Tribunal decision: Assessee's appeal partly allowed, Revenue's appeal dismissed

The Tribunal partly allowed the assessee's appeal by deleting the addition of Rs. 110 crores as a revenue receipt and restricting the deduction under Section 36(1)(viia) to the actual provision made. The Revenue's appeal was dismissed, affirming the deletion of the addition on account of interest income on Non-Performing Assets (NPAs).

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Issues Involved:
1. Addition of Rs. 110 crores as revenue receipt.
2. Disallowance of deduction under Section 36(1)(viia) of Rs. 10,32,12,700.
3. Addition of Rs. 3,49,75,000 on account of interest income on Non-Performing Assets (NPAs).

Issue-wise Detailed Analysis:

1. Addition of Rs. 110 crores as revenue receipt:
The primary issue in the assessee's appeal was the addition of Rs. 110 crores by the Assessing Officer (AO) as a revenue receipt chargeable to tax. The amount represented a loan from the Government of Maharashtra converted into a non-refundable grant. The AO and CIT(A) treated it as a revenue receipt, while the assessee argued it was a capital receipt. The AO noted the grant was given to recoup the bank's negative net worth and remove RBI restrictions. The assessee contended the grant was for maintaining the Statutory Liquidity Ratio (SLR) and thus a capital receipt. The Tribunal held that the grant was given to safeguard the interests of farmers and small depositors, not in the course of trade, and thus it was a capital receipt not chargeable to tax. The Tribunal relied on the Supreme Court's judgment in Ponni Sugars and Chemicals Ltd., emphasizing the purpose of the grant over its form.

2. Disallowance of deduction under Section 36(1)(viia) of Rs. 10,32,12,700:
The assessee claimed a deduction of Rs. 15,47,62,700 under Section 36(1)(viia) for bad and doubtful debts, but the AO restricted it to Rs. 5,15,50,000, the amount actually provided in the books. The CIT(A) upheld this restriction. The Tribunal referred to the Pune Bench's decision in Shri Mahalaxmi Co-op. Bank Ltd., which followed the Punjab & Haryana High Court's ruling in State Bank of Patiala, holding that the deduction is limited to the provision made in the books. Consequently, the Tribunal upheld the AO's decision, restricting the deduction to the actual provision made in the books.

3. Addition of Rs. 3,49,75,000 on account of interest income on Non-Performing Assets (NPAs):
The Revenue's appeal contested the deletion of Rs. 3,49,75,000 added by the AO as interest income on NPAs. The AO argued that even for NPAs, interest should be accrued based on the mercantile system of accounting. The CIT(A) disagreed, following the Tribunal's decision in The Omerga Janta Sahakari Bank Ltd., which relied on the Delhi High Court's judgment in Vasisth Chay Vyapar Ltd., holding that interest on NPAs does not accrue due to uncertainty in collection. The Tribunal upheld the CIT(A)'s decision, noting the divergence in High Court judgments and choosing the view favorable to the assessee, following the Supreme Court's guidance in CIT vs. Vegetable Products Ltd.

Conclusion:
The Tribunal partly allowed the assessee's appeal, deleting the addition of Rs. 110 crores and restricting the deduction under Section 36(1)(viia) to the actual provision made. The Revenue's appeal was dismissed, affirming the CIT(A)'s deletion of the addition on account of interest income on NPAs.

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