ITAT, Chandigarh bench recently held that the interest on sticky loans / NPA has to be taxed on receipt basis. Recently Revenue approached Tribunal regarding the Impugned decision of the Commissioner of Income Tax (Appeals), Palampur.
The issue before the Tribunal was regarding the taxability of interest on loans categorized as NPA’s/sticky loans whether on accrual basis or on receipt basis.
The assessee is a Co-operative Society, having operations as a non-Scheduled Bank. During the proceedings, the Assessing Officer noticed that since the assessee following mercantile system of accounting, assessee had shown non-performing assets on which no interest income had been credited/recognized. Subsequently assessee submitted that interest on NPA’S is accounted only on receipt basis by following the accounting standard-9 relating to Revenue recognition prescribed by the institute of Chartered Accountants of India.
While considering the assessee’s submission, the AO ruled that it was required to account for interest on sticky loans/NPA on accrual basis since it followed the mercantile system of accounting.
Accordingly, AO computed the interest on NPA’S and added the same to the income of assessee. First appellate authority CIT (A) who allowed the appeal of assessee while relied on the decision of I.T.A.T., Pune Bench in the case of ACIT vs. Usmanabad Janta Sahkari Bank Ltd holding that the provisions of Section 43D of the Income Tax Act, 1961 which allowed interest on bad and doubtful debts as prescribed in the guidelines issued by the RBI, to be accounted for on receipt basis in case of Public Financial Institutions, public companies etc., to be applicable in the case of the assessee also.
Aggrieved Revenue carried the matter before Chandigarh bench wherein advocate of revenue Dr. Gulshan Raj agreed the present issue was covered in favour of assessee by the decision of the ITAT Chandigarh Bench in the case of Ludhiana Central Cooperative Bank Ltd(supra), holding that interest on sticky loans/NPA’s was to be subjected to tax on receipt basis.
The Tribunal bench comprising Judicial Member Diva Singh and Accountant Member Annapurna Gupta, stated that no reason to interfere in the order of the CIT (A) since they are rightly ruled that such interest shall be taxable on receipt basis.
Recently, the Supreme Court in CIT v. Vasisth Chay Vyapar Ltd has held that the interest income earned by Non-Banking Financial Companies (NBFCs) on non-performing assets (NPAs) should not be taxed on the accrual basis.
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