2016 (3) TMI 275 - AT - Income Tax

Additions towards interest on NPA - Held that - Interest on NPA, whose recovery is doubtful and which was not recovered by the assessee bank, but has been kept in a suspense account and has not been credited into the Profit & loss account, cannot be included in the income of the assessee for the year under consideration. The CIT(A), rightly deleted the additions made by the A.O. towards interest on NPAs. There is no error or infirmity in the order passed by the CIT(A). Therefore, we direct the A.O. to delete the additions towards interest on NPA. - Decided in favour of assessee.

Issues Involved:
1. Taxability of interest on Non-Performing Assets (NPAs) for a cooperative bank.
2. Applicability of RBI guidelines versus Income-Tax Act provisions.
3. Method of accounting for recognizing interest on NPAs.

Issue-wise Detailed Analysis:

1. Taxability of Interest on Non-Performing Assets (NPAs):
The primary issue was whether the interest on NPAs should be taxed on an accrual basis or only upon actual realization. The assessee, a cooperative bank, argued that as per RBI guidelines, interest on NPAs should not be recognized on an accrual basis but rather on actual realization. The Assessing Officer (A.O.) added the interest on NPAs to the income, arguing that RBI guidelines cannot override the provisions of the Income-Tax Act, 1961, particularly Section 145, which mandates either mercantile or cash system of accounting.

2. Applicability of RBI Guidelines versus Income-Tax Act Provisions:
The CIT(A) deleted the additions made by the A.O., stating that interest on NPAs had not genuinely accrued to the assessee. The CIT(A) emphasized that when the recovery of the principal amount itself is doubtful, it is unreasonable to expect the recovery of interest on such advances. The CIT(A) supported the assessee's position, highlighting that RBI guidelines for income recognition, asset classification, and provisioning must be followed by cooperative banks.

3. Method of Accounting for Recognizing Interest on NPAs:
The assessee consistently followed the cash system of accounting for interest on NPAs, in line with RBI guidelines. The A.O. argued that the assessee should follow the mercantile system of accounting, as per Section 145 of the Act. However, the tribunal found merit in the assessee's argument that the RBI guidelines, which mandate recognizing interest on NPAs only upon realization, should prevail. The tribunal also referenced previous decisions, including those by the ITAT, Visakhapatnam, and the Hon'ble Supreme Court, which supported the non-recognition of interest on NPAs on an accrual basis.

Judgment:
The tribunal upheld the CIT(A)'s decision, agreeing that interest on NPAs, whose recovery is doubtful and which is not credited to the profit & loss account, should not be included in the income of the assessee. The tribunal cited several precedents, including the Hon'ble Supreme Court's decision in the case of UCO Bank Vs. CIT, which supported the assessee's method of accounting for interest on NPAs. Consequently, the appeal filed by the revenue was dismissed, and the additions made by the A.O. were directed to be deleted.

Conclusion:
The tribunal concluded that the interest on NPAs should not be taxed on an accrual basis if the principal amount itself is doubtful of recovery. The decision reinforced the applicability of RBI guidelines over the provisions of the Income-Tax Act in this context, emphasizing the principle of recognizing real income rather than notional income. The appeal by the revenue was dismissed, and the CIT(A)'s order was upheld.

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