2015 (3) TMI 603 - AT - Income Tax

Interest income on non-performing asset advances - Applicability of provisions of section 43D - assessee is a non-scheduled co-operative bank carrying on banking business in terms of a licence issued by the Reserve Bank of India (RBI) - as per the AO interest income on non-performing assets advances accrued to the assessee and accordingly, he brought to tax such interest income - CIT(A) deleted the addition - Held that - As relying on Asst. CIT v. Omerga Janta Sahakari Bank Ltd. 2014 (12) TMI 355 - ITAT PUNE who considered the judgment of CIT v. Vasisth Chay Vyapar Ltd. 2010 (11) TMI 88 - Delhi High Court as well as the judgment of CIT v. Sakthi Finance Ltd. 2013 (3) TMI 266 - MADRAS HIGH COURT which had expressed divergent views with respect to the issue of accrual of interest income on non- performing assets advances ; and, following the proposition that in the absence of any judgment of the jurisdictional High Court, there being contrary judgments of the non-jurisdictional High Courts, a decision which was favourable to the assessee was to be followed in view of the reasoning laid down by the hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME Court and, thus the Tribunal decided the issue in favour of the assessee. Assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a scheduled bank included in second schedule of RBI so as to fall within the scope of section 43D of the Act - in Commissioner of Income tax Versus Vasisth Chay Vyapar Ltd. & others 2010 (11) TMI 88 - Delhi High Court it was held that what to talk of interest, even the principle amount itself had become doubtful to recover - In this scenario it was legitimate move to infer that interest income thereupon has not accrued - thus, there was no infirmity with the decision of the CIT(A) in holding that the interest income relatable on NPA advances did not accrue to the assessee Decided against revenue.

Summary

Issues Involved:
1. Taxability of interest income on non-performing asset (NPA) advances for a non-scheduled co-operative bank.
2. Applicability of Section 43D of the Income-tax Act, 1961.
3. Relevance of RBI guidelines on income recognition for NPAs.
4. Divergent judicial opinions on the accrual of interest income on NPAs.

Detailed Analysis:

1. Taxability of Interest Income on NPAs:
The primary issue in both appeals was whether interest income on NPAs should be included in the assessee's total income for the assessment years 2009-10 and 2010-11. The assessee, a non-scheduled co-operative bank, did not account for interest on NPAs as per RBI guidelines. The Assessing Officer (AO) contended that such interest income should be taxed on an accrual basis under the mercantile system of accounting, resulting in additions of Rs. 53,88,043 and Rs. 38,36,285 for the respective assessment years.

2. Applicability of Section 43D:
The AO argued that Section 43D, which allows interest income on NPAs to be taxed in the year it is credited or received, did not apply to the assessee because it is not a scheduled bank. Both parties agreed that Section 43D was not applicable to the assessee, necessitating a decision based on general principles of income accrual.

3. Relevance of RBI Guidelines:
The Commissioner of Income-tax (Appeals) and the Tribunal considered the RBI guidelines on income recognition for NPAs. The Tribunal noted that the RBI guidelines, which mandate non-recognition of interest income on NPAs, should be followed. This view was supported by the Delhi High Court's judgment in CIT v. Vasisth Chay Vyapar Ltd., which held that interest income on NPAs does not accrue and should not be included in total income.

4. Divergent Judicial Opinions:
The Tribunal acknowledged the conflicting judgments of the Delhi High Court and the Madras High Court on this issue. The Delhi High Court, in CIT v. Vasisth Chay Vyapar Ltd., held that interest on NPAs does not accrue, while the Madras High Court, in CIT v. Sakthi Finance Ltd., held the opposite. In the absence of a jurisdictional High Court ruling, the Tribunal followed the Supreme Court's principle in CIT v. Vegetable Products Ltd., opting for the interpretation favorable to the assessee.

Conclusion:
The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), affirming that the interest income on NPAs should not be included in the assessee's total income for the relevant assessment years. Consequently, the appeals by the Revenue were dismissed.

Order:
The consolidated order pronounced on October 31, 2014, dismissed both appeals of the Revenue, affirming the favorable treatment of the assessee's claim regarding non-recognition of interest income on NPAs as per RBI guidelines.