2014 (12) TMI 1367 - AT - Income Tax

Addition to Interest Income - Additions made on account of accrued interest on loans and advances without appreciating that after the amendment to section 145 of the Act w.e.f. 1.4.1997, banks are required to follow the mercantile system of accounting.-CIT-A deleted that addition - DR submitted that the assessee has to follow the provisions of section 145 of the Act for the purposes of computation of income under the normal provisions of the Act - HELD THAT - Respectfully following the decision of the Hon'ble High Court of Karnataka in the case of CIT V Urban Co-operative Bank 2014 (10) TMI 740 - KARNATAKA HIGH COURT and the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 2014 (11) TMI 94 - ITAT BANGALORE , we decide the issue in favour of the assessee. Consequently, the grounds raised at S.Nos.3 4 and amended ground No.3 raised by revenue are dismissed. Provision for Non-Performing Assets ( NPA ) - HELD THAT - Tribunal in the assessee's own case for Assessment Year 2007-08 2014 (11) TMI 94 - ITAT BANGALORE , we uphold the order of the learned CIT (Appeals) in allowing the assessee's claim of deduction on account of provision for NPA.

Summary

Issues Involved:
1. Addition to interest income.
2. Provision for Non-Performing Assets (NPA).

Detailed Analysis:

1. Addition to Interest Income: Rs. 2,33,08,318
Background: The Assessing Officer (AO) observed that the assessee, a District Central Co-operative Bank, was following a hybrid system of accounting, which contravenes Section 145 of the Income Tax Act, 1961. The AO added Rs. 2,33,08,318 to the income on account of accrued interest on loans and advances, arguing that the income should be computed either on a cash or mercantile basis, not a hybrid one.

CIT(A) Decision: The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee's appeal, referencing the Supreme Court decision in UCO Bank Ltd. v. CIT, which held that only real income, not notional income, should be taxed. The CIT(A) also noted that the AO's calculation of interest was flawed due to incorrect assumptions and double additions.

Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, citing the Karnataka High Court's ruling in CIT v. Urban Co-op. Bank Ltd., which stated that income from non-performing assets (NPAs) should be assessed on a cash basis despite the bank maintaining a mercantile system of accounting. The Tribunal also referenced its own previous decision in the assessee's case for the Assessment Year 2007-08, which supported the assessee's practice of recognizing interest on NPAs on a receipt basis.

Conclusion: The Tribunal dismissed the Revenue's grounds related to the addition of interest income, affirming that the interest accrued on NPAs should be recognized on a receipt basis, following judicial precedents and RBI guidelines.

2. Provision for Non-Performing Assets (NPA)
Background: The AO disallowed the assessee's provision for NPAs amounting to Rs. 1,50,00,000, arguing that such provisions should be claimed as bad and doubtful debts under Section 36(1)(viia) of the Act.

CIT(A) Decision: The CIT(A) allowed the deduction for the actual provision of Rs. 1,37,31,000, relying on the Supreme Court's decision in UCO Bank Ltd. v. CIT, which supported the deduction of provisions for NPAs as mandated by RBI guidelines.

Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, referencing its own ruling in the assessee's case for the Assessment Year 2007-08, which allowed the deduction for provisions made in compliance with RBI guidelines. The Tribunal noted that the provision for NPAs, although named differently, essentially serves the same purpose as a provision for bad and doubtful debts and should be allowed as a deduction under Section 36(1)(viia).

Conclusion: The Tribunal dismissed the Revenue's grounds related to the provision for NPAs, affirming the CIT(A)'s decision to allow the deduction as per the RBI guidelines and judicial precedents.

Final Order:
The Tribunal dismissed the Revenue's appeal for the Assessment Year 2008-09, upholding the CIT(A)'s order in favor of the assessee on both issues of addition to interest income and provision for NPAs. The order was pronounced in the open court on 3rd December 2014.