2015 (5) TMI 924 - AT - Income Tax

Interest on Non Performing Assets u/s.43D - CIT(A) deleted the addition - Held that - In view of the ratio laid down in ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (2015 (3) TMI 886 - ITAT PUNE) and in ACIT vs. The Omerga Janta Sahakari Bank Ltd. (2014 (12) TMI 355 - ITAT PUNE) we uphold the order of CIT(A) in holding that the interest on NPAs is not taxable in the hands of the assessee for the captioned assessment year - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of interest on Non-Performing Assets (NPAs) under section 43D of the Income Tax Act, 1961.
2. Applicability of section 43D to non-scheduled banks.
3. Interpretation of section 145 of the Income Tax Act, 1961.
4. Reliance on previous Tribunal decisions and pending appeals in higher courts.

Detailed Analysis:

1. Deletion of Addition on Account of Interest on NPAs:
The primary issue revolves around the deletion of the addition of Rs. 36,81,987/- made by the Assessing Officer (AO) under section 43D of the Income Tax Act, 1961, on account of interest on NPAs. The AO had credited the interest on an accrual basis to the Profit & Loss Account, rejecting the assessee's method of not recognizing interest as income unless received on sticky advances. The AO disallowed the deduction of overdue interest, relying on the Supreme Court's decision in Southern Technologies Ltd. vs. JCIT.

2. Applicability of Section 43D to Non-Scheduled Banks:
The Revenue argued that the provisions of section 43D, which allow for the deferment of interest income on certain bad and doubtful debts, apply only to financial institutions and scheduled banks, not to non-scheduled banks like the assessee. The CIT(A) had previously allowed the assessee's claim, relying on the Tribunal's decision in ACIT vs. Osmanabad Janata Sahakari Bank Ltd., which the Department did not accept and had appealed to the Bombay High Court.

3. Interpretation of Section 145:
The AO contended that the assessee's method of accounting did not align with section 145 of the Income Tax Act, which mandates that income should be computed based on either the cash or mercantile system of accounting. The CIT(A), however, accepted the assessee's method, which was consistent with RBI norms for accounting interest on NPAs.

4. Reliance on Previous Tribunal Decisions and Pending Appeals:
The Tribunal noted that the issue was covered by previous decisions of the Pune Bench, which had ruled in favor of the assessee in similar cases. The Tribunal cited the decisions in ACIT vs. Osmanabad Janta Sah. Bank Ltd. and ACIT vs. The Omerga Janta Sahakari Bank Ltd., where it was held that interest on NPAs should not be taxed on an accrual basis. The Tribunal also referenced divergent views from the Delhi High Court and Madras High Court on similar issues, ultimately favoring the assessee in the absence of a jurisdictional High Court ruling.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the interest on NPAs is not taxable in the hands of the assessee for the assessment year in question. The appeal of the Revenue was dismissed, following the precedent set by the Pune Bench and the principle of favoring the assessee in case of conflicting judgments from non-jurisdictional High Courts. The order was pronounced on 29.4.2015.