2022 (9) TMI 833 - AT - Income Tax

TDS u/s 194A - Liability to deduct the TDS on interest paid on saving bank accounts - Non deduction of tax on interest paid on deposits by various invoking provisions of Section 40(a)(ia) - HELD THAT - Disallowance on the ground that the same has been disallowed for the AY 2014-15, immediately succeeding assessment year under consideration. Assessee fairly submitted that the Section 40(a)(ia) was amended vide Finance Act, 2014 whereby the disallowance in respect of default in payment of TDS in case of payments to residents has been restricted to 30% instead of 100% and since the amendment is curative in nature and have been made to remove the undue hardships to the assessee, therefore, submitted that the disallowance of 100% of the expenditure may be restricted to 30%. DR has not objected for the same disallowance of 100% made by CIT(A) has been restricted to 30% in view of the amendment vide Finance Act 2014 to Section 40(a)(ia) - Accordingly, the disallowance made by the A.O in respect of defaulting payment of TDS is restricted to 30%. Ground No. 1 is partly allowed for statistical purpose. Addition on account of accrued interest on NPA - HELD THAT - We are of the opinion that the assessee who is into banking activities has to follow RBI Guidelines and we do not find any error with the assessee in offering the interest on NPA for taxation in the assessment year relevant to such financial year of recovery. AO/CIT(A) have committed an error in disallowing Rs. 52,20,914/- on account of interest on non performing assets. Accordingly, ground of Appeal No. 2 of the assessee is allowed. Disallowance on account of amortization of premium on government securities - HELD THAT - Disallowance of amortization premium for the Assessments Year 2010-11 and 2011-12 has been also mentioned by the A.O in the Assessment order, but has not followed the consistency. Apart from the same as per the RBI Guidelines dated 16/10/2000, the investment portfolio of the bank is required to be classified under three categories viz. Held to Maturity (HTM), held for Trading (HFT) and Available for Sales (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining to maturity. In the case of HFT and AFS securities forming stock in trade of the bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. Disallowance on account of democratization of premium of government securities is deserves to be deleted. Accordingly, we allow Ground No. 3 of the assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 6,36,02,481/- due to non-deduction of tax on interest paid on deposits under Section 40(a)(ia) of the Act.
2. Addition of Rs. 52,20,914/- on account of interest on non-performing assets (NPA).
3. Disallowance of Rs. 1,92,041/- on account of amortization of premium on government securities.

Issue-Wise Detailed Analysis:

1. Disallowance of Rs. 6,36,02,481/- Due to Non-Deduction of Tax on Interest Paid on Deposits:

The Assessing Officer (AO) disallowed Rs. 6,36,02,481/- on account of non-deduction of tax on interest paid on various deposits by invoking Section 40(a)(ia) of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowance to the extent of Rs. 1,72,27,362/-.

The Tribunal observed that there is no liability to deduct TDS on interest on saving bank accounts and compulsory deposit accounts as per Section 194A of the Act. This was accepted by the AO for the Assessment Year (AY) 2014-15, and no additions were made. Hence, the additions for AY 2013-14 regarding Rs. 69,73,450/- (interest on saving bank accounts) and Rs. 16,76,968/- (interest on compulsory deposit accounts) were deleted.

For interest on recurring deposits, the Tribunal noted that the amendment to Section 194A, which includes recurring deposits, was effective from 1st June 2015 and thus not applicable for AY 2013-14. Therefore, the addition of Rs. 11,80,887/- was deleted.

Regarding interest on FDRs for non-members amounting to Rs. 73,96,057/-, the Tribunal accepted the assessee's contention that the disallowance should be restricted to 30% instead of 100%, as per the amendment in the Finance Act, 2014. Thus, the disallowance was reduced to 30%.

2. Addition of Rs. 52,20,914/- on Account of Interest on Non-Performing Assets (NPA):

The AO added Rs. 52,20,914/- on account of accrued interest on NPA, which was confirmed by the CIT(A). The assessee argued that the interest on NPA should not be recognized as income unless actually received, following RBI guidelines.

The Tribunal agreed with the assessee, noting that the RBI guidelines for income recognition on NPAs apply to cooperative societies engaged in banking activities. The Tribunal cited precedents, including a decision in the case of Vaish Cooperative Adarsh Bank Ltd., which supported the non-recognition of interest on NPAs as income unless received. Thus, the addition of Rs. 52,20,914/- was deleted.

3. Disallowance of Rs. 1,92,041/- on Account of Amortization of Premium on Government Securities:

The AO disallowed Rs. 1,92,041/- claimed by the assessee as amortization of premium on government securities, considering it a capital loss. The CIT(A) upheld this disallowance, relying on the Supreme Court decision in Southern Technology Vs. CIT.

The Tribunal, however, noted that similar disallowances were deleted in the assessee's own case for AY 2010-11 and 2011-12. Additionally, RBI guidelines require the amortization of premium on securities held to maturity. The Tribunal concluded that the disallowance of Rs. 1,92,041/- was not justified and deleted it.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal deleted the disallowances and additions related to interest on saving bank accounts, compulsory deposit accounts, recurring deposits, and NPAs, while reducing the disallowance on FDRs for non-members to 30%. The disallowance on amortization of premium on government securities was also deleted.