2022 (8) TMI 1346 - AT - Income Tax

Interest on Non performing assets (NPA) - Applicability of provisions of section 43D - asesssee has recognized the amount of interest attributable on sticky advances as NPA for a period of 90 days or more as per the guidelines issued by the RBI in accordance with Sec. 43D - AO was of the view that as per Rule 6E interest is not to be offered for taxation with respect to advances which become Non Performing Assets for a period of 180 days or more - HELD THAT - As categorically provided in the provisions of section 43D that income by way of interest in relation to bad and doubtful debts to be prescribed in accordance with guidelines issued by the RBI. The section 43D was introduced by the Finance Act 1991 as per the section the category of bad and doubtful debts to be prescribed in the Income Tax Rules having regard to the guidelines issued by the RBI in relation to such debts. During the year under consideration the RBI has reduced the period to 90 days for categorization of interest on sticky loan as NPA however similar changes was not made to Rule 6EA. After considering the provisions of Sec. 43D and judicial findings as supra we consider that norms for categorization of bad and doubtful debts had to be prescribed considering the guidelines issued by the RBI. CIT(A) is not justified in substituting the limit for recognizing of interest on account of NPA to 180 days from 90 days in view of the clear provisions of Sec. 43D(a) that in the case of public financial institutions or schedule bank or a state financial corporation or a State Industrial Investment Corporation the income by way of interest in relation to such categories of bad and doubtful debt as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts. Therefore both the ground of appeals of the assessee are allowed. Revision u/s 263 - interest expenditure u/s 36(1)(iii) - HELD THAT - As merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different dates as discussed therefore we don t find any reason to interfere in the decision of ld. CIT(A) accordingly this ground of appeal of the revenue is dismissed. Rectification u/s 154 - Fees for professional/deduction services accounted under the head other income given in schedule 14 of the annual account and it had also filed application u/s 154 - CIT(A) has directed the A.O to dispose off the application u/s 154 filed by the assessee in accordance with law and procedure. After perusal of the fact and findings of the ld. CIT(A) as supra we don t find any error in the decision of the ld. CIT(A). Therefore this ground of appeal of the revenue stand dismissed.

Summary

Issues Involved:
1. Addition of Interest on Non-Performing Assets (NPA) derecognized as per provisions of Section 43D of the Income Tax Act.
2. Disallowance of interest expenses claimed under Section 36(1)(iii) in respect of perpetual bonds.
3. Direction to dispose of rectification application filed under Section 154.

Detailed Analysis:

1. Addition of Interest on Non-Performing Assets (NPA) Derecognized as per Provisions of Section 43D of the Income Tax Act:

The primary issue revolved around whether the interest on NPAs, which were overdue for more than 90 days but less than 180 days, should be recognized for tax purposes. The assessee bank followed RBI guidelines, which classify NPAs for a period of 90 days or more, while the A.O. adhered to Rule 6EA, which mandates a period of 180 days for such classification.

The CIT(A) upheld the A.O.'s decision, stating that the provisions of Section 43D require adherence to Rule 6EA, which prescribes a 180-day period. The CIT(A) referenced judicial precedents, including the Hon'ble Supreme Court's ruling in Southern Technologies Ltd. vs. JCIT, which emphasized that RBI prudential norms do not override the provisions of the Income Tax Act.

However, the ITAT, upon appeal, found merit in the assessee's argument that Section 43D should be read in conjunction with RBI guidelines. The ITAT cited decisions from various tribunals, including Union Bank of India vs. ACIT and Royal Bank of Scotland vs. DCIT, which supported the view that RBI guidelines should prevail. Consequently, the ITAT allowed the assessee's appeal, recognizing the interest on NPAs for a period of 90 days as per RBI guidelines.

2. Disallowance of Interest Expenses Claimed Under Section 36(1)(iii) in Respect of Perpetual Bonds:

The A.O. disallowed the interest expenses on perpetual bonds, treating them akin to equity rather than debt, based on their perpetual nature and the lack of redemption rights for investors. The A.O. referenced an order under Section 263 by the Pr. CIT for A.Y. 2013-14, which held similar views.

The CIT(A) reversed the A.O.'s decision, highlighting that the bonds were classified as borrowings in the bank's balance sheet and that interest was paid after deducting tax at source. The CIT(A) noted that the bonds had fixed interest rates and were redeemed by the bank, distinguishing them from equity. The CIT(A) also emphasized that disallowing the interest would result in double taxation, as bondholders had already offered the interest income in their returns.

The ITAT upheld the CIT(A)'s decision, noting that the bonds were indeed borrowings and that the interest paid was a legitimate business expense. The ITAT referenced the case of Kerala Road Transport Corporation vs. ITO, which supported the view that interest on borrowings should be deductible.

3. Direction to Dispose of Rectification Application Filed Under Section 154:

The revenue's appeal included a ground challenging the CIT(A)'s direction to the A.O. to dispose of the assessee's rectification application filed under Section 154. The CIT(A) had directed the A.O. to address the application concerning an addition of Rs. 4,42,424 on the income of the merged entity, which the assessee claimed was already accounted for.

The ITAT found no error in the CIT(A)'s direction, noting that the assessee had provided supporting details and that the rectification application was a procedural matter. Consequently, this ground of the revenue's appeal was dismissed.

Conclusion:

The ITAT allowed the assessee's appeal regarding the addition of interest on NPAs, aligning with RBI guidelines for a 90-day period. The ITAT also upheld the CIT(A)'s decision to allow interest expenses on perpetual bonds under Section 36(1)(iii), recognizing them as borrowings. Lastly, the ITAT dismissed the revenue's ground concerning the rectification application under Section 154. The overall result was that the assessee's appeal was allowed, and the revenue's appeal was dismissed.