2018 (9) TMI 530 - AT - Income Tax

Tribunal rules in favor of cooperative bank on NPA interest & gratuity premium deductions

The Tribunal ruled in favor of the assessee, a cooperative bank, regarding interest on Non-Performing Assets (NPAs) for the assessment years 2012-13 and ... Recognition of interest on Non-Performing Assets on actual receipt basis and not on accrual basis - overriding effect of RBI directions on income recognition - application of prudential norms for income recognition in cooperative banks - allowability of employer's contribution to group gratuity fund paid to LIC as deduction - distinction between deduction under the specific approved fund provision and allowance under general business expenditure provisionRecognition of interest on Non-Performing Assets on actual receipt basis and not on accrual basis - overriding effect of RBI directions on income recognition - application of prudential norms for income recognition in cooperative banks - Addition made by the Assessing Officer for interest on Non-Performing Assets was deleted and interest on NPAs is to be recognised on actual receipt basis. - HELD THAT: - The Tribunal held that the issue of taxability of interest on NPAs concerns recognition of income, for which the Reserve Bank of India's prudential norms prevail. Following the view of this Tribunal and the Gujarat High Court (as applied by coordinate benches and Supreme Court precedents discussed in the orders reproduced), income from NPAs for cooperative banks governed by RBI directions cannot be taken to income on accrual where the RBI norms require recognition only on actual receipt. In the facts of the assessee (interest kept in suspense and not brought to profit and loss), the Assessing Officer's addition for accrued interest on NPAs was not sustainable. Respectfully following the earlier decisions on identical facts, the Tribunal upheld the CIT(A)'s deletion of the addition and dismissed the Revenue's appeals on this ground. [Paras 4]Appeals dismissed on the issue of interest on NPAs; addition deleted.Allowability of employer's contribution to group gratuity fund paid to LIC as deduction - distinction between deduction under the specific approved fund provision and allowance under general business expenditure provision - Payment of gratuity premium to LIC under group gratuity scheme is allowable as a deduction. - HELD THAT: - The Tribunal accepted the assessee's position and the authorities relied upon that where contributions are paid to LIC under a group gratuity/master policy and the payment is an actual expenditure (not merely a provision), such payments are allowable. Coordinate benches and High Court decisions show that lack of formal approval of a gratuity fund does not preclude allowance under the general business expenditure principle; payments to LIC under a group scheme, with no control by the employer over the fund and with gratuity actually paid to employees by LIC on event, are not disallowable as provisions. Applying these precedents to identical facts, the Tribunal upheld the CIT(A)'s grant of deduction and dismissed the Revenue's appeals on this ground. [Paras 7]Appeals dismissed on the gratuity premium issue; payment to LIC allowed as deduction.Final Conclusion: Both appeals filed by the Revenue for assessment years 2012-13 and 2013-14 are dismissed (deletion of additions relating to interest on NPAs upheld; gratuity premium payments to LIC allowed as deduction). Cross objections filed by the assessee are dismissed in limine for being time-barred. Issues Involved:1. Interest on Non-Performing Assets (NPAs)2. Gratuity Premium Paid to LIC Gratuity FundDetailed Analysis:1. Interest on Non-Performing Assets (NPAs):The first issue pertains to the interest on Non-Performing Assets (NPAs) for the assessment years 2012-13 and 2013-14. The assessee, a cooperative bank, claimed deductions for accrued interest on NPAs, which the Assessing Officer (AO) added back to the income on the grounds that interest should be recognized on an accrual basis as per the mercantile system of accounting. The amounts in question were Rs. 46,79,284/- for 2012-13 and Rs. 72,29,895/- for 2013-14.The CIT(A) deleted these additions, relying on the Tribunal's earlier decision in the assessee’s own case for the assessment year 2009-10, where it was held that interest on loans whose recovery is doubtful and not brought to the Profit & Loss account should not be included in the income. The Tribunal upheld this view, citing the case of District Cooperative Central Bank, Eluru vs. ITO, where it was established that interest on NPAs should be recognized on a receipt basis, not on an accrual basis, following the RBI guidelines and the judicial precedents set by the Hon’ble Gujarat High Court in Mahila Sewa Sahakari Bank Ltd.The Tribunal reiterated that the RBI guidelines, which mandate recognizing income from NPAs only upon actual receipt, override the provisions of the Income Tax Act regarding income recognition. This principle was supported by various judicial precedents, including the Supreme Court's decision in Southern Technologies Ltd. and the Bombay High Court's decision in CIT vs. Deogiri Nagari Sahakari Bank Ltd. Consequently, the Tribunal directed the AO to delete the additions made towards interest on NPAs for both assessment years.2. Gratuity Premium Paid to LIC Gratuity Fund:The second issue concerns the gratuity premium paid to the LIC Gratuity Fund. For the assessment year 2012-13, the assessee debited Rs. 11,00,000/- towards this premium. The AO disallowed the deduction on the grounds that the fund was not an approved gratuity fund as required under Section 36(1)(v) of the Income Tax Act.The CIT(A) allowed the appeal of the assessee, citing the ITAT Hyderabad 'B' Bench decision in ACIT vs. Sri Krishna Durga Limited, which held that payments made to the LIC under a group gratuity scheme are allowable deductions even if the fund is not approved.The Tribunal upheld this view, referencing its own decision in ACIT vs. The Guntur District Cooperative Central Bank Ltd., where it was held that payments to the LIC under a group gratuity scheme qualify for deduction under Section 37 of the Act, as these payments are actual expenses and not mere provisions. This principle was supported by judicial precedents from the ITAT Ahmedabad Bench in Baroda Gujarat Grameen Bank and the ITAT Madras Bench in Verizon Data Services India Pvt. Ltd., which allowed deductions for payments made to LIC under group gratuity schemes.The Tribunal concluded that the actual payment made to the Group Gratuity Fund of LIC should be allowed as a deduction, thereby upholding the CIT(A)’s order and dismissing the revenue’s appeals for both assessment years.Cross Objections:The assessee filed cross objections supporting the CIT(A)’s order, but these were dismissed as they were filed beyond the due date without a condonation petition.Conclusion:The appeals of the revenue for the assessment years 2012-13 and 2013-14 were dismissed, and the cross objections of the assessee for the same years were dismissed in limine. The judgment was pronounced in the open court on 5th September 2018.