2021 (7) TMI 404 - AT - Income Tax

Addition made of interest on sticky loans/NPAs - CIT-A deleted the addition - HELD THAT - Identical issue had been adjudicated by the ITAT Chandigarh Bench in the case of Kangra Central Cooperative Bank Ltd., Dharamshala (supra). 2017 (1) TMI 1533 - ITAT CHANDIGARH The ITAT had held the same to be taxable on receipt basis following its decision in the case of Ludhiana Central Cooperative Bank Ltd. 2017 (1) TMI 778 - ITAT CHANDIGARH wherein it noted, that the judgement of the Hon' ble Gujarat High Court in the case of Pr. CIT- 5 vs Shri Mahila Sewa Sahkari Bank Ltd 2016 (8) TMI 377 - GUJARAT HIGH COURT and CIT vs Deogiri Nagari Sahakari Bank Ltd Others. 2015 (1) TMI 1218 - BOMBAY HIGH COURT was followed. DR has been unable to distinguish the said case before us, nor has he brought to our notice any contrary judgment of any Hon' ble High Court or the Hon' ble Apex Court on the issue. Since admittedly the issue stands covered in favour of the assessee by the decision of the ITAT Chandigarh Bench in the case of Kangra Central Cooperative Bank Ltd., Dharamshala (supra) we see no reason to interfere in the order of the Ld.CIT(A) who has deleted the addition so made following the said decision. Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Taxability of interest on Non-Performing Assets (NPAs)/sticky loans on an accrual basis versus receipt basis.

Issue-wise Detailed Analysis:

1. Taxability of Interest on NPAs/Sticky Loans:
The solitary issue in this appeal concerns the addition of interest on NPAs/sticky loans amounting to ?3,29,01,484, which was deleted by the Commissioner of Income Tax (Appeals) [CIT(A)], following a precedent set by the ITAT Chandigarh Bench. The assessee, a cooperative bank, follows the mercantile system of accounting but did not account for interest on NPAs in its Profit & Loss Account, adhering to RBI guidelines.

The Assessing Officer (AO) added the interest on NPAs to the assessee's income, arguing that under the mercantile system, such interest should be accrued. The CIT(A) reversed this addition, referencing the ITAT Chandigarh decision in the case of Kangra Central Cooperative Bank Ltd., which supported the assessee's method of accounting for interest on NPAs on a receipt basis.

The ITAT Chandigarh Bench had previously ruled that interest on NPAs should be taxed on a receipt basis, not an accrual basis, for cooperative banks, aligning with the "Real Income Theory," Accounting Standard AS-9, and RBI guidelines. This position was reinforced by various High Court decisions, including the Gujarat High Court in Pr. CIT-5 vs. Shri Mahila Sewa Sahkari Bank Ltd. and the Bombay High Court in CIT vs. Deogiri Nagari Sahakari Bank Ltd. & Others, which held that RBI guidelines on income recognition override the provisions of the Income Tax Act due to Section 45Q of the RBI Act.

The Supreme Court's decisions in UCO Bank, Calcutta Vs. CIT, West Bengal, and Mercantile Bank Ltd. Vs. CIT, Bombay City-III, further supported the receipt basis for accounting interest on doubtful loans, emphasizing that such interest should be recognized as income only when its realization becomes reasonably certain.

The Revenue's appeal argued that the CIT(A) erred in deleting the addition, given the assessee's mercantile system of accounting. However, the ITAT upheld the CIT(A)'s decision, noting that the issue was covered by the ITAT Chandigarh Bench's ruling in the case of Kangra Central Cooperative Bank Ltd. and other similar cases, and that the DR could not provide any contrary judgments.

In conclusion, the ITAT dismissed the Revenue's appeal, affirming that interest on NPAs should be taxed on a receipt basis, consistent with established judicial precedents and RBI guidelines.