2016 (3) TMI 910 - AT - Income Tax

Addition on account of accrued interest on Non Performing Assets u/s 43D - CIT(A) deleted the addition - Held that - Hon ble Bombay High Court in CIT Vs. M/s. Deogiri Nagari Sahakari Bank Ltd. 2015 (1) TMI 1218 - BOMBAY HIGH COURT has laid down the proposition that the interest accrued on NPAs is not taxable in the hands of assessee, in view of the guidelines issued by the RBI. No addition is warranted on account of interest accrued on NPAs. Accordingly, we uphold the order of CIT(A) in deleting the addition made on account of interest accrued on NPAs. - Decided in favour of assessee Addition made on account of amortization of premium on government securities - Held that - The assessee is entitled to the claim of deduction on account of amortization of premium paid on Government securities held in HTM category. See Commissioner of Income Tax-2, Mumbai Versus HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT - Decided in favour of assessee

Issues Involved:
1. Deletion of addition on account of accrued interest on Non-Performing Assets (NPAs) under Section 43D of the Income-tax Act, 1961.
2. Applicability of Section 43D to non-scheduled banks.
3. Interpretation of provisions under Section 145 of the Income-tax Act, 1961 regarding the accounting system.
4. Consideration of Supreme Court decision in Southern Technologies Limited Vs. JCIT.
5. Satisfaction of conditions in CBDT Circular No.F-201/81/84 ITA-II dated 09/10/1984.
6. Deletion of addition on account of amortization premium on Government Securities.
7. Applicability of CBDT instruction No.17/2008 post-Southern Technologies Limited Vs. JCIT decision.

Detailed Analysis:

1. Deletion of Addition on Account of Accrued Interest on NPAs:
The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 45,89,499/- on account of accrued interest on NPAs under Section 43D of the Income-tax Act, 1961. The assessee, a cooperative bank, did not credit the interest receivable or accrued on NPAs to its Profit & Loss Account, citing RBI guidelines. The Assessing Officer added the interest accrued on NPAs to the assessee's income, arguing that the assessee followed a mercantile system of accounting. The CIT(A) deleted this addition, which was upheld by the Tribunal, referencing the Bombay High Court's decision in CIT Vs. Deogiri Nagari Sahakari Bank Ltd. and other similar cases, which ruled that interest on NPAs is not taxable in view of RBI guidelines.

2. Applicability of Section 43D to Non-Scheduled Banks:
The Revenue argued that Section 43D applies only to Financial Institutions and Scheduled Banks, not to non-scheduled banks. However, the Tribunal upheld the CIT(A)'s decision, referencing previous Tribunal decisions that extended the benefits of Section 43D to cooperative banks, despite them not being scheduled banks.

3. Interpretation of Provisions under Section 145:
The Revenue claimed that the assessee was not allowed to use the Mixed or Hybrid System of accounting under Section 145. The Tribunal, however, did not find merit in this argument, as the CIT(A) had already ruled in favor of the assessee, and the Tribunal upheld this decision based on consistent judicial precedents.

4. Consideration of Supreme Court Decision in Southern Technologies Limited Vs. JCIT:
The Revenue cited the Supreme Court's decision in Southern Technologies Limited Vs. JCIT, which held that RBI provisions are disclosure norms and cannot override the provisions of the Income Tax Act, 1961. The Tribunal acknowledged this but maintained that interest on NPAs should not be taxed, aligning with the Bombay High Court's interpretation.

5. Satisfaction of Conditions in CBDT Circular No.F-201/81/84 ITA-II:
The Revenue contended that the assessee did not satisfy the conditions of the CBDT Circular, which requires the assessee to be a Banking Company and the interest to remain uncovered for three consecutive years. The Tribunal upheld the CIT(A)'s decision, which had found that these conditions were satisfied by the assessee.

6. Deletion of Addition on Account of Amortization Premium on Government Securities:
The Revenue argued that the amortization premium on Government Securities held under "Held to Maturity" (HTM) should not be allowed as a revenue expenditure. The Tribunal upheld the CIT(A)'s decision to delete the addition, referencing the Bombay High Court's decision in CIT Vs. HDFC Bank Ltd., which allowed such amortization as a deduction.

7. Applicability of CBDT Instruction No.17/2008 Post-Southern Technologies Limited Vs. JCIT Decision:
The Revenue argued that the CBDT instruction No.17/2008, issued prior to the Southern Technologies Limited decision, should not allow amortization of premium as a deduction. The Tribunal upheld the CIT(A)'s decision, referencing judicial precedents that allowed such deductions despite the Supreme Court's ruling.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on all grounds, including the deletion of additions on account of accrued interest on NPAs and amortization premium on Government Securities. The Tribunal's order was pronounced on February 10, 2016.

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