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2015 (1) TMI 1006 - AT - Income TaxInterest income on Non- Performing Assets - income recognition - Held that - the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (2010 (1) TMI 5 - SUPREME COURT OF INDIA), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis- -vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (2010 (11) TMI 88 - Delhi High Court) has held that the interest on NPA assets cannot be said to have accrued to the assessee. We find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. - Decided in favour of assessee.
Issues Involved:
1. Addition of Rs. 16,60,002/- made by the Assessing Officer on account of interest income on Non-Performing Assets (NPAs). Issue-wise Detailed Analysis: 1. Addition of Rs. 16,60,002/- on account of interest income on NPAs: The primary issue in this appeal is the addition of Rs. 16,60,002/- made by the Assessing Officer (AO) concerning interest income on NPAs. The assessee, a non-scheduled Co-operative Bank, argued that it did not recognize interest income on NPAs following the Prudential Norms issued by the Reserve Bank of India (RBI). The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the AO, leading to the Revenue's appeal. During the hearing, it was acknowledged that a similar issue had been addressed by the Pune Bench of the Tribunal in the case of ACIT vs. The Omerga Janta Sahakari Bank Ltd. The Tribunal had considered judgments from 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. The Tribunal, following the principle of favoring the assessee in the absence of a jurisdictional High Court judgment, decided in favor of the assessee, citing the Supreme Court's reasoning in CIT vs. Vegetable Products Ltd. The Tribunal noted that section 43D of the Income-tax Act, 1961, which prescribes the taxability of interest income on bad and doubtful debts as per RBI guidelines, did not apply to the assessee because it was not a scheduled bank. Therefore, the controversy had to be resolved based on general principles of income accrual. The Tribunal referenced the Visakhapatnam Bench's decision in The Durga Cooperative Urban Bank Ltd., which dealt with a similar issue. The Tribunal there had concluded that interest income on NPAs did not accrue to the assessee following RBI guidelines and should be taxed only upon receipt. The Tribunal also considered the Hon'ble Supreme Court's decision in Southern Technologies Ltd., which distinguished between income recognition and permissible deductions under the Income-tax Act. The Supreme Court held that RBI's Prudential Norms for income recognition had an overriding effect, supporting the non-recognition of interest income on NPAs on an accrual basis. Despite the Revenue's reference to the contrary judgment by the Hon'ble Madras High Court in CIT vs. Sakthi Finance Ltd., which held that interest on NPAs should be taxed on an accrual basis, the Tribunal preferred the view favorable to the assessee, following the Supreme Court's principle in CIT vs. Vegetable Products Ltd. Consequently, the Tribunal affirmed the CIT(A)'s order, rejecting the Revenue's appeal and upholding the non-recognition of Rs. 16,60,002/- as interest income on NPAs by the assessee. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision and holding that the interest income on NPAs did not accrue to the assessee and should not be taxed on an accrual basis. The judgment was pronounced in the open Court on 12th January 2015.
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