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Facts
The assessee, a Co-operative bank, filed its return for AY 2008-09. The assessment was reopened under Section 148 due to accrued interest on staff loans, investments, member loans, and overdue interest (NPA) not taken to the Profit & Loss Account. The Assessing Officer made additions, which were subsequently confirmed by the CIT(A) after dismissing the assessee's appeal due to non-response.
Held
The Tribunal held that the Assessing Officer and CIT(A) erred in making additions for interest accrued on Non-Performing Assets (NPA). Citing Section 45Q of the RBI Act and various judicial precedents, the Tribunal ruled that interest on NPA for co-operative banks is not taxable on an accrual basis, but only on receipt, even prior to the 2018 amendment to Section 43D of the Income Tax Act. The addition was directed to be deleted.
Key Issues
Whether interest accrued on Non-Performing Assets (NPA) of a co-operative bank is taxable on an accrual basis or only on receipt, considering Section 43D of the Income Tax Act and Section 45Q of the RBI Act. Also, the validity of reopening assessment under Section 148.
Sections Cited
147, 148, 143(1), 143(3), 43D, 40(a)(ii), 45Q
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K, HON’BLE & SHRI S.R. RAGHUNATHA, HON’BLE
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals), NFAC, Delhi dated 06.10.2023 and pertains to assessment year 2008-09.
At the outset, we find that there is a delay of 73 days in appeal filed by the assessee, for which petition for condonation of :-2-: ITA. No: 1783/Chny/2024 delay along with reasons for delay has been filed. After considering the petition filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the assessee for adjudication. 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 interest accrued on staff loans as on 31.03.2008 of Rs.8,69,569/- and interest accrued on investments of Rs.33,62,611/- had been taken into profit and loss account, whereas interest accrued on member loans of :-3-: ITA. No: 1783/Chny/2024 Rs.18,76,894/- and over due interest of Rs.1.00.06.535/- as on 31.03.2008 were not taken to P & L Account vide foot note of the statement of accounts. Further, it was also noticed that an amount of Rs.1,30,110/- had been claimed as deduction towards ‘Income tax interest due’ under the head “Rent, Taxes and Insurance”. After considering the submissions made by the assessee, the AO passed an order u/s.143(3) r.w.s.147 of the Act dated 19.03.2014 by making an addition of the above said amounts to the total income by holding as under: “….Admittedly, during the Financial Year 2008-09, the Registered Co-operative Societies reverted back to the old system of account i.e, mercantile system of accounting. The Income tax law does not allow exempting accrued interests from the purview of Profit & Loss Account. It should be included in the Profit and Loss Account invariably. As such the interest accrued to member loan of 18,76,884/- and overdue interest of 1,00,16,535 are added to the income returned by the assessee. Likewise, an amount of 1,30,110/- is also added back to the income returned by the assessee in the light of section 40(a)(ii) of the Income Tax Act, as the said expenditure i.e. income tax interest due is not admissible expenditure. Based on the above, the assessment is completed as under:- Income assessed as per original order u/s 143(3) - 21,45,820 Add : Addition made towards.
1. Over due ineptest - 1,00,16,535 2. Accrued Interest - 18,76,894 3. Rent, Taxes and Insurance disallowed 4. Under Sec. 40(a)(ii) - 1,30,110 ---------------- Total income assessable 1,41,69,359….” Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld.CIT(A), NFAC, Delhi.
6. Since, the assessee did not respond to any of the notices issued by the Ld.CIT(A) from 25.01.2021 to 21.09.2023, the Ld.CIT(A) passed an order dated 06.10.2023 by confirming the addition made by the AO by dismissing the appeal of the assessee. Aggrieved by the order of the Ld.CIT(A), the assessee preferred an appeal before us.
:-4-: ITA. No: 1783/Chny/2024 7. The ld.AR of the assessee stated that the issue involved in the case is that it is the Interest on 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.
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 2007-08, on 31 March 2008 the assessee has accounted the interest accrued :-5-: ITA. No: 1783/Chny/2024 on NPA Loans and depicted the same in Balance Sheet and Profit and Loss Account as below:
In the Schedule to Interest earned during the year 2007-08 the following is shown in Foot Note as on 31.03.2008 not taken to P&L:
Interest accrued on members loan Rs. 18,76,894/- Overdue Interest Rs. 1,00,16,535/- 9. The ld.AR argued that the Balance sheet and Profit and Loss account containing the above information is filed along with Return of Income on 16.09.2009. The Return was accepted u/s 143(1) on 09.03.2010. Reassessment for the first time was made under Section 143(3) and order was passed on 21.12.2010 making certain additions (not the present disputed one) to the returned income. During assessment and reassessment the assessee has made true and full disclosure to the assessing officer. Without provoking events or any fresh information, the AO has issued a Notice under Section 148 on 13.03.2013 (i.e. after 3 years). In the final assessment order, no reason is given why the case is taken up for reassessment for the second time. The assessing officer has picked up figures disclosed in the Balance Sheet and Profit and Loss account relating to accrued interest on NPA Loans to Members & other parties and added the same as Income on some incorrect reasoning and without any fresh tangible material. The ld.AR relied on the following judicial :-6-: ITA. No: 1783/Chny/2024 precedents in support of his argument on reopening of assessment was bad in law.
