2017 (6) TMI 352 - HC - Income Tax

Addition on account of accrued interest on NPAs - Tribunal confirming the order of the CIT(A) which held that assessee bank is not liable to be taxed on the notional interest on non performing assets based upon the accrual accounting theory - interest on NPAs non taxable on accural basis - Held that - This very question came to be considered at length and decided by the Division Bench of this Court in the case of Principal Commissioner of Income-tax-5 v. Shri Mahila Sewa Sahakari Bank Ltd. 2016 (8) TMI 377 - GUJARAT HIGH COURT holding that interest on non performing assets is not taxable on accrual basis looking to the guidelines of the Reserve Bank of India - Decided in favour of assessee.

Summary

Issues:
Taxability of notional interest on nonperforming assets based on accrual accounting theory.

Analysis:
The appeals were filed by the revenue challenging the judgment of the Income Tax Appellate Tribunal regarding the taxability of notional interest on nonperforming assets of a cooperative bank on an accrual basis. The revenue argued that as the bank follows the mercantile system of accounting, interest on advances accrues and becomes taxable. However, the bank contended that since the recovery of the principal sum is doubtful and the accounts have become nonperforming, there is no question of receiving any interest on such NPAs.

The High Court noted a previous decision by a Division Bench in a similar case where it was held that interest on NPAs was not charged as mandatorily stipulated under the Income Recognition and Asset Classification norms of the Reserve Bank of India. The court also referred to a CBDT circular from 1984 stating that interest not received for three years would not be taxed as income even on an accrual basis, even if credited to an Interest Suspense Account. The Assessing Officer's dismissal of this submission based on the misconception that the circular applied only to banking companies and not cooperative banks was deemed incorrect. The court clarified that a cooperative bank falls under the definition of a banking company as per the Banking Regulation Act, thus making the circular applicable.

The revenue's argument, citing a Supreme Court case, that RBI directives enabling NBFCs to adjust provisions for doubtful debts do not govern the taxability of income was considered. However, the court noted that this argument was raised and addressed in the previous Division Bench case, where it was held that interest on NPAs cannot be taxed on an accrual basis. Therefore, the court concluded that the current appeals did not raise any substantial questions of law and dismissed them accordingly.