Bank's NPA recovery income under Section 43D taxable when credited to P&L or received, whichever is earlier

ITAT Chandigarh held that income from NPA recovery under OTS should be taxed in the year when credited to profit and loss account or received, whichever is earlier, as per Section 43D. The appellant bank appropriated interest income of Rs. 1,20,87,000 in AY 2016-17 and 2017-18 after recovering bad loans through civil litigation. ITAT ruled that Section 43D compliance requires recognition and appropriation per RBI guidelines, not mere receipt. The CIT(A)'s order enhancing income for AY 2013-14 was set aside, and the assessee's appeal was allowed.

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Issues Involved:
1. Disallowance of premium paid on government securities.
2. Addition of Rs. 7,43,000/- under the One Time Settlement (OTS) scheme.
3. Addition of Rs. 1,20,87,000/- as income from NPA recovery.

Issue-wise Detailed Analysis:

1. Disallowance of Premium Paid on Government Securities:
The Assessee, a cooperative society engaged in banking, claimed a deduction of Rs. 12,39,000/- as revenue expenditure for the premium paid on government securities. The Assessing Officer (AO) treated this amount as capital expenditure, leading to its disallowance. The CIT(A) decided this issue in favor of the Assessee, and the department's appeal on this issue was dismissed by the ITAT.

2. Addition of Rs. 7,43,000/- under the OTS Scheme:
The AO added Rs. 7,43,000/- to the Assessee's income, considering it as income recovered under the OTS scheme for NPAs. The Assessee contended that this amount was not income as it was only received as a token and not credited to the borrower's account until final settlement. The CIT(A) found that the amount was included in the total income based on the ledger extract and audit report, thus deleting the addition made by the AO. The ITAT upheld this decision, noting that the amount was rightly accounted for under the OTS scheme and should not be considered as income until it is credited to the borrower's account.

3. Addition of Rs. 1,20,87,000/- as Income from NPA Recovery:
The AO and CIT(A) added Rs. 1,20,87,000/- as income for the Assessment Year (AY) 2013-14, arguing it should be taxed under Section 43D of the Income Tax Act, 1961. The Assessee argued that this amount was treated as a liability due to ongoing litigation and was only recognized as income in AY 2016-17 and AY 2017-18 when the litigation was resolved. The ITAT examined Section 43D, which requires income by way of interest on bad or doubtful debts to be taxed in the year it is credited to the profit and loss account or received, whichever is earlier. However, the ITAT found that the Assessee had recognized and appropriated the income in the years 2016-17 and 2017-18, following the RBI guidelines and the Indian Contract Act, 1872. The ITAT concluded that taxing the amount in AY 2013-14 would lead to double taxation, as the Assessee had already accounted for it in subsequent years. Therefore, the ITAT set aside the CIT(A)'s order and allowed the Assessee's appeal.

Conclusion:
The ITAT allowed the Assessee's appeal, holding that:
- The premium paid on government securities was correctly treated as revenue expenditure.
- The amount received under the OTS scheme was not income until credited to the borrower's account.
- The income from NPA recovery was appropriately recognized and taxed in AY 2016-17 and AY 2017-18, not in AY 2013-14, to avoid double taxation.

Order:
The appeal of the Assessee is allowed, and the impugned order of the CIT(A) is set aside. The decision was pronounced in open court on 21/08/2024.

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