2011 (3) TMI 1552 - AT - Income Tax

Interest on NPAs in cooperative banks taxable only on receipt, RBI Act section 45Q norms prevail

ITAT held that interest on NPAs of the assessee, a cooperative bank, is not taxable on accrual basis. Relying on SC's interpretation of section 45Q of the ... Taxability of interest on Non performing assets (“NPA”) - Revenue recognition - income accrual - cooperative bank - overriding effect is given to the directions of Reserve Bank of India vis-à-vis income recognition principles in the Companies Act 1956 - whether the learned CIT (A) is justified in holding that the interest income relating to NPA, is not includible in the total income of the assessee - Held that:- The assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd. [2010 (1) TMI 5 - SUPREME COURT], that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-àvis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd [2010 (11) TMI 88 - DELHI HIGH COURT] has held that the interest on NPA assets cannot be said to have accrued to the assessee. In the result the appeal of the revenue is dismissed. Issues Involved:1. Whether the interest income relating to non-performing assets (NPA) is includible in the total income of the assessee.Issue-Wise Detailed Analysis:1. Whether the interest income relating to non-performing assets (NPA) is includible in the total income of the assessee:The appeal of the revenue is directed against the order dated 14.09.2010 passed by learned CIT(A), Vijayawada, relating to the assessment year 2007-08. The primary issue raised is whether the learned CIT (A) is justified in holding that the interest income relating to non-performing assets (NPA) is not includible in the total income of the assessee.The facts are that the assessee, a cooperative bank governed by the Reserve Bank of India (RBI) directions, did not include the interest of Rs. 18,26,306/- related to NPA advances in its total income. The assessee argued that as per RBI's Prudential Norms, accrued interest on NPAs should not be recognized as income until actually received. The Assessing Officer, however, held that Section 43D of the Income Tax Act, which allows such treatment, applies only to public financial institutions or scheduled banks, not to cooperative banks. Hence, the interest on NPAs was added to the total income of the assessee.The assessee appealed to the learned CIT (A), arguing that only real income should be taxed under Section 5 of the Income Tax Act, and since the interest on NPAs is notional, it should not be taxed. The CIT (A) agreed, citing the case of TCI Finance Ltd Vs. ACIT (2004) 91 ITD 573 (Hyd), where it was held that non-recognition of income on the grounds of doubtful realisability of the principal amount is legally correct under the mercantile system of accounting. The CIT (A) also referenced the case of CIT vs. Annamalai Finance Ltd (2005) 275 ITR 451 (Mad), where it was held that when the principal amount is doubtful of recovery, no interest can be said to have accrued. Thus, the CIT (A) deleted the addition made by the Assessing Officer.Aggrieved, the revenue appealed to the Tribunal, arguing that the prudential norms prescribed by the RBI cannot override the provisions of the Income Tax Act, as held by the Hon'ble Supreme Court in Southern Technologies Ltd Vs. ACIT (320 ITR 577). The revenue contended that the interest on NPAs was rightly assessed by the Assessing Officer.The assessee countered by citing the decision of the Hon'ble Delhi High Court in CIT vs. M/s Vasisth Chay Vyapar Ltd (ITA 552/2005), which held that interest on NPAs does not accrue to the assessee. The Delhi High Court had considered the Supreme Court's decision in Southern Technologies Ltd, distinguishing it on the grounds that the case dealt with the admissibility of deductions for provisions made on NPA assets, not the taxability of interest on NPAs.The Tribunal noted that the Hon'ble Delhi High Court in M/s Vasisth Chay Vyapar Ltd had held that interest on NPAs does not accrue to the assessee, even under the mercantile system of accounting. The High Court had considered Section 45Q of the RBI Act, which gives overriding effect to RBI directions on income recognition, and Accounting Standard AS-9 on Revenue Recognition, which states that revenue should only be recognized when it is reasonably certain that ultimate collection will be made.The Tribunal also referenced several other cases, including CIT vs. Elgi Finance Ltd., CIT vs. KKM Investments, and UCO Bank vs. CIT, which supported the principle that interest on NPAs should not be recognized as income until actually received. The Tribunal concluded that the interest on NPAs did not accrue to the assessee and upheld the CIT (A)'s order, dismissing the revenue's appeal.In conclusion, the Tribunal held that the interest income relating to NPAs is not includible in the total income of the assessee, affirming the CIT (A)'s decision and dismissing the revenue's appeal.