2017 (7) TMI 1418 - AT - Income Tax

Interest due on Non-Performing Assets - CIT deleting the addition made by the AO holding that the interest due on Non-Performing Assets was taxable as the Co-op Bank was following mercantile system of Accounting except with regard to the interest pertaining to NPAs - HELD THAT - As per CIT it is to taxed in the year of actual receipt even though it is following mercantile system of Accounting.at the assessee is a Co-operative Society which is engaged in the business of banking and has been following the directions of the Apex Bank and according to that interest due on NPAs had to be accounted for as income on actual receipts basis. Even otherwise AS9 of ICAI on Revenue recognitions provide for where there in uncertainty about the collection of Revenue recognition of income or such Revenue is postponed to the extent of uncertainty involved therefore the assessee recognized Revenue on advances classified as NPAs on actual receipt basis and even the assessee consistently following the method of accounting in accordance with Section 145 of the Act. Therefore on the aforesaid reasons and observations we do not have any hesitation to uphold the action of the Ld. CIT(A) to dismiss the appeals of the Department. Hence the instant appeals stand dismissed.

Summary

Issues:
- Taxability of interest on Non-Performing Assets (NPA) under the mercantile system of accounting.
- Applicability of RBI guidelines and Accounting Standards in recognizing income from NPAs.
- Dispute regarding the recognition of interest on NPAs in the year of actual receipt.

Analysis:
1. Taxability of NPA Interest: The Revenue Department contested the deletion of an addition of Rs.1,12,27,702/- by the Assessing Officer (AO) concerning interest on NPAs. The AO argued that interest on NPAs should be taxable as the Co-op Bank followed the mercantile system of accounting. The AO disregarded the relevance of RBI Directions to the treatment of taxable income, emphasizing the Income Tax Act's provisions. The ITAT held that interest on NPAs must be recognized as income, even if not accounted for in the books, as the bank did not fall within the category of business under Section 43D for recognizing interest on NPAs on a receipt basis.

2. Applicability of RBI Guidelines: The CIT(A) deleted the addition based on the appellant's argument that the Co-operative Bank followed RBI guidelines, recognizing income on NPAs on an actual receipt basis. The CIT(A) referred to a previous judgment involving a similar issue and held that interest on NPAs should be taxed in the year of actual receipt. The ITAT upheld the CIT(A)'s decision, emphasizing that the Co-operative Bank's adherence to RBI guidelines and Accounting Standards justified recognizing income from NPAs on an actual receipt basis.

3. Recognition of NPA Interest: The ITAT considered the appellant's consistent method of accounting in line with Section 145 of the IT Act and the uncertainty surrounding revenue collection for NPAs. The ITAT agreed with the CIT(A) that recognizing revenue on NPAs based on actual receipts was appropriate. The ITAT dismissed the Revenue Department's appeals, stating that the Co-operative Bank's compliance with the Apex Bank's directives and the AS-9 of ICAI supported the recognition of income from NPAs on an actual receipt basis.

In conclusion, the ITAT upheld the CIT(A)'s decision to dismiss the appeals, emphasizing the Co-operative Bank's adherence to RBI guidelines and Accounting Standards in recognizing income from NPAs on an actual receipt basis. The judgment highlighted the importance of following statutory provisions and consistent accounting practices in determining the taxability of interest on NPAs under the mercantile system of accounting.