2016 (2) TMI 36 - AT - Income Tax

Addition on account of interest on Non Performing Assets - assessee is following the mercantile system of accounting - CIT(A) deleted the addition - Held that - As decided in Unclaimed dividend in Deogiri Nagari Sahakari Bank Ltd. 2015 (1) TMI 1218 - BOMBAY HIGH COURT question amounts to excess provisions for dividend made by the Assessee on an earlier occasion which has been reversed by the Assessee in the year under consideration and transferred to a reserve account. The provisions for dividend made earlier was not a charge action profits but it was appropriation of the profits available post taxation. Assessee bound by Reserve Bank of India directions to treat deposit as non-performing asset Interest does not accrue - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition made on account of interest on Non-Performing Assets (NPA) under the mercantile system of accounting.
2. Applicability of RBI guidelines versus provisions of the Income Tax Act as per the Supreme Court ruling in Southern Technologies Ltd. vs. JCIT.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Interest on NPA:
The case revolves around whether the interest on NPAs, which was not routed through the profit and loss account by the assessee following RBI guidelines, should be added to the income for tax purposes. The Assessing Officer (AO) added Rs. 1,10,00,642/- to the total income of the assessee, arguing that the prudential norms issued by the RBI do not regulate the taxability of such income. The AO emphasized that the assessee did not provide detailed information on each NPA account to verify the security or guarantee status.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, relying on the Pune Bench of the Tribunal's decision in the case of ACIT Vs. The Omerga Janta Sahakari Bank Ltd. The CIT(A)'s decision was contested by the Revenue, which maintained that the Supreme Court's ruling in Southern Technologies Ltd. vs. JCIT mandates that RBI guidelines cannot override the provisions of the Income Tax Act. The Revenue argued that the assessee, being a cooperative society, must follow the statutory provisions of the Income Tax Act, despite the RBI guidelines.

2. Applicability of RBI Guidelines Versus Provisions of the Income Tax Act:
The Revenue's contention was based on the Supreme Court's decision in Southern Technologies Ltd. vs. JCIT, which held that RBI guidelines do not override the provisions of the Income Tax Act. The Revenue cited ongoing appeals in similar cases and argued for the reversal of the CIT(A)'s order.

However, the assessee's counsel referred to the Bombay High Court's decision in CIT Vs. Deogiri Nagari Sahakari Bank Ltd., which considered the Supreme Court's ruling in Southern Technologies Ltd. and held that cooperative societies governed by RBI guidelines must adhere to these prudential norms. The High Court emphasized that Section 45Q of the RBI Act has an overriding effect over the income recognition principles under the Companies Act, thus necessitating compliance with RBI directions.

The Tribunal, after considering both sides, upheld the CIT(A)'s decision. It referenced the Bombay High Court's ruling, which supported the deletion of additions on account of interest on NPAs. The High Court had dismissed the Revenue's appeal, confirming that RBI guidelines on prudential norms apply to cooperative societies and override the income recognition principles under the Companies Act.

Conclusion:
The Tribunal dismissed the Revenue's appeal and the assessee's Cross Objection, which was merely in support of the CIT(A)'s order. The Tribunal's decision was based on the binding precedent set by the Bombay High Court, affirming that RBI guidelines on NPAs must be followed by cooperative societies, and hence, the addition made by the AO was correctly deleted by the CIT(A). The Tribunal concluded that no substantial question of law arose, and the CIT(A)'s order was upheld.