2013 (2) TMI 731 - AT - Income Tax

Tribunal overturns CIT(A) decision, rules interest on NPA not income under IT Act

The Tribunal allowed the appellant's appeal, overturning the decision of the CIT(A) and holding that the addition of interest on NPA account as income was ... Addition on interest on NPA Account in as much as such interest has not accrued - Held that:- The appellant is making the provision of interest as per the guidelines issued by the R.B.I. However, same has not been credited in the p&l account as it was notional had not received actually by it. Section 43 is also not applicable as assessee has not credited in the p&l account but shown in the assets and liability side in the balance sheet directly and also not received actually. Thus, we have considered view that the CIT(A) was not justifying in confirming the addition. Accordingly, the assessee’s appeal is allowed. Issues:1. Addition of interest on NPA account as income for assessment year 2009-10.Analysis:1. The appeal was filed by the assessee against the order of CIT(A) confirming the addition of interest on NPA account as income. The AO had added Rs. 1,58,897 as income based on the Board's Circular and Supreme Court decision in UCO Bank case. The appellant, a Cooperative Society in banking, argued that as per RBI guidelines, no interest is to be charged on NPA. However, the AO considered the interest accrued on NPA account as income and made the addition after giving the appellant a reasonable opportunity to be heard.2. The CIT(A) upheld the AO's decision, stating that the interest on NPA account was accrued during the year and should be considered as income, as per the Board's Circular and Supreme Court decision. The appellant's argument that income from NPA should be recognized only when actually received was not accepted. The CIT(A) held that since the interest was credited in the books of accounts, it should be added to the total income of the appellant, applying section 43D of the IT Act.3. The appellant further contended that as per RBI guidelines, income from non-performing assets should not be recognized on an accrual basis but only when actually received. The appellant had passed a book entry for the interest on NPA account, reflecting it in the balance sheet but not crediting it to the P&L account as income. The Tribunal observed that since the interest was not credited to the P&L account and not actually received, section 43 was not applicable. The Tribunal found the CIT(A)'s decision unjustified and allowed the appellant's appeal, deleting the addition of interest on NPA account as income.4. The Tribunal's decision was based on the fact that the appellant followed RBI guidelines and did not credit the interest on NPA account to the P&L account as income since it was not actually received. The Tribunal concluded that the CIT(A) was not justified in confirming the addition of interest on NPA account as income, and therefore allowed the appellant's appeal.5. In conclusion, the Tribunal allowed the appellant's appeal, overturning the decision of the CIT(A) and holding that the addition of interest on NPA account as income was not justified. The appellant's practice of not recognizing income from NPA on an accrual basis, in line with RBI guidelines, was considered valid by the Tribunal.6. The Tribunal's decision was pronounced on 15.02.2013, allowing the appellant's appeal against the addition of interest on NPA account as income for assessment year 2009-10.