2018 (3) TMI 1527 - HC - Income Tax

Addition made on account of accrued interest on loans treated as Non Performing Assets - violation of Section 145 - Held that - As relying on case of Shri Siddeshwar Co-operative Bank Limited 2016 (6) TMI 1129 - KARNATAKA HIGH COURT mere nomenclature adopted with reference to the bad loans and advances receivable, would refer to all non-performing assets of any nature, of whatever category placed as a non-performing asset and therefore, the contention of the Revenue that in respect of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the Revenue which has accrued notionally is without any basis. In that view of the matter, the substantial question o law is answered against the Revenue and in favour of the assessee. Co-operative Bank is not required to deduct tax while paying interest under Section 194A. See Bagalkot District Central Co- op. Bank . See CIT v/s Bagalkot District Central Co-op. Bank 2016 (7) TMI 748 - KARNATAKA HIGH COURT Securities categorized and accounted as held to maturity were stock-in-trade and could not be considered as investments and accordingly answered the said question against the Revenue. See Karnataka Vikas Grameen Bank 2015 (12) TMI 1420 - KARNATAKA HIGH COURT

Summary

Issues:
1. Addition of accrued interest on loans treated as Non Performing Assets under Section 145 of the Income Tax Act, 1961.
2. Applicability of Section 194A(3)(v) of the Income Tax Act, 1961 to cooperative societies engaged in banking.
3. Claiming depreciation on investments in government securities held to maturity as held for trading.

Issue 1:
The first substantial question of law pertains to the addition made on account of accrued interest on loans treated as Non Performing Assets (NPAs) under Section 145 of the Income Tax Act, 1961. The Court, relying on previous judgments, held that the mere nomenclature adopted with reference to bad loans and advances receivable would encompass all non-performing assets of any nature. The Court rejected the Revenue's contention that tax should be paid on the revenue notionally accrued from non-performing assets even if they do not yield any income, as the assessee follows a mercantile system of accounting. The Court referred to previous cases and ruled in favor of the assessee, stating that the Revenue's argument lacked basis. Therefore, the Court answered the first substantial question of law against the Revenue and in favor of the assessee.

Issue 2:
The second issue concerns the applicability of Section 194A(3)(v) of the Income Tax Act, 1961 to cooperative societies engaged in banking. The Court cited a Co-ordinate Bench judgment in the case of Bagalkot District Central Co-op. Bank, where it was held that cooperative banks are not required to deduct tax while paying interest under Section 194A of the Act. The Court dismissed the appeal filed by the Revenue, stating that the issue was covered by the previous judgment. Consequently, the Court answered the second question against the Revenue.

Issue 3:
The third issue revolves around claiming depreciation on investments in government securities held to maturity as held for trading. The Court referred to a Co-ordinate Bench judgment in the case of Karnataka Vikas Grameen Bank, where it was held that securities categorized and accounted as held to maturity should be considered stock-in-trade and not investments. The Court agreed with the Co-ordinate Bench's view and answered the question against the Revenue. As a result, the appeals filed by the Revenue were dismissed.

This judgment by the Karnataka High Court addressed various substantial questions of law related to income tax assessments for the assessment years 2008-09 and 2009-10. The Court provided detailed analyses and rulings on each issue raised by the Revenue, ultimately deciding in favor of the assessee in all three instances based on previous judgments and interpretations of relevant provisions of the Income Tax Act, 1961.