(Last Updated On: February 10, 2017)

Taxability of income from NPAs on receipt basis

Extension of scope of section 43D to Co-operative Banks

The existing provisions of section 43D of the Act, inter-alia, provides that interest income in relation to certain categories of bad or doubtful debts received by certain institutions or banks or corporations or companies, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year or actually received, whichever is earlier. This provision is an exception to the accrual system of accounting which is regularly followed by such assessees for computation of total income.

The benefit of this provision is presently available to scheduled banks, public financial institutions, State financial corporations, State industrial investment corporations and certain public companies like Housing Finance companies.

With a view to provide a level playing field to co-operative banks vis-à-vis scheduled banks and to rationalise the scope of the section 43D, it is proposed to amend section 43D of the Act so as to include co-operative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Consequentially,As per matching principle in taxation, if the interest income on bad or doubtful debts is chargeable to tax on receipt basis, the interest payable on such bad or doubtful debts need to be allowed on actual payment. In view of this, it is proposed by Finance Bill 2017 to amend section 43B of the Act to provide that any sum payable by the assessee as interest on any loan or advances from a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank shall be allowed as deduction if it is actually paid on or before the due date of furnishing the return of income of the relevant previous year.

It is further proposed to include the definitions of the expressions “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” in the said section.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

[Clauses 17 & 18]

Relevant Clause 17 of Finance Bill 2017

Amendment of section 43B.

17. In section 43B of the Income-tax Act, with effect from the 1st day of April, 2018,—

(i) in clause (e), after the words “scheduled bank”, the words “or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank” shall be inserted;

(ii) in Explanation 4, after clause (c), the following clause shall be inserted, namely:—

‘(d) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.’.

Relevant Clause 18 of Finance Bill 2017

Amendment of section 43D.

18. In section 43D of the Income-tax Act, with effect from the 1st day of April, 2018,—

(i) in clause (a), after the words “scheduled bank or”, the words “a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or” shall be inserted;

(ii) in the long line, after the words “scheduled bank or”, the words “a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or” shall be inserted;

(iii) in the Explanation, after clause (f), the following clause shall be inserted, namely:—

‘(g) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.’.