Accrued Interest on Sticky advances of Co-Operative Banks not taxable

Brief of the Case: In the case of CIT Vs. M/s.Deogiri Nagari Sahakari Bank Ltd. & Others , Bombay High Court inter-alia held that the assessee herein being a Cooperative Bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the Cooperative banks. The provisions of Section 45Q of Reserve Bank of India Act has an overriding effect vis-à-vis income recognition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks.

Facts of the Case: The assessee in all the cited appeals were the Co­operative Banks registered under section 9(1) of the Maharashtra Co­operative Societies Act, 1960. The assessee banks were engaged in the Banking business by following mercantile system of accounting. The assessee Co­operative banks had furnished its return of income for the year under consideration declaring their total income. The AO passed the order under section 143 (3) of the IT Act on different dates by making additions on various issues.

The common issue involved in all the appeals relating to the assessment year was about deletion of the additions on account of interest on sticky advances. In all the cases, the AO, during the assessment proceeding had observed that the provisions of Section 43 (D) of the IT Act cannot be applied to the assessee as it was not a Scheduled Bank but a Co­operative Bank. In the opinion of the Assessing officer, considering the provisions of section 43­D of the IT Act, non scheduled Co­operative banks were specifically excluded from the special provisions of the 43­D of the IT Act, regarding interest on sticky advances. The AO had also held that CBDT circular No.F­ 201/81/84 ITA­II dated 09.10.1984 was applicable only to banking companies and not to non­-scheduled banks and co­ operative banks.

On aggrieved, the assessee Banks preferred appeals separately before the CIT(A), who directed to delete the additions on the interest of sticky advances, on the NPA made by the AO.

On aggrieved by the order of CIT(A), the Revenue preferred separate appeals in each case before the Income Tax Appellate Tribunal, Pune Bench. The ITAT confirmed the decision of the CIT(A) and dismissed the appeals of the Revenue.

Revenue filed the present appeals challenging the legality and correctness of the order passed by the ITAT.

Contention of the Revenue: Revenue submitted that the assessee in all the cited cases were the co­operative Banks and not Scheduled Banks, therefore, special provisions of Section 43­D of the Income Tax will not be applicable to them. Further submitted that, in view of the provisions of Section 145 of the IT Act, the Co­operative banks had to follow either mercantile system of accounting or Cash system. They cannot have mix system of account. The RBI directions under the RBI Act are prudential norms, but have nothing to do with the computation or taxability of the provision of the NPA under the IT Act. Though the RBI directions deviate from the accounting practice as provided by the Companies Act, but they do not override the provisions of the IT Act and they are operating in different fields. The ITAT ought to have held that the assessee cooperative banks does not satisfy the conditions of CBDT circular No.F.201/81/84/ITA­II dated 09.10.1984 and therefore could not avail the benefits of the circular. On the basis of aforesaid submissions, the learned counsel further submits that substantial question of law involved in the above appeals and thus order passed by the AO under section 143 (3) of the IT Act, 1961 are required to be confirmed.

Further submitted that the Tribunal ought to have allowed the appeal by  relying  on  the  judgment  in  the  matter  of  Southern Technologies  Ltd.  Vs.  Joint  Commissioner  of  Income Tax, Coimbtore Reported in 2010 (2) SCC 548, wherein it was held that the provisions of Section 45Q of Reserve Bank of India Act has an overriding effect vis­a­vis income recognition principle under the Companies Act. Hence, Section 45Q of the RBI Act shall have overriding effect over the income recognition principle followed by cooperative banks.

Contention of the Assessee: Assessee Banks submitted that the issues involved in the above appeals were no more res­integra in view of the decision rendered by the  Hon’ble  Supreme  Court  in  the  case  of  Uco  Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal reported in (1999) 4 Supreme Court Cases 599, wherein it was held that that Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied.

The Assessee 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 liable to be taxed 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 Co­operative banks, as understood by Section 43 C of the Income Tax Act on the Scheduled Bank.

The ITAT has rightly dismissed the appeals of the revenue by confirming the order passed by the CIT(A). There is no substantial question of law involved in these appeals and thus all the appeals are liable to be dismissed.

Held by CIT (A): The CIT (Appeals) rejected the contention of the Revenue and directed to delete the additions on the interest of sticky advances, on the NPA made by the AO.

Held by ITAT: The ITAT confirmed the decision of the CIT(A) and dismissed the appeals of the Revenue.

Held by High Court: High Court observed that Uco Bank case (supra) and Mercantile Bank (supra) case squarely applies to the facts of the present case and issues involved.

After examining the facts and circumstances, the High Court decided the case in favour of the assessee by restoring the views taken by the CIT (Appeals) and ITAT and held that no substantial question of law arises in these appeals.

Accordingly, the Appeals of the revenue were dismissed.

NF