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2015 (9) TMI 795 - AT - Income TaxAddition on account of interest receivables on sticky advances - CIT(A) deleted the addition - whether the assessee being a non scheduled bank could not take the benefit of section 43D of the Income Tax Act, 1961? - Held that - As decided in Lokmangal Co-op Bank Ltd. case 2014 (12) TMI 345 - ITAT PUNE Pune Bench of the Tribunal in the case of Osmanabad Janata Sahari Bank Ltd (2015 (3) TMI 886 - ITAT PUNE) has decided an identical issue in favour of the assessee after considering the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. 2010 (1) TMI 5 - SUPREME COURT OF INDIA to finally held that the interest income relatable to NPA advances did not accrue to the assessee) which has been followed by the Ld.CIT(A). Interest on the sticky advances/NPA advances cannot be brought to tax . - Decided in favour of assessee.
Issues Involved:
1. Taxability of interest on Non-Performing Assets (NPAs) for a Cooperative Society. 2. Applicability of Section 43D of the Income Tax Act to Cooperative Banks. 3. Adherence to RBI guidelines versus Income Tax Act provisions. 4. Interpretation of CBDT Circular No. F.201/81/84/TA-II dated 09-10-1984. 5. Consistency of the Tribunal's decision with past precedents and higher court rulings. Issue-Wise Detailed Analysis: 1. Taxability of Interest on NPAs: The primary issue revolves around whether the interest receivable on loans categorized as NPAs should be considered as income for the year under consideration. The AO argued that such interest should be taxed on an accrual basis, while the assessee contended that, as per RBI guidelines, interest on overdue loan accounts is credited to the profit and loss account only upon actual realization. The CIT(A) sided with the assessee, noting that the interest receivable on NPAs was directly taken to the balance sheet and not included in the profit and loss account, thus should not be taxed on an accrual basis. 2. Applicability of Section 43D: The AO argued that Section 43D, which allows certain financial institutions to recognize income on NPAs only upon actual receipt, did not apply to cooperative banks. The CIT(A) and Tribunal, however, noted that while Section 43D specifically mentions scheduled banks, the principle of recognizing income only upon actual receipt should still apply, following the rationale that RBI guidelines have an overriding effect on income recognition. 3. Adherence to RBI Guidelines versus Income Tax Act Provisions: The Tribunal emphasized that RBI guidelines on income recognition for NPAs take precedence over the Income Tax Act's provisions. This view was supported by the Supreme Court's decision in Southern Technologies Ltd., which held that RBI guidelines override the accrual principles under the Income Tax Act for the purpose of income recognition. 4. Interpretation of CBDT Circular No. F.201/81/84/TA-II dated 09-10-1984: The assessee argued that the CBDT Circular, which clarifies the taxability of interest on NPAs, supported their position. The Tribunal upheld this view, referencing the Supreme Court's decision in UCO Bank, which held that such circulars are binding on the tax authorities and that interest on 'sticky' loans should not be included in income until actually received if it remains unpaid for three years. 5. Consistency with Past Precedents and Higher Court Rulings: The Tribunal referred to several past decisions, including those of the Bombay High Court and the Pune Bench of the Tribunal, which consistently held that interest on NPAs should not be taxed on an accrual basis. The Tribunal also noted the divergence of opinions between different High Courts but chose to follow the view favorable to the assessee, in line with the Supreme Court's principle in CIT vs. Vegetable Products Ltd. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 26,59,026/- made by the AO on account of interest receivable on NPAs. The Tribunal affirmed that RBI guidelines and CBDT circulars take precedence over the Income Tax Act's accrual principles for income recognition, and interest on NPAs should only be taxed upon actual receipt.
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