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Asst. Commissioner of Income Tax Versus The Sindagi Urban Co-op. Bank Ltd.

2015 (4) TMI 760 - ITAT BANGALORE

Addition on account of accrued interest on loan classified as Non performing Assets - RBI prudential norms restricts accrual of interest on NPAs - Cooperative banks are covered under provisions of sec.43D - Held that:- In the case of Karnataka High Court in Canfin Homes Ltd. [2011 (8) TMI 178 - KARNATAKA HIGH COURT], it was held that the definition of non-performing asset shows an asset becomes non-performing when it ceases to yield income. Non-performing asset is an asset in respect of which in .....

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erefore, the contention of the revenue that in respect, of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis.

In Karnavati Co-op. Bank Ltd.[2011 (11) TMI 367 - ITAT AHMEDABAD], the ITAT Ahmedabad Bench held that provisions of Sec.43D of the Act are applicable to Cooperative Banks also.

In view of the same, respectfull .....

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of appeal raised by Revenue read as follows : "1. The CIT (A) erred in law and on facts, in deleting the addition of ₹ 10,49,668/- on account of accrued interest on loans which are classified as "Non-performing Assets" relying on the Karnataka High Court decision in Canfin Homes Ltd (2011) 5 TaxCorp (DT) 49593, ignoring the provisions of section 43D of the I. T. Act, 1961 ? 2. On the facts and in law the CIT (A) erred in holding that income accrued to the assessee cannot be .....

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ssee had not credited in the profit and loss account interest receivable to the extent of ₹ 10,49,668/-. The Assessing Officer was of the view that the assessee was following mercantile system of accounting and therefore interest that has accrued on loans and advances had to be accounted as income in the books of account. The assessee was accordingly called upon to explain as to why interest receivable has not been credited to the profit and loss account. The assessee submitted that as per .....

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hat the assessee was following mercantile system of accounting and therefore had to recognize income on the basis of accrual. The Assessing Officer also held that RBI norms regarding non-performing assets have nothing to do with computation of income under the Income-tax Act, 1961 (Act). Accordingly the Assessing Officer brought to tax a sum of ₹ 10,49,668/- as interest receivable on loans and investments on accrual basis. The Assessing Officer also made a reference to the provisions of Se .....

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case of JCIT v. Canfin Homes Ltd (2011) 5 TaxCorp (DT) 49593, held that interest on non-performing assets cannot be treated as income accrued to an assessee. The CIT (A) was also of the view that the provisions of Sec.43D of the Act were applicable to cooperative banks and in this regard relied on the decision of Ahmedabad Bench of ITAT in the case of Karnavati Cooperative Bank v. DCIT (2012) 14 ITR (Trib) 175. 05. Aggrieved by the order of CIT (A), Belgaum dt.17.9.2013 for Assessment Year 2010- .....

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09, wherein this Tribunal held that a cooperative bank carrying on the banking business need not recognize income on non-performing assets. 08. We have given a careful consideration to the rival submissions. Section 43D of the Act is reproduced below : 43-D: Special provision in case of income of public financial institutions, public companies, etc.-Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) in the case of a public financial institution or a sched .....

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nk in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. 09. Section 43D of the Act was brought in basically inten .....

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ons as defined in section 4A of the Companies Act, 1956,-scheduled banks as per Expln. (ii) to Section 36(1)(viia) of the Act, -State financial corporations established under section 3 or 3A of the State Financial Corporations Act, 1951 and institutions notified under section 46 of the said Act, and -State industrial investment corporations which are Government companies as per section 617 of the Companies Act, 1956 and which are engaged in providing long term finance for industrial projects and .....

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in respect of such interest are confined to "interest suspense account", such interest amounts will not be treated as income of the assessee in view of the nonobstante clause of section 43D even though the assessee is following mercantile system of accounting. 10. In Karnavati Co-op. Bank Ltd. Vs. DCIT (2012) 14 ITR (Trib) 175 (Ahmedabad), the ITAT Ahmedabad Bench held that provisions of Sec.43D of the Act are applicable to Cooperative Banks also. The following were the relevant obser .....

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ribed that an income by way of interest shall be chargeable to tax in the previous year in which it is credited. The other deviation from the said accepted principle of accountancy is that an income by way of interest shall be chargeable to tax in the previous year in which it is actually received. The Act says that the incidence of credit or "actually received", whichever is earlier is to be taken into account for the purpose of chargeability of income by way of interest. Simultaneous .....

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hever is earlier, then it is compulsory to abide by the said rule. No scope is left with the Revenue authorities to ignore these provisions due to unambiguous use of language in the section. As far as the status of the assessee is concerned, the AO has stated that the assessee-bank is a co-operative bank. Undisputedly, the assessee is also governed by the RBI guidelines. Vide an Expln. (d) r/w s. 36(1)(viia) annexed to s. 43D the definition of the entities incorporated by the section have been d .....

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s is credited to a suspense account, it need not be included in assessee s taxable income, provided the ITO is satisfied that recovery is practically improbable. The CBDT under s. 119 has power to issue circulars in exercise of its statutory powers. If the Board considers it necessary to lay down certain rules and then direct the sub-ordinate authorities, such directions are required to be followed and such circular would be binding on the Department unless and until held as ultra vires by a Cou .....

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financial institution, etc. s. 43D has to be applied in its letter and spirit. 10. Besides the above, the Bangalore Bench of the ITAT in the case of Shiva Sahakari Bank Niyamitha (supra) has held as follows : "8. Having heard both the parties and having considered their rival contentions, we find that undisputedly the assessee is in the banking business and is also governed by the Banking regulations. Whether the interest accrued on NPA s which are doubtful of being recovered, should be re .....

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he Hon ble Supreme Court, while holding that the RBI directions are only norms and act in a different field as against the Income-tax Act, has also observed that collectability of a receipt is different from accrual and hence in each case, the assessee has to prove that interest is not recognized or taken into account due to uncertainty in calculation of ITA No.257/B/12 the income and it is for the AO accept the claim of the assessee under the IT Act or not to accept it, in which case there will .....

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s purpose write off is a condition for allowance. It is, therefore, clear that the facts of the case before the Apex Court are entirely on a different set of facts and hence its finding on non-allowability of the provisions of NPA s cannot be applied to the facts of the case before us but its observation that for recognizing the interest income on NPA s, AO has to consider the facts of each case has relevance to the case before us. In view of the same, we hold that the decision of the Hon ble Su .....

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unal. In the said decision, at para 8 of the order, the Hon ble High Court has held as under : Therefore, it is clear if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount; accrued was not realized immediately cannot be a ground to avoid payment of tax .....

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