Dy. CIT v. Durga Cooperative Urban Bank Ltd.

INCOME TAX ACT, 1961

--Income--Accrual Interest on non-performing assets--Assessee, a co-operative society, was governed by the directions issued by the Reserve Bank of India. It was generating income by carrying on banking business by providing credit facility to its members. It enjoyed exemption under section 80P up to the assessment year 2006-07. Consequent to the amendment made to section 80P, its profit from banking business became taxable. Accordingly, it filed its return of income for the relevant year declaring income. During the course of scrutiny proceedings, AO noticed that assessee did not include the interest on NPA advances. Assessee submitted that interest on NPA advances could not be said to have been accrued to it as it followed the guidelines of RBI. Since assessee was following mercantile system of accounting, AO opined that the interest on NPA advances accrued to assessee and accordingly, he added the interest relating to NPA advances to the total income of assessee. CIT(A) deleted the addition made by AO. Held: Assessee was a co-operative bank and was governed by the directions issued by RBI. Hence, the directions with regard to the prudential norms issued by RBI were equally applicable to assessee as applicable to the companies registered under the Companies Act. Therefore, interest on NPA advances could not be said to have accrued to assessee.