Introduction
In Nicoloson Co-operative Town Bank Ltd. v. Income-tax Officer[i], the Income Tax Appellate Tribunal, Chennai Bench (‘Tribunal’) addressed a contentious issue surrounding the taxability of accrued interest on non-performing assets (‘NPAs’). The Tribunal was faced with the question of whether such accrued interest, which was disclosed in the balance sheet but not credited to the profit and loss account (‘P&L Account’) in accordance with Reserve Bank of India (‘RBI’) guidelines, could still be subjected to tax under the Income-tax Act, 1961 (‘Act’) prior to the express inclusion of co-operative banks under s. 43D of the Act from AY 2018–19.
Facts
Nicolson Co-operative Town Bank Ltd. (‘Assessee’) was a co-operative bank engaged in banking and other allied activities. For the assessment year (‘AY’) 2008-09, the Assessee had not credited the amounts of interest accrued on members’ loans and overdue interest on NPA in the P&L Account and disclosed it in the footnote of the financial statements.
The original assessment was completed under s. 143(3) of the Act. Thereafter, in 2013, the assessment was reopened under s. 148 of the Act based on the disclosures in the financials showing accrued but uncredited NPA interest: Rs. 18,76,894 on member loans and Rs. 1,00,16,535 as overdue interest.
The Assessing Officer (‘AO’) added these amounts to the Assessee’s income, along with a disallowance of Rs. 1,30,110/- towards income tax interest claimed under the head ‘Rent, Taxes and Insurance.’ The AO held that interest, being accrued, must be included in the P&L Account under mercantile accounting.
The Assessee preferred an appeal before the Commissioner of Income-tax (Appeals) (‘CIT(A)’), but the CIT(A) upheld the additions made by the AO since the Assessee did not respond to any of the notices issued by the CIT(A).
The Assessee thereafter preferred this appeal against the order of the CIT(A) and argued that overdue interest pertaining to the NPA was credited to P&L Account in the subsequent year based on the actual realisation. Further, it was argued that s. 45Q of the RBI Act, 1934 (‘RBI Act’) and RBI guidelines envisage that interest on NPA cannot be treated as income unless actually received, and thus no real income has accrued.
Held
The Tribunal allowed the appeal filed by the Assessee.
The Tribunal observed that s. 45Q of the RBI Act requires the crediting of the interest on loans which are NPA in the P&L Account only on a receipt basis, and thus the Assessee had followed the provisions of the RBI Act and its norms in maintaining their books.
The Tribunal held that merely disclosing accrued NPA interest in the balance sheet, as a statutory requirement, does not constitute accrual of income liable to tax. .
It emphasised that s. 45Q of the RBI Act has an overriding effect on other enactments concerning income recognition, as upheld in multiple High Court and Tribunal decisions, and it is observed that without the actual realisation by the Assessee, the levy of tax on accrued interest is bad in law.
The Tribunal therefore directed the AO to delete the additions related to NPA interest and recompute the income accordingly.
Our Analysis
The Tribunal’s decision reinforces a well-established jurisprudential stance that RBI’s prudential norms on income recognition take precedence over contrary provisions in the Income Tax Act, especially when dealing with NPAs. Though s. 43D of the Act was extended to co-operative banks only from AY 2018–19, courts[ii] have consistently held that s. 45Q of the RBI Act has an overriding effect. This case highlights how income tax assessments cannot operate in isolation from regulatory frameworks designed for specialised sectors such as banking.
The judgment also raises important considerations on the validity of reassessment proceedings in the absence of any fresh tangible material. The AO’s action of reopening the case based solely on financial disclosures made during the original assessment proceedings violates the principle laid down in various precedents. By nullifying the additions, the Tribunal sends a clear message that statutory compliance in financial disclosures, mandated by sectoral regulations like the RBI guidelines, should not be used to trigger reassessment or justify additions, especially when such disclosures were already scrutinized in earlier proceedings.
End Note
[i] [2025] 173 taxmann.com 231 (Chennai - Trib.).
[ii] The Principal Commissioner of Income Tax-3, Ludhiana versus the Ludhiana Central Co-op. bank ltd., Ludhiana, 2018 (11) TMI 442 - Punjab and Haryana High Court; Karnavati co-op. Bank Ltd. versus Deputy Commissioner of Income-tax, Circle-11 [2012] 14 ITR 175; the Pr. Commissioner of Income-tax-6, Pune versus the Solapur district Central Coop. Bank Ltd., and. the Laxmi Cooperative Bank Ltd. 2019 (2) TMI 238 - Bombay High Court; 2020(8) TMI 822, The Commissioner of Income Tax, Tiruchirappalli v. M/s Tiruchirappalli District Central Co-op Bank Ltd, (Madras High Court) following the Decision of Honourable Supreme Court in 2018(3) TMI 56, CIT v. Vasisth Chay Vyapar Ltd.
Authored by Maarij Ahmad, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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