2025 (3) TMI 810 - AT - Income Tax

Accrual of income - addition of interest accrued on NPA based on the foot note shown in the balance sheet of the assessee - HELD THAT - We note that the assessee s books are maintained as per the norms and provisions of the RBI Act and audited by its statutory auditors. Therefore in terms of section 45Q of the RBI Act the assessee has disclosed the details of interest accrued on loans which have become NPA without crediting the same to the Profit and loss account. These amounts are need to be credited to the Profit and loss account only on receipt basis. AO and the of CIT(A) have made an addition of the accrued interest on NPA for the A.Y.2008-09 stating that income tax law does not allow exemption of the same. In relation to the present case it is pertinent to note the following judicial precedents have held that section 43D of the Act cannot override the provisions of the RBI Act and hence the levy tax on accrued interest without realization of the same by the assessee is bad in law. AO and that of CIT(A) have erred in making addition of interest accrued on NPA based on the foot note shown in the balance sheet of the assessee and hence we set aside the order of the ld.CIT(A) by allowing the grounds raised by the assessee. Thus we direct the AO to delete the addition of accrued interest on NPA and recompute the income of the assessee. Decided in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

a. Whether the reopening of the assessment under Section 147 of the Income Tax Act was valid without fresh tangible material.

b. Whether the accrued interest on Non-Performing Assets (NPA) should be added to the income of the assessee Co-operative Bank for the assessment year 2008-09, given that Section 43D of the Income Tax Act was not applicable to Co-operative Banks until the assessment year 2018-19.

2. ISSUE-WISE DETAILED ANALYSIS

a. Reopening of Assessment under Section 147

- Relevant legal framework and precedents: The reopening of an assessment under Section 147 requires the presence of tangible material that leads to a belief that income has escaped assessment. The assessee argued that the reopening was done without any new material, relying on precedents such as Dy. Commissioner of Income Tax vs. Royal Palms India Ltd and Dy. Commissioner of Income Tax Vs. Gujarat State Fertilizer and Chemicals Ltd.

- Court's interpretation and reasoning: The Tribunal did not specifically adjudicate this issue as the appeal was allowed on other grounds. However, it was noted that the reopening was based on figures already disclosed in the balance sheet.

b. Accrued Interest on Non-Performing Assets (NPA)

- Relevant legal framework and precedents: Section 43D of the Income Tax Act allows certain financial institutions to recognize interest on NPAs on a receipt basis, but this was applicable to Co-operative Banks only from the assessment year 2018-19. The assessee argued that, based on various judicial precedents, interest on NPAs should not be taxed on an accrual basis even before this amendment.

- Court's interpretation and reasoning: The Tribunal considered the provisions of Section 45Q of the Reserve Bank of India (RBI) Act, which have an overriding effect over other laws, including the Income Tax Act. It was noted that RBI guidelines prohibit the recognition of interest on NPAs as income unless actually received.

- Key evidence and findings: The assessee's financial statements for the year ending 31.03.2008 showed interest on NPAs as a footnote and not credited to the Profit and Loss Account, complying with RBI guidelines.

- Application of law to facts: The Tribunal found that the assessee's practice of not crediting accrued interest on NPAs to the Profit and Loss Account was consistent with RBI guidelines and judicial precedents.

- Treatment of competing arguments: The Tribunal considered the Department's reliance on the non-applicability of Section 43D to Co-operative Banks before 2018 but found that RBI guidelines and overriding provisions of Section 45Q supported the assessee's position.

- Conclusions: The Tribunal concluded that the addition of accrued interest on NPAs to the assessee's income was not justified and directed its deletion.

3. SIGNIFICANT HOLDINGS

- Core principles established: The Tribunal reiterated that Section 45Q of the RBI Act, which mandates compliance with RBI guidelines on income recognition, overrides the provisions of the Income Tax Act. Accrued interest on NPAs should not be taxed unless actually received, even before the amendment of Section 43D to include Co-operative Banks.

- Final determinations on each issue: The Tribunal allowed the appeal, directing the deletion of the addition of accrued interest on NPAs. The issue of reopening the assessment was left open and not adjudicated, as the appeal was resolved in favor of the assessee on the primary issue.