Gujarat H.C : Assessee bank is not liable to be taxed on the notional interest on non performing assets based upon the accrual accounting theory and thereby deleting the addition of Rs.1,16,77,000/- on account of accrued interest on NPAs

High Court Of Gujarat

Pr.CIT vs. Sarangpur Cooperative Bank Ltd.

Akil Kureshi & Biren Vaishnav, JJ.

Tax Appeal No. 324 to 326 of 2017

5th June, 2017

Counsel Appeared:

Manish Bhatt for Mauna M Bhatt, Adv., for the Appellant.


These appeals arise in common background. Facts may be noticed from Tax Appeal No. 324 of 2017.

The appeals are filed by the revenue challenging the judgement of Income Tax Appellate Tribunal dated 27.7.2016. The following questions are presented for our consideration.

“(A) Whether Appellate Tribunal is right in law and on facts in confirming the order of the CIT(A) which held that assessee bank is not liable to be taxed on the notional interest on non performing assets based upon the accrual accounting theory and thereby deleting the addition of Rs.1,16,77,000/- on account of accrued interest on NPAs?

(B) Whether Appellate Tribunal is right in law and on facts in deciding that interest on NPAs is not taxable on accural basis without appreciating the fact that the Hon’ble Madras High Court in the case of CIT-Coimbatore v. Sakthi Finance Ltd. (2013) 352 ITR 102, following the decision of Hon’ble Supreme Court in the case of Southern Technologies Ltd. 320 ITR 577, has decided that the interest on NPAs is taxable on accrual basis?”

Respondent-assessee is a co-operative bank. The issue pertains to taxing the notional interest on nonperforming assets of the bank on accrual basis. The revenue contends that since the respondent-assessee follows mercantile system of accounting, the moment interest on advances accrue, they become taxable. The Bank on the other hand contends that the recovery of principal sum itself is doubtful the accounts have become non-performing therefore there is no question of receiving any interest on such NPAs.

We would have considered the question as presented by the revenue but for the fact that this very question came to be considered at length and decided by the Division Bench of this Court in the case of Principal Commissioner of Income-tax-5 v. Shri Mahila Sewa Sahakari Bank Ltd. reported in (2016) 242 Taxman 60 wherein this Court in conclusion held as under:

“30. As can be seen from the assessment order, before the Assessing Officer the assessee had inter alia submitted that interest on NPA was not charged as mandatorily stipulated under Income Recognition and Asset Classification norms of the Reserve Bank of India. It has also been submitted that the CBDT circular bearing F.No.201/21/84-ITA-II dated 9.10.1984 issued under section 119 of the Act for all banking and non banking financial companies stating that if the interest has not been received for three years, the same will not be taxed as an income even on accrual basis even if interest has been credited to Interest Suspense Account would be applicable in its case. The Assessing Officer brushed aside the submission based upon the circular of 1984, on the ground that the same is applicable only to banking companies and not to cooperative banks, on a misconception of law that a cooperative bank is not a banking company. In this regard it may be noted that the expression banking company has been defined under section 5(c) of the Banking Regulation Act, 1949 to mean any company which transacts the business of banking in India. Part V of the Banking Regulation Act bears the heading Application of the Act to Cooperative Societies. Section 56 thereof provides that the provisions of the Act, as in force for the time being, shall apply to, or in relation to cooperative societies as they apply to, or in relation to banking companies subject to the modifications stated thereunder. Clause (a) of section 56, to the extent the same is relevant for the present purpose, provides that throughout the Act, unless the context otherwise requires, – (i) references to a banking company or the company or such company shall be construed as references to a cooperative bank. Section 2(i) of the RBI Act provides that co-operative bank, co-operative credit society, director, primary agricultural credit society, primary co-operative society and primary credit society shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949. Evidently therefore, the expression banking company would take within its sweep a co-operative bank. The Assessing Officer has thereafter entered into a discussion on the provisions of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which provides for enforcement of security interest of banks and financial institutions and has observed that in the instant case, no material has been brought on record by the assessee to prove its efforts made in a bid to recover such debts which are classified as NPA and other categories. The Assessing Officer has also entered into a discussion as regards the quality of management, etc., without even examining as to whether or not there was any probability of interest being received on the NPAs. The Commissioner (Appeals) has placed reliance upon the decision of the Supreme Court in the case of Southern Technologies Limited (supra) and held that there is no merit in the contention of the assessee that under commercial accounting, interest on NPAs cannot be charged. On the question of applicability of the CBDT Circular dated 9.10.1984, the Commissioner (Appeals) held that the same would not be applicable for the reason that the provisions of section 43D of the Act are clear and cannot be overridden through delegated legislation viz. circulars and notifications. The Commissioner (Appeals) was further of the opinion that the statutory provisions were brought on the Act much later than the said circular (which was issued in 1984) and therefore the said circular would not have any effect or binding force upon the Assessing Officer. The view adopted by the Assessing Officer and the Commissioner (Appeals) is clearly contrary to the view expressed by this court hereinabove. The Tribunal was therefore, wholly justified in setting aside the order passed by the Commissioner (Appeals) confirming the assessment order.”

5. Learned counsel Mr.Manish Bhatt for revenue however drew our attention to the observations made by the Supreme Court in paragraphs 30 and 31 in the case of Southern Technologies Ltd. vs. Joint Commissioner of Income-Tax reported in (2010) 320 ITR 577 (SC) to contend that the RBI directives enabling NBFC to adjust a provision for possible diminution in the value of asset or provision for doubtful debts and show only the net figure in the balance-sheet would not govern the taxability of income. In other words he argued that irrespective of such directives of RBI, interest even on NBFCs can be taxed on accruable basis.

We noticed that this contention was raised before the Division Bench in the case of Principal Commissioner of Income-tax-5 v. Shri Mahila Sewa Sahakari Bank Ltd. and considered by the Court.

In view of the above, these Tax Appeals do not give rise to any substantial questions of law and they are dismissed.

[Citation : 406 ITR 302]

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