2016 (12) TMI 1475 - AT - Income Tax

Claiming deduction u/s 80P - Held that - To avail benefit under section 80P(2)(a)(i) the underlying principle is that the assessee organization has to carry out its activities on the principle of mutuality. Once the assessee failed to carry its activities on the above principle the assessee is not entitled to get benefit under section 80P of the Act as it will come within the purview of section 80P(4) after 01/04/2007. In the present case it is very clear that the assessee is carrying its business activities with members and non-members. Once non-members entered into the organization the principles of mutuality will automatically exists. Insofar as license of RBI is concerned it is not a basis for considering the assessee is eligible for section 80P or not the only basis is whether the assessee is carrying its activities on the principles of mutuality or not. In the present case by considering the objects of the assessee and also activities carried out by the assessee it cannot be said that the assessee is working on the basis of principle of mutuality and therefore not eligible for benefit under section 80P of the Act. The assessee has also failed to fulfill the conditions as laid down in sub-clause (4) of section 80P to avail the benefit of section 80P of the Act. - Decided against assessee Accrual of interest - Disallowance of overdue interest - Assessee treated the interest amount not received for more than 90 days as sticky loans and the interest which is accrued and already credited is reversed by creating reserve account and debiting the same as expenditure - Held that - interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank but has been kept in a suspense account and has not been brought to the P&L a/c of the assessee could not be included in the income of the assesse. The CIT(A) rightly deleted the additions towards interest on NPAs. There is no error or infirmity in the order of CIT(A). Accordingly we direct the A.O. to delete the additions made towards interest on NPAs. See DCIT v. The Gandhi Co-op Urban Bank Ltd. 2015 (11) TMI 1626 - ITAT VISAKHAPATNAM - Decided in favour of assessee

Summary

Issues Involved:
1. Eligibility for exemption under Section 80P of the Income Tax Act.
2. Treatment of overdue interest on sticky loans.
3. Verification and decision on provision for Non-Performing Assets (NPA).
4. Statutory reserve issue.

Detailed Analysis:

1. Eligibility for Exemption under Section 80P:
The primary issue revolves around whether the assessee, a cooperative society, is eligible for exemption under Section 80P of the Income Tax Act. The assessee claimed this exemption, but the Assessing Officer (A.O.) disallowed it, invoking Section 80P(4), which excludes cooperative banks from such exemptions. The A.O. observed that the assessee's activities included accepting deposits and issuing loans to both members and non-members, akin to banking operations. The CIT(A) upheld this view, noting that the society's objectives and activities were consistent with banking. The Tribunal confirmed this, emphasizing that the society's operations with non-members violated the principle of mutuality, thus disqualifying it from the exemption under Section 80P(2)(a)(i). The Tribunal also clarified that the lack of an RBI banking license was irrelevant to the exemption eligibility, focusing instead on the nature of the activities.

2. Treatment of Overdue Interest on Sticky Loans:
The second issue concerns the disallowance of overdue interest on loans not received for over 90 days, which the assessee treated as sticky loans. The A.O. denied this treatment, insisting that under the mercantile system of accounting, such interest should be taxed. The CIT(A) upheld this view. However, the Tribunal sided with the assessee, referencing prior decisions, including the Supreme Court's ruling in UCO Bank v. CIT, which supported recognizing interest on NPAs only upon actual receipt. The Tribunal highlighted that the assessee followed RBI guidelines for income recognition, and unrealized interest on NPAs should not be taxed.

3. Verification and Decision on Provision for NPA:
The CIT(A) directed the A.O. to verify and decide on the provision for NPAs. The Tribunal found no infirmity in this directive, implying that the A.O. should ensure compliance with relevant guidelines and principles in assessing the provision for NPAs.

4. Statutory Reserve Issue:
The issue concerning a statutory reserve of ?10,000 was not pressed before the CIT(A), leading the Tribunal to dismiss this ground.

Separate Judgments:
The Tribunal delivered a common order for the sake of convenience, addressing appeals for different assessment years and cross-objections filed by the assessee. The Tribunal's decision varied slightly across these appeals, but the core findings remained consistent.

Conclusion:
The Tribunal concluded that the assessee is not eligible for exemption under Section 80P(2)(a)(i) due to its banking-like activities with non-members, thus falling under Section 80P(4). The Tribunal allowed the treatment of overdue interest on sticky loans in favor of the assessee, following established judicial precedents. Verification and decision on NPAs were to be conducted by the A.O. as directed by the CIT(A). The statutory reserve issue was dismissed due to lack of pressing. The appeals were partly allowed, and the cross-objections were dismissed as infructuous.