Non-Scheduled Bank Required To Tax The Interest On Sticky Loans Or NPAs On Receipt Basis: Himachal Pradesh High Court

The Himachal Pradesh High Court has held that the non-scheduled bank was required to tax the interest on the sticky loans and non-performing assets (NPAs) on a receipt basis.

The division bench of Justice Sabina and Justice Sushil Kukreja has observed that an amendment to Section 43D by Finance Act, 2017 was made by which the scope of section 43D to Co-operative Banks was extended. Although the amendment was sought to take effect on April 1, 2018, it was likely to be treated as retrospective in nature.

"With a view to providing a level playing field to co-operative banks vis-à-vis scheduled banks and to rationalize the scope of Section 43D, it was proposed to introduce an amendment to Section 43D to include co-operative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The omission was sought to be corrected by bringing the scheduled and non-scheduled banks," the court noted.

The assessee or respondent is a non-scheduled bank. The assessing officer noted that the assessee had not credited or recognized interest on NPAs, although it was following a mercantile system of accounting.

The notice was issued to the assessee with regard to the assessment years 2012–13 and 2013–14. The assessee was asked to explain why the interest on loans had not been added to its income. The case of the assessee was that the amount of interest had not been shown as income because the same had become an NPA, and the bank was not certain about the recovery of the principal amount or interest. Hence, the bank had not made any entries in its books of account for the years in question with regard to interest due on NPA accounts.

The assessing officer held that the assessee was required to show the interest on NPAs as income, and consequently, the income of the assessee was recomputed by the assessing officer by including the interest, which was liable to accrue on the loans, etc. The assessee filed appeals before the Commissioner of Income Tax Appeals, and the appeals were allowed by the appellate authority.

The appellant/department contended that the assessee was a non-scheduled bank and was following a mercantile system of banking. Hence, the assessee was required to credit the income of NPAs or sticky loans and could claim the same as bad debt in the next year. The assessee could not draw any benefit under Section 43D of the Income Tax Act, 1961. Section 43D was not retrospective in nature, but it was to take effect on April 1, 2018.

The respondent contended that the assessee is a non-scheduled bank. A suspense account is required to be created by each bank as per Reserve Bank of India instructions. There was no justification for the assessee paying tax on the sticky loans and then claiming it as a bad debt the following year. Section 43D of the Income Tax Act was substituted by the Finance Act 1999 with effect from April 1, 2000, whereas it had been earlier inserted by the Finance Act 1991 with effect from April 1, 1991. Initially, the section was applicable only to scheduled banks, but thereafter, it was amended and was also made applicable to cooperative banks with effect from April 1, 2018. A perusal of the objects at the time of the addition of cooperative banks in Section 43D reveals that the same was done with the intention to cure the defect.

The court held that the object of amending the existing provisions of Section 43D reveals that the benefit of the existing provision is available to scheduled banks, a public financial institutions, etc. It was evident that the amendment was brought into force with a view to cure the omission in Section 43D.

Case Title: Pr. Commissioner of Income Tax Versus The Kangra Central Co-op Bank Ltd.

Citation: ITA Nos. 82 & 83 of 2018

Date: 07.12.2022

Counsel For Appellant: Senior Advocate Vinay Kuthiala, Advocate Vandana Kuthiala

Counsel For Respondent: Advocates Vishal Mohan, Rakesh Kumar Thakur

Citation: 2022 LiveLaw (HP) 42  

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