2013 (11) TMI 904 - AT - Income Tax

Interest on sticky advances accrual of income - provision of interest on doubtful debts - Held that - As per Circular dated October 6, 1952 issued by CBDT, where interest accruing on doubtful debts is credited to a suspense account, it need not be included in assessee s taxable income, provided the Income tax Officer is satisfied that recovery is practically improbable Following UCO Bank vs. CIT 1999 (5) TMI 3 - SUPREME Court - A beneficial circular is not to be treated as inconsistent with the provisions of statute and binding on the authorities - In respect of interest on sticky advances interest income is to be taxed only when actually received as prescribed by CBDT Circular - The law as laid down in UCO Bank is that in terms of CBDT Circular the interest is to be added as income only when actually received or credited in respect of the sticky advances while making assessment for a financial institution Following Vashist Chay Vyapar Ltd. 2010 (11) TMI 88 - Delhi High Court the interest income relatable to NPA advances did not accrue to the assessee - Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of addition on account of sticky advances.
2. Applicability of Section 43D to the assessee.
3. Interpretation and applicability of CBDT Circulars.
4. Concept of real income in the context of banking business.

Detailed Analysis:

1. Disallowance of Addition on Account of Sticky Advances:
The primary issue in the appeal was whether the CIT(A) erred in disallowing the addition of Rs.34,58,116/- on account of sticky advances. The assessee, a Co-operative Bank, follows the mercantile system of accounting but did not include the interest on Non-Performing Assets (NPA) in its profit and loss account. The Assessing Officer (AO) added this interest to the total income, which was later rectified under section 154. The CIT(A) allowed relief to the assessee, which the Revenue opposed. The Tribunal referenced the case of ACIT vs. Osmanabad Janta Sah. Bank Ltd., where it was held that interest income related to NPAs does not accrue to the assessee. The Tribunal upheld the CIT(A)'s decision, confirming that the interest on sticky advances should not be added to the total income.

2. Applicability of Section 43D to the Assessee:
Section 43D prescribes that interest on certain bad or doubtful debts is chargeable to tax in the year it is credited or actually received, whichever is earlier. The Tribunal discussed the applicability of this section to non-scheduled banks and cooperative banks. It was noted that the assessee, being a cooperative bank, is governed by RBI guidelines and falls under the entities defined in Section 43D. Hence, the provisions of Section 43D apply to the assessee, supporting the non-inclusion of interest on NPAs in taxable income until actually received.

3. Interpretation and Applicability of CBDT Circulars:
The Tribunal examined the relevance of CBDT Circulars, which provide that interest on doubtful debts credited to a suspense account need not be included in taxable income if recovery is improbable. The Supreme Court's decision in UCO Bank vs. CIT affirmed that beneficial circulars are binding on the authorities and interest on sticky advances should be taxed only when actually received. The Tribunal reiterated that the CBDT's power to issue such circulars is statutory and must be followed unless deemed ultra vires by a court.

4. Concept of Real Income in the Context of Banking Business:
The Tribunal addressed the concept of real income, emphasizing that income should be recognized only when it materializes. Citing the Supreme Court's decision in CIT vs. Godhra Electricity Co., it was affirmed that hypothetical income should not be taxed. The Tribunal also referenced the Madras High Court's decision in CIT vs. Elgi Finance Ltd., which supported the non-recognition of income from NPAs in line with RBI guidelines and accounting standards. The Tribunal concluded that the interest on NPAs should not be taxed until actually received, aligning with the principle of real income.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to disallow the addition of Rs.34,58,116/- on account of sticky advances, confirming that interest on NPAs should not be included in taxable income until actually received. The appeal of the Revenue was dismissed.