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Facts
The assessee, a co-operative bank, followed the mercantile system of accounting but recognized interest on NPAs only on realization. The AO added notional interest of Rs. 2,96,87,476/-. The CIT(A) deleted this addition, holding that Section 43D of the Income Tax Act applies retrospectively to co-operative banks.
Held
The Tribunal held that the issue is covered by the decision of the Himachal Pradesh High Court in Pr.CIT v. Kangra Central Co-operative Bank Ltd., which ruled that Section 43D is retrospective and applies to co-operative banks for prior assessment years. Therefore, notional interest on NPAs not credited to the profit and loss account cannot be taxed until realized.
Key Issues
Whether Section 43D of the Income Tax Act, which provides for the taxation of interest on NPAs, applies retrospectively to co-operative banks, and whether notional interest on NPAs can be taxed before realization.
Sections Cited
143(3), 43D
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Order PER LALIET KUMAR, J.M: This appeal by the Revenue is directed against the order of the Ld. CIT(A)/NFAC, Delhi dated 13.12.2023, pertaining to the assessment year 2017-18, whereby the addition of Rs. 2,96,87,476/- made by the Assessing Officer on account of interest accrued on Non-Performing Assets (NPAs) was deleted. 2. In the present appeal the sole ground raised
by the Revenue read as under:
1. Whether on the facts and in law, the Ld. CIT(Appeals) has erred in deleting the additions made by the AO amounting to Rs. 2,96,87,476/- on account of interest accrued on NPA which has not been credited to profit and loss account.
3. Briefly, the facts of the case in brief are that the assessee, a co-operative bank engaged in the business of banking, filed its return declaring income of Rs. 7,34,35,350/-. The case was selected for scrutiny and assessment was completed under section 143(3) on 11.12.2019. 2 3.1 The Assessing Officer observed that the assessee followed the mercantile system of accounting and, therefore, interest on NPAs ought to have been credited on accrual basis. Since the assessee recognized such interest only on actual realization, the AO added the notional sum of Rs. 2.96 crores.
4. The Ld. CIT(A) deleted the addition after a detailed examination of the RBI’s prudential norms and judicial precedents, including the jurisdictional High Court’s ruling in CIT v. Kangra Central Co-operative Bank Ltd. (335 ITR 182 [HP]).
5. Against the order of the Ld. CIT(A) the Revenue preferred in appeal before the Tribunal.
6. During the course of hearing the Ld. DR relied upon the assessment order and contended that the benefit of section 43D is confined to “scheduled banks”, and therefore a non-scheduled co-operative bank cannot claim exemption from taxation of accrued interest on NPAs. According to him, the CIT(A) erred in deleting the addition without appreciating that the assessee follows mercantile accounting.
7. The Ld. Senior Advocate appearing for the assessee supported the order of the CIT(A). He submitted that the issue is no longer res integra and stands squarely covered by the decision of the Hon’ble Himachal Pradesh High Court in Pr.CIT v. Kangra Central Co-operative Bank Ltd.[2022] 145 taxmann.com 357 (Himachal Pradesh). The Hon’ble High Court has categorically held that the provisions of section 43D are retrospective in nature, being declaratory and intended to remove hardship to co-operative banks, and therefore apply even to assessment years prior to the statutory amendment specifically including co- operative banks. 7.1 The Ld. Senior Advocate further submitted that once an asset is classified as an NPA in accordance with the RBI’s prudential norms, no income can be said to accrue therefrom until realized. He emphasized that the doctrine of “real income” governs such cases and that notional accrual of interest, when 3 recovery is uncertain or doubtful, cannot be subjected to tax. He placed reliance on UCO Bank v. CIT (237 ITR 889 SC), Godhra Electricity Co. (225 ITR 746 SC), and Vasisth Chay Vyapar Ltd. (330 ITR 440 Del).
We have carefully considered the rival submissions and perused the record. It is an admitted position that the assessee is a co-operative bank governed by the Reserve Bank of India’s Master Circular on Prudential Norms for Income Recognition and Asset Classification, which mandates that interest on NPAs shall be recognised only on a receipt basis. The assessee has consistently followed this method of accounting, which has been accepted by the Department in earlier years. 8.1 The Hon’ble Himachal Pradesh High Court in Pr. CIT v. Kangra Central Co- operative Bank Ltd. [2022] 145 taxmann.com 357 (Himachal Pradesh)examined this very issue and held that the provisions of section 43D are retrospective in operation, thereby extending to co-operative banks even prior to the amendment of 2017. The High Court categorically observed that once an asset is classified as non-performing, it cannot be said to yield any income; hence, the question of taxing such unrealised interest does not arise. For ready reference, we are reproducing the findings of Kangra Central Co-operative Bank Ltd. (supra) wherein the Hon'ble High Court had held as under: 21. A perusal of the objects of amending the existing provisions of section 43D of the Act vide Finance Bill 2017, reveals that the benefit of the existing provision was available to scheduled bank or a public financial institution etc. With a view to provide level playing field to cooperative banks vis-à-vis scheduled banks and to rationalize the scope of section 43D, it was proposed to introduce the amendment to section 43D of the Act so as to include co-operative banks other then a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The omission was sought to be corrected by bringing at par the scheduled banks and non-scheduled banks. Thus, it is evident that the amendment was brought in force with a view to cure the omission in section 43D. Although, the amendment was sought to be made effective w.e.f. 1st April, 2018, but it was liable to be treated as retrospective in nature. In order to arrive at this view, reliance is made on the decision of Hon'ble Supreme Court in Allied Motors' case (supra). Moreover, it serves no purpose that the assessee, which is a non-scheduled bank, should include the NPAs/sticky loans in the relevant assessment year and then claim it as a bad debt in the next assessment year. There is no quarrel with the preposition of law settled by the judgments relied upon by the learned counsel for the appellant, but in view of the decision 4 given by the Hon'ble Supreme Court in Allied Motors' case (supra), we are of the opinion that the view taken by the Tribunal that the assessee was required to tax the interest on the sticky loans/NPAs on receipt basis, is liable to be upheld.