2021 (2) TMI 416 - AT - Income Tax

Co-op banks eligible for tax benefits on NPAs under Section 43D before amendment date

The tribunal held that the provisions of Section 43D, as amended, should be applied to co-operative banks, allowing interest on NPAs to be taxed only when ... Deduction of interest on non-performing assets - Special provision in case of income of public financial institutions (section 43D) and its application to co-operative banks - Non-retrospective operation of Finance Act, 2017 amendment - Override of mercantile system of accounting by a non-obstante provision - Binding effect of CBDT circulars in guidance to revenue authorities - Scope of revisionary powers under section 263 - requirement of order being erroneous and prejudicial to revenueDeduction of interest on non-performing assets - Special provision in case of income of public financial institutions (section 43D) and its application to co-operative banks - Scope of revisionary powers under section 263 - requirement of order being erroneous and prejudicial to revenue - Whether the addition of interest on non-performing advances made in assessment for AY.2015-16 in the case of a co-operative urban bank was sustainable, and whether the CIT's invocation of revisional powers under section 263 was justified. - HELD THAT: - The Tribunal examined the legal position regarding taxation of interest on non-performing assets and the applicability of section 43D to co-operative banks. Section 43D creates a special charging rule for interest of certain financial institutions, overriding the ordinary mercantile principle and providing that such interest is chargeable only when credited to profit and loss account or actually received, whichever is earlier. The Tribunal noted authoritative decisions and CBDT guidance which treat interest on specified 'sticky' or non-performing advances as not assessable until credited/received, and recorded that several benches of the Tribunal and High Courts have applied section 43D (and the allied circulars/guidance) to co-operative banks in like circumstances. The Finance Act, 2017 amendment expressly included co-operative banks with effect from 01-04-2018 and is not retrospective; however, the body of precedent treating co-operative banks as entitled to the protective rule under section 43D (or otherwise following the CBDT guidance) led the Tribunal to conclude that the Assessing Officer's treatment did not amount to an order which was erroneous and prejudicial to the interests of revenue for the purposes of invoking section 263. Applying those determinations to the facts, the Tribunal directed deletion of the addition of interest on NPAs made in assessment for AY.2015-16. [Paras 3, 4, 5]The addition of interest on non-performing advances in the assessment for AY.2015-16 is deleted and the CIT's exercise of revisional jurisdiction under section 263 is quashed.Final Conclusion: The appeal is allowed: the Tribunal deletes the addition of interest on NPAs made in the assessment for AY.2015-16 and quashes the revisional order of the CIT under section 263. Issues Involved:1. Addition of interest on Non-Performing Assets (NPAs) amounting to Rs. 15,04,061.2. Applicability of Section 43D of the Income Tax Act to co-operative banks for the Assessment Year (AY) 2015-16.3. Retrospective application of the amendment to Section 43D by the Finance Act, 2017.Issue-wise Detailed Analysis:1. Addition of Interest on NPAs:The assessee's primary grievance concerns the addition of Rs. 15,04,061 as interest receivable on NPAs, which was not received during the assessment period. The lower authorities upheld this addition, prompting the appeal.2. Applicability of Section 43D to Co-operative Banks:The tribunal noted that the Finance Act, 2017 amended Section 43D to include co-operative banks, effective from 01-04-2018. This amendment, however, does not have retrospective effect. The tribunal referenced a decision from its co-ordinate bench in 'The Taliparamba Co-operative Bank Ltd. vs. ITO,' which deleted similar additions of interest on NPAs based on the statutory amendment.3. Retrospective Application of the Amendment:The tribunal discussed the legislative intent and the prospective nature of the amendment. The CIT had previously found that the deduction under Section 43D was erroneously allowed for AY 2013-14, as the assessee did not fall under the categories eligible for this deduction before the amendment. The CIT viewed the amendment as prospective, thus disallowing the deduction for periods prior to 01-04-2018.The assessee argued that the amendment should be treated as retrospective, citing various judicial precedents and the practice of following RBI guidelines for accounting interest on NPAs. The tribunal examined several case laws where courts held that interest on NPAs should not be taxed until actually received or credited, even if the assessee follows the mercantile system of accounting.Tribunal's Conclusion:The tribunal concluded that the provisions of Section 43D, as amended, should be applied to co-operative banks. It emphasized that the non-obstante clause in Section 43D overrides other provisions, allowing interest on NPAs to be taxed only when actually received or credited. The tribunal found that the assessee, being a co-operative bank, is governed by RBI guidelines and is eligible for the benefits under Section 43D, even before the amendment's effective date.The tribunal adopted the detailed reasoning from previous judgments and directed the Assessing Officer to delete the impugned addition of Rs. 15,04,061. Consequently, the assessee's appeal was allowed.Order Pronouncement:The order was pronounced in the open court on 19th January 2021.