2014 (12) TMI 1061 - AT - Income Tax

Tribunal partially allows appeal, deletes interest on NPAs, upholds Agricultural Stabilization Fund addition.

The Solapur District Central Co-op. Bank Ltd. Versus Asstt. Commissioner of Income Tax, Circle- 2, Solapur.

The appeal was partly allowed by the Tribunal. The addition of Rs. 47,01,85,366/- for interest on Non-Performing Assets (NPAs) was deleted, as the ... Addition of interest on NPA’s - Assessee is a co-operative bank carrying on banking business – Held that:- Following the decision in ACIT vs. The Omerga Janta Sahakari Bank Ltd. [2014 (12) TMI 355 - ITAT PUNE] - the interest income on NPAs is not recognizable on accrual basis. The aforesaid matrix is not challenged by the Revenue also - the stand of the Revenue is that the income, though relatable to NPAs, is deemed to have accrued since assessee has credited it in its Profit & Loss Account, and the corresponding debit in the Profit & Loss Account is only a Provision for overdue interest and it is not an allowable deduction - assessee is registered as a co-operative society and is carrying on the banking business - the interest on NPAs have been credited in the Profit & Loss Account and thus its accrual has been accepted by the assessee and that the contra entry by way of debit in the Profit & Loss Account is to be understood as a mere Provision and, since a Provision is not an allowable deduction, the amount of ₹ 47,01,85,366/- has been added to the total income. The assessee bank is following the mercantile system of accounting - However, with regard to the recognition of income on NPAs, it has applied the RBI guidelines which say that such income is not to be recognized on accrual basis but is to be recognized as income only when it is actually received - The RBI guidelines also prescribe the manner in which the interest in relation to NPAs is to be shown in the Annual financial statements - In terms of the Master Circular on Income Recognition, Asset Classification, Provisioning & Other Related Matters issued by the RBI on 4th July, 2004 in chapter 4 of ‘Income Recognition’, the accrued interest in relation to NPAs should be computed and shown separately, though not accounted as income of the bank for the relevant period - with a view to ensuring uniformity in accounting the accrued interest in respect of both the performing and non-performing assets, the RBI guidelines inter-alia, prescribe that interest accrued in respect of NPAs should not be debited to borrowal accounts but shown separately under ‘Interest Receivable Account’ on the ‘Property and Assets’ side of the Balance-Sheet and corresponding amount shown under the ‘Overdue Interest Reserve Account’ on the ‘Capital and Liabilities’ side of the Balance-Sheet - ‘Overdue Interest Reserve Account’ cannot be regarded as a ‘reserve’ or a part of the owned funds of the bank, as it is not created out of the real income received by the bank - the assessee has not debited the interest on NPAs to the accounts of the respective borrowals but it has been shown separately under ‘Interest Receivable Account’ on the ‘Property and Assets’ side of the Balance-Sheet and corresponding amount has been shown under ‘Overdue Interest Reserve Account’ on the ‘Capital and Liabilities’ side of the Balance-Sheet - Thus, the depiction in the Balance-Sheet is in adherence to the prescription contained in the Banking Regulation Act, 1949 (as applicable to Co-operative Societies), a statute under which assessee is bound to carry out its banking business. Assessee has drawn up its annual financial statement in compliance with the requirements of the statutes under which it functions and/or is incorporated - the RBI guidelines permit that interest income on NPAs be parked in a suspense account and it is not necessary that it has to be brought to the Profit & Loss Account by the assessee - assessee has credited the gross amount of interest on credit side of the Profit & Loss Account and simultaneously shown on the debit side of the Profit & Loss Account, the amount of interest on NPAs - instead of netting of the interest the two amounts have been shown separately one on the credit side and other on the debit side - The net effect of the said presentation is the same - Therefore, the lower authorities have misguided themselves in rejecting the claim of the assessee for non-recognition of interest income on NPAs – the order of the CIT(A) is set aside – Decided in favour of assessee. Addition of interest on Agricultural Stabilization Fund and interest on Corpus Fund – Held that:- No fault can be found with the order of the CIT(A) on this count as it has been justifiably concluded by him that the impugned interest is only an appropriation of profits towards specific purpose and it does not constitute a business expenditure of the assessee - The constitution of the Agricultural Credit (Stabilization) Fund per the resolution of the Government of Maharashtra reflects that it is created by appropriation of the profits of the assessee bank, and the yearly credit of interest @ 3% on the balance to the credit of Fund, is not a charge against the Profit & Loss Account - the order of the CIT(A) is upheld – Decided against assessee. Issues Involved:1. Addition of Rs. 47,01,85,366/- in respect of interest on Non-Performing Assets (NPAs).2. Rejection of the method of accounting for NPA interest.3. Exclusion of interest actually received on NPAs if the primary ground fails.4. Addition of interest on Agricultural Stabilization Fund and Corpus Fund.5. Disallowance of excess provision for bonus.6. Charging of interest under sections 234B, 234C, and 234D of the Income-tax Act.7. Liability to interest under sections 234A, 234B, and 234C.Issue-wise Detailed Analysis:1. Addition of Rs. 47,01,85,366/- in respect of interest on NPAs:The primary dispute revolves around the addition of Rs. 47,01,85,366/- on account of interest on NPAs. The assessee, a co-operative bank, did not recognize interest income on NPAs in compliance with RBI guidelines, which mandate that such income should only be recognized on receipt basis. The Revenue argued that since the assessee credited the interest to its Profit & Loss Account, it should be considered as accrued income. However, the Tribunal noted that the assessee followed RBI guidelines and the interest on NPAs was shown separately as a contra entry in the financial statements. The Tribunal held that the mere book entry does not constitute actual income unless it is received, and thus, the addition made by the Assessing Officer was deleted.2. Rejection of the method of accounting for NPA interest:The Tribunal observed that the assessee's method of accounting for NPA interest, which involved showing gross interest on the credit side and overdue interest on the debit side of the Profit & Loss Account, was in compliance with RBI guidelines and the Maharashtra Co-operative Societies Act. This method does not imply that the interest on NPAs had accrued. The Tribunal concluded that the Revenue's rejection of this method was misguided and upheld the assessee's approach.3. Exclusion of interest actually received on NPAs if the primary ground fails:This ground was raised as an alternative to the primary ground. Since the Tribunal decided in favor of the assessee on the primary ground, this alternative ground was dismissed as infructuous.4. Addition of interest on Agricultural Stabilization Fund and Corpus Fund:The assessee challenged the addition of Rs. 52,24,988/- on the Agricultural Stabilization Fund and Rs. 13,97,158/- on the Corpus Fund. The Tribunal noted that the interest on the Agricultural Stabilization Fund was an appropriation of profits and not an actual outgo, and thus, not deductible as business expenditure. The addition of Rs. 13,97,158/- on the Corpus Fund was not pressed by the assessee and was dismissed accordingly.5. Disallowance of excess provision for bonus:The assessee did not press this ground, and it was dismissed.6. Charging of interest under sections 234B, 234C, and 234D:The Tribunal noted that this ground was consequential in nature and did not require specific adjudication.7. Liability to interest under sections 234A, 234B, and 234C:Similar to the previous ground, this was also consequential and did not require specific adjudication.Conclusion:The appeal was partly allowed, with the Tribunal directing the deletion of the addition of Rs. 47,01,85,366/- on account of interest on NPAs and upholding the addition of Rs. 52,24,988/- on the Agricultural Stabilization Fund. The other grounds were either dismissed or not pressed.