2014 (12) TMI 355 - AT - Income Tax

Deletion of addition on Non-performing Assets Applicability of provisions of section 43D - Revenue was of the view that the interest income even in relation to such NPAs was liable to be included in this year s total income, having regard to the mercantile system of accounting followed by the assessee - Held that - so far as the applicability of section 43D of the Act to the assessee is concerned, there is a convergence of opinion between the assessee and the Revenue to the effect that the same is not applicable to the assessee. Following the decision in DCIT vs. The Durga Cooperative Urban Bank Ltd. 2011 (3) TMI 1552 - ITAT VISAKHAPATNAM the assessee is a cooperative bank and also governed by the Reserve Bank of India - the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act - assessee is a Co-operative Bank carrying on banking business in terms of a license granted by RBI and is not a scheduled bank included in second schedule of RBI so as to fall within the scope of section 43D of the Act - in Commissioner of Income tax Versus Vasisth Chay Vyapar Ltd. & others 2010 (11) TMI 88 - Delhi High Court it was held that what to talk of interest, even the principle amount itself had become doubtful to recover - In this scenario it was legitimate move to infer that interest income thereupon has not accrued - thus, there was no infirmity with the decision of the CIT(A) in holding that the interest income relatable on NPA advances did not accrue to the assessee Decided against revenue.

Issues Involved:
1. Taxability of interest income on Non-Performing Assets (NPAs) for a Co-operative Bank.
2. Applicability of Section 43D of the Income-tax Act, 1961 to a Co-operative Bank.
3. Relevance of RBI guidelines versus the provisions of the Income-tax Act.
4. Consistency in accounting practices and recognition of income as per RBI Prudential Norms.
5. Jurisdictional precedence and conflicting judgments from different High Courts.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income on NPAs:
The primary issue in the appeal was whether the interest income on NPAs should be taxed on an accrual basis or on receipt basis. The Assessing Officer (AO) included the interest income on NPAs on an accrual basis, arguing that the Co-operative Bank followed the mercantile system of accounting. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, reasoning that the interest on NPAs did not accrue as per the provisions of Section 5 of the Act and the CBDT Circular No.F-201/81/84 ITA-II dated 09.10.1984. The CIT(A) also emphasized that the interest on NPAs should be recognized only when actually received, following RBI Prudential Norms and Accounting Standard-9 issued by the Institute of Chartered Accountants of India, which considers the certainty of revenue collection.

2. Applicability of Section 43D of the Income-tax Act:
Both the assessee and the Revenue agreed that Section 43D of the Act, which prescribes the taxability of interest income on bad or doubtful debts for scheduled banks, public financial institutions, and certain other entities, did not apply to the Co-operative Bank in question as it was not a 'scheduled bank'. Therefore, the taxability of interest income on NPAs had to be decided based on general principles of income accrual.

3. Relevance of RBI Guidelines versus Provisions of the Income-tax Act:
The CIT(A) and the Tribunal relied on the RBI guidelines, which mandate recognizing interest income on NPAs on an actual receipt basis, overriding the mercantile system of accounting. The Tribunal cited the Hon'ble Delhi High Court's judgment in the case of M/s Vasisth Chay Vyapar Ltd. and the Visakhapatnam Bench of the Tribunal in the case of The Durga Cooperative Urban Bank Ltd., which supported the view that interest income on NPAs does not accrue for tax purposes until actually received. The Tribunal distinguished the judgment of the Hon'ble Supreme Court in Southern Technologies Ltd., which dealt with the deductibility of provisions for NPAs but acknowledged that income recognition should follow RBI guidelines.

4. Consistency in Accounting Practices:
The CIT(A) noted that the assessee had consistently followed the practice of recognizing interest income on NPAs as per RBI Prudential Norms, and this practice had been accepted by the Revenue in the past. This consistency supported the assessee's case that the interest income on NPAs should not be taxed on an accrual basis.

5. Jurisdictional Precedence and Conflicting Judgments:
The Tribunal acknowledged the conflicting judgments from the Hon'ble Delhi High Court and the Hon'ble Madras High Court on the issue of interest income on NPAs. The Delhi High Court in M/s Vasisth Chay Vyapar Ltd. held that such interest does not accrue, while the Madras High Court in Sakthi Finance Ltd. held it should be taxed on an accrual basis. In the absence of a jurisdictional High Court ruling, the Tribunal preferred the view favorable to the assessee, following the Supreme Court's guidance in CIT vs. Vegetable Products Ltd.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 19,24,030/- made by the AO on account of interest income on NPAs, affirming that such income did not accrue to the assessee during the year under consideration. The cross-objection by the assessee regarding the correct amount of interest on NPAs was rendered academic and infructuous following the dismissal of the Revenue's appeal. The order was pronounced in open court on 31st October, 2013.

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