2022 (12) TMI 449 - HC - Income Tax

Interest accrued on non performing assets - Applicability of sec 43D - whether the assessee was liable to pay tax on interest accrued on loans categorized as non-performing assets (NPA)/sticky loans on receipt basis as claimed by the assessee or on accrual basis as calculated by the revenue? - HELD THAT - A perusal of the objects of amending the existing provisions of Section 43D vide Finance Bill 2017, reveals that the benefit of the existing provision was available to scheduled bank or a public financial institution etc. With a view to provide level playing field to cooperative banks vis- -vis scheduled banks and to rationalize the scope of Section 43D, it was proposed to introduce the amendment to Section 43D so as to include co-operative banks other then a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The omission was sought to be corrected by bringing at par the scheduled banks and non-scheduled banks. Thus, it is evident that the amendment was brought in force with a view to cure the omission in Section 43D. Although, the amendment was sought to be made effective w.e.f. 1st April, 2018, but it was liable to be treated as retrospective in nature. In order to arrive at this view, reliance is made on the decision of Hon ble Supreme Court in Allied Motors case 1997 (3) TMI 9 - SUPREME COURT It serves no purpose that the assessee, which is a non-scheduled bank, should include the NPAs/sticky loans in the relevant assessment year and then claim it as a bad debt in the next assessment year. There is no quarrel with the preposition of law settled by the judgments relied upon by the learned counsel for the appellant, but in view of the decision given in Allied Motors 1997 (3) TMI 9 - SUPREME COURT we are of the opinion that the view taken by the Tribunal that the assessee was required to tax the interest on the sticky loans/NPAs on receipt basis, is liable to be upheld. Appeal dismissed.

Summary

Issues Involved:
1. Taxability of interest accrued on Non-Performing Assets (NPAs) for a non-scheduled bank.
2. Applicability of Section 43D of the Income Tax Act to cooperative societies.
3. Differentiation between scheduled and non-scheduled banks in the context of tax treatment of NPAs.

Detailed Analysis:

1. Taxability of Interest Accrued on NPAs:
The primary issue was whether the assessee, a non-scheduled bank, should pay tax on interest accrued on NPAs on a receipt basis, as claimed by the assessee, or on an accrual basis, as calculated by the revenue. The assessee argued that since the interest on NPAs was uncertain and the principal amount was doubtful of recovery, it did not recognize this interest as income. The assessing officer, however, included this interest in the income of the assessee, leading to a recomputation of the income. The Tribunal dismissed the revenue's appeal, supporting the assessee's stance that the interest on NPAs should be taxed on a receipt basis.

2. Applicability of Section 43D to Cooperative Societies:
Section 43D of the Income Tax Act was initially applicable only to scheduled banks and certain financial institutions. The revenue argued that this section did not apply to cooperative societies, including non-scheduled banks like the assessee. The Tribunal, however, noted that Section 43D was amended by the Finance Act 2017 to include cooperative banks, effective from April 1, 2018. The Tribunal interpreted this amendment as curative, aimed at providing a level playing field between scheduled and non-scheduled banks, and therefore, should be applied retrospectively from the date of the original introduction of Section 43D.

3. Differentiation Between Scheduled and Non-Scheduled Banks:
The revenue contended that the case of the assessee, a non-scheduled bank, should not be equated with that of scheduled banks, such as in the case of CIT vs. Punjab State Co-op Bank Ltd. The Tribunal, however, found that the differentiation was not justified in the context of taxing interest on NPAs. The Tribunal upheld the view that taxing such interest on a receipt basis was consistent with the principles laid out in various Supreme Court judgments, including Allied Motors (P.) Ltd. vs. CIT, which emphasized reasonable interpretation of amendments intended to cure omissions and ensure equitable treatment across different types of banks.

Conclusion:
The High Court upheld the Tribunal's decision, dismissing the revenue's appeals. It concluded that the interest on NPAs should be taxed on a receipt basis for non-scheduled banks, aligning with the curative intent of the amendment to Section 43D. The court emphasized that the amendment aimed to provide equitable treatment to cooperative banks and should be applied retrospectively to achieve its intended purpose. The substantial questions of law were answered in favor of the assessee, maintaining the Tribunal's interpretation and application of the relevant provisions.