2016 (12) TMI 1709 - AT - Income Tax

Accrued interest on NPAs - Held that - A.O. as well as CIT(A) were not justified in bringing to tax a sum towards alleged accrued interest on NPAs. See Principal Commissioner of Income Tax-5 Versus Shri Mahila Sewa Sahakari Bank Ltd. 2016 (8) TMI 377 - GUJARAT HIGH COURT

Summary

Issues:
Assessment of interest receivable on Non Performing Assets (NPAs) by a Cooperative bank under Sec. 43D of the Income Tax Act.

Analysis:
The judgment revolves around the assessment of interest receivable on NPAs by a Cooperative bank for the Assessment Year 2012-13. The dispute arose as the Assessing Officer (A.O.) and CIT(A) contended that under Sec. 43D of the Act, interest on NPAs is assessable to tax on an accrual basis for non-scheduled Cooperative banks, despite the assessee's consistent method of recognizing interest on NPAs only upon actual receipt. The assessee cited various decisions, including the Hon'ble Bombay High Court and ITAT Visakhapatnam bench rulings, supporting its stance that interest on NPAs should be taxed only in the year of actual receipt, not on accrual basis.

The Ld. CIT(A) upheld the taxability of interest on NPAs on an accrual basis under Sec. 43D, emphasizing that statutory provisions prevail over judicial decisions. However, the assessee, dissatisfied with this decision, appealed to the Appellate Tribunal, presenting the latest order of the Hon'ble Gujarat High Court in a similar case that ruled in favor of the assessee. The Gujarat High Court emphasized the applicability of RBI Guidelines, stating that income recognition should align with prudential norms and real income theory, overriding the provisions of the Income Tax Act.

The revenue argued that Sec. 43D recognizes the taxability of interest on NPAs, but the Tribunal noted that the assessee's claim was based on compliance with RBI Guidelines, which take precedence over income tax laws. The Tribunal concurred with the Gujarat High Court's decision, emphasizing that interest on NPAs cannot be taxed if actual income is not received. Citing the principle laid down by the Supreme Court, the Tribunal directed the A.O. to delete the addition of interest on NPAs, as it was not in accordance with law. The Tribunal's decision was based on the Gujarat High Court ruling and the ITAT Visakhapatnam Bench decision, which were consistent with various reported decisions of other High Courts.

In conclusion, the Tribunal held that the A.O. and CIT(A) erred in assessing the interest on NPAs on an accrual basis and directed the deletion of the addition of the alleged accrued interest on NPAs, aligning with the decisions of the High Court of Gujarat and the ITAT Visakhapatnam Bench.

This comprehensive analysis of the judgment highlights the key issues, arguments presented by both parties, judicial interpretations, and the final decision rendered by the Appellate Tribunal, providing a detailed overview of the legal reasoning and implications of the case.