2015 (5) TMI 610 - AT - Income Tax

Interest on NPAs not taxable in assessee's hands for AY, Tribunal dismisses Revenue's appeal

The Commissioner of Income Tax, Circle-1, Solapur Versus Janata Sahakari Bank Ltd.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 25,83,045/- on account of interest on NPAs. The ... Interest on Non Performing Assets u/s.43D - CIT(A) deleted the addition - whether assessee being a non scheduled bank could not take the benefit of section 43D? - Held that:- In view of the ratio laid down in ACIT Vs. Osmanabad Janta Sah. Bank Ltd. (2015 (3) TMI 886 - ITAT PUNE) and in ACIT vs. The Omerga Janta Sahakari Bank Ltd. (2014 (12) TMI 355 - ITAT PUNE ) we uphold the order of CIT(A) in holding that the interest on NPAs is not taxable in the hands of the assessee for the captioned assessment year. - Decided in favour of assesse. Issues Involved:1. Deletion of addition made on account of interest on Non-Performing Assets (NPAs) under Section 43D of the Income Tax Act, 1961.2. Applicability of Section 43D to non-scheduled banks.3. Interpretation of Section 145 of the Income Tax Act, 1961.4. Reliance on previous Tribunal decisions and ongoing appeals in higher courts.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Interest on NPAs:The primary issue in the appeal was the deletion of an addition of Rs. 25,83,045/- made by the Assessing Officer (AO) on account of interest on NPAs. The AO had included this interest as taxable income, arguing that the assessee was following a mercantile system of accounting and thus, the interest accrued should be taxed. The assessee contended that as per RBI norms, such interest should only be recognized when received. The CIT(A) sided with the assessee, directing the AO to delete the addition, citing that the interest was not credited to the Profit & Loss Account but rather shown as a contra item in the Balance Sheet.2. Applicability of Section 43D to Non-Scheduled Banks:The Revenue argued that the CIT(A) erred in applying Section 43D, which is applicable to Financial Institutions and Scheduled Banks, to a non-scheduled bank like the assessee. The Tribunal upheld the CIT(A)'s view that Section 43D did not apply to the assessee, a cooperative bank not included in the second schedule of the RBI. Therefore, the issue had to be decided based on general principles of income accrual rather than the specific provisions of Section 43D.3. Interpretation of Section 145:The AO had relied on Section 145 of the Income Tax Act, which mandates that income should be computed under the mercantile system of accounting. However, the Tribunal noted that in the context of NPAs, the RBI's prudential norms, which have an overriding effect, should be followed. This was in line with the Supreme Court's ruling in the case of Southern Technologies Ltd., which distinguished between income recognition and permissible deductions under the Income Tax Act.4. Reliance on Previous Tribunal Decisions and Ongoing Appeals:The CIT(A) had relied on a previous decision by the Pune Bench of the Tribunal in the case of ACIT vs. Osmanabad Janta Sahakari Bank Ltd., which was under appeal in the High Court. The Tribunal found that in the absence of a jurisdictional High Court ruling, it was appropriate to follow the decision favorable to the assessee, as per the Supreme Court's reasoning in CIT vs. Vegetable Products Ltd. The Tribunal also considered other relevant judgments, including those from the Delhi and Madras High Courts, and found that the interest on NPAs should not be taxed on an accrual basis.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 25,83,045/- on account of interest on NPAs. The Tribunal ruled that the interest on NPAs is not taxable in the hands of the assessee for the assessment year in question, aligning with the principles laid down by the Supreme Court and other relevant judgments. The appeal of the Revenue was dismissed, and the order was pronounced on April 29, 2015.