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2018 (1) TMI 1621 - AT - Income TaxReal v/s hypothetical income - Addition on account of accrued interest on NPA account - Mercantile system of accounting - HELD THAT - In this case, appellant is a co-operative society is assessed to tax and engaged in the business of banking and governed by the banking Regulation Act, 1949. Return of income for assessment year under consideration was e-filed declaring total income at ₹ 2,59,94,100/-. The AO vide order u/s.143(3) of the Act dated 11.03.2015 assessed the total income of ₹ 3,13,72,830/-. It is also held that in the case of banking companies, any interest accrued on advances classified as non-performing is taxed in the year in which the same is actually received. The theory of only real income is to be taxed is a settled law and therefore notwithstanding the appellant has been following mercantile system of accounting, the appellant could be taxed on the real income and not on the hypothetical income. Disallowance u/s 14A - Assessee stated that the AO has not made any such observation to this effect that he was not satisfied with the correctness of the claim and just mechanically worked out the disallowance - HELD THAT - Section 14A has not confirmed specific power to the AO to assume that a part of the expenditure must have necessarily been incurred to earn exempted income which he can estimate and disallow. The AO has no authority to estimate the expenditure which the appellant would have, in his opinion, incurred in relation to the exempted income - Since in the past similar additions were deleted by the CIT(A) and thereafter confirmed by the Hon ble ITAT Bench. We are not inclined to interfere in the order passed by the ld. CIT(A). In our considered opinion, ld. CIT(A) has passed detailed and reasoned order which does not require any kind of interference at our end. - Decided against revenue.
Issues Involved:
1. Deletion of addition of ?34,73,904/- on account of accrued interest on NPA account. 2. Deletion of addition under Section 14A of ?19,04,830/-. Issue-wise Detailed Analysis: 1. Deletion of Addition of ?34,73,904/- on Account of Accrued Interest on NPA Account: The appellant, a Co-operative Society engaged in banking, filed its return of income showing ?2,59,94,100/-. The Assessing Officer (AO) assessed the total income at ?3,13,72,830/-, including an addition of ?34,73,904/- for accrued interest on Non-Performing Assets (NPA). The AO argued that interest on NPAs should be taxed on an accrual basis as per the mercantile system and provisions of Section 145 of the Income-tax Act, 1961. However, the appellant contended that interest on NPAs should only be taxed when actually received, citing the principle of real income and various judicial precedents, including the Supreme Court's decision in UCO Bank vs. CIT and CIT vs. Shoorji Vallabhdas & Co. The appellant further argued that the method of recognizing interest on NPAs upon realization is consistent with Accounting Standard 9 issued by the Institute of Chartered Accountants of India and RBI guidelines. The appellant also highlighted that the department had accepted this method in previous assessments and that there was no new fact justifying a different treatment for the current year. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the appellant's arguments and deleted the addition. The ITAT upheld the CIT(A)'s decision, emphasizing that the theory of real income should be applied, and hypothetical income should not be taxed. The ITAT also noted that similar additions had been deleted in the appellant's own case in previous years and by other judicial pronouncements. 2. Deletion of Addition under Section 14A of ?19,04,830/-: The AO made an addition under Section 14A amounting to ?19,04,830/-, disallowing expenditure purportedly incurred to earn exempt income. The appellant argued that the AO did not express dissatisfaction with the correctness of the appellant's claim and mechanically worked out the disallowance without proper justification. The ITAT referred to its coordinate bench's decision, which stated that the AO must provide specific reasons for not being satisfied with the appellant's claim and cannot assume that a part of the expenditure must have necessarily been incurred to earn exempt income. The ITAT reiterated that the AO has no authority to estimate the expenditure for disallowance under Section 14A without proper basis. The CIT(A) had deleted the addition, and the ITAT upheld this decision, noting that similar additions had been deleted in previous assessments and confirmed by the ITAT. The ITAT concluded that the CIT(A) had passed a detailed and reasoned order, which did not require any interference. Conclusion: The appeal filed by the department was dismissed. The ITAT upheld the CIT(A)'s order, which deleted the additions made by the AO on account of accrued interest on NPA and under Section 14A, emphasizing the principles of real income and proper justification for disallowances.
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