2013 (9) TMI 1083 - AT - Income Tax

Tax Tribunal: NPAs interest non-taxable, dividends forfeited; TDS disallowance reinstated

ACIT, Circle-1, Aurangabad Versus M/s. Sunderlal Sawji Urban Co-op Bank Ltd.

ACIT, Circle-1, Aurangabad Versus M/s. Sunderlal Sawji Urban Co-op Bank Ltd. - TMI Issues Involved:1. Taxability of interest on Non-Performing Assets (NPA) for a cooperative bank.2. Taxability of forfeited dividend as income under Section 28 of the Income Tax Act.3. Applicability of TDS provisions on payments made before the end of the financial year.Issue-wise Detailed Analysis:1. Taxability of Interest on Non-Performing Assets (NPA):The primary issue was whether the interest received from bad and doubtful debts (NPA) can be offered on an actual receipt basis as per RBI guidelines, despite the assessee following the mercantile system of accounting. The Revenue argued that the accrued interest on NPA should be taxed under the mercantile system. However, the CIT(A) deleted the addition by following the decision of ITAT, Pune in the case of Osmanabad Janata Sahari Bank Ltd., which relied on the ITAT Visakhapatnam Bench's decision in DCIT, Vijayawada vs. The Durga Cooperative Urban Bank Ltd. and the Hon'ble Delhi High Court's decision in Vashist Chay Vyapar Ltd. The Tribunal concluded that interest income on NPA advances did not accrue to the assessee. The Tribunal upheld the CIT(A)'s decision, confirming that the interest on sticky advances/NPA advances cannot be brought to tax, aligning with the principle of real income and RBI guidelines.2. Taxability of Forfeited Dividend:The second issue was whether the forfeited amount of dividend constitutes income under Section 28 of the Income Tax Act. The AO included the forfeited dividend amount as income, arguing it should be taxed under 'income from other sources' since it was not exempt under Section 10(34). However, the CIT(A) deleted the addition, noting that the dividend liability arose from profits already taxed and that the unclaimed dividend was essentially an excess provision reversed by the assessee. The CIT(A) relied on the ITAT Delhi decision in Gulshan Mercantile Urban Cooperative Bank Ltd., which supported the assessee's stance. The Tribunal upheld the CIT(A)'s decision, confirming that the forfeited dividend, which was already subjected to tax, should not be taxed again under Section 41(1).3. Applicability of TDS Provisions:The third issue involved the applicability of TDS provisions on payments made before the end of the financial year. The AO disallowed an amount under Section 40(a)(ia) due to non-deduction of TDS on Pigmy commission payments. The CIT(A) deleted the disallowance, following the decision in Merilyn Shipping and Transport vs. ACIT, which stated that TDS provisions do not apply to amounts not outstanding at year-end. However, the Tribunal reversed this decision, citing the Kolkata High Court's ruling in CIT vs. Crescent Export Syndicate, which overturned the Merilyn Shipping and Transport decision. Consequently, the Tribunal allowed the Revenue's ground, reinstating the disallowance.Conclusion:The Tribunal's judgment addressed three key issues: the taxability of interest on NPAs, the treatment of forfeited dividends, and the applicability of TDS provisions. The Tribunal upheld the CIT(A)'s decisions on the first two issues, confirming the non-taxability of interest on NPAs and forfeited dividends. However, it reversed the CIT(A)'s decision on the third issue, reinstating the disallowance for non-deduction of TDS. The Revenue's appeal was thus partly allowed.