2015 (7) TMI 38 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on interest receivable, aligning with RBI guidelines

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 75,25,140/- on account of interest receivable ... Addition of interest receivable on NPAs/sticky loans / advances - CIT(A) deleted the addition - Held that:- The issue in the present appeal against the recognition of interest receivable on sticky loans/advances is identical to the issue in assessee's own case relating to assessment year 2010-11 [2015 (7) TMI 37 - ITAT PUNE] wherein find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. The assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act. The Hon'ble Supreme Court has held in the case of Southern Technologies Ltd (2010 (1) TMI 5 - SUPREME COURT OF INDIA), that the provision of 45Q of Reserve Bank of India Act has an overriding effect vis-à-vis income recognition principle under the Companies Act. Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court.Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (2010 (11) TMI 88 - Delhi High Court ) has held that the interest on NPA assets cannot be said to have accrued to the assessee. Thus we hold that the interest on NPAs is not taxable in the hands of the assessee for the captioned assessment year. Consequently, the grounds of appeal raised by the Revenue are dismissed. - Decided in favour of assessee. Issues Involved:1. Deletion of addition of Rs. 75,25,140/- on account of interest receivable on sticky loans/advances.2. Applicability of Section 43D to non-scheduled banks.3. Correct interpretation of Section 145 of the Income-tax Act, 1961.4. Reliance on prior Tribunal decisions and pending appeals.Issue-wise Detailed Analysis:1. Deletion of Addition of Rs. 75,25,140/- on Account of Interest Receivable on Sticky Loans/Advances:The Revenue challenged the deletion of Rs. 75,25,140/- made by the Assessing Officer (AO) on account of interest receivable on sticky loans/advances. The AO noted that the bank had not considered the interest receivable on Non-Performing Assets (NPAs) as income for taxation, despite reflecting it in the Balance Sheet. The AO held that since the assessee followed the mercantile system of accounting, the accrued interest on NPAs should be taxed. The CIT(A) relied on the Tribunal's decision in ACIT Vs. Osmanabad Janta Sah. Bank Ltd., which held that income from NPAs should not be assessed on a mercantile basis. The Tribunal upheld the CIT(A)'s decision, stating that interest on NPAs is not taxable until actually received, following the principle of 'real income.'2. Applicability of Section 43D to Non-Scheduled Banks:The Revenue argued that the provisions of Section 43D, which allow interest on sticky loans to be taxed only when actually received, apply only to financial institutions and scheduled banks, not non-scheduled banks like the assessee. The CIT(A) and the Tribunal found that even though Section 43D did not directly apply to non-scheduled banks, the principle of recognizing income only when actually received, as per RBI guidelines, should be followed. The Tribunal cited various cases, including Vashist Chay Vyapar Ltd. and UCO Bank, supporting the view that interest on NPAs does not accrue for tax purposes until received.3. Correct Interpretation of Section 145 of the Income-tax Act, 1961:The AO contended that under the mercantile system of accounting, as per Section 145, income should be recognized on an accrual basis. However, the CIT(A) and the Tribunal emphasized that the principle of 'real income' should prevail, meaning income should only be recognized when there is a reasonable certainty of its receipt. The Tribunal noted that the RBI guidelines, which mandate recognizing interest on NPAs only when received, align with this principle and should be followed.4. Reliance on Prior Tribunal Decisions and Pending Appeals:The CIT(A) relied on its own previous decision in ACIT Vs. Osmanabad Janta Sah. Bank Ltd., which was not accepted by the Department and was under appeal. The Tribunal upheld the CIT(A)'s reliance on this decision, noting that similar issues had been consistently decided in favor of the assessee in various cases, including those of The Durga Cooperative Urban Bank Ltd. and Karnavati Cooperative Bank Ltd. The Tribunal also considered the conflicting judgments of the Delhi High Court and the Madras High Court on similar issues, opting to follow the more favorable view for the assessee as per the Supreme Court's guidance in CIT vs. Vegetable Products Ltd.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 75,25,140/- on account of interest receivable on sticky loans/advances. The Tribunal affirmed that the interest on NPAs should not be taxed until actually received, aligning with the RBI guidelines and the principle of 'real income.' The Tribunal's decision was consistent with prior rulings on similar issues, reinforcing the non-taxability of interest on NPAs for non-scheduled banks until actual receipt.