2017 (9) TMI 187 - HC - Income Tax

Accrued interest in relation to NPA - amount not brought to the tax by the assessee - applicability of section 145 - assessee is a cooperative bank - ITAT quashed and set aside order of AO - Held that - Tribunal followed the decision of this Court in case of Principal Commissioner of Income Tax v. Shri Mahila Sewa Sahakari Bank Ltd. 2016 (8) TMI 377 - GUJARAT HIGH COURT in which the assessee-cooperative bank had not recognized the interest on NPAs as per the section 45Q of the RBI and prudential Norms issued by the RBI in exercise of its statutory powers.. The Court was of the opinion that the bank was bound by such directives of RBI. The Court relied upon a CBDT circular in this respect and held that the interest was not taxable on the basis of accrual. The situation being identical, the issue is covered by the decision of this Court in case of Shri Mahila Sewa Sahakari Bank Ltd. (supra). Revenue however submitted that the Supreme Court in case of Southern Technologies Ltd. v. Joint Commissioner of IncomeTax reported in 2010 (1) TMI 5 - SUPREME COURT OF INDIA has made a clear distinction with respect to the RBI directions holding that the said directives may apply for the purpose of drawing the accounts of the bank, nevertheless, the same cannot have effect on the computation of the assessee s taxable income. We however notice that the High Court in case of Shri Mahila Sewa Sahakari Bank Ltd. (supra) has considered such a contention and referred to the decision of Supreme Court in case of Southern Technologies Ltd. (supra) before coming to the above noted - Decided against revenue

Summary

Issues:
1. Appeal against ITAT judgment on accrued interest in NPA
2. Taxation of income in non-performing accounts
3. Interpretation of RBI guidelines on interest accrual
4. Applicability of CBDT circular on interest taxation

Analysis:
1. The Revenue appealed against the ITAT judgment questioning the quashing of AO's order adding back accrued interest in NPA to the total income of the assessee. The Tribunal allowed the assessee's appeal, citing the decision of the Gujarat High Court in a similar case involving a cooperative bank. The Tribunal held that interest income on NPA cannot be considered as accrued income for taxation purposes, following the provisions of Section 145 of the Income Tax Act.

2. The respondent assessee, a cooperative bank, had its income in non-performing accounts taxed by the Assessing Officer based on accrual of income. However, the Tribunal overturned this decision, referencing the Gujarat High Court's ruling in a previous case involving a similar issue. The Tribunal agreed with the assessee's argument that interest on NPA should not be included in the profit and loss account, in line with RBI guidelines and prudential norms.

3. The Tribunal's decision was influenced by the Gujarat High Court's judgment in a case involving a cooperative bank that did not recognize interest on NPAs as per RBI guidelines. The Court held that the bank was bound by RBI directives, and therefore, the interest income was not taxable based on accrual. The Court also considered a CBDT circular in this regard. The Revenue argued citing a Supreme Court judgment that RBI directives should not affect the computation of taxable income, but the High Court had already addressed and dismissed this contention.

4. Ultimately, the High Court dismissed the Tax Appeal, upholding the Tribunal's decision and the precedent set by previous judgments regarding the treatment of interest on NPAs for taxation purposes. The Court's analysis centered on the interpretation of RBI guidelines, the applicability of CBDT circulars, and the distinction made by the Supreme Court in a related case, affirming the non-taxable nature of interest income on NPAs as per the prevailing legal framework.