Income Tax Act, 1961 – Sections 43D and 145 - The assessee, reversed Rs.2,91,38,000 as overdue interest on Non-Performing Assets (NPAs) in its profit and loss account for AY 2011-12. This amount, previously added as income in earlier years when the provision was created, was claimed as a deduction upon reversal. The Assessing Officer disallowed the deduction, treating the interest as accrued income. The CIT(A) deleted the disallowance, and the Revenue appealed to the Tribunal - Whether the reversal of overdue interest on NPAs previously added as income in earlier years qualifies as a deduction upon reversal - Whether interest on NPAs can be taxed on an accrual basis under Section 145 despite non-realization – HELD - The overdue interest was earlier added to the assessee's income in compliance with the accrual system. Upon reversal due to non-receipt, the amount became eligible for deduction to avoid double taxation. This treatment aligns with earlier Tribunal decisions in the assessee's case and other co-operative banks - Interest on NPAs does not accrue as income under prudential norms issued by the RBI. The Tribunal referenced judicial precedents, including CIT v. Deogiri Nagari Sahakari Bank Ltd. and ACIT v. Arvind Sahakari Bank Ltd., which confirm that unrealized interest on NPAs cannot be taxed as income - Although Section 43D specifically applies from AY 2017-18, its principles reflect established jurisprudence permitting interest on bad and doubtful debts to be taxable only upon realization - The Tribunal upheld the CIT(A)’s order, allowing the deduction of Rs.2,91,38,000 and rejecting the Revenue's appeal. It emphasized that taxing unrealized interest on NPAs contravenes the principles of income recognition under the RBI guidelines and settled jurisprudence. The appeal was dismissed
2024-VIL-1800-ITAT-DEL
IN THE INCOME TAX APPELLATE TRIBUNAL
NAGPUR BENCH NAGPUR
ITA No. 118/Nag./2020
Assessment Year: 2011-12
Date of Hearing: 28.11.2024
Date of Pronouncement: 12.12.2024
ASSTT. COMMISSIONER OF INCOME TAX
Vs
THE BULDHANA DISTRICT CENTRAL CO-OPERATIVE BANK LTD.
Assessee by: Shri Manoj G. Moryani
Revenue by: Shri Sandipkumar Salunke
BEFORE
SHRI V. DURGA RAO, JUDICIAL MEMBER
SHRI K.M. ROY, ACCOUNTANT, MEMBER
ORDER
PER K.M. ROY, A.M.
This appeal by the Revenue is directed against the impugned order dated 02/09/2020, passed by the learned Commissioner of Income Tax (Appeals)–1, Nagpur, [“learned CIT(A)”], for the assessment year 2011–12.
2. The Revenue has raised following grounds: -
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of the provision claimed of overdue interest amounting to Rs. 2,91,38,000/- without appreciating the facts of the case.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 2,91,38,000/- without appreciating the provision of sec. 45(1) of the act.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowances of Rs. 2,91,38,000/- without following alternatively the concept of real income provided in Board Circular No. 201/21/84 dt. 09/10/1984.
4. Any other ground which may be raised with permission of Hon’ble ITAT.”
3. Fact in Brief :- The assessee is a Co-operative Bank engaged in the business of banking. The return of income has been filed on 19/09/2011, declaring total income at Rs. nil, showing the current year’s loss to be carried forward at Rs. 9,17,22,792, including unabsorbed depreciation of Rs. 32,80,263. The return of income was processed under section 143(1) of the Income Tax Act, 1961 ("the Act") on 11/01/2012 and selected for scrutiny. The assessment was made on total loss of Rs. 2,44,14,471, by making addition of Rs. 2,91,38,000, on account of deduction of excess overdue provision Rs. 41,42,952/- on account of Bad-debt written-off and of Rs. 3,28,70,000, 3,28,70,000/- on account of excess NPA provision. Being aggrieved the assessee preferred appeal before the first appellate authority.
3. Before the learned CIT(A), the assessee made following submissions, which were also reproduced by the learned CIT(A) in its order vide Page–4 to 7 and also further submissions at Page–9 to 14.
