2019 (2) TMI 238 - HC - Income Tax

Income Tax Act: Cooperative Banks NPA Interest Non-Taxable. Amortized Premium on Gov Securities Not Revenue.

The Pr. Commissioner of Income Tax-6, Pune Versus The Solapur District Central Coop. Bank Ltd., and The Laxmi Cooperative Bank Ltd.

The High Court held that section 43D of the Income Tax Act applies to cooperative banks, extending its scope to include them. Interest on Non Performing ... Section 43D - applicability - cooperative bank - scope of amendment - retrospective or prospective - Held that:- The Gujarat High Court in case of Pr. CIT v/s. Shri Mahila Sewa Sahakari Bank Ltd. [2016 (8) TMI 377 - GUJARAT HIGH COURT] had undertaken the detailed exercises to examine an identical situation. The Cooperative Banks were acting under the directives of the Reserve Bank of India with regard to the prudential norms set out. The Court was of the opinion that, taxing interest on NPA cannot be justified on the real income theory. Identical issue was also examined in case of Pr. CIT v/s. Ludhiana Central Coop. Bank Ltd [2018 (11) TMI 442 - PUNJAB AND HARYANA HIGH COURT] a held that tribunal while relying upon the various pronouncements had decided the issue regarding taxability of interest on NPA in favour of the assessee as being taxable in the year of receipt. The deletion made by the CIT(A) on account of addition regarding interest accrued on NPA. No illegality or perversity could be demonstrated by learned counsel for the Revenue in the aforesaid findings recorded by the Tribunal. Section 43D essentially provides for charging of interest on actual basis in case of certain special circumstances, in the hands of the public financial institutions, public companies etc. Explanation to Section 43D defines certain terms for the purpose of said section. Clause (g) was inserted in the said explanation by Finance Act, 2016 w.e.f. 1.04.2018 which provides that for the purpose of such Section, Cooperative Banks, Primary Agricultural Credit Society and Primary Agricultural and Rural Development Bank shall have meanings respectively assigned in Explanation to subsection of Section 80B of the Act. By virtue of such insertion, the Cooperative Banks would get the benefit of 43D of the Act. One way of looking at this amendment, can be that, the same is curative in nature and would, therefore, apply to pending proceedings, notwithstanding the fact that, the legislature has not made the provision retrospective. - Decided against revenue Issues:1. Applicability of section 43D to cooperative banks.2. Taxability of interest on Non Performing Assets (NPA) in cooperative banks.3. Allowance of amortized premium on investment in Government Securities as revenue expenditure.Analysis:Issue 1: Applicability of section 43D to cooperative banksThe appeal challenged the judgment of the Income Tax Appellate Tribunal regarding the application of section 43D of the Income Tax Act, 1961 to a Cooperative Bank. The Assessing Officer contended that the bank should offer interest due for tax on an accrual basis, contrary to the bank's practice of crediting interest to the Profit and Loss Account only upon actual receipt. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, but the Tribunal reversed it. The Tribunal, relying on the real income theory, referred to the Supreme Court's decision in CIT v/s. Shoorji Vallabhdas & Co. The High Court noted that similar issues were addressed by the Gujarat High Court and Punjab & Haryana High Court, where the judgments favored the cooperative banks. The High Court concluded that no question of law arose, especially considering the subsequent amendment to Section 43D, which extended its scope to include cooperative banks.Issue 2: Taxability of interest on NPA in cooperative banksThe High Court referred to previous judgments by the Gujarat High Court and Punjab & Haryana High Court, where the taxability of interest on NPA in cooperative banks was discussed. The Courts held that taxing interest on NPA based on the real income theory was not justified. The Supreme Court dismissed appeals against these judgments, indicating approval of the decisions. The High Court noted that the legislature's amendment to Section 43D aimed to provide a level playing field to cooperative banks, further supporting the non-taxability of interest on NPA in such banks. The High Court dismissed the appeals, considering the legal precedents and the legislative intent behind the amendment.Issue 3: Allowance of amortized premium on investment in Government SecuritiesThe Revenue pressed a question regarding whether the amortized premium on investments in Government Securities held under the category 'Held to Maturity' could be allowed as revenue expenditure. However, the Counsel for the Revenue acknowledged that a similar question had been dismissed by a Division Bench of the Court in a previous order. Consequently, the High Court dismissed all appeals, including the one concerning the amortized premium on investments.In conclusion, the High Court's judgment addressed the issues of applicability of section 43D to cooperative banks, taxability of interest on NPA, and allowance of amortized premium on investments in Government Securities. The decision was based on legal precedents, legislative amendments, and the real income theory, ultimately dismissing all appeals presented before the Court.