The facts emanating from the order of the AO and the submissions of the assessee is that the assessee is a Co-operative Bank and is engaged in banking business and the assessee was claiming deduction u/s 80P(2)(a)(i) up to AY 2006-07 @ 100%. It is submitted that the assessee has claimed the interest income amount of Rs 4,04,16,564/- as interest income from the NPA (Non-performing assets) but since the loans/principal amounts have become bad the assessee has neither received the loan amount nor the interest income. The assessee has treated the interest amount as “interest receivable” in the debit side of the balance sheet and as a liability under the head “overdue interest reserve account” in the credit side of the balance sheet. The AO has treated the interest income from the NP As as a normal business income on the ground that in the mercantile system of accounting the accrued income is to be treated as income of the assessee and accordingly, has made the addition of Rs. 4,04,16,564/- vide the order of the AO.
The assessee is in appeal’ against the order of the AO and it is submitted that the AO is not justified to make the addition as the loan/principal amount has become bad (NPA) and at the same time, the assessee has not received any interest income and as such no real income has accrued to the assessee. It is submitted that in the case of interest on NP As the party account is debited and the interest account is credited in the P&L account and since the interest is actually not received a reverse entry is passed at the year-end by which the P&L account is debited and the overdue interest account is credited. It is also submitted that the assessee has maintained the books of accounts on the NP A and its interest on the basis of the RBI guidelines and since the income has not been received by the assessee, the AO is not justified to treat the same as income of the assessee. It is also submitted that when the interest income finally recovered or received in future the same is accounted for and offered as income of the assessee in the relevant FY. It is also submitted that only the real income of the assessee may be taxed and not the notional income. The assessee also submitted that no interest would be said to have accrued to the assessee on the loans of doubtful recovery and the assessee also relied on various case laws some of which are as under:-
