2015 (2) TMI 289 - AT - Income Tax

Income recognition - unrealizable interest on non-performing advances - not recognized as revenue by the assessee bank following theory of real income while determining accrued income as per provisions of section 145 - Held that - Neither of the parties have placed material on record to demonstrate that the verification of accrual of interest has been decided on the basis of examination of each account. Respectfully following the decision of Hon ble Madras High Court in the case of Sakthi Finance Ltd. (2013 (3) TMI 266 - MADRAS HIGH COURT) are of the view that the accrual of interest is a matter of fact which needs to be decided on the basis of examination of the status of each party. We therefore restore the issue back to the file of A.O to decide the issue de novo - Decided in favour of assessee for statistical purposes. Addition to an amount of interest income - Held that - it is Assessee s submission that the interest of ₹ 40,35,373/- has already been offered to tax in earlier years. Apart from the submissions that the amount has been offered to tax in earlier years, no details or break up has been placed before us to demonstrate as to when the interest was offered to tax in earlier year. We also find that A.O has also not given any finding about as to when the amounts was claimed by the assessee as deduction and therefore the amount claimed by the Assessee is double deduction. We are therefore of the view that the issue needs re-examination. Restore the issue back to the file of A.O to decide the issue afresh - Decided in favour of assessee for statistical purposes. Disallowance of certain expense - Held that - A.O had disallowed the expenses for the reason that the Assessee could not explain the discrepancy between the amount appearing in the ledger and its Profit and Loss account. On the other hand we further find that CIT(A) has restricted the disallowance to 20% but while restricting the disallowance to 20%, there is no finding of CIT(A) about the discrepancy which has not been explained by the Assessee. In view of the aforesaid facts and the contentions of the ld. A.R, we are of the view that in fairness, the matter needs to be re-examined and we therefore restore the issue back to the file of A.O to decide the issue afresh after giving adequate opportunity of hearing to the Assessee. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Addition on account of unrealizable interest on non-performing advances.
2. Addition pertaining to an amount of interest income already recognized in preceding years.
3. Disallowance of certain expenses.

Issue-wise Detailed Analysis:

1. Addition on account of unrealizable interest on non-performing advances:

During the assessment proceedings, the Assessing Officer (A.O.) noted that the Assessee, a Co-op. Bank, did not offer interest on non-performing assets (NPA) for tax despite following the mercantile system of accounting. The Assessee argued that as per the Reserve Bank of India (RBI) regulations, interest on NPAs should not be recognized unless actually realized. However, the A.O. contended that the Income Tax Act, being a special act for tax computation, should prevail, and added Rs. 67,21,070/- as accrued interest on NPAs to the Assessee's income.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s addition, stating that under section 145(1) of the Income Tax Act, income must be recognized as it accrues, and the Assessee did not provide sufficient evidence to prove that the interest was irrecoverable.

Upon appeal, the Tribunal noted that the A.O. did not establish any uncertainty in the collection of the interest on NPAs. It referred to the Hon'ble Madras High Court's decision in Sakthi Finance Ltd. vs. CIT, which emphasized that the accrual of interest is a factual matter to be assessed individually. The Tribunal restored the issue to the A.O. for re-examination, directing a decision in line with the guidelines of the Madras High Court and RBI, providing the Assessee an opportunity to present necessary details.

2. Addition pertaining to an amount of interest income already recognized in preceding years:

The A.O. disallowed the Assessee's claim of Rs. 40,35,361/- as prior period interest, arguing it was a double deduction since the Assessee had not credited this amount to the Profit and Loss account on an accrual basis post-2007, following the cessation of 100% deduction u/s. 80P(2) for Co-op. Banks. The CIT(A) upheld the disallowance.

The Tribunal found that the Assessee claimed the interest had already been taxed in earlier years but provided no detailed evidence. The Tribunal restored the issue to the A.O. for re-examination, instructing a detailed verification of when the interest was offered to tax and when it was allowed as a deduction. The Assessee was directed to furnish all necessary details promptly.

3. Disallowance of certain expenses:

The A.O. disallowed Rs. 19,95,532/- in expenses (advertisement, consultancy fees, building maintenance, and office rent) due to discrepancies between the amounts in the ledger and the Profit and Loss account. The CIT(A) restricted the disallowance to 20%, acknowledging the legitimacy of the expenses but noting the Assessee's failure to substantiate the discrepancies.

The Tribunal found no specific finding by the CIT(A) on the discrepancies and restored the issue to the A.O. for re-examination. The A.O. was directed to provide the Assessee an opportunity to explain the discrepancies and decide the issue afresh based on the evidence provided.

Conclusion:

The Tribunal allowed the Assessee's appeal for statistical purposes, remanding all issues back to the A.O. for re-examination and fresh decision-making in accordance with the law and guidelines provided. The A.O. was instructed to give the Assessee adequate opportunity to present necessary details and explanations.

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