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2020 (8) TMI 822 - HC - Income TaxOverdue interest on non performing assets - Taxability on accrual basis - Revenue recognition - HELD THAT - The earliest among the decisions on the said point in favour of the assessee is by the High Court of Karnataka in the case of CIT Vs. Canfin Homes Ltd 2011 (8) TMI 178 - KARNATAKA HIGH COURT . Also see THE LUDHIANA CENTRAL CO-OP. BANK LTD., LUDHIANA 2018 (11) TMI 442 - PUNJAB AND HARYANA HIGH COURT The Revenue, in the raised identical contentions as raised before us stating that the case of the assessee was to be dealt with for the purpose of taxability as per the provisions of the Act and not as per the provisions of the RBI Act, which was the accounting method that the assessee was supposed to follow. The contention was rejected on the ground that even under the Act, interest income had not accrued. The Court further noted that the submission of the Revenue was entirely based on the judgment of the Hon ble Supreme Court in the case of Southern Technologies Ltd., and proceeded to explain as to what was the decision and the effect of the said decision with regard to the assessee/cooperative bank in the paragraph quoted above. The above mentioned decision in the case of Vasisth Chay Vyapar Ltd 2010 (11) TMI 88 - DELHI HIGH COURT was affirmed by the Hon ble Supreme Court in the 2018 (3) TMI 56 - SUPREME COURT . In the light of the above discussion, the substantial question of law framed in this case has to be necessarily answered in favour of the assessee and against the Revenue.
Issues Involved:
1. Taxability of overdue interest on non-performing assets (NPA) for a cooperative bank. 2. Applicability of Section 43D of the Income Tax Act, 1961 to cooperative banks. 3. Relevance of RBI guidelines in determining taxability under the Income Tax Act. Detailed Analysis: 1. Taxability of Overdue Interest on NPAs: The primary issue was whether overdue interest on NPAs should be taxed on an accrual basis. The Tribunal held that such interest is not taxable on an accrual basis, referencing RBI guidelines. The assessee, a cooperative bank, argued that overdue interest on investments classified as NPAs per RBI guidelines was not recognized as income due to uncertainty in receipt. The Assessing Officer, however, rejected this stance, asserting that the exception under Section 43D applied only to public financial institutions, not cooperative societies, until the Finance Act, 2017 included cooperative banks from 01.04.2018. 2. Applicability of Section 43D of the Income Tax Act: The Assessing Officer’s decision was based on the fact that Section 43D, which allows certain financial institutions to recognize interest income on NPAs only when it is actually received, did not apply to cooperative banks during the assessment year in question. This provision was extended to cooperative banks only from 01.04.2018. The Tribunal, however, ruled in favor of the assessee, aligning with various High Court decisions that upheld similar views. 3. Relevance of RBI Guidelines: The Tribunal and subsequent High Court judgments emphasized that RBI guidelines, issued under the Banking Regulation Act, have an overriding effect on income recognition principles. This was supported by multiple High Court decisions, including those of the Punjab & Haryana High Court and the Gujarat High Court, which were affirmed by the Supreme Court. These courts held that interest on NPAs does not accrue for tax purposes if the RBI guidelines mandate non-recognition due to uncertainty in collection. Supporting Judgments: - Punjab & Haryana High Court in PCIT, Ludhiyana Vs. Ludhiyana Central Cooperative Bank: Held that the RBI guidelines have an overriding effect, and interest on NPAs should not be taxed on an accrual basis. - Gujarat High Court in Shri Mahila Sewa Sahakari Bank Ltd.: Affirmed by the Supreme Court, held that cooperative banks should not recognize interest on NPAs as income until actually received. - Delhi High Court in CIT Vs. Vasisth Chay Vyapar Ltd.: Supported the view that interest on NPAs does not accrue for tax purposes if the RBI guidelines mandate non-recognition. - Karnataka High Court in CIT Vs. Canfin Homes Ltd.: Held that income from NPAs should be recognized only when actually received, aligning with RBI guidelines. Conclusion: The High Court dismissed the Revenue’s appeal, affirming that the overdue interest on NPAs for cooperative banks is not taxable on an accrual basis, in line with RBI guidelines. The substantial question of law was answered in favor of the assessee, emphasizing the precedence of RBI guidelines over the provisions of the Income Tax Act in matters of income recognition for NPAs. The court’s decision aligns with multiple High Court and Supreme Court rulings, reinforcing the principle that interest on NPAs should be recognized as income only when actually received.
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