“Regarding ground No.01: - Overdue interest provision on NPA accounts credited (reversal) in profit and loss account is claimed as a deduction in the return of income, as, in the earlier assessment years 2008-09 an amount of Rs.11,17,33,000/- was debited in the profit and loss account on account of overdue interest provision of NPA account and same was added in the assessment. Thereafter on reversal of excess provision following amounts have been credited in the profit and loss account and same has been claimed as deduction in the computation of income.
|
A.Y. |
Over due Interest Provision on NPA accounts added in the return of income |
Reversal out of the Overdue Interest Provision on NPA Accounts |
|
08-09 |
11,17,33,000 |
-- |
|
09-10 |
-- |
3,80,40,000/- |
|
10-11 |
-- |
1,80,60,000 (claimed and allowed by Hon. ITAT, Nagpur Bench) |
|
11-12 |
|
2,91,38,000 (Pending Before your Honor) |
In A.Y. 2010-11 the amount of Rs.1,80,60,000/- on account of reversal of excess provision for overdue interest on NPA accounts has been allowed by the Hon. ITAT Nagpur Bench in favour of this assessee. Appellant humbly submits that this ground under appeal is squarely covered by Hon. ITAT judgment which was passed on 06.03.2018 in appellant own case.
Submission dated 19/08/2020
“In respect of the issue of Rs. 18060000/- for A.Y. 10-11, the Honourable Tribunal vide order no. 127/NAG/2015, 128/Nag/2015 & 135/Nag/2015 dated 06.03.2018 has mentioned as under :
“Per Bench-ITA No. 127/Nag/2018-the first issue is this appeal of the assessee is against the order No. CIT(A)-1/311/2013-14 of learned CIT(A)-1, Nagpur dated 27.01.2015 rejecting the claim of deduction respect of reversal of NPA interest credited to Profit and Loss account. For This, the assessee has raised following ground :-
“01. The learned Commissioner of Income Tax (Appeals)-1 erred in rejecting the claim of deduction in the computation of income in respect of reversal of NPA interest credited to profit and loss account”
Para no. 3 read as under :-
“Aggrieved the assessee preferred the appeal before the CIT(A). Learned CIT(A) rejected the claim of deduction in computation of income is respect of reversal of NPA interest credited to P&L account Aggrieved, now the assessee is in second appeal before the Tribunal.”
Department has also filed an appeal on the point of reversal of subvention of Interest receivable credited in P&L account. However Tribunal has made discussion on both the issue simultaneously in para no. 02 to 06 and in para 07 give a conclusion to ground of appeal filed by assessee.
On the issue of reversal of NPA interest in the appellate order of Honorable Tribunal Para 07 reads as under :
“07. In view of the above details we are convinced that the assessee’s claim is bonafide and the amount which has been reversed and debited to profit and loss account for A.Y. 11-12 has already been added in the computation of income because the assessee has already claimed the same in computation of income for A.Y. 2010-11 i.e. year under consideration.
In view of these facts, we allow the claim of the assessee and this issue of assessee’s appeal is allowed.”
The conclusion drawn by the Honourable Tribunal in para 07 of the order, there is thin line of difference in conclusion drawn by the Tribunal. The Tribunal has allowed the appeal filed by the assessee in para 07 and rejected the claim of Department on interest subvention in para 19 of the order by giving reference of para 07.
Para 19 reads as under: “At the outset, it is stated that this issue had been already being adjudicated by us in ITA No. 127/Nag/2015 vide para 07, hence we need not to repeat the same again and our decision in that appeal will apply here also. This issue of revenues appeal is accordingly dismissed.
Para 20 of ITAT order reads as under :
“20 In the result, two appeals filed by the assessee are allowed and the appeal filed by the Department is dismissed.
In view of the above the issue before your Honor in respect of claim of reversal of NPA interest credited in P & L account and claimed as a deduction in computation of income is covered by Honorable ITAT order referred above,
Overdue Interest provision on NPA Accounts which was debited in profit and loss account and added in the assessment has already been assessed and now on reversal of the same amounts to same amount being assessed twice and therefore it is humbly submitted that on the reversal of Overdue Interest on NPA account credited in profit and loss account should not be added to the income because the overdue interest has already been assessed in the earlier years.
Appellant further submits that in A.Y. 2008-09 the overdue interest provision on NPA was added to the income at Rs. 111733000/-. As against this in A.Y. 2009-10 reversal of overdue interest provision on NPA was at Rs. 38040000/-, in A.Y. 2010-11 it was at Rs. 18060000/- and in A.Y. 11-12 it was at Rs. 29138000/-. Thus the total of reversal comes to Rs. 85238000/- as against overdue interest provision of Rs. 111733000/-. Thus the reversal is must less than Rs.111733000/-. In view of this it is submitted that the amount of Rs. 111733000/- has been assessed in A.Y. 2008-09 and the amount of Rs. 38040000/- for A.y. 2009-10 and 29138000 for A.Y. 11-12 has been assessed, which amounts to double assessment of the overdue interest provision. Once on debiting in the profit & loss account for A.Y. 2008-09 and again on crediting in the Profit & Loss account ofr A.Y. 2009-10, 11-12. Therefore your honor is humbly requested to delete the addition of Rs. 29138000/- in A.Y. 11-12.”
