencing decisions from the ITAT Pune Bench and ITAT Chandigarh Bench, which supported accounting for interest on NPAs on a receipt basis under Section 43D of the Income Tax Act, 1961, applicable to public financial institutions and companies.

Revenue's Appeal:
The Revenue challenged the CIT(A)'s decision, arguing that the assessee should declare interest on NPAs on an accrual basis due to its mercantile accounting system.

ITAT's Findings:
The ITAT upheld the CIT(A)'s decision, noting:
- The ITAT Chandigarh Bench had previously ruled in favor of taxing interest on NPAs on a receipt basis in similar cases.
- The "Real Income Theory" and Accounting Standard AS-9, along with RBI guidelines, support recognizing income only when its realization is certain.
- The Gujarat High Court in Pr. CIT-5 vs. Shri Mahila Sewa Sahkari Bank Ltd. ruled that income from NPAs should be recognized on a receipt basis, emphasizing the RBI Directions' overriding effect over the Income Tax Act per Section 45Q of the RBI Act.
- The Bombay High Court in CIT vs. Deogiri Nagari Sahakari Bank Ltd. also supported this view, stating that RBI guidelines must be followed for income recognition.

Supreme Court Precedents:
- UCO Bank vs. CIT: The Supreme Court approved the receipt basis for accounting interest on doubtful loans, aligning with accounting practices and Section 145 of the Income Tax Act.
- Mercantile Bank Ltd. vs. CIT: Reaffirmed the receipt basis for interest on NPAs.
- The Supreme Court in Southern Technologies Ltd. vs. JCIT emphasized that RBI Directions have an overriding effect on income recognition principles under the Companies Act.

Conclusion:
The ITAT concluded that the interest on NPAs should be taxed on a receipt basis, consistent with the "Real Income Theory," Accounting Standard AS-9, and RBI guidelines. The Revenue's argument based on the State Bank of Travancore case was dismissed, as it was overruled by subsequent Supreme Court decisions. The ITAT found no reason to interfere with the CIT(A)'s order, thereby dismissing the Revenue's appeals.

Judgment:
Both appeals by the Revenue were dismissed, affirming that interest on NPAs should be taxed on a receipt basis. The order was pronounced in the open court.