2014 (11) TMI 288 - AT - Income Tax

Interest accrued on Non-Performing Assets Applicability of CBDT Circular - Held that - Following the decision in assessee s own case for the earlier assessment year, it has been held in Maharashtra Nagari Sahakari Bank Ltd. 2014 (11) TMI 240 - ITAT PUNE - Vide an explanation (d) r.w.s. 36(1)(viia) annexed to section 43-D the definition of the entities incorporated by the section have been defined and in the absence of any contrary material, the assessee is covered by one of the entities, hence the provisions of section 43-D are to be applied - The CBDT u/s.119 of the I.T. Act has power to issue Circulars in exercise of its statutory powers - If the Board consider it necessary to lay down certain Rules and then direct the sub-ordinate authorities, such directions are required to be followed and such Circular would be binding on the Department unless and until held as ultra vires by a court of law - in terms of CBDT Circular the interest is to be added as income only when actually received or credited in respect of the sticky advances while making assessment for a financial institution. Interpretation of the language of the statute Concept of real income approved in the case of banking business Held that - If the statute has used the terminology for the chargeability of interest on the basis when credited or actually received , then no ambiguity has been left by the Statute - If the statute is so clear that an interpretation can easily be made, then that exact meaning should be given to the language of the Section - section 43-D has to be applied in its letter and spirit - assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit & Loss Account thus, there is no reason to interfere in the order of the CIT(A) Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of interest accrued on Non-Performing Assets (NPAs).
2. Applicability of RBI guidelines versus the Income-tax Act.
3. Use of Hybrid System of Accounting.
4. Relevance of Supreme Court decision in Southern Technologies Vs. JCIT.
5. Restoration of the Assessing Officer's order.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Interest Accrued on NPAs:
The primary issue in this appeal is the deletion of an addition amounting to Rs. 1,05,61,520/- on account of interest accrued on NPAs. The Revenue contended that the CIT(A) erred in deleting this addition by ignoring the provisions of Section 145 and Section 43D of the Income-tax Act, 1961. The assessee, a cooperative bank, argued that it followed RBI Guidelines, which dictate that income on NPAs should be recognized on an actual receipt basis. The Assessing Officer (AO) had added the interest accrued on NPAs to the taxable income, asserting that the assessee followed a Hybrid System of Accounting, which is not permissible under Section 145.

2. Applicability of RBI Guidelines versus the Income-tax Act:
The AO argued that the RBI directions and the Income-tax Act operate in different fields and that the provisions of Section 43D, which allow certain financial institutions to account for interest on NPAs on a receipt basis, do not apply to non-scheduled cooperative banks. The assessee countered that it consistently followed the RBI norms for accounting interest on NPAs, which the CIT(A) accepted, leading to the deletion of the addition.

3. Use of Hybrid System of Accounting:
The AO noted that the assessee was following both the mercantile and cash systems of accounting, which is not allowed under Section 145. The assessee maintained that it followed the mercantile system but accounted for interest on NPAs on a cash basis as per RBI guidelines. The CIT(A) found merit in the assessee's argument and deleted the addition.

4. Relevance of Supreme Court Decision in Southern Technologies Vs. JCIT:
The Revenue cited the Supreme Court decision in Southern Technologies Vs. JCIT to support their position. However, the Tribunal noted that the issue in that case was different, involving the provision for doubtful debts, not the accrual of interest on NPAs. The Tribunal found that the principles laid down in the case of UCO Bank and other relevant decisions were more applicable, supporting the assessee's method of accounting for interest on NPAs.

5. Restoration of the Assessing Officer's Order:
The Revenue sought to restore the AO's order, arguing that the CIT(A) had erred in its judgment. However, the Tribunal found that the issue was already covered in favor of the assessee by previous decisions, including the Tribunal's own decision in the assessee's case for the assessment year 2007-08. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal.

Conclusion:
The Tribunal concluded that the interest on NPAs should not be included in the assessee's income in the year of accrual, upholding the CIT(A)'s order and dismissing the Revenue's appeal. The decision was pronounced in the open Court on October 30, 2014.