Submission dated 04/08/2020
“Appellant had already filed submission and paper book on 18.08.2017 and 24/10/2018, appellant further submits as under :
Regarding ground No.01:- Overdue interest provision on NPA accounts credited (reversal) in profit and loss account is claimed as a deduction in return of income, as in the earlier assessment years 2008-09 an amount of Rs. 11,17,33,000/- was debited in the profit and loss account on account of overdue interest provision on NPA account and same was added in the assessment. Thereafter on reversal of excess provision following amounts have been credited in the profit and loss account and same has been claimed as deduction in the computation of income.
|
A.Y. |
Over due Interest Provision on NPA accounts added in the return of income |
Reversal out of the Overdue Interest Provision on NPA Accounts |
|
08-09 |
11,17,33,000 |
-- |
|
09-10 |
-- |
3,80,40,000/- |
|
10-11 |
-- |
1,80,60,000 (claimed and allowed by Hon. ITAT, Nagpur Bench) |
|
11-12 |
|
2,91,38,000 (Pending Before your Honor) |
In A.Y. 2010-11 the amount of Rs. 1,80,60,000/- on account of reversal of excess provision for overdue interest on NPA accounts has been allowed by the Hon. ITAT Nagpur Bench in favour of this assessee. Appellant humbly submits that this ground under appeal is squarely covered by Hon. ITAT judgment which was passed on 06.03.2018 in appellant own case. Appeal effect is enclosed herewith for your kind perusal.”
4. The learned CIT(A) directed the Assessing Officer to delete the addition by holding as under: -
“5.6.3 As the Hon'ble ITAT has dealt with the issue of reversal of NPA interest as a whole, along with the above referred decision of the Hon'ble ITAT for AY 2010-11 in the appellant's own case, a reference has also been made to the decision of Hon'ble ITAT in the case of the Washim Urban Co-operative Bank Ltd. Vs DCIT in ITA No.71 and 72/Nag./2015 (AY 2007-08 and 2010-11), wherein vide order dt. 06/03/2018, reference has been made to the order of Hon'ble ITAT in the appellant's case for AY 2010-11 and it has been held as follows:
"3. At the outset, Ld Counsel for the assessee stated that the issues are regarding accrued interest on NPA amounting to Rs.33,47,052/-, deduction of excess NPA interest disallowed amounting to Rs.82,53,506/-, overdue interest difference of Rs.47,69,440/- on NPA the issue is the same. We find that the issue as regards to overdue interest on NPA account and we have already adjudicated this issue in the case of ITA No. 127, 128 & 135/NAG/2015 in the case of THE BULDHANA DISTRICT CENTRAL COOP. BANK LTD. vs DCIT wherein we have held as under:-
“7. In view of the above details, we are convinced that the assessee's claim is a bonafide and the amount which has been reversed and debited to the P&L A/c for A.Y. 211-12 has already been added in the computation of income because the assessee has already claimed the same in the computation of income for A.Υ. 2010- 11 ie. year under consideration. In view of these facts, we allow the claim of the assessee and this issue of assessee's appeal is allowed."
5.6.4 In view of the decision of the Hon'ble ITAT in the above referred cases, the contention of the appellant that the amount of Rs. 11,17,33,000/-, which was debited for AY 2008-09 to the P&L a/c on account of overdue interest provision on NPA account but was disallowed in the assessment, was the origin point of the present issue. Therefore, as held by Hon'ble ITAT the reversal out of the overdue interest provision on NPA account, being eligible for deduction from the total income, the amount of Rs.2,91,38,000/- for AY 2011-12, as discussed in the table preceding para 5.6.1 is held to be allowable. Accordingly, the AO is direct to delete the addition made on this account. Thus, Ground No.1 stands allowed.”
The Revenue being aggrieved by the order so passed by the learned CIT(A), filed appeal before the Tribunal. He prayed that interest once accrued is irreversible though not collected.
5. Before us, the learned Departmental Representative assailing the impugned order passed by the learned CIT(A) submitted that the the learned CIT(A) was not at all justified in deleting the addition made by the Assessing Officer. He thus prayed that the impugned order be reversed.
