ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE -1(1), DAVANAGERE vs. M/S DAVANGERE URBAN CO-OP BANK , DAVANAGERE

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by revenue against order dated 05/03/2018 passed by the Ld.CIT(A), Davangere for assessment year 2011-12 on following grounds of appeal:

Brief facts of the case are as under: 2. Assessee is a co-operative bank and filed its return of income on 30/09/2011 declaring total income at rupees ‘nil’. Ld.AO noted that assessee has not accounted for the interest accrued on non- performing assets. Ld.AO, accordingly disallowed the same. Ld.AO made addition in the hands of assessee for not accounting for interest accrued on standard assets amounting to Rs.26.02 lakhs. Ld.AO disallowed deduction claimed under principle of mutuality amounting to Rs.2,66,37,989/-. Ld.AO also disallowed sum of Rs.2,60,846/- under section 36(1)(viia) of the act being excess claim made by assessee towards provision under bad debt. Disallowance under section 40(a)(ia) of the Act, was made towards interest paid on deposits for non-deduction of TDS.

of CIT Vs Canfin Homes Ltd is eld as under: "Therefore, it is clear, if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realized immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the same, then it cannot said to have been accrued and the said amount cannot be brought to tax. In the instant case we are concerned with anon performing asset. As the definition of nonperforming asset shows an asset becomes non performing when it ceases to yield income. Non performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non performing asset, then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the National Housing Bank, the income from non-performing asset should be recognized only when it is actually recognized. That is what, the Tribunal held in the instant case. Therefore, the contention of the Revenue that in respect of non performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the Revenue which has accrued notionally is without any basis. In that view of the matter, the second substantial question framed is answered against the Revenue and in favour of the assessee." 5d. Thus, respectfully following the decisions of the Apex Court and Honible jurisdictional High Court (cited Supra) in the above cases, I also hold that the interest earned on Non-performing Assets be brought to tax on receipt basis and not on accrual basis and also keeping in view the fact that the assessee is statutorily obliged to account for the interest on non-performing assets on actual receipt basis and that, it does not matter whether the interest is shown in the year of receipt or on accrual basis as the tax rate is one and the same on the income to be assessed, it is held that the Assessing Officer is not justified in bringing to tax the interest on non-performing assets on accrual basis just because the assessee follows hybrid system of accounting and as such the addition of Rs.2,42,22,852/- being interest accrued on NPA is held to be unwarranted and the same is deleted. Thus, this ground is allowed in favour of the appellant."