2017 (11) TMI 916 - HC - Income Tax

Addition u/s. 36(1)(viia) - Held that - Entire issue is covered by the judgment of this Court in case of Shri Mahila Sewa Sahakari Bank Ltd. (2016 (8) TMI 377 - GUJARAT HIGH COURT). In the said case, the Court has considered following substantial question of law Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law and on facts in holding that interest on non performing assets is not taxable on accrual basis looking to the guidelines of the Reserve Bank of India ? The Court answered the question in favour of the assessee and concurred with the view of the Delhi High Court in case of Vasisth Chay Vyapar Ltd.(2010 (11) TMI 88 - Delhi High Court). In the said decision, contrary to what was argued before us by the counsel for the Revenue, the Court had not only noticed but also referred to at some length the judgment of the Supreme Court in case of Southern Technologies Limited (2010 (1) TMI 5 - SUPREME COURT OF INDIA).- Decided in favour of the assessee and against the Revenue

Issues:
- Interpretation of section 36(1)(viia) of the Income Tax Act regarding deduction for provision of bad and doubtful debts made by a bank.
- Whether RBI directives can govern the taxability of income for a cooperative bank.
- Application of statutory limitations on deductions under chapter VIA.
- Consideration of real income for taxation purposes.

Issue 1: Interpretation of section 36(1)(viia) of the Income Tax Act regarding deduction for provision of bad and doubtful debts made by a bank:
The case involved a cooperative bank filing a return of income, claiming a deduction of a certain sum under the head "reserve for overdue interest." The Assessing Officer disallowed the deduction under section 36(1)(viia) of the Income Tax Act, stating that the deduction cannot be granted within the parameters of such provisions. The dispute arose from the bank's provision for overdue interest on non-performing assets, which the bank argued was in line with RBI directives. The Commissioner of Income Tax (Appeals) and the Tribunal allowed the deduction, relying on previous judgments and the real income principle.

Issue 2: Whether RBI directives can govern the taxability of income for a cooperative bank:
The Assessing Officer contended that RBI directives cannot govern the taxability of income, leading to the disallowance of the deduction claimed by the bank. However, the bank argued that it was bound by RBI directives to make a provision for the entire overdue interest on non-performing assets, as recovering such interest was almost impossible due to the nature of the loans. The Tribunal upheld the bank's position, emphasizing the importance of following RBI guidelines for cooperative banks.

Issue 3: Application of statutory limitations on deductions under chapter VIA:
The Revenue argued that the deductions granted by the Commissioner of Income Tax (Appeals) and the Tribunal did not consider the ceiling prescribed under section 36(1)(viia) of the Act. The Supreme Court's decision in Southern Technologies Limited v. Joint CIT was cited, stating that the RBI directives should not influence the taxability of certain receipts. However, the bank's counsel highlighted the consistent view of various courts in granting deductions based on the principle of taxing real income, as seen in the case of Shri Mahila Sewa Sahakari Bank Ltd.

Issue 4: Consideration of real income for taxation purposes:
The High Court referred to a previous judgment involving a similar issue and substantial question of law regarding the taxability of interest on non-performing assets based on RBI guidelines. The Court concurred with the view that interest on non-performing assets should not be taxed on an accrual basis, considering the guidelines of the Reserve Bank of India. The judgment favored the assessee, dismissing all Tax Appeals against the Revenue.

In conclusion, the High Court's judgment upheld the bank's position, emphasizing the importance of following RBI directives for cooperative banks and considering the principle of taxing real income in determining the taxability of interest on non-performing assets. The decision provided clarity on the interpretation of section 36(1)(viia) of the Income Tax Act and highlighted the significance of adhering to statutory limitations while granting deductions under chapter VIA.

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