6. The learned Counsel for the assessee supported the order passed by the learned CIT(A) and justified the conclusion drawn by the assessee by directing the Assessing Officer to delete the addition made by the Assessing Officer in respect of overdue interest amounting to Rs. 2,91,38,000. In support of his arguments, the learned Counsel relied upon the following case laws: -
1) ACIT v/s Arvind Sahakari Bank Ltd. ITA no.376 & 377/Nag./2010 dated 16/09/2015;
2) CIT v/s Deogiri nagari Sahakari Bank Ltd., Income Tax Appeal no.53 of 2014, judgment dated 22/01/2015 (Bombay High Court at Aurangabad Bench).
7. We have heard the rival contention of both the parties; perused material placed on record and duly considered the facts of the case in the light of settled legal position and the case laws relied upon by the assessee as well as Revenue. We find that the very same issue was examined by us in assessee’s own case wherein the Tribunal, while speaking through the very same Bench, in IT no.158/Nag./2019, order dated 29/05/2024, decided the issue in favour of the assessee and against the Revenue by observing as under:–
“9. Insofar as gorund no.2, which relates to the addition of Rs. 1,43,97,123, towards accrued interest on non-performing assets is concerned, we find that the issue is covered in favour of the assessee by the judgment of the Hon’ble Bombay High Court, rendered in CIT v/s Deogiri Nagari Sahakari Bank Ltd., ITA no.53 of 2014, judgment dated 22/01/2015, wherein the Hon’ble Court has held as under: -
“11. The learned counsel for respondent has placed reliance in a case of Mercantile Bank Ltd., Bombay Vs. The Commissioner of Income Tax, Bombay City-III reported in (2006) 5 SCC 221, where similar question was raised before the Apex Court. The question was whether the assessee is under Income Tax Act, 1961 in respect of the interest on doubtful advances credited to the interest suspense account. In this case, the Uco Bank's Case (supra) was also referred and the Hon'ble Apex Court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent Co-operative banks, as understood by Section 43D of the Income Tax Act on the Scheduled Bank.
12. Learned counsel for the appellants / revenue place reliance on the judgment in the case of Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, Coimbtore reported in 2010 (2) SCC 548. However, this judgment pertains to non-Banking financial companies. Uco Bank case (supra) and Mercantile Bank (supra) case squarely applies to the facts of the present case and issues involved. We therefore, do not find it necessary to interfere in the judgment of the Appellate Tribunal. We hold that no substantial question of law arises in these appeals.”
10. We also find that this issue is further also covered by the decision of the Co-ordinate Bench of the Tribunal, Nagpur, in ACIT v/s Arvind Sahakari Bank Ltd., ITA no.376 and 377/Nag./2013, order dated 16/09/2015, wherein the Tribunal observed as under: -
“10. As regards the second issue, the interest accrued of non performing assets of the bank, the AO has opined that the same is taxable on accrual basis. In this regard the AO further placed reliance on the judgment of the Hon'ble Apex Court in the case of Southern Technologies Ltd. 320 ITR 577. Upon assessee's appeal, learned CIT (Appeals) referred to the ITAT Vishakhapatnam Bench decision in the case of CIT vs. Durga Urban Cooperative Bank Ltd. (supra) which read as under:
"9. The Hon'ble Supreme Court in the case of M/s Southern Technologies Ltd (Supra) dissected the matter into two parts viz.. a) Income Recognition and b) permissible deduction/exclusions under the Income Tax Act. In so far as income recognition is concerned, the Hon 'ble Supreme Court held that Section 145 of the Income Tax Act has no role to play and the Assessing Officer has to follow Reserve Bank of India directions 1998, since by virtue of 45Q of the Reserve Bank of India Act, an overriding effect is given to the directions of Reserve Bank of India vis-a-vis income recognition principles in the Companies Act 1956. In so far as computation of income under the Income Tax Act is concerned, (which involves deduction of permissible deductions and exclusions) the admissibility of such deductions shall be governed by the provisions of the Income Tax Act. The relevant observations of the Hon'ble Supreme Court are extracted below:
"Applicability of Section 145
40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under Chapter'i.JIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFC to reflect "true and correct" profits. By virtue of Section 45Q. an overriding effect is given to the Directions 1998 vis-a-vis "Income Recognition" principles in the Companies Act. 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the 'permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of Income Recognition and presentation of Financial Statements. The Accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the Accounting Policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the Reserve Bank of India Directions 1998 in view of Section 450 of the Reserve Bank of India Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute ".
