2024 (1) TMI 1063 - AT - Income Tax

Accrual of income - interest due on NPA accounts - Urban Co-operative Bank - assessee's not accepted by the AO stating that since the assessee was following mercantile system of accounting, the interest income on NPA need to be included in its total income and has referred to the CBD T Instruction No.17/2008 dated 26.11.2008 issued in the context of Section 145 - HELD THAT - As decided in Kangra Central Co- operative Bank 2022 (12) TMI 449 - HIMACHAL PRADESH HIGH COURT although the amendment in section 43D was sought to be made effective w.e.f 1/04/2018 but it was liable to be treated as retrospective in nature and has upheld the view taken by the Tribunal that the assessee was required to tax the interest on the sticky loans/NPAs on receipt basis. We, therefore, find that the matter is squarely covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court. The amendment whether to be read as retrospective or prospective being a question of law where so decided by the Hon ble Jurisdictional High Court is binding on all the authorities under its jurisdiction and we see no reason but to respectfully follow the said decision. In the instant case, it is not in dispute that the assessee is a Co-operative Bank and covered under Non Scheduled Bank as per the Banking Regulation Act, 1949 and therefore, the amendment brought in by the Finance Act, 2017 which has been held to be retrospective in nature applies in the case of the assessee. Thus the addition so made by the AO and confirmed by the ld. CIT(A) is hereby set aside. Appeal of assessee allowed.

Summary

Issues Involved:
1. Whether the interest due on Non-Performing Assets (NPAs) should be treated as income of the assessee.
2. Whether the amendment in Section 43D of the Income Tax Act, effective from 01.04.2018, should be treated as retrospective.

Summary:

Issue 1: Treatment of Interest on NPAs as Income

The assessee, a Co-operative Society engaged in banking, followed the mercantile system of accounting and did not recognize interest on NPAs in its Profit & Loss Account, adhering to RBI guidelines. The Assessing Officer (AO) added Rs. 49,52,913/- as income, citing CBDT Instruction No. 17/2008 and the requirement for banks to follow the mercantile system strictly. The AO distinguished the case from the Supreme Court decision in UCO Bank, which applied to Scheduled Banks, not Non-Scheduled Banks like the assessee.

Issue 2: Retrospective Applicability of Section 43D Amendment

The assessee argued that the amendment to Section 43D, effective from 01.04.2018, should be treated as retrospective, citing the Himachal Pradesh High Court's decision in Pr. CIT Vs Kangra Central Co-operative Bank. The CIT(A) disagreed, stating the amendment was not explicitly retrospective and the Supreme Court's UCO Bank decision did not apply to Co-operative Banks. The CIT(A) upheld the AO's decision.

Tribunal's Findings:

The Tribunal noted that the Himachal Pradesh High Court had treated the amendment as retrospective, aiming to provide a level playing field between Scheduled and Non-Scheduled Banks. The Tribunal found the matter covered by the jurisdictional High Court's decision, which is binding. Consequently, the addition made by the AO and confirmed by the CIT(A) was set aside.

Conclusion:

The appeals were allowed, and the Tribunal's decision in ITA 366/CHD/2023 was applied mutatis mutandis to ITA 367/CHD/2023.

Order Pronouncement:

The order was pronounced in the Open Court on 6th December, 2023.