2018 (2) TMI 254 - AT - Income Tax

Addition of interest on NPA accounts u/s. 43D - Held that - This issue is now well settled in favour of the assessee and against the revenue by the judgment the case of Shri Mahila Sewa Sahkari Bank Ltd. 2016 (8) TMI 377 - GUJARAT HIGH COURT .

Summary

Issues Involved:
1. Confirmation of addition made by the Assessing Officer (A.O.) of ?1.02 crores being interest on Non-Performing Assets (NPA) accounts under Section 43D of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Confirmation of Addition of ?1.02 Crores as Interest on NPA Accounts under Section 43D of the Income Tax Act, 1961
The core issue revolves around the confirmation of an addition of ?1.02 crores made by the A.O. as interest on NPA accounts under Section 43D of the Income Tax Act, 1961. The assessee contested this addition, arguing that the interest on NPA accounts should not be recognized as income due to the uncertainty of its realization, as per the Reserve Bank of India (RBI) Directions.

The Tribunal noted that this issue has been settled in favor of the assessee by the Hon’ble Jurisdictional High Court of Gujarat in the case of Shri Mahila Sewa Sahkari Bank Ltd. (395 ITR 324). The High Court held that while determining the tax liability of an assessee, the recognition of income must align with the RBI Directions, which take precedence over the accounting principles and Section 145 of the Income Tax Act. The High Court emphasized that the A.O. must follow the RBI Directions for income recognition.

The Tribunal also referenced the Delhi High Court's decision in Commissioner of Income-tax v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Delhi), which supported the view that interest income on NPA accounts does not accrue to the assessee under the Income Tax Act due to the uncertainty of its realization. The Delhi High Court underscored that the provisions of the RBI Act and the Prudential Norms issued by the RBI override the Income Tax Act regarding income recognition.

Additionally, the Tribunal discussed the Madras High Court's decision in Commissioner of Income-tax v. Sakthi Finance Limited, which held that mere characterization of an account as NPA is insufficient to conclude uncertainty in the realization of interest income. Each case must be assessed individually to determine the uncertainty of interest accrual on NPAs.

The Tribunal also noted that the CBDT Circular dated 9.10.1984, which states that if interest has not been received for three years, it should not be taxed as income even on an accrual basis, applies to all banking and non-banking financial companies. The Tribunal found that the A.O. and the Commissioner (Appeals) had incorrectly dismissed this circular's applicability to cooperative banks, which are also considered banking companies under the Banking Regulation Act, 1949.

The Tribunal concluded that the First Appellate Authority's confirmation of the assessment was based on the findings of its predecessor for A.Y. 2011-12. However, since the Co-ordinate Bench had reversed these findings for A.Y. 2011-12, the Tribunal directed the A.O. to delete the impugned additions for the current assessment year as well.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal directing the A.O. to delete the addition of ?1.02 crores made as interest on NPA accounts under Section 43D of the Income Tax Act, 1961. The judgment was pronounced in open court on 19-01-2018.