10. Turning to the facts of the case before us, the assessee herein is a cooperative bank and it is not in dispute that it is also governed by the Reserve Bank of Indie. Hence 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. The Hon 'ble Supreme Court has held in the case of Southern Technologies Ltd (Supra), that the provision of 45Q of Reserve Bank of India Act has an overriding effect visa- 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. Hence the Assessing Officer has to follow the Reserve Bank of India directions 1998, as held by the Hon 'ble Supreme Court.
10.1 Based on the prudential norms, the assessee herein did not admit the interest relatable to NPA advances in its total income. The Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd (Supra) has held that the intereston NPA assets cannot be said to have accrued to the assessee. In this regard, the following observations of Hon'ble Delhi High Court in the above cited case are relevant:
"What to talk of interest, even the principle amount itself had become doubtful to recover. In this scenario it was legitimate move to infer that interest income thereupon has not "accrued". The said decision of the Hon 'ble Delhi High Court is equally applicable to the issue in our hands. Accordingly we do not find any infirmity with the decision of the learned CIT (A) in holding that the interest income relatable on NPA advances did not accrue to the assessee. Accordingly we uphold his order.
11. In the result the appeal of the revenue is dismissed."
11. Considering the above, learned CIT(Appeals) held as under:
“On perusal of the above judgment clearly establishes that the facts of the case are identical to the case law quoted above. The Hon'ble Tribunal has also taken into consideration the ratio of the Apex Court in Southers Technologies Ltd., and that of the Delhi High Court in the case of Vasistha Chay Vyapar Ltd. (supra) reported in 330 CTR 440 (Del.) Respectfully following the above judicial pronouncements, I hold that the AO has not justified in disallowing 27,03,083/- as income of the appellant being interest accrued on NPAs. This ground is therefore allowed."
Against the above order, Revenue is in appeal before us.
12. Having heard both the counsel and perusing the record, we find that the ratio from the above Tribunal decision is clearly applicable on the facts of this case. We further note that Hon'ble Delhi High Court in similar case has duly expounded that the assessee is correct in not recognizing interest accrued on the NPA. The ratio has been followed by the Tribunal in the order as above. We further note that similar view was taken by Hon'ble jurisdiction High Court in the case of CIT v/s M/s. Deogiri Nagari Sahakari Bank Ltd., ITA no.53 OF 2014, judgment dated 22nd January 2015. Since the facts are identical, respectfully following the precedents, we hold that interest on NPA had not accrued to the assessee. Accordingly, we do not find any infirmity in the order of learned CIT(Appeals). Accordingly we uphold the same.
13. In the result, the appeals filed by the Revenue stand dismissed.”
11. Since the issue for our adjudication is covered by the aforesaid decision of the Co-ordinate Bench of the Tribunal wherein the Tribunal while relying upon the judgments of the Hon’ble Bombay High Court, Aurangabad Bench cited supra, have decided the issue in favour of the assessee, respectfully following the same, we decline to interfere with the well-reasoned and cogent order passed by the learned CIT(A) and dismiss the ground no.2, raised by the Revenue. The learned Departmental Representative failed to bring into light any distinguishing facts leading us to take a different view from the above judgments.
8. Since the issue raised by the Revenue rotates on a solitary issue of disallowance of provision for overdue interest is identical to the issue decided supra and in the background of the facts and circumstances of the present case, we find no infirmity in the order passed by the learned CIT(A) which we hereby upheld by dismissing the grounds of appeal raised by the Revenue. During the course of hearing, the learned Departmental Representative submitted that the Department is moving before the Hon’ble Jurisdictional High Court to challenge the order. We are not impressed by the above submissions of the learned D.R. since there is no order till date reversing the settled jurisprudence. Relying on the above judicial precedents, we hold that the appeal of the Revenue has no legal legs to stand upon and hence the same is dismissed. There is no scope to tinker with the cogent and judicious findings of the learned CIT(A).
9. We further draw support from the provisions of section 43D of the Act which permits income by way of interest in relation to bad and doubtful debts shall be chargeable to tax as per guidelines of Reserve Bank of India. The said provision has been made applicable to Co–operative Bank from the assessment year 2017–18. However, since the same is a beneficial provision, the same may be permitted to apply retrospectively. The provision is a non-abstante one and hence has an overriding effect upon section 145 of the Act.
10. In the result, appeal filed by the revenue is dismissed.
Order pronounced in the open Court on 12/12/2024.
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