Cooperative bank can recognize NPA interest income on receipt basis despite mercantile accounting under sections 145 and 43D

ITAT Rajkot held that cooperative bank following mercantile accounting could recognize interest income from NPAs on actual receipt basis per RBI guidelines under sections 145 and 43D, despite using mercantile system. CIT(A) correctly deleted additions of accrued interest on NPAs. Regarding section 36(1)(viia) deduction for bad debt provisions, ITAT ruled cooperative banks are entitled to 7.5% deduction on total income regardless of whether provisions relate to rural or non-rural advances, reversing AO's disallowance.

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Issues:
- Appeal against orders of Ld. CIT(Appeals) for assessment years 2012-13 and 2013-14
- Deletion of additions made on account of interest accrued on NPA
- Deletion of addition relating to deduction u/s 36(1)(viia) of the Act

Analysis:

Assessment year 2012-13:
The Department appealed against the Ld. CIT(Appeals) order deleting the additions on account of interest accrued on NPAs. The AO added the interest accrued on NPAs as taxable income, but the Ld. CIT(Appeals) allowed the appeal, citing various court decisions favoring the assessee. The ITAT upheld the Ld. CIT(Appeals) decision, referring to Supreme Court and High Court judgments stating that interest on NPAs should be taxed on a receipt basis, not on accrual basis. The ITAT dismissed the Department's appeal, affirming that the additions were rightly deleted.

In the same assessment year, the Department challenged the deletion of the addition related to deduction u/s 36(1)(viia) of the Act. The AO disallowed the deduction claimed by the assessee, contending that it applies only to rural advances. However, the Ld. CIT(Appeals) allowed the deduction, emphasizing that the provision does not require rural credits for eligibility. The ITAT supported the Ld. CIT(Appeals) decision, citing precedents where cooperative banks were entitled to claim the deduction irrespective of rural advances. Consequently, the Department's appeal was dismissed for this ground as well.

Assessment year 2013-14:
Since the issues and grounds for both assessment years were similar, the Department's appeal was dismissed for the assessment year 2013-14 based on the same reasoning and precedents discussed for the assessment year 2012-13.

In conclusion, the ITAT upheld the Ld. CIT(Appeals) decisions for both assessment years, dismissing the Department's appeals. The judgments cited by the ITAT supported the assessee's position regarding the taxation of interest accrued on NPAs and the eligibility for deduction u/s 36(1)(viia) of the Act, emphasizing that the provisions should be interpreted in favor of the assessee.

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