Section 43D – Public financial institutions, special provisions in case of income of (Interest) – Where income on NPA was actually not credited but was shown as receivable in balance sheet of assessee co-operative bank, interest on NPA would be taxable in year when it would be actually received by assessee bank

9. Principal
CIT vs. Solapur District Central Co-op. Bank Ltd.; [2019] 102 taxmann.com 440
(Bom):Date
of order: 29^th January, 2019 A.Y.:
2009-10

Section
43D – Public financial institutions, special provisions in case of income of
(Interest) – Where income on NPA was actually not credited but was shown as
receivable in balance sheet of assessee co-operative bank, interest on NPA
would be taxable in year when it would be actually received by assessee bank

During the
assessment for A.Y. 2009-10, the Assessing Officer noticed that the assessee
co-operative bank had transferred an amount of Rs. 7.80 crore to the Overdue
Interest Reserve (OIR) by debiting the interest received in profit and loss
account related to Non-Performing Assets. He was of the opinion that the
assessee-bank had to offer the interest due to tax on accrual basis. The
explanation of the assessee-bank was that the Reserve Bank of India guidelines
provide that income on Non-Performing Assets (‘NPA’) is not to be credited to
profit and loss account but instead to be shown as receivable in the balance
sheet, and it is to be taken as income in the profit and loss account only when
the interest is actually received. It was also pointed out that, as per the
Reserve Bank of India norms, interest on assets not received within 180 days is
to be taken to the OIR account. Similarly, the interest which was not received
for the earlier years was also taken into OIR account. In this manner, only the
interest received during the year was credited to profit and loss account and
offered to tax. However, the Assessing Officer discarded the explanations of
the assessee, principally on the basis of accrual of interest income and
assessed such interest to tax.

On the
assessee’s appeal, the Commissioner (Appeals) confirmed the decision of the
Assessing Officer. On appeal, the Tribunal reversed the decisions of the
Revenue authorities. The Tribunal broadly relied upon the principle of real
income theory and referred to the decision of the Supreme Court in case of CIT
vs. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC).

On appeal
by the Revenue, the Bombay High Court upheld the decision of the Tribunal and
held as under:

“i)   The issue is squarely covered by the
judgements of Gujarat High Court and Punjab & Haryana High Courts. The
Gujarat High Court in case of Pr. CIT vs. Shri Mahila Sewa Sahakari Bank
Ltd. [2017] 395 ITR 324/[2016] 242 Taxman 60/72 taxmann.com 117 had
undertaken a detailed exercise to examine an identical situation. The Court
held that the co-operative banks were acting under the directives of the
Reserve Bank of India with regard to the prudential norms set out. The Court
was of the opinion that taxing interest on NPA cannot be justified on the real
income theory.

ii)   The Punjab & Haryana High Court in case
of Pr. CIT vs. Ludhiana Central Co-operative Bank Ltd. [2018] 99 taxmann.com
81 concluded that the Tribunal while relying upon the various
pronouncements had correctly decided the issue regarding taxability of interest
on NPA in favour of the assessee as being taxable in the year of receipt; the
Tribunal had upheld the deletion made by the CIT(A) on account of addition of
Rs. 3,02,82,000 regarding interest accrued on NPA and that there was no
illegality or perversity in the aforesaid findings recorded by the Tribunal.

iii)   The issue is thus covered by the decisions of
two High Courts. Against the judgement of the Gujarat High Court, the appeals
have been dismissed by the Supreme Court. Thus, the Supreme Court can be seen
to have approved the decision of the Gujarat High Court. Therefore, there is no
reason to entertain these appeals, since no question of law can be stated to
have arisen.

iv)  For the reference, it may also be noticed that
subsequently, legislature has amended section 43D. Section 43D essentially
provides for charging of interest on actual basis in case of certain special
circumstances, in the hands of the public financial institutions, public
companies, etc. Explanation to section 43D defines certain terms for the
purpose of the said section. Clause (g) was inserted in the said Explanation by
Finance Act, 2016 which provides that for the purpose of such section,
Co-operative Banks, Primary Agricultural Credit Society and Primary
Agricultural and Rural Development Bank shall have meanings, respectively
assigned in Explanation to sub-section 4 of section 80B. By virtue of such
insertion, the co-operative banks would get the benefit of section 43D. One way
of looking at this amendment can be that the same is curative in nature and
would, therefore, apply to pending proceedings, notwithstanding the fact that
the legislature has not made the provision retrospective.

v)   As per the Memorandum explaining the
provision, the insertion of clause (g) to the Explanation was to provide for a
level playing field to the co-operative banks. This may be one more indication
to hold a belief that the legislature, in order to address a piquant situation
and to obviate unintended hardship to the assessee, has introduced the amendment.
However, in the present case, there is no need to conclude this issue and leave
it to be judged in appropriate proceedings.”