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2015 (7) TMI 37 - AT - Income TaxAccrual of interest income - Addition on account of interest receivables on sticky loans/advances - whether the provisions of section 43D are applicable to the assessee-bank? - CIT(A) deleted the addition - Held that - Hon ble High Court of Delhi in the case of Vashist Chay Vyapar Ltd. 2010 (11) TMI 88 - Delhi High Court in which the Hon ble Delhi High Court has considered the decision in the case of Southern Technologies Ltd. 2010 (1) TMI 5 - SUPREME COURT OF INDIA . The Tribunal in ACIT, Circle-3, Nanded Vs. Osmanabad Janta Sahakari Bank Ltd. 2015 (3) TMI 886 - ITAT PUNE finally held that the interest income relatable to NPA advances did not accrue to the assessee. Turning to the facts of the case before us, the assessee 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 assessee 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 (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis- 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. Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee - Decided in favour of assessee.
Issues Involved:
1. Deletion of addition of Rs. 58,17,443/- on account of interest receivables on sticky loans/advances. 2. Applicability of section 43D to the assessee-bank. 3. Correct interpretation of section 145 of the Income Tax Act, 1961. 4. Reliance on a previous ITAT decision in a similar case, which is under appeal. Detailed Analysis: 1. Deletion of Addition of Rs. 58,17,443/- on Account of Interest Receivables on Sticky Loans/Advances: The Revenue challenged the deletion of Rs. 58,17,443/- made by the Assessing Officer (AO) on account of interest receivables on sticky loans/advances. The AO noted that the interest receivable on Non-Performing Assets (NPA) was not credited to the profit and loss account but reflected in the balance sheet. The assessee-bank argued that this practice was in line with the Reserve Bank of India (RBI) guidelines, which mandate that income should be recognized only when received. The AO, however, did not accept this contention, arguing that the bank followed the mercantile system of accounting, which requires accrued interest to be taxed. The AO cited a CBDT circular stating that interest on bad and doubtful advances should not be included in taxable income only if it remains unrecoverable for three consecutive years. The AO concluded that the assessee contravened section 43D of the Income Tax Act, assessing the interest on NPA as income on an accrual basis. 2. Applicability of Section 43D to the Assessee-Bank: The CIT(A) deleted the addition made by the AO, relying on the ITAT Pune's decision in a similar case. The Tribunal noted that section 43D prescribes that interest income on bad and doubtful debts should be taxed in the year it is credited to the profit and loss account or received, whichever is earlier. However, the Tribunal found that this section was not applicable to the assessee, a cooperative bank, as it is not a scheduled bank included in the second schedule of the RBI. The Tribunal emphasized that the issue should be decided on general principles of whether the income accrued to the assessee during the year. The Tribunal referenced several cases, including the Delhi High Court's decision in M/s Vasisth Chay Vyapar Ltd., which held that interest income on NPAs did not accrue to the assessee. 3. Correct Interpretation of Section 145 of the Income Tax Act, 1961: The Tribunal discussed the interpretation of section 145, which deals with the method of accounting. It noted that the RBI guidelines, which mandate that interest on NPAs should be recognized only on receipt, override the provisions of section 145 due to section 45Q of the RBI Act. This section gives the RBI guidelines an overriding effect concerning income recognition. The Tribunal cited the Supreme Court's decision in Southern Technologies Ltd., which distinguished between income recognition and permissible deductions under the Income Tax Act. The Tribunal concluded that the RBI guidelines should be followed for income recognition, meaning that interest on NPAs should not be taxed on an accrual basis. 4. Reliance on Previous ITAT Decision in a Similar Case: The CIT(A) relied on the ITAT Pune's decision in the case of Osmanabad Janta Sahakari Bank Ltd., which was under appeal by the Department. The Tribunal found no reason to interfere with the CIT(A)'s order, as the decision in Osmanabad Janta Sahakari Bank Ltd. had not been reversed by the jurisdictional High Court. The Tribunal also referenced other similar decisions, including those of the ITAT Visakhapatnam and Ahmedabad Benches, which supported the assessee's position. Conclusion: The Tribunal upheld the CIT(A)'s order, confirming that the interest income on NPAs did not accrue to the assessee and should not be taxed on an accrual basis. The Tribunal dismissed the Revenue's appeal, emphasizing the overriding effect of the RBI guidelines on income recognition for cooperative banks. The Tribunal's decision was based on consistent judicial precedents and the principle of real income, which dictates that only actual income should be taxed.
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