2016 (9) TMI 54 - AT - Income Tax

Tribunal Rules Notional Interest on NPAs Non-Taxable, Citing Real Income Theory

DCIT, Circle-5 (3), Ahmedabad and ACIT, Circle-11, Ahmedabad Versus The Sarangpur Coop. Bank Ltd.

The Tribunal dismissed the Revenue's appeals, affirming that notional interest on Non-Performing Assets (NPAs) could not be brought to tax, citing the ... Addition on account of accrued interest on NPAs - Held that:- We find that the ld.CIT(A) by a well-reasoned order and following the decision rendered by the Hon’ble Bombay High Court in the case of CIT vs. M/s.Deogiri Nagari Sahakari Bank Ltd [2015 (1) TMI 1218 - BOMBAY HIGH COURT] has held that notional interest income on accrual basis on the NPA accounts cannot be brought to tax. Before us, Revenue has not brought any contrary binding decision in its support. In view of the aforesaid set of facts, we see no reason to interfere with the order of the ld.CIT(A) and thus, the ground of Revenue is dismissed. Issues Involved:1. Deletion of addition on account of accrued interest on Non-Performing Assets (NPAs).Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Accrued Interest on NPAs:The Revenue appealed against the deletion of the addition of Rs. 1,16,77,000/- made on account of accrued interest on NPAs by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Assessee, a bank, had not offered interest on NPA accounts to tax, which the Assessing Officer (AO) added back, arguing that the Assessee was not a Scheduled Bank and thus could not claim the benefit of section 43D of the Income Tax Act, 1961. The AO also noted that the Assessee followed the mercantile system of accounting, and thus, the interest should have been accrued.The CIT(A) initially confirmed the AO's addition but later, following the Tribunal's directions, deleted the addition. The Tribunal had directed the AO to ascertain the status of the Assessee bank and the status of each NPA party, emphasizing that the accrual of interest on NPAs is a matter of fact to be decided based on individual cases.The CIT(A), in the set-aside proceedings, observed that the Assessee bank followed RBI guidelines, which mandated not recognizing interest on NPAs on an accrual basis. The CIT(A) relied on multiple judicial precedents, including the Supreme Court's judgment in UCO Bank vs. CIT, which held that notional interest on sticky loans should not be taxed. The CIT(A) also considered the concept of real income theory, concluding that taxing notional interest on NPAs, where the recovery of principal itself was doubtful, was unjustified.The Tribunal upheld the CIT(A)'s decision, noting that the Assessee had provided sufficient evidence of the uncertainty regarding the realization of interest from NPAs. The Tribunal referenced several judicial decisions supporting the non-taxability of interest on NPAs, including those from the Bombay High Court and the jurisdictional ITAT.The Tribunal concluded that the Revenue had not provided any contrary binding decision and thus found no reason to interfere with the CIT(A)'s order. Consequently, the Tribunal dismissed the Revenue's appeals for all the assessment years involved.Conclusion:The Tribunal dismissed the Revenue's appeals, affirming that the notional interest on NPAs could not be brought to tax, following the real income theory and various judicial precedents, including the Supreme Court's ruling in UCO Bank vs. CIT.