South Canara District Central Co-operative Bank Ltd. Vs DCIT (ITAT Bangalore)
Banking is a Business, Not a Theory – ITAT Knocks Down Disallowances -Real Income over Notional Income – ITAT Slams Taxation of Unrealised Interest
Assessee is a co-operative bank engaged in banking & credit facilities to its members. Assessment involved multiple disallowances by AO, questioning both the accounting methodology & the allowability of key expenditure items. The core issues before Tribunal were: (1) hybrid system of accounting, (2) disallowance of interest income accrual, (3) allowability of interest on loans & advances, (4) amortization of investments, & (5) provision for standard assets.
Hybrid System of Accounting – Consistency Prevails
AO objected to Assessee following a mixed or hybrid system of accounting-recognising interest on standard assets on mercantile basis, while recognising interest on non-performing assets (NPAs) on receipt basis. AO insisted that once mercantile system is adopted, all income must be accounted on accrual basis. Assessee contended that as a co-operative bank, it was bound by RBI/NABARD prudential norms, which require interest on NPAs to be recognised only on actual receipt. Tribunal upheld Assessee’s accounting method, noting that the bank had consistently followed this system in earlier years, & the same had been accepted by both the Department & various judicial precedents. It reiterated that consistency & adherence to RBI norms carry more weight than theoretical purity. AO cannot force a change simply because of a different view. Accordingly, the hybrid accounting system was upheld.
