2015 (6) TMI 1098 - AT - Income Tax

Entitlement for interest on NPA as provided under section 43D - whether interest on accrual basis in respect of non performing assets (NPA) of a cooperative bank are to be taxed or not? - Held that - We may like to refer the decision of Karnavati Co-op Bank Ltd. (2011 (11) TMI 367 - ITAT AHMEDABAD ) wherein the issue was identical and as held that in a situation when the assessee is a Cooperative bank however governed by RBI guide lines then the provisions of section 43D is to be applied. Even the ITAT Pune Bench in the case of Omerga Janta Sahakari Bank Ltd. 2014 (12) TMI 355 - ITAT PUNE has held that the assessee a Cooperative bank operating under the license from RBI and governed by the Circulars of Reserve Bank of India is entitled for relief. On the basis of those circulars the said Cooperative Bank had not accounted for the interest income of NPA. It was held that interest income relatable to NPA was not includible on accrual basis since the interest income had not accrued to the assessee in that period. Both the Tribunals have also discussed a decision of Hon ble Supreme Court pronounced in the case of Southern Technologies Ltd. (2010 (1) TMI 5 - SUPREME COURT OF INDIA ) as expressed that in essence RBI directions were prudential norms issued which deals essentially in respect of recognition of income. The guidelines were in respect of NBFCS to disclose the amount of NPA in their financial accounts. By virtue of section 45Q an overriding effect is given to said directions vis-a-vis principles of income recognition. The Hon ble Court has observed that the accounting policies adopted by NBFC cannot determine the taxability of income. It was held that the Assessing Officer has to consider the directions of Reserve Bank of India as per section 45Q of Reserve Bank of India Act and examine the issue as per the prudential norms issued by RBI in connection with the income recognition of a bank. The Court has also commented that in such a situation the provisions of section 145 had no role to play. We therefore hold that the decisions as cited before us squarely cover the issue in favour of the assessee.

Summary

Issues:
1. Applicability of Rule 6E/Sec.43D on overdue interest of NPA.
2. Entitlement of cooperative bank for interest on NPA under section 43D of I.T. Act.
3. Binding nature of RBI guidelines on income tax authorities.
4. Eligibility of cooperative bank for exception under section 43D of I.T. Act.

Issue 1: Applicability of Rule 6E/Sec.43D on overdue interest of NPA:
The appeal by the Revenue challenged the CIT(A)'s decision regarding the non-inclusion of overdue interest of NPA in the assessee bank's income. The Assessing Officer noted the hybrid accounting system used by the bank, where interest accrued on NPA was not realized and accounted for on a cash basis. The Revenue contended that the provisions of Sec. 43D should apply, while the bank argued that RBI norms were applicable, justifying the non-recognition of NPA interest income. The CIT(A) ruled in favor of the bank, stating that the Assessing Officer's addition was unwarranted, and all grounds were allowed.

Issue 2: Entitlement of cooperative bank for interest on NPA under section 43D of I.T. Act:
The core issue revolved around whether a cooperative bank, following RBI guidelines, could claim an exception under section 43D of the I.T. Act for interest on NPA. The ITAT referred to precedents where cooperative banks governed by RBI circulars were entitled to relief under section 43D. Citing decisions like Karnavati Co-op Bank Ltd. and Omerga Janta Sahakari Bank Ltd., the ITAT emphasized that the RBI's prudential norms were crucial for income recognition, overriding accounting policies. The ITAT concluded that the bank in question was eligible for the exception under section 43D, in line with established judicial interpretations and Supreme Court rulings.

Issue 3: Binding nature of RBI guidelines on income tax authorities:
The CIT(A) emphasized the binding nature of RBI guidelines on income tax authorities, citing Supreme Court decisions that upheld the authority of circulars issued by the Board. The CIT(A) highlighted that the circulars provided by the RBI were essential for recognizing income, and the Assessing Officer was required to consider these prudential norms for income recognition in banks. The ITAT concurred with this view, underscoring the significance of RBI directives in determining taxability of income, especially concerning NPA accounts.

Issue 4: Eligibility of cooperative bank for exception under section 43D of I.T. Act:
The ITAT analyzed various decisions and rulings to establish that cooperative banks adhering to RBI guidelines were entitled to the exception under section 43D of the I.T. Act. Referring to judgments like Karnavati Cooperative Bank and Bagalkot District Central Cooperative Bank, the ITAT reaffirmed that the provisions of section 43D applied to cooperative banks governed by RBI directives. The ITAT dismissed the Revenue's appeal, confirming the findings of the CIT(A) in favor of the assessee.

Overall, the judgment underscored the importance of RBI guidelines in income recognition for banks, upheld the eligibility of cooperative banks for exceptions under section 43D, and highlighted the binding nature of RBI circulars on income tax authorities, leading to the dismissal of the Revenue's appeal.