Urban Co-operative Bank wins appeal on NPA interest taxation under Section 43D receipt basis

ITAT Chandigarh allowed the appeal of an Urban Co-operative Bank regarding interest accrual on NPA accounts. The AO had added interest income on NPAs to total income under mercantile accounting system, relying on CBDT Instruction No.17/2008. However, following the Kangra Central Co-operative Bank HC decision, ITAT held that Section 43D amendment by Finance Act 2017 was retrospective, requiring co-operative banks to tax interest on NPAs only on receipt basis, not accrual basis. The addition made by AO and confirmed by CIT(A) was set aside.

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Issues Involved:
1. Whether the interest due on Non-Performing Assets (NPAs) should be treated as income of the assessee.
2. Whether the amendment in Section 43D of the Income Tax Act, effective from 01.04.2018, should be treated as retrospective.

Summary:

Issue 1: Treatment of Interest on NPAs as Income

The assessee, a Co-operative Society engaged in banking, followed the mercantile system of accounting and did not recognize interest on NPAs in its Profit & Loss Account, adhering to RBI guidelines. The Assessing Officer (AO) added Rs. 49,52,913/- as income, citing CBDT Instruction No. 17/2008 and the requirement for banks to follow the mercantile system strictly. The AO distinguished the case from the Supreme Court decision in UCO Bank, which applied to Scheduled Banks, not Non-Scheduled Banks like the assessee.

Issue 2: Retrospective Applicability of Section 43D Amendment

The assessee argued that the amendment to Section 43D, effective from 01.04.2018, should be treated as retrospective, citing the Himachal Pradesh High Court's decision in Pr. CIT Vs Kangra Central Co-operative Bank. The CIT(A) disagreed, stating the amendment was not explicitly retrospective and the Supreme Court's UCO Bank decision did not apply to Co-operative Banks. The CIT(A) upheld the AO's decision.

Tribunal's Findings:

The Tribunal noted that the Himachal Pradesh High Court had treated the amendment as retrospective, aiming to provide a level playing field between Scheduled and Non-Scheduled Banks. The Tribunal found the matter covered by the jurisdictional High Court's decision, which is binding. Consequently, the addition made by the AO and confirmed by the CIT(A) was set aside.

Conclusion:

The appeals were allowed, and the Tribunal's decision in ITA 366/CHD/2023 was applied mutatis mutandis to ITA 367/CHD/2023.

Order Pronouncement:

The order was pronounced in the Open Court on 6th December, 2023.

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