M/S. BELUR URBAN CO-OPERATIVE BANK LTD.,HASSAN vs. INCOME TAX OFFICER, WARD-2, HASSAN

Brief facts of the case are as follows:

Aggrieved by the Assessment Order, assessee filed appeal before the First Appellate Authority (FAA). Assessee contended before the FAA that it had not accounted the interest receivable. It was submitted that it is in consonance with Rule 22 of the Karnataka Co-operative Societies Rules, 1960. Further, the assessee relied on the judgment of the Hon’ble jurisdictional High Court in the case of CIT Vs. Urban Co-operative Bank Ltd., in (judgment dated 30.06.2014). The CIT(A), however, distinguished the case law relied on by the assessee and held that interest is recoverable (though not credited in the P & L account) since the state government had assured the reimbursement of interest. Further, the CIT(A) held that assessee cannot be allowed to have hybrid system of accounting and interest income has to be assessed on accrual basis. The CIT(A) also noted at para 9.7 of the impugned order that assessee did not press the ground relating to the taxability of interest income only in the year of receipt as per the provisions of section 145B(3) of the Act. Thus, the appeal of assessee was dismissed by the CIT(A).

Aggrieved by the order of the CIT(A), assessee has filed the present appeal before the Tribunal raising the following grounds:

The learned AR submitted that there was a mistake in submission before the lower authorities. It was stated that the state government has not stood as a guarantor for the reimbursement of interest which is not recovered in respect of loans which has become Non-Performing Assets (NPAs). In this context, the learned AR relied on the judgment of the Hon’ble jurisdictional High Court in the case of CIT Vs. Urban Co-operative Bank Ltd., (supra). The learned AR further submitted that some of the interests were recovered and duly offered to tax in the year of receipts. It was submitted that in the interest of justice and equity, the matter needs to be examined afresh by the AO.

The learned Standing Counsel supported the orders of the AO and CIT(A).

I have heard the rival submissions and perused the material on record. It is the claim of the learned AR that the assessee had computed income in consonance with Rule 22 of Karnataka Co-operative Societies Rules, 1960 which reads as under: “22. Manner of determining net profits under sub-section (1) of Section 57 and rate at which dividend may be paid by Co-operative Societies.—(1) In determining net profits from which not less than 25 per cent are to be taken to the reserve fund under sub-section (2) of Section 57, the following procedure shall be adopted.— (a) All interest accrued due, but not actually realised shall be deducted from the gross profits for the year, before the net profits are arrived at. So much of the accrued interest that has been so deducted from the profits :of the year, as are actually recovered during the subsequent year, may be added to the profits of the subsequent year. The Registrar may, in special cases and after due enquiry, permit a society to treat interest accrued due for a period not exceeding one year as profits; but, if the amount so permitted to be treated as profits is not actually recovered during the subsequent year, it shall be deducted from the profits of such subsequent year before the net profits of that year are arrived at;”

However, it is to be noted that section 145 of the Act does not permit the assessee to follow the hybrid system of accounting. In other words, if the interest income has accrued, the same is to be brought to tax in the year of accrual though it is received in the subsequent year. Further, question is whether there is a right to receive / accrual in the relevant Assessment Year. It is the case of the assessee before the Tribunal that principal amount itself has not been recovered much less the interest on the same. Consequently, the interest on these NPAs is never accounted for since there is no right to receive the same in the relevant year. In the interest of justice and equity, I am of the view that the matter requires reconsideration at the level of the AO. Assessee shall provide the necessary proof to show that interest which is not accounted for in the books of accounts is on the NPAs which is not recoverable. Assessee is also directed to furnish necessary material to prove when interest income was received subsequently, the same was offered to tax in the year of receipt. To examine these aspects, the matter is restored to the files of the AO. It is ordered accordingly.

In the result, appeal filed by the assessee is allowed for statistical purposes.