2015 (2) TMI 1205 - AT - Income Tax

Accrued Interest on loans classified as NPAs - whether the interest accrued in NPAs which are doubtful of being recovered should be recognised as the assessed income on accrual or on receipt basis - Held that - On an appreciation of the material on record we find that the assessee is in the banking business and governed by RBI Guidelines and Regulations. CIT(A) has rendered a detailed finding deciding the issue in favour of the assessee and deleting the addition on account of interest accrual / receivable on NPAs by following the decisions in the case of Canfin Homes Ltd. (2011 (8) TMI 178 - KARNATAKA HIGH COURT ) and Shiva Sahakari Bank Niyamitha (2012 (12) TMI 1021 - ITAT BANGALORE) for Assessment Year 2008-09. As also seen that the learned CIT(A) following the decision in the case of Karnavati Co-operative Bank Ltd. (2011 (11) TMI 367 - ITAT AHMEDABAD) held that co-operative banks being governed by RBI Guidelines the provisions of section 43D of the Act are also applicable to cooperative banks like the assessee and that there is nothing in section 43D of the Act which makes the interest income of the co-operative bank from NPA s taxable on accrual basis. Before us Revenue has not been able to controvert these findings of the learned CIT(A) in the impugned order. - Decided against revenue

Summary

Issues:
1. Treatment of interest income by a co-operative bank under the Income Tax Act.
2. Applicability of section 43D of the Income Tax Act to co-operative banks.
3. Disallowance of interest payment on term deposits under Section 40(a)(ia) of the Act.

Issue 1: Treatment of interest income by a co-operative bank under the Income Tax Act:

The case involved the assessment of a co-operative bank's income for the year 2009-10. The Assessing Officer noted that the bank followed a hybrid system of accounting, recognizing interest income on a receipt basis and other incomes on an accrual basis. The Assessing Officer treated the interest accrued but not credited to the profit and loss account as the bank's income for the year. Additionally, the bank failed to deduct tax at source on interest payments on term deposits exceeding a certain threshold. The CIT(A) partially allowed the bank's appeal, deleting the addition of interest receivable on non-performing assets but upholding the disallowance under Section 40(a)(ia) of the Act.

Issue 2: Applicability of section 43D of the Income Tax Act to co-operative banks:

The Revenue challenged the CIT(A)'s decision to delete the addition of interest accrued on non-performing assets, arguing that the provisions of section 43D of the Act were not applicable to the bank. The CIT(A) relied on the decisions of the Karnataka High Court and the ITAT in similar cases to support the bank's position. The Tribunal analyzed the bank's accounting practices and the applicability of section 43D to co-operative banks. It concluded that the interest income from non-performing assets should not be taxed on an accrual basis for co-operative banks, in line with the decisions cited by the CIT(A) and the principles established by the High Court.

Issue 3: Disallowance of interest payment on term deposits under Section 40(a)(ia) of the Act:

The Revenue's appeal also challenged the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act regarding interest payments on term deposits. The Tribunal did not delve into this issue specifically in the judgment summary provided, but it was part of the grounds raised by the Revenue in their appeal.

In conclusion, the Tribunal dismissed the Revenue's appeal for the Assessment Year 2009-10, upholding the CIT(A)'s decision regarding the treatment of interest income by the co-operative bank and the applicability of section 43D of the Income Tax Act to co-operative banks. The judgment highlighted the importance of adhering to accounting practices and relevant legal provisions in determining the tax liability of financial institutions like co-operative banks.