2017 (1) TMI 1255 - AT - Income Tax

Accrual of income - Interest due on Non Performing Assets - as per CIT(A) addition made by treating accrued interest on NPAs as income of the assessee directed to be deleted - Held that - It remains an undisputed fact that the assessee co-operative bank has been following the mercantile system of accounting, except with regard to interest pertaining to NPAs. As noted by the ld. CIT(A), this position stands accepted by the department in the earlier years. The assessee has been following the RBI guidelines in this matter. Its method of accounting is entirely in accordance with the RBI guidelines. The RBI guidelines need to be mandatorily followed by the assessee. Moreover, this method of accounting, adopted by the assessee, is in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India. Section 45Q of the RBI Act provides, in the non obstante Clause with which it begins, that the provisions of the Chapter under which section 45Q falls, shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being inforce. In M/s Vasisth Chay Vyapar Ltd. (2010 (11) TMI 88 - Delhi High Court ), it has been held that when an NBFC classifies an asset as a Non-performing Asset in accordance with the directions issued the Reserve Bank of India, it is legitimate to infer that the interest income thereon is not accrued, even though the NBFC is following the mercantile system of accounting. Interalia, M/s Southern Technologies Ltd. (2010 (1) TMI 5 - SUPREME COURT OF INDIA ) has been distinguished in M/s Vasisth Chay Vyapar Ltd. (supra). Apropos the applicability of section 43D of the I.T. Act, it is on record that during the proceedings before the ld. CIT(A), the assessee, by way of submission dated 17.09.2015, the assessee had stated that the assessee had been confirmed by the Headquarter of the Punjab State Co-operative Bank , to be a scheduled bank. This position has not been disputed. - Decided against revenue

Summary

Issues:
- Taxability of interest on Non Performing Assets (NPAs) for a Co-operative Bank under the mercantile system of accounting.

Analysis:
The case involved three appeals filed by the department for Assessment Years 2011-12 to 2013-14, all concerning the taxability of interest on NPAs for a Co-operative Society engaged in banking. The Assessing Officer (AO) had added interest on NPAs to the income of the assessee, which was contested by the department in appeal. The main contention was that the interest on NPAs should be taxable as the Co-operative Bank followed the mercantile system of accounting, except for NPAs. The department argued that the provisions of section 43D of the Income Tax Act did not apply to Co-operative Banks, thus the interest should be taxed on accrual basis.

The ld. CIT(A) allowed the appeal of the assessee, stating that the method of accounting for interest on NPAs followed by the Co-operative Society was in accordance with RBI guidelines and Accounting Standards. The CIT(A) emphasized that the RBI guidelines were mandatory for the appellant and that the provisions of section 45Q of the RBI Act had to be followed, notwithstanding any other law. Referring to the decision in "M/s Vasisth Chay Vyapar Ltd.," it was held that interest income on NPAs could not be considered accrued for tax purposes if classified as NPAs as per RBI directions, even under the mercantile system of accounting.

The Tribunal upheld the CIT(A)'s decision, noting that the Co-operative Bank had been following the mercantile system of accounting, except for NPAs, which was accepted by the department in previous years. The Tribunal emphasized the mandatory nature of following RBI guidelines and Accounting Standards in such matters. Additionally, it was confirmed that the Co-operative Bank had been confirmed as a scheduled bank by the Punjab State Co-operative Bank headquarters. The Tribunal found no merit in the department's grievance and upheld the CIT(A)'s well-reasoned order, dismissing all three appeals on the same common issue.

In conclusion, the Tribunal affirmed the CIT(A)'s decision, emphasizing the adherence to RBI guidelines, Accounting Standards, and the non-obstante clause of section 45Q of the RBI Act. The taxability of interest on NPAs for the Co-operative Bank under the mercantile system of accounting was settled in favor of the assessee, leading to the dismissal of all three appeals by the department.