No Deduction of Accrued Interest on Bad Debts / NPAs since Assessee is not a Scheduled Bank and had not recognized any Income as per RBI Guidelines [Read Order]

The Ahmedabad bench of ITAT in the case of Dy. Commissioner of Income-Tax vs The Saurashtra Co-op Bank Ltd, held that deduction of accrued interest on bad debts and doubtful debts / NPAs can be allowed to  Assessee since it is not a Scheduled Bank and had not recognized any income as per RBI guidelines.

In the instant case, the Revenue filed an appeal against the order of CIT (A) Ahmedabad wherein the appellate authority reversed the Assessing Officer’s action adding an amount of Rs.83,45,400/- on account of accrued interest on bad and doubtful debts/NPAs during the course of proceedings under Section 143(3) of the Income Tax Act, 1961.

During the assessment proceedings, the AO concluded that Section 43D of the Act r.w. Rule 6EA would not apply in case of the assessee bank as it is not a scheduled bank as classified to this effect by the Reserve Bank of India. The AO also added that Section 43D of the Income Tax Act covers only scheduled bank.

The AO further concluded that the assessee failed to establish cause of uncertainty towards realization of outstanding dues in question including principle and interest amount. Accordingly AO made the aforementioned addition.

Aggrieved, the Assessee carried the matter before the CIT (A) wherein the authority observed that “after making addition of Rs.83,45,400/- on account of accrued interest on nonperforming assets. The Assessing Officer has made addition on the ground that the appellant being a scheduled bank, the provision of Section 43D were not applicable, the real income theory was not applicable in view of mercantile method of accounting and the uncertainty of income was not established”.

Accordingly CIT (A) observed that for the notional interest Income on accrual basis on the NPAs, cannot be brought to tax.

Being aggrieved, the Revenue appealed the same before the Tribunal and strongly supported the action of AO that Section 43D of the Income Tax Act would not cover the assessee’s case as it is not a scheduled bank as per the market regulator the Reserve Bank of India’s classification.

Dismissing the appeal, the Tribunal relied on its’ coordinate bench’s order (supra) that once the assessee bank had not recognized any income as per RBI guidelines issued u/s.45Q of the Reserve Bank of India Act, 1934, provisions of Chapter III thereof would have an overriding effect over all other laws including the Income Tax Act, 1961.