2012 (12) TMI 1021 - AT - Income Tax

Whether the interst accured on NPA should be recognized as assessee s income on accrual or on receipt basis - Held that - If a particular income is due but is not possible to recover the same then it cannot be said to have been accrued and the said amount cannot be brought to tax - the definition of NPA shows an asset becomes non performing when it ceases to yield income - when it is not yielding any revenue the question of showing that revenue and paying tax would not arise - as per policy guidelines issued by the National Housing Bank the income from NPA should be recognized only when it is actually received - the contention of the revenue that in respect of NPA even though it does not yield any income as the assessee has adopted a mercantile system of accounting he has to pay tax on the revenue which has accrued notionally is without any basis - Decided in favor of assessee

Issues:
1. Treatment of accrued interest on loans and advances under sec. 145 of the Income-tax Act.
2. Applicability of RBI guidelines on accounting for interest on non-performing assets.
3. Whether interest on non-performing assets should be recognized on accrual or receipt basis.
4. Disallowance of provision for doubtful debts under sec. 36(1)(vii) of the Income-tax Act.
5. Interpretation of real income theory for taxation purposes.

Issue 1: Treatment of accrued interest on loans and advances under sec. 145 of the Income-tax Act:
The appeal concerns the addition of accrued interest on loans and advances by the Assessing Officer, which the CIT(A) deleted. The assessee argued that under the mercantile system of accounting, only real income should be considered for taxation, not notional income. The CIT(A) upheld the deletion, stating that interest on non-performing assets should only be accounted for when received, as per RBI guidelines. The Tribunal dismissed the Revenue's appeal, following the decision that real income should be considered for taxation.

Issue 2: Applicability of RBI guidelines on accounting for interest on non-performing assets:
The Revenue contended that RBI guidelines are for supervision, not for recognizing accrued income under the Income-tax Act. However, the assessee argued that following RBI guidelines, interest on non-performing assets should only be recognized when received. The Tribunal upheld the CIT(A)'s decision, emphasizing that RBI guidelines support recognizing such interest only upon receipt.

Issue 3: Recognition of interest on non-performing assets on accrual or receipt basis:
The dispute centered on whether interest on non-performing assets should be recognized on accrual or receipt basis. The Tribunal ruled in favor of recognizing such interest only when received, aligning with the RBI guidelines and the mercantile system of accounting.

Issue 4: Disallowance of provision for doubtful debts under sec. 36(1)(vii) of the Income-tax Act:
The Tribunal differentiated the case from those related to provisions for doubtful debts under sec. 36(1)(vii) of the Income-tax Act. It clarified that the decision on non-allowability of such provisions does not apply to the case at hand, where the focus was on recognizing interest income on non-performing assets.

Issue 5: Interpretation of real income theory for taxation purposes:
The Tribunal analyzed the real income theory for taxation, emphasizing the importance of recognizing real income over notional income. It considered various judicial decisions and the jurisdictional High Court's ruling, which highlighted the significance of reflecting true income in accounts for tax purposes.

In conclusion, the Tribunal dismissed the Revenue's appeal, following the decision based on the interpretation of the Income-tax Act, RBI guidelines, and the mercantile system of accounting, emphasizing the importance of recognizing income on a real basis rather than notionally.

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