2018 (1) TMI 1232 - AT - Income Tax

Addition made on account of interest income on NPAs - Determination of tax liability - whether the assessee is a non-scheduled co-operative bank and the provisions of section 43D are not applicable to the assessee? - Held that - As relying on case Pr. Commissioner of Income Tax vs. Shri Mahila Sewa Sahakari Bank Ltd 2016 (8) TMI 377 - GUJARAT HIGH COURT we dismiss the appeal of the department as Co-operative bank is also a banking company; not liable to pay tax on NPA interest on accrual basis in view of RBI norms relating to income recognition and assets classification. - Decided against revenue

Summary

Issues:
Appeal against order of Commissioner of Income Tax (Appeals) - Addition made on interest income on NPAs - Applicability of section 43D - Mercantile system of accounting - Jurisdictional High Court's decision.

Analysis:
The appeal pertains to the assessment year 2012-13 and challenges the order of the Commissioner of Income Tax (Appeals) regarding the addition made on account of interest income on Non-Performing Assets (NPAs). The Department contended that the assessee, a non-scheduled cooperative bank, is not covered under the provisions of section 43D of the Income Tax Act. During the assessment proceedings, it was noted that the assessee failed to offer interest income on all outstanding loans and advances as of 31.03.2012. The assessee explained that interest on NPAs amounting to ?98,17,814 was not credited to the Profit and Loss account during the year, citing the maintenance of accounts on the mercantile system. The Assessing Officer, however, disregarded the explanation and made an addition of the said amount.

The first statutory appeal before the Commissioner of Income Tax (Appeals) favored the assessee. The Tribunal examined the relevant record and the impugned order. The assessee's representative referred to a judgment of the Jurisdictional High Court in a similar matter involving a cooperative bank. The High Court held that interest income on NPAs should not be taxable on an accrual basis for cooperative banks, as per RBI guidelines on income recognition and asset classification. The Tribunal, in line with the High Court's decision, dismissed the appeal of the Department, emphasizing that a cooperative bank is considered a banking company and is not liable to pay tax on NPA interest on an accrual basis as per RBI norms.

In conclusion, the Tribunal upheld the Commissioner of Income Tax (Appeals) decision, ruling in favor of the assessee based on the High Court's interpretation of the relevant provisions and RBI guidelines. The appeal filed by the Department was dismissed, affirming that interest on NPAs for cooperative banks should not be taxable on an accrual basis due to RBI norms governing income recognition and asset classification.