2019 (4) TMI 824 - AT - Income Tax

Accrual of income - Addition towards accrued interest on NPAs - recognized accounting practice - real income or actual receipts - HELD THAT - Appellant is co-op bank registered under the Gujarat Co-Op Society Act and carrying on banking business as per Reserve Bank of India guidelines. The appellant has furnished the complete list of Non Performing Assets as per RBI Guidelines and also furnished the details of interest accrued on such NPAs during the Financial Year 2010-11 which aggregated to ₹ 25,00,752/- and same was not charged as mandatorily stipulated under income recognition and Assets classification norms of Reserve Bank of India. As we can see, the assessee case is covered by Jurisdictional High Court in the matter of Pr.CIT vs. Shri Mahila Sewa Sahakari Bank Ltd. 2016 (8) TMI 377 - GUJARAT HIGH COURT wherein it has been held that Non Performing Asssets CANNOT BE RECOGNISED ON ACCRUAL BASIS ASSESSEE BOUND BY RESERVE BANK OF INDIA GUIDELINES and income from Non Performing Asset is not recognized on accrual basis but is booked as income only when it is actually received. Therefore bank should not take to income account, interest on Non Performing Assets on accrual basis. Respectfully following the above said judgment, we allow this ground of appeal. Disallowance of Investment Depreciation Reserve - HELD THAT - As relying on M/S. GAJANAN NAGARI SAHAKARI BANK LTD. 2015 (6) TMI 551 - BOMBAY HIGH COURT securities were stock in trade and so depreciation would amount to loss and not income-Authorities below held that this aspect was well settled through judgment of High Court in the case of Commissioner of Income Tax vs. Bank of Baroda 2003 (3) TMI 80 - BOMBAY HIGH COURT , as well as UCO Bank vs. the Commissioner of Income Tax- Supreme Court 1999 (9) TMI 4 - SUPREME COURT held that merely because securities were kept under head by bank till maturity, said security could not be treated as purely investment.-Security held by bank was in nature of stock in trade - decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of accrued interest on NPAs.
2. Disallowance of Investment Depreciation Reserve.

Analysis:

Taxability of Accrued Interest on NPAs:
The appeal was filed against the order of the Ld. CIT(A)-10, Ahmedabad regarding the addition of accrued interest on NPAs and Investment Depreciation Reserve for A.Y. 2011-12. The AO observed that the appellant had not offered the interest accrued on advances classified as NPAs for taxation, resulting in an addition of &8377; 25,00,752. The appellant argued that since the recovery of the advances was uncertain, there was no accrual of income to be taxed. The ITAT noted that the appellant, a co-op bank under RBI guidelines, provided a list of NPAs and the accrued interest of &8377; 25,00,752, following RBI norms. Referring to a High Court judgment, the ITAT held that income from NPAs cannot be recognized on an accrual basis but only when actually received. Consequently, the interest on NPAs was not liable to tax. The ground of appeal on this issue was allowed based on the High Court precedent.

Disallowance of Investment Depreciation Reserve:
The AO also disallowed the Investment Depreciation Reserve of &8377; 10,75,880. The appellant cited a Bombay High Court judgment in a similar case where the deduction towards depreciation of securities held as investments was allowed. The High Court held that securities held as investments were akin to stock in trade, and depreciation would amount to a loss, not income. The ITAT, in line with the High Court ruling, allowed the ground of appeal related to the disallowance of Investment Depreciation Reserve. Consequently, the appeal filed by the Assessee was allowed based on the decisions cited and the legal principles applied.

In conclusion, the ITAT, Ahmedabad, in its judgment, addressed the issues of taxability of accrued interest on NPAs and the disallowance of Investment Depreciation Reserve for the relevant assessment year. By relying on precedents and established legal principles, the ITAT allowed the appeal filed by the Assessee, providing a detailed analysis and justification for each issue raised in the appeal.