- Dy. Commissioner of Income Tax vs. Royal Palms India Ltd and vice versa 2016(6) TNMI 105, the Hon'ble ITAT Mumbai - Dy. Commissioner of Income Tax Vs. Gujarat State Fertilizer and Chemicals Ltd 2015(9) TMI 748 – Gujarat High Court
Further, the ld.AR submitted that the assessee being a Co-op Bank, as per RBI guidelines certain loan accounts are classified as NPA accounts and interest should not be charged and accounted on NPA Loans. As per co-operative accounting practice, the interest accrued on NPA Loans are accounted and shown as contra entries on the Asset side and Liability side of the Balance Sheet and not taken to Profit and Loss Account. It is the statutory requirement as per RBI guidelines for Banking institutions to not charge interest on NPA Loans. But to comply with the Co-operative audit requirement, we have worked out accrued interest on NPA Loans and 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.
:-7-: ITA. No: 1783/Chny/2024 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 virtue of the provisions of section 45Q of the 1934 Act, the provisions of Chapter IIIB thereof have an overriding effect over other laws. Therefore, notwithstanding the provisions of section 43D of the Act, since the provisions of section 45Q of the 1934 Act have an overriding effect vis-a- vis income recognition principles in the Companies Act, the Assessing Officer is bound to follow the RBI Directions so far as income recognition is concerned. The interest on principal loan amount which has been classified as NPA cannot be held to have "accrued" so as to tax them under the Act. The contention that the assessee cannot indirectly claim the benefit which would amount to a benefit similar to that under section 43D of the Act, therefore, does not merit acceptance. b) The ITAT Ahmedabad in KARNAVATI CO-OP. BANK LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-11 [2012] 14 ITR 175, [2012] 134 ITD 486, [2012] 144 TTJ 769 has decided that section 43D has to be followed in letter & spirit and that as per Hon'ble Supreme Court decision in UCO bank case interest on sticky advances are to be recognised as income only when actually received. c) Bombay high court based on Gujarat High Decision & Punjab & Haryana High Court Decisions held that even though the amendment of section 43D is not retrospective, it is curative in nature. THE PR.
:-8-: ITA. No: 1783/Chny/2024 COMMISSIONER OF INCOME TAX-6, PUNE VERSUS THE SOLAPUR DISTRICT CENTRAL COOP. BANK LTD., AND. THE LAXMI COOPERATIVE BANK LTD. 2019 (2) TMI 238 - BOMBAY HIGH COURT. d) The ITAT PUNE has held in the case of HE NANDED DISTRICT CENTRAL CO-OP. BANK LTD. VERSUS DY. COMMISSIONER OF INCOME TAX [2015] 37 ITR (Trib) 532 (ITAT [Pune]) 2014 (10) TIMI 613 - ITAT PUNE, that The assessee is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of India - the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the assessee as it is applicable to the companies registered under the Companies Act - as decided in M/s Southern Technologies Ltd. Versus Joint Commnr. of Income Tax, Coimbatore [2010 (1) TMI 5 - SUPREME COURT OF INDIA] - the provision of 45Q of Reserve Bank of India Act has an overriding effect vis- a-vis income recognition principle under the Companies Act - Hence Sec.45 Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks also - the AO has to follow the Reserve Bank of India directions, 1998. e) The Honorable 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 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. In light of the above arguments the ld.AR prayed to set aside the order of ld.CIT(A) and delete the additions made.
Per contra the ld.DR relied on the orders of the lower authorities.
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 :-9-: ITA. No: 1783/Chny/2024 income and after issuing intimation u/s.143(1) by accepting the return of income, the case was selected for scrutiny and concluded the assessment u/s.143(3) of the Act. Later the AO re-opened the assessment and issued notice u/s.148 of the Act for the reason that the in the Schedule to the financials as on 31.03.2008, the Interest earned during the financial year 2007-08 the following is shown in Foot Note as on 31.03.2008 not taken to P&L:
Interest accrued on members loan Rs. 18,76,894/- Overdue Interest Rs. 1,00,16,535/-.
Further, the AO passed an order u/s.143(3) r.w.s. 147 of the Act by making an addition of the above interest amounts on NPA shown in the balance sheet, which was subsequently confirmed in the appeal filed with the ld.CIT(A).
We note that the assessee’s books are maintained as per the norms and provisions of the RBI Act and audited by its statutory auditors. Therefore, in terms of section 45Q of the RBI Act, the assessee has disclosed the details of interest accrued on loans which have become NPA without crediting the same to the Profit and loss account. These amounts are need to be credited to the Profit and loss account only on receipt basis. The AO and the of ld.CIT(A) have made an addition of the accrued interest on NPA for the A.Y.2008- :-10-: ITA. No: 1783/Chny/2024 09 stating that income tax law does not allow exemption of the same.
In relation to the present case, it is pertinent to note the following judicial precedents have held that section 43D of the Act cannot override the provisions of the RBI Act and hence the levy tax on accrued interest without realization of the same by the assessee is bad in law. a) 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 b) The ITAT Ahmedabad in KARNAVATI CO-OP. BANK LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-11 [2012] 14 ITR 175, [2012] 134 ITD 486, [2012] 144 TTJ 769 c) THE PR. COMMISSIONER OF INCOME TAX-6, PUNE VERSUS THE SOLAPUR DISTRICT CENTRAL COOP. BANK LTD., AND. THE LAXMI COOPERATIVE BANK LTD. 2019 (2) TMI 238 - BOMBAY HIGH COURT. d) THE NANDED DISTRICT CENTRAL CO-OP. BANK LTD. VERSUS DY. COMMISSIONER OF INCOME TAX [2015] 37 ITR (Trib) 532 (ITAT [Pune]) 2014 (10) TIMI 613 - ITAT PUNE, e) 2020(8) TMI 822, The Commissioner of Income Tax, Tiruchirappalli Vs M/s Tiruchirappalli District Central Co op Bank Ltd, (Madras High Court) 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.
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 :-11-: ITA. No: 1783/Chny/2024 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.
In the result the appeal of the assessee is allowed.
Order pronounced in the court on 7th , March, 2025 at Chennai.