2018 (5) TMI 935 - AT - Income Tax

Taxability of interest on loans categorised as non-performing assets/sticky loans - addition on accrual basis as contended by the Revenue or on receipt basis as claimed by the assessee - Held that - The issue involved in the present appeals being identical to that decided by the Income-tax Appellate Tribunal in the case of Ludhiana Central Co- op. Bank Ltd., (2017 (1) TMI 778 - ITAT CHANDIGARH), the decision rendered therein would squarely apply to the present cases, following which we hold that the interest on sticky loans/non-performing assets has to be taxed on receipt basis. We, therefore, uphold the order of the Commissioner of Income-tax (Appeals) and dismiss the ground raised by the Revenue.

Summary

Issues Involved:
1. Taxability of interest on loans categorized as non-performing assets (NPAs)/sticky loans.
2. Basis of accounting for interest income on NPAs - accrual basis vs. receipt basis.

Detailed Analysis:

Issue 1: Taxability of Interest on Loans Categorized as Non-Performing Assets (NPAs)/Sticky Loans

The primary issue in the appeals was whether the interest on NPAs should be taxed on an accrual basis, as contended by the Revenue, or on a receipt basis, as claimed by the assessee. The assessee, a co-operative society operating as a non-scheduled bank, argued that interest on NPAs was accounted for on a receipt basis in accordance with Accounting Standard 9 and RBI guidelines. The Assessing Officer (AO) disagreed, insisting on an accrual basis due to the mercantile system of accounting followed by the assessee, leading to the addition of interest income on NPAs to the assessee's income.

Issue 2: Basis of Accounting for Interest Income on NPAs - Accrual Basis vs. Receipt Basis

The Commissioner of Income-tax (Appeals) (CIT(A)) sided with the assessee, citing decisions from the ITAT Pune Bench and the ITAT Chandigarh Bench, which held that interest on bad and doubtful debts should be accounted for on a receipt basis as per section 43D of the Income-tax Act, 1961. This section allows such interest to be recognized on a receipt basis in alignment with RBI guidelines.

The Revenue's appeal contended that the CIT(A) erred in deleting the additions made by the AO due to the assessee's use of the mercantile system of accounting. However, the ITAT Chandigarh Bench had previously ruled in favor of the assessee in a similar case (Deputy CIT v. Ludhiana Central Co-op. Bank Ltd.), holding that interest on NPAs should be taxed on a receipt basis. The Tribunal noted that several High Courts and the Supreme Court had upheld the "real income theory," which supports recognizing income only when its realization is reasonably certain.

The Tribunal referenced the Supreme Court's decision in UCO Bank v. CIT, which approved the receipt basis of accounting for interest on doubtful loans, aligning with accounting practices and section 145 of the Income-tax Act. The Tribunal also considered the Gujarat High Court's ruling in Principal CIT v. Shri Mahila Sewa Sahakari Bank Ltd., which emphasized the RBI guidelines' overriding effect on income recognition for NPAs, as mandated by section 45Q of the RBI Act.

Further, the Tribunal highlighted the Bombay High Court's decision in CIT v. Deogiri Nagari Sahakari Bank Ltd., which reiterated that interest on NPAs should be taxed in the year of receipt, following the RBI guidelines. The Tribunal dismissed the Revenue's reliance on the Supreme Court's decision in State Bank of Travancore, noting it had been overruled by subsequent judgments.

The Tribunal concluded that the CIT(A)'s order was consistent with established judicial precedents and upheld the treatment of interest on NPAs on a receipt basis. Consequently, the Revenue's appeals were dismissed.

Conclusion:

The Tribunal affirmed that interest on NPAs should be taxed on a receipt basis, in line with RBI guidelines and judicial precedents, dismissing the Revenue's appeals. The CIT(A)'s decision to allow the assessee's method of accounting for interest on NPAs was upheld, ensuring that such interest is recognized only when actually received.