2015 (1) TMI 1407 - AT - Income Tax

Accrual of income - Addition on account of accrued interest on loans which are classified as Non-performing Assets - applicability of provisions of sec. 43D - assessee is a Co-operative Bank carrying on the business of banking - Held that - Merely because the said amount accrued was not realized immediately cannot be a ground to avoid payment of tax but if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the same then it cannot said to have been accrued and the said amount cannot be brought to tax. Therefore we reverse the finding of CIT(A) and restore the issue back to the file of Assessing Officer to verify whether the assessee has followed the mercantile system of accounting or not? Secondly if this amount is accrued to the assessee but it is not possible to recover the same then it cannot be said to have been accrued and the said amount cannot be brought to tax. The Assessing Officer should verify from the P 10, 000/- u/s. 40(a)(ia) - Held that - As decided in ACIT vs. The Belgaum District Central Cooperative Bank Ltd. Belgaum 2015 (1) TMI 743 - ITAT PANAJI terms clause (v) which is general in nature will not apply to the co-op bank. The provisions of Section 194A (1)(viia) is clearly applicable and therefore the assessee has to deduct T.D.S. on income credited or paid in respect of deposits except which falls under that provisions. Assessee cooperative bank is liable for TDS u/s. 194. We therefore dismiss the appeal of the assessee.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 31,87,638/- on account of accrued interest on loans classified as Non-Performing Assets (NPA).
2. Disallowance under section 40(a)(ia) for non-deduction of tax at source (TDS) on interest paid to members of the cooperative bank.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of Rs. 31,87,638/- on Account of Accrued Interest on Loans Classified as NPA:

The primary issue revolves around whether the interest accrued on loans classified as NPAs should be recognized as income for taxation purposes. The Department argued that the CIT(A) erred in deleting the addition of Rs. 31,87,638/- relying on the Karnataka High Court decision in Canfin Home Ltd., ignoring the provisions of section 43D of the Income Tax Act, 1961. The Department contended that the cooperative bank does not fall under the category specified in section 43D, which allows certain institutions to defer the recognition of interest income on NPAs.

The assessee, a cooperative bank, followed a hybrid system of accounting, recognizing interest on NPAs on a cash basis as per RBI guidelines. The CIT(A) deleted the addition, citing the Supreme Court decision in UCO Bank v. CIT (1999) 237 ITR 889, which held that interest on sticky advances should be added as income only when actually received. The CIT(A) also relied on the Karnataka High Court's decision in Canfin Homes Ltd., which supported the non-recognition of notional income on NPAs.

The Tribunal, however, found that the CIT(A) did not verify whether the assessee followed the mercantile system of accounting or a hybrid system. The Tribunal held that section 43D is not applicable to cooperative banks as they are not scheduled banks. The Tribunal reversed the CIT(A)'s decision and remanded the matter back to the Assessing Officer (AO) to verify the accounting system followed by the assessee and determine whether the interest income on NPAs was actually accrued and recoverable.

2. Disallowance Under Section 40(a)(ia) for Non-Deduction of TDS on Interest Paid to Members:

The second issue concerns the disallowance of Rs. 53,00,668/- under section 40(a)(ia) for non-deduction of TDS on interest paid to members of the cooperative bank. The assessee argued that the interest payments to its members were covered under section 194A(3)(v) of the Income Tax Act, which exempts cooperative societies from deducting TDS on interest paid to members.

The AO disallowed the interest payments, interpreting that section 194A(3)(v) applies to cooperative societies other than cooperative banks. The CIT(A) upheld the AO's decision, relying on the ITAT Pune Bench decision in Bhagani Nivedita Sahakari Bank Ltd. v. ACIT, which held that cooperative banks are not covered under section 194A(3)(v). The CIT(A) also referenced the Kerala High Court decision in Moolamattom Electricity Board Employees Co-op Bank Ltd., which distinguished between primary credit societies and cooperative societies engaged in banking.

The Tribunal supported the CIT(A)'s decision, emphasizing that cooperative banks are subject to TDS provisions under section 194A(1) for interest payments exceeding Rs. 10,000/-. The Tribunal referred to the CBDT's explanatory notes and previous judicial pronouncements, concluding that cooperative banks must deduct TDS on interest paid to members and non-members alike.

Conclusion:

The Tribunal allowed the Department's appeal for statistical purposes regarding the recognition of interest income on NPAs and remanded the matter back to the AO for verification. The Tribunal dismissed the assessee's appeal concerning the disallowance under section 40(a)(ia), upholding the requirement for cooperative banks to deduct TDS on interest payments to members. The Tribunal's decisions were consistent with previous judicial interpretations and legislative intent, ensuring compliance with the specific provisions of the Income Tax Act.