2015 (9) TMI 1768 - AT - Income Tax

Deduction u/s 36(1)(viia) - as noted that the cooperative bank is not a company and hence cannot be a non scheduled bank and would therefore not eligible for deduction u/s 36(1)(viia) - HELD THAT - A conjoined reading of the Banking Regulation Act and the Companies Act makes it clear that all cooperative banks operating under the direct supervision and registration of RBI are companies within the meaning of section 5(c) of the Banking Regulation Act, 1949. The assessee bank i.e. Arvind Sahakari Bank Ltd., Katol has been duly registered and approved by the Reserve Bank of India and has been so notified as per the list submitted by the learned counsel of the assessee. This is a list published by Reserve Bank of India on its website. This has not been doubted as to its veracity. Thus we agree with the learned counsel of the assessee that once the Reserve Bank of India recognizes and notifies a Cooperative Bank as a non scheduled bank, the Revenue cannot contend otherwise. Admittedly upon fulfilling all the necessary conditions of the RBI, the assessee bank has been duly notified as a non schedule bank and hence being a non schedule bank it is entitled to deduction u/s 36(1)(viia) - Decided in favour of assessee. Accrual of income on interest - interest accrued of non performing assets of the bank - AO has opined that the same is taxable on accrual basis - HELD THAT - We find that the ratio from the Durga Urban Cooperative Bank Ltd. decision 2011 (3) TMI 1552 - ITAT VISAKHAPATNAM is clearly applicable on the facts of this case. We further note that Hon ble Delhi High Court in Vasistha Chay Vyapar Ltd. 2010 (11) TMI 88 - DELHI HIGH COURT in similar case has duly expounded that the assessee is correct in not recognizing interest accrued on the NPA. The ratio has been followed by the Tribunal in the order as above. We further note that similar view was taken in the case of CIT v/s M/s. Deogiri Nagari Sahakari Bank Ltd. 2015 (1) TMI 1218 - BOMBAY HIGH COURT Since the facts are identical, we hold that interest on NPA had not accrued to the assessee. Decided in favour of assessee.

Summary

Issues Involved:

1. Entitlement of the assessee to deduction under Section 36(1)(viia) of the Income Tax Act, 1961.
2. Taxability of interest accrued on Non-Performing Assets (NPAs) as income.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 36(1)(viia):

The primary issue was whether the assessee, a cooperative society engaged in banking activities, was entitled to claim a deduction under Section 36(1)(viia) of the Income Tax Act for the assessment years 2009-10 and 2010-11. The Assessing Officer (AO) initially denied this deduction, asserting that the assessee was neither a scheduled bank nor a non-scheduled bank nor a cooperative bank as defined under the Banking Regulation Act, 1949. The AO's interpretation was that a non-scheduled bank must be a "banking company" as per the Banking Regulation Act, which did not include cooperative banks.

Upon appeal, the CIT(Appeals) reversed the AO's decision. The CIT(A) clarified that under Section 5 of the Banking Regulation Act, read with Section 56, cooperative banks are indeed considered "banking companies." The CIT(A) noted that the Reserve Bank of India (RBI) had duly registered and approved the assessee as a non-scheduled bank, and this classification was available on the RBI's website. The CIT(A) concluded that once the RBI recognizes a cooperative bank as a non-scheduled bank, it is entitled to the deduction under Section 36(1)(viia). The Tribunal upheld this view, agreeing that the RBI's notification of the assessee as a non-scheduled bank was conclusive and that the Revenue could not challenge this classification.

2. Taxability of Interest on NPAs:

The second issue concerned whether the interest accrued on NPAs should be recognized as income by the assessee. The AO added the interest on NPAs to the assessee's taxable income, arguing that neither the RBI norms nor accounting standards prevented the accrual of interest on NPAs. The AO referenced the Supreme Court's decision in Southern Technologies Ltd. v. JCIT, which held that RBI directions do not override the provisions of the Income Tax Act regarding income recognition.

The CIT(Appeals), however, sided with the assessee, referencing the ITAT Vishakhapatnam Bench's decision in CIT vs. Durga Co-operative Urban Bank and the Delhi High Court's ruling in Vasisth Chay Vyapar Ltd. The CIT(A) observed that these judgments established that interest on NPAs does not accrue as income, aligning with RBI's prudential norms. The Tribunal agreed, noting that the RBI's guidelines on income recognition for NPAs have an overriding effect, as supported by the Supreme Court's interpretation in Southern Technologies Ltd. The Tribunal also cited a similar precedent from the jurisdictional High Court in CIT v/s M/s. Deogiri Nagari Sahakari Bank Ltd., reinforcing the view that interest on NPAs does not accrue as income.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on both issues, dismissing the Revenue's appeal. It affirmed that the assessee was entitled to the deduction under Section 36(1)(viia) as a non-scheduled bank recognized by the RBI and that interest on NPAs should not be considered accrued income. The appeals filed by the Revenue were consequently dismissed.