2015 (3) TMI 886 - AT - Income Tax

Accrual of interest - Addition made on account of sticky advances - CIT(A) deleted the addition accepting the plea of the assessee that provisions of section 43D are applicable to the assessee company and to hold decision of the Hon'ble Supreme Court in the case of UCO Bank vs. CIT (1999 (5) TMI 3 - SUPREME Court) is applicable even to the non-scheduled bank like assessee - Held that - The identical issue has been considered in the case of DCIT, Vijayawada vs. The Durga Cooperative Urban Bank Ltd., Vijayawada 2011 (3) TMI 1552 - ITAT VISAKHAPATNAM placing its heavy reliance on the decision of Vashist Chay Vyapar Ltd. 2010 (11) TMI 88 - Delhi High Court , in which considered the decision in the case of Southern Technologies Ltd. 2010 (1) TMI 5 - SUPREME COURT OF INDIA to finally held that the interest income relatable to NPA advances did not accrue to the assessee. In the case before us, admittedly, assessee has directly taken the interest to the Balance Sheet and it is not routed through the Profit & Loss Account. Moreover, the issue of the taxability of the interest on the sticky losses/advances, is covered in favour of the assessee by the decision of the coordinate Benches in the case of The Durga Cooperative Urban Bank Ltd., Vijayawada (supra) and Karnavati Cooperative Bank Ltd. (2011 (11) TMI 367 - ITAT AHMEDABAD )to hold interest on the sticky advances/NPA advances cannot be brought to tax. We find no reason to interfere with the reasoned order of the Ld. CIT(A) and accordingly the same is confirmed. In the result, the Revenue's ground is dismissed. - Decided in favour of assessee. Scope of Section 14A - Disallowance of carried forward losses - whether losses are forming part of total income in view of Sec.14A as the same is result of profits and gains of business or profession? - CIT(A) directed the Assessing Officer to allow the set off of the brought forward losses of the earlier year - Held that - As relying on CIT vs. Kribhco 2012 (7) TMI 591 - DELHI HIGH COURT wherein held Section 14A states that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under Chapter VIA has to be excluded for the purpose of the said Section. The words do not form part of the total income under this Act is significant and important. As noticed above, before allowing deduction under Chapter VIA we have to compute the income and include the same in the total income. In this manner, the income which qualifies for deductions under Sections 80C to 80U has to be first included in the total income of the assessee. It, therefore, becomes part of the income, which is subjected to tax. Thereafter, deduction is to be allowed in accordance with and subject to the fulfillment of the conditions of the respective provisions. This is also subject to Section 80AB and 80A(1) and (2). Chapter VIA does not postulate or state that the incomes which qualify for the said deduction will be excluded and not form part of the total income. They form part of the total income but are allowed as a deduction and reduced - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of sticky advances.
2. Disallowance of carried forward losses.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Sticky Advances:

The Revenue challenged the CIT(A)'s decision to delete the addition of Rs. 6,86,73,957/- made on account of sticky advances. The Assessing Officer (AO) had included this interest in the total income, arguing that Section 43D of the Income Tax Act, which allows exclusion of interest on non-performing assets (NPAs) from taxable income, did not apply to cooperative banks but only to scheduled banks and other specified institutions.

The CIT(A) rejected the AO's contentions, stating that Section 43D does not grant an exemption but defers the taxability of interest on NPAs until it is actually received. The CIT(A) emphasized that the principle of real income, as recognized in the case of UCO Bank vs. CIT (237 ITR 889), applies to cooperative banks as well, meaning that income on NPAs should not be taxed until it is actually realized.

Furthermore, the CIT(A) noted that the assessee followed the Reserve Bank of India's (RBI) guidelines and Accounting Standard-9 (AS-9) for revenue recognition, which mandates that income from NPAs should only be recognized when it is actually received. The CIT(A) also highlighted various judicial precedents supporting the non-taxability of unrealized interest on NPAs, including decisions from the Supreme Court and High Courts.

The ITAT upheld the CIT(A)'s decision, referencing similar rulings by other benches and courts, which consistently held that interest on NPAs should not be taxed until it is actually received. The ITAT emphasized that the principle of real income and the provisions of Section 43D, as well as relevant CBDT circulars, support the non-taxability of unrealized interest on NPAs.

2. Disallowance of Carried Forward Losses:

The Revenue also contested the CIT(A)'s decision to allow the set-off of carried forward losses amounting to Rs. 2,39,37,185/-. The AO had disallowed this set-off, arguing that the losses were incurred in years when the cooperative bank's income was exempt under Section 80P of the Income Tax Act, and hence, the provisions of Section 14A, which disallows expenses related to exempt income, should apply.

The CIT(A) directed the AO to allow the set-off of the brought forward losses, rejecting the AO's application of Section 14A. The CIT(A) reasoned that the losses were part of the total income as per Sections 2(45) and 5 of the Act and were not exempt income but deductions under Chapter VI-A.

The ITAT upheld the CIT(A)'s decision, referencing the Delhi High Court's judgment in the case of CIT vs. Kribhco, which clarified that deductions under Chapter VI-A do not imply that the income ceases to be part of the total income. The ITAT concluded that the brought forward losses should be allowed to be set off against the current year's income.

Conclusion:

The ITAT confirmed the CIT(A)'s orders on both issues, thereby dismissing the Revenue's appeal. The judgment reaffirmed the principles of real income and the applicability of Section 43D to cooperative banks, and clarified the treatment of carried forward losses in the context of deductions under Chapter VI-A.