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TMI Blog2025 (3) TMI 810X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. 3. The assessee has raised the following grounds of appeal: a. In the absence of fresh tangible material there cannot be a formation of belief in vacuum for reopening the assessment u/s. 147 of the Act. b. The ld. CIT(A) has erred in confirming addition of Rs. 18,76,894/- and Rs. 1,00,16,535/- towards NPA accrued interest on members loan and overdue interest as on 31.03.2008 respectively. As per section 43D of the Act the interest accrued on non-performing accounts will be considered as income only on receipt and not on accrual. But the problem with section 43D is that it is applicable to Co-operative Banks only from A.Y 2018-19 and the amendment is not retrospective. 4. The brief facts of the case are that the assessee the Co-operative bank engaged in banking and other activities filed its return of income for the A.Y.2018-19 on 16.09.2009 admitting a total income of Rs. 21,36,510/-. The return was processed u/s. 143(1) of the Act on 09.03.2010. The original assessment order u/s. 143(3) was passed on 21.12.2010, determining the total income Rs. 21,45,82/-. 5. Later the assessment was reopened by issue of notice u/s. 148 of the Act dated 13.03.2013 on account of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Non-Performing Assets (NPA) accounts of the Co-operative Bank not credited to Profit and Loss Account. The ld.AR submitted that based on the actual realisation of overdue interest, the same has been credited to P & L account and the tax was paid in the subsequent year. Further, the ld.AR stated that the basic fact that as per Section 45Q of the RBI Act and RBI guidelines interest should not be charged on NPA accounts and reckoned as Income. 8. The ld.AR further argued that the Appellate authority has decided that the Bank is following cash basis instead of Mercantile Basis of accounting and hence added the accrued interest on NPA as income and dismissed the appeal. Although Section 43D was introduced in the Income Tax Act w.e.f 01.04.1991 regarding special provisions in case of income from public financial institutions - interest on NPA, Co-operative Banks are included w.e.f 01.04.2018. However various Tribunals, High Courts and the Supreme Court has consistently held that interest on NPA loans of Co-operative Banks also not taxable even before 01.04.2018 as envisaged in Section 43D. The assessee is a Co-op Bank carrying on Banking Business. At the end of the Financial year 2007- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown it in the Balance Sheet as Accrued interest with a remark as doubtful of recovery on the Asset side. On the Liability side, it is shown as Overdue Interest Reserve and Members Loan Interest Reserve. A foot note is also given in Profit and Loss Account stating that Interest accrued on NPA Loan accounts are not credited to Interest earned account and not taken to Profit and Loss Account. 11. The ld.AR reiterated that the Section 43D of the Act, the interest accrued on Non performing accounts will be considered as income only on receipt and not on accrual. But the problem with section 43D is that it is applicable to Co-operative banks only from Assessment year 2018-2019. The amendment is also not retrospective. Further, the ld.AR stated that various Courts have held that the Interest on Non-performing assets are not taxable even in the hands of Co-operative banks, even before the beneficial amendment made in 2018 for Co-operative Banks. a) It has been held by the Punjab & Haryana High Court in the case of THE PRINCIPAL COMMISSIONER OF INCOME TAX-3, LUDHIANA VERSUS THE LUDHIANA CENTRAL CO-OP. BANK LTD., LUDHIANA, 2018 (11) TMI 442 - PUNJAB AND HARYANA HIGH COURT that by virt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle followed by cooperative banks also - the AO has to follow the Reserve Bank of India directions, 1998. e) The Honourable Madras High Court in 2020(8) TMI 822, The Commissioner of Income Tax, Tiruchirappalli Vs M/s Tiruchirappalli District Central Co op Bank Ltd, following the Decision of Honourable Supreme Court in 2018(3) TMI 56, CIT Vs VASISTH CHAY VYAPAR LTD, held that Section 45Q of the RBI Act overrides Income Tax Act, and also held that Tribunal was right in holding that overdue interest on non-performing assets is not taxable on accrual basis by referring to the guideline of Reserve Bank of India. In light of the above arguments the ld.AR prayed to set aside the order of ld.CIT(A) and delete the additions made. 12. Per contra the ld.DR relied on the orders of the lower authorities. 13. We have heard the rival contentions perused the material available on record and gone through the orders of authorities along with the case laws relied. Admittedly, the assessee is a cooperative bank engaged in the business of providing credit facilities. During the impugned assessment year the assessee filed its return of income and after issuing intimation u/s. 143(1) by accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt) following the Decision of Honorable Supreme Court in 2018(3) TMI 56, CIT Vs VASISTH CHAY VYAPAR LTD, held that Section 45Q of the RBI Act overrides Income Tax Act, and also held that Tribunal was right in holding that overdue interest on non-performing assets is not taxable on accrual basis by referring to the guideline of Reserve Bank of India.
17. In the present facts and circumstances of the case and respectfully following the decisions of the hon'ble courts(supra), we are of the considered view that the AO and that of ld.CIT(A) have erred in making addition of interest accrued on NPA based on the foot note shown in the balance sheet of the assessee and hence we set aside the order of the ld.CIT(A) by allowing the grounds raised by the assessee. Thus, we direct the AO to delete the addition of accrued interest on NPA and recompute the income of the assessee. Since, the appeal is allowed in favour of the assessee, we are not adjudicating the ground raised by the assessee in respect of the reopening of the assessment and left open.
18. In the result the appeal of the assessee is allowed.
Order pronounced in the court on 7th, March, 2025 at Chennai. X X X X Extracts X X X X X X X X Extracts X X X X
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