2018 (3) TMI 146 - AT - Income Tax

Tribunal Upholds Co-op Bank's Claim for Interest on NPAs, Emphasizes RBI Guidelines

The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to delete the disallowance of interest on Non-Performing Assets (NPAs) claimed by ... Addition on account of interest on Non Performing Assets - assessee is following the mercantile system of accounting - Held that:- As decided in assessee's own case [2016 (2) TMI 36 - ITAT PUNE] No disallowance of interest accrued on NPAs is warranted. The provisions for dividend made earlier was not a charge action profits but it was appropriation of the profits available post taxation. Assessee bound by Reserve Bank of India directions to treat deposit as non-performing asset – Interest does not accrue - Decided in favour of assessee Issues Involved:1. Disallowance of interest on Non-Performing Assets (NPAs) claimed by the assessee.2. Applicability of RBI guidelines versus Income Tax Act provisions.Issue-wise Detailed Analysis:1. Disallowance of Interest on NPAs Claimed by the Assessee:The primary issue in this appeal is the disallowance of interest on NPAs amounting to Rs. 5,74,82,647/- claimed by the assessee, a Co-operative Bank, during the scrutiny assessment proceedings. The Assessing Officer disallowed this interest, leading to an appeal by the assessee before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) deleted the addition, following the Tribunal's decision in the assessee's own case for the assessment year 2010-11. The Revenue, dissatisfied with this decision, appealed to the Tribunal.The Department's representative, Shri Mukesh Jha, supported the Assessing Officer's disallowance, arguing that the provisions of the Income Tax Act override RBI guidelines. He cited the Hon’ble Supreme Court's decision in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax (320 ITR 577) and the Ahmedabad Bench of Tribunal's decision in The Sarangpur Co-op. Bank Ltd. Vs. DCIT (ITA Nos. 529 & 530/Ahd/2013).Conversely, the assessee's representative, Shri M.K. Kulkarni, argued that the Tribunal had already considered and allowed the issue of interest on NPAs in the assessee's own case for the assessment year 2010-11, even considering the Supreme Court's decision in Southern Technologies Ltd.The Tribunal reviewed the submissions and found that the issue was identical to the one in the assessee's case for the assessment year 2010-11. The Tribunal had previously granted relief to the assessee by following the Bombay High Court's decision in Commissioner of Income Tax Vs. Deogiri Nagari Sahakari Bank Ltd. and others (379 ITR 24), which distinguished the facts of the Southern Technologies Ltd. case.2. Applicability of RBI Guidelines versus Income Tax Act Provisions:The Tribunal noted that the Hon’ble Bombay High Court had addressed the issue of interest on sticky advances and the applicability of RBI guidelines in the Deogiri Nagari Sahakari Bank Ltd. case. The High Court had observed that while the Assessing Officer believed that section 43D of the Income-tax Act did not apply to non-scheduled co-operative banks, the Commissioner of Income Tax (Appeals) and the Tribunal had directed the deletion of additions on interest on NPAs, following RBI guidelines.The Tribunal also referred to the Supreme Court's decision in UCO Bank v. CIT (237 ITR 889), which upheld the practice of not treating interest on doubtful loans as income until realized, even under a mercantile accounting system. The Tribunal emphasized that the RBI directions had an overriding effect on income recognition principles under the Companies Act, as held in Southern Technologies Ltd., and thus should be followed by the Assessing Officer.The Tribunal concluded that the issue in the present appeal was identical to the earlier case and upheld the Commissioner of Income Tax (Appeals)'s decision, finding no merit in the Revenue's appeal. Consequently, the cross objections filed by the assessee were dismissed as infructuous.Conclusion:The Tribunal dismissed the Revenue's appeal and the assessee's cross objections, upholding the deletion of the disallowance of interest on NPAs. The Tribunal emphasized the applicability of RBI guidelines and the precedence set by the Bombay High Court and Supreme Court in similar cases. The decision reaffirmed that no disallowance of interest accrued on NPAs was warranted, aligning with the Tribunal's earlier judgments and the legal principles established by higher courts.