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2015 (4) TMI 672 - AT - Income TaxAccrual of interest - Addition being interest on N.P.A. accounts not credited to P&L account - whether provisions of section 43D would not be applicable to the appellant if it is not a scheduled bank? - Co-operative Bank not being a scheduled bank - assessee submitted that as per the RBI guidelines, the interest accrued on Non-performing Assets (NPA) cannot be subjected to tax - assessee also submitted that on the principles of income recognition as per guidelines of the RBI, the interest income is required to be offered for taxation on cash basis and not on accrual basis. Held that - the assesses herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assesses as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (2010 (1) TMI 5 - SUPREME COURT OF INDIA), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. Thus no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. The Hon ble Coordinate Bench in the case of ACIT vs. Solapur Siddheshwar Sahakari Bank Ltd. 2015 (3) TMI 603 - ITAT PUNE has noted that there is a divergent view between the Hon ble Delhi High Court in the case of M/s.Vasisth Chay Vyapar Ltd. 2010 (11) TMI 88 - Delhi High Court and the Hon ble Madras High Court in the case of CIT vs. Sakthi Finance Ltd. 2013 (3) TMI 266 - MADRAS HIGH COURT in respect of application of the judgement of the Hon ble Apex Court rendered in the case of Southern Technology Ltd.(supra) on income recognition norms prescribed by R.B.I. - AO directed to delete the addition. - Decied in favour of assessee.
Issues Involved:
1. Confirmation of addition of Rs. 1,72,73,000/- being interest on N.P.A. accounts not credited to P&L account. 2. Applicability of RBI guidelines on income recognition for Non-performing Assets (NPA). 3. Applicability of Section 43D of the Income Tax Act. 4. Jurisdictional Tribunal decisions and their binding nature. 5. Real income theory and its application to accrued interest on NPAs. 6. Claim for credit of interest income disclosed in subsequent years. 7. Applicability of CBDT Circular dated 9-10-1984. Issue-wise Detailed Analysis: 1. Confirmation of Addition of Rs. 1,72,73,000/-: The primary issue is the confirmation of the addition of Rs. 1,72,73,000/- made by the Assessing Officer (AO) on account of accrued interest on NPAs, which was not credited to the Profit and Loss (P&L) account by the assessee. The AO's addition was upheld by the CIT(A), leading to the present appeal. 2. Applicability of RBI Guidelines: The assessee contended that as per RBI guidelines, interest accrued on NPAs should not be subjected to tax. The CIT(A) rejected this argument, citing the Supreme Court's decision in Southern Technologies Ltd., which held that RBI guidelines are for prudential norms and do not override the provisions of the Income Tax Act regarding taxability. 3. Applicability of Section 43D: The assessee argued that Section 43D, which allows certain financial institutions to recognize interest income on NPAs on a receipt basis, should apply. However, CIT(A) clarified that Section 43D applies only to scheduled banks and other specified entities, not to cooperative banks like the assessee. This interpretation was supported by the Tribunal's earlier decisions, which emphasized that the statutory provisions are clear and unambiguous. 4. Jurisdictional Tribunal Decisions: The assessee cited several decisions from the ITAT Ahmedabad and other benches, which had ruled in favor of not taxing accrued interest on NPAs. However, CIT(A) distinguished these cases, noting that the Tribunal's decision in the case of Karnavati Co-op Bank was based on the absence of contrary material and did not establish a general principle applicable to all unscheduled banks. 5. Real Income Theory: The assessee invoked the real income theory, arguing that notional income like accrued interest on NPAs should not be taxed. CIT(A) referred to the Supreme Court's decision in Southern Technologies Ltd., which held that the real income theory does not apply to notional expenses like provisions for NPAs under the Income Tax Act, thereby rejecting the assessee's argument. 6. Claim for Credit of Interest Income Disclosed in Subsequent Years: The assessee requested that if the appeal is not allowed, the AO should be directed to allow credit for interest income disclosed in subsequent years. CIT(A) rejected this request, stating that there is no provision under the Income Tax Act to allow deduction of income of a particular year against any other income, and such modifications must follow the procedure prescribed under Section 139 of the Act. 7. Applicability of CBDT Circular Dated 9-10-1984: The assessee argued that the CBDT Circular dated 9-10-1984, which states that interest on accrual basis will not be taxed if not received for three years, should apply. CIT(A) dismissed this argument, noting that statutory provisions introduced later override the circular, and the circular cannot override clear statutory provisions. Conclusion: The Tribunal, after considering the rival submissions and the material on record, found that under identical facts, the Coordinate Bench of the Tribunal in the case of ACIT vs. Solapur Siddheshwar Sahakari Bank Ltd. had decided in favor of the assessee. The Tribunal also noted the divergent views of the Hon'ble Delhi High Court and the Hon'ble Madras High Court regarding the application of the Supreme Court's decision in Southern Technologies Ltd. on income recognition norms prescribed by RBI. Following the principle laid down by the Supreme Court in CIT vs. Vegetable Products Ltd., the Tribunal decided in favor of the assessee, directing the AO to delete the addition. Final Judgment: The appeal of the assessee is allowed. The AO is directed to delete the addition of Rs. 1,72,73,000/- made on account of accrued interest on NPAs.
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