2018 (1) TMI 1683 - AT - Income Tax

Disallowance of interest on Non Performing Assets - additions on account of provision of interest on Non Performing Assets - disallowance of provisions against standard assets - HELD THAT - We find that the Assessing Officer has disallowed the provisions which the assessee has made on standard assets and has also made addition on account of interest on Non Performing Assets which the assessee had not taken into account. We find that these issues are squarely covered in favour of the assessee by the orders of the Tribunal in the case of M/s Punjab Gramin Bank 2017 (3) TMI 1781 - ITAT AMRITSAR and also in the case of Moga Central Cooperative Bank 2017 (10) TMI 1605 - ITAT AMRITSAR - Decided in favour of assessee. Provisions against the standard assets - HELD THAT - Issue covered in favour of assessee by the order of the Hon'ble Tribunal in the case of Punjab Gramin Cooperative Bank 2017 (3) TMI 1781 - ITAT AMRITSAR .The deduction under section 36(1)(viia) of the Act is allowed only in respect of certain specific categories of assessee mentioned in the clause like banks, financial institutions, etc. who are in business of lending money. It is not allowed even to non-banking financial institutions since they are not included in this clause. It is seen that though section 36(1) (vii) states that deduction for provision is allowable in respect of provision for bad and doubtful debts, the computation of such deduction is made with reference to total income of the specified Banks based upon quantum of average advances. The deduction of the provisions is neither limited to the quantum of bad debts in the books nor is computed with reference to the quantum of standard assets. The deduction in this clause refers to allowable provisions of anticipated default on the loans and advances made in respect of total assets including standard assets and the claim of the assessee does not fall into the proviso to section 36(1) (viia) as the proviso deals with further deduction for provisions on bad and doubtful debts. The claim of the assessee is covered in the main provisions of section 36(1)(viia) of the Act. The Ld. CIT(A) has passed a very exhaustive and speaking order and we do not find any infirmity in the same. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of interest on Non-Performing Assets (NPA).
2. Deletion of addition on account of disallowance of provision against standard assets.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Disallowance of Interest on Non-Performing Assets (NPA)
The Appellate Tribunal addressed the disallowance of Rs. 1,13,35,169/- made by the Assessing Officer (A.O.) on account of interest on NPAs. The revenue contended that the assessee was following a mixed/hybrid system of accounting, which is not recognized. However, the Tribunal found that the issue was covered in favor of the assessee by previous Tribunal decisions in similar cases, such as M/s Jalandhar Central Cooperative Bank Ltd., M/s Punjab Gramin Bank, and Moga Central Cooperative Bank Ltd.

The Tribunal cited the Supreme Court's decision in UCO Bank Ltd., which approved the receipt basis of accounting for interest on loans whose recovery was doubtful. The Supreme Court held that this method was in accordance with accounting practice and the method prescribed under section 145 of the Income Tax Act. The Tribunal also referred to the CBDT Circular dated 9th October 1984, which stated that interest on loans with no recovery for three years would be taxed on a receipt basis.

Further, the Tribunal referenced various High Court decisions, including the Gujarat High Court in the case of Pr. CIT-5 Vs. Shri Mahila Sewa Sahakari Bank Ltd., which held that the RBI guidelines on income recognition prevailed over the Income Tax Act due to section 45Q of the RBI Act. The Tribunal concluded that the interest on NPAs should be taxable in the year of receipt, dismissing the revenue’s appeal.

Issue 2: Deletion of Addition on Account of Disallowance of Provision Against Standard Assets
The second issue involved the disallowance of Rs. 34,00,000/- on account of provision against standard assets. The A.O. had disallowed this provision, arguing that section 36(1)(viia) of the Income Tax Act allows provisions only for bad and doubtful debts, not for standard assets. The Tribunal found that this issue was also covered in favor of the assessee by previous Tribunal decisions, particularly in the case of Punjab Gramin Cooperative Bank.

The Tribunal noted that section 36(1)(viia) allows deductions for provisions for bad and doubtful debts without differentiating between bad assets and standard assets. The deduction is computed based on the total income and the quantum of average advances, not limited to bad debts alone. The Tribunal upheld the CIT(A)’s decision, which allowed the provision against standard assets, and found no infirmity in the CIT(A)’s order.

Conclusion:
The Tribunal dismissed the revenue's appeal on both grounds, upholding the CIT(A)’s order in favor of the assessee. The Tribunal's decision was based on established judicial precedents and the interpretation of relevant sections of the Income Tax Act and RBI guidelines. The appeal filed by the revenue was dismissed in its entirety.