2013 (8) TMI 476 - AT - Income Tax

Interest on outstanding loans - Accrual of interest on NPA - Scheduled Bank - Special provisions u/s 43D - Held that - loans were advanced since 1999 and they had become NPAs against which suits for recovery were filed by the assessee in various Courts. In view of the assessee having neither received the loans or part thereof nor any interest therefrom, no interest was provided in the books of account as the recovery of the loans itself had become difficult. Admittedly, the assessee was following mercantile system of accounting under which income is to be recognized when the same accrues irrespective of the fact whether the same is received or not. However, in respect of the interest due on NPAs special provisions are provided under section 43D of the Act, which is non obstante clause and in case of NPAs i.e. the debts recovery of which had become bad, interest is to be provided on this recovery, i.e. the year in which it is actually received by the institution or the bank or other body or when it is charged to the Profit & Loss Account whichever is earlier. The provisions of section 43D of the Act override other provisions of the Act and said provisions are applicable in the case of assessee, being Scheduled Bank. Once the loans had become NPAs and the assessee had opted to account for the interest on such NPAs only on recovery of the same, the law recognizes such treatment of interest on NPAs as valid in view of the provisions of section 43D of the Act - No addition - Decided against Revenue.

Summary

Issues involved:
1. Addition of interest on outstanding loans.
2. Deletion of audit fee from the account.

Issue 1: Addition of interest on outstanding loans:
The Appellate Tribunal ITAT Chandigarh heard two appeals by the Revenue against separate orders of CIT(A) for Assessment years 2007-08 and 2008-09. The Revenue raised grounds of appeal regarding the addition of interest on outstanding loans. The CIT(A) allowed the claim of the assessee, stating that the loans had become Non Performing Assets (NPAs) and no provision for interest on accrual basis was made due to pending litigation and unrecovered amounts. The CIT(A) observed that the bank had taken legal action, and recovery was difficult. The Tribunal noted that the assessee followed the mercantile system of accounting but did not recognize interest on NPAs until recovery, citing section 43D of the Act. The Tribunal upheld the CIT(A)'s decision based on precedents and dismissed the Revenue's appeal.

Issue 2: Deletion of audit fee from the account:
Another issue concerned the deletion of an addition of Rs. 3.00 lakhs from the audit fee paid. The CIT(A) allowed the claim, stating that the revised audit fee was paid to the Government of Punjab as per sanctioned rates. The Tribunal agreed with the CIT(A), noting that the assessee did not debit the amount to the profit and loss account, and provision was not made for it. Consequently, the Tribunal dismissed the Revenue's appeal on this ground as well.

In conclusion, the Appellate Tribunal ITAT Chandigarh dismissed both appeals filed by the Revenue, upholding the decisions made by the CIT(A) regarding the addition of interest on outstanding loans and the deletion of the audit fee from the account. The Tribunal emphasized adherence to the provisions of the Act and relevant legal precedents in reaching its decisions.