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DCIT, Circle-2 (1) , Vijayawada Versus M/s. Gandhi Co-Operative Urban Bank Limited

2016 (3) TMI 275 - ITAT VISAKHAPATNAM

Additions towards interest on NPA - Held that:- Interest on NPA, whose recovery is doubtful and which was not recovered by the assessee bank, but has been kept in a suspense account and has not been credited into the Profit & loss account, cannot be included in the income of the assessee for the year under consideration. The CIT(A), rightly deleted the additions made by the A.O. towards interest on NPAs. There is no error or infirmity in the order passed by the CIT(A). Therefore, we direct the A .....

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f the case, are that the assessee is a co-operative bank, which is engaged in the business of banking, filed its return of income for the assessment year 2010-11 on 14.10.2010 declaring a total income of ₹ 4,89,67,030/-. The assessee again filed a revised return on 20.1.2012 declaring a total income of ₹ 4,05,84,250/-. The return of income was processed u/s 143(1) of the Income-Tax Act, 1961 (hereinafter called as the Act ) on 25.5.2001. Subsequently, the case was selected for scruti .....

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a letter dated 24.12.2012 and stated that it has not credited interest on NPA to the profit & loss account. The assessee further submitted that it is following the method of accounting as per the accounting standards regularly, wherein the income on NPA is offered on the basis of actual realization rather than on accrual basis. The assessee further submitted that being a co-operative bank bound to follow the guidelines issued by the RBI accordingly, income recognition was made as per the RBI .....

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the opinion that as per the amended provisions of section 43D of the Act, interest on non performing assets shall be chargeable to tax in the previous year in which it is credited by the banks to the profit & loss account. With these observations made additions to interest on NPAs. 3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee submitted that as per the RBI guidelines, interest on NPAs need not be recognized on accrua .....

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ular no.201/21/84 dated 9.10.1984 was applicable even for the assessment year under consideration, after the amended provisions of section 145 of the Act, as per the decision of Hon ble Allahabad High Court in the case of CIT Vs. Kailash Auto Finance Ltd. reported in 320 ITR 394. The CIT(A) however, after considering the explanations furnished by the assessee, deleted the additions made by the A.O. towards interest on NPAs. While doing so, the CIT(A) was of the opinion that the interest on NPA h .....

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The Ld. D.R. submitted that the CIT(A) was erred in deleting the interest charged on the NPAs, when the assessee is following mercantile system of accounting. The Ld. D.R. further submitted that the guidelines issued by the RBI cannot over ride the provisions of the Income-Tax Act, 1961, as section 145 of the Act, mandates that the assessee s either to follow mercantile or cash system of accounting. The Ld. D.R. further submitted that as per the board instruction no.17 of 2008 dated 26.11.2008, .....

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tnam in assessee s own case for the assessment year 2009-10. The A.R. further submitted that the assessee is a cooperative bank, is bound to follow the regulative instructions of RBI and as per the guidelines issued by the RBI, all cooperative banks should follow prudential norms for income recognition, asset classification and provisioning. The assessee being a cooperative bank bound to follow the guidelines issued by the RBI, has recognized the interest on NPAs on actual receipt basis. Therefo .....

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tion, no bank is allowed to recognize interest on NPA on accrual basis. Therefore, the assessee being a co-operative bank, bound by RBI directives, has not recognized interest accrued to the non performing assets. The A.O. was of the opinion that the assessee is following mercantile system of accounting. Therefore, it should recognize the interest relatable to NPAs on accrual basis. We do not see any merits in the arguments of the A.O. for the reason that when the principal amount itself is in d .....

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case for the assessment year 2009-10. We have examined the case laws relied upon by the A.R. in the light of the facts of the present case and find that the coordinate bench of this Tribunal, in assessee s own case for the assessment year 2009-10, has considered the issue and deleted the additions towards interest on NPAs. The relevant portion is reproduced as under: 6. We have heard both the parties and perused the materials available on record. The assessee is a co-operative bank, regularly fo .....

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e is following mercantile system of accounting, it should recognize the interest relatable to NPAs, therefore, made the additions. The CIT(A), by relied upon the judgement of the ITAT, Hyderabad bench in the case of TCI Finance Ltd. Vs. ACIT (2004) 91 ITD 573 and also the Hon ble Madras High Court judgement in the case of CIT Vs. Annamalai Finance Ltd. (2005) 275 ITR 451, held that when the principal amount itself is doubtful of recovery, it cannot be said that any interest accrued on such princ .....

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s. Durga Co-operative Urban Bank Ltd. (supra). We have examined the case law referred by the A.R. in the light of the facts of the present case and find that the ITAT, Visakhapatnam bench in the above mentioned case on similar facts held the issue in favour of the assessee. The relevant portion is reproduced as under: 10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India. Hence the .....

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e income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Honible Supreme Court. 10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (Supra) has held that the interest on NPA assets cannot be said to have accrued to the assessee. In this regard .....

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that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order. 8. An identical issue came up for consideration before the ITAT Pune Bench in the case of Vaidyanath Urban Co-op. Bank Ltd. Vs. CIT in ITA No.413/PN/2014 dated 31.3.2015, wherein the ITAT under similar set of facts held as under: 10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserv .....

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verriding effect over the income recognition principle followed by cooperative banks also. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon'ble Supreme Court. Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the interest on NPA assets cannot be said to have accrued to th .....

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d CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order." Following the aforesaid discussion, which has been rendered on an identical issue under similar circumstances, we find no reasons to interfere with the ultimate conclusion of the CIT(A) in deleting the impugned addition relating to interest income in respect of NPAs. 9. The Hon ble Supreme Court of India, in the case of UCO Bank Vs. CIT had an occasion to .....

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with accounting practice. Up to the asst. yr. 1978-79, the CBDT's circular of 6th Oct., 1952 would be applicable; while from the asst. yr. 1979- 80, the CBDT's circular of 9th Oct., 1984 is made applicable. In the present case, the assessment was made on the basis of the CBDT's circular of 9th Oct., 1984, since the assessment pertains to asst. yr. 1981-82 to which the circular of 9th Oct., 1984, is applicable. Under sub-s. (2) of s. 119, without prejudice to the generality of the Boa .....

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tion of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter al/a, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under s. 119 which are binding on the authorities in the administration of the Act. Under s. 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own adva .....

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be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities. If the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all ITOs should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyon .....

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