2010 (12) TMI 1228 - AT - Income Tax

Summary

Issues involved:
Revenue's appeal against Commissioner of Income Tax (Appeals)-I, Coimbatore for assessment years regarding treatment of finance charges on non-performing assets (NPAs) on accrual basis.

Summary:

Issue 1: Finance charges on NPAs

The Appellate Tribunal considered the Revenue's appeal regarding the treatment of finance charges on NPAs on accrual basis. The Assessing Officer (A.O.) had initially treated the finance charges on NPAs on accrual basis for the relevant assessment years. However, the assessee did not show any income on finance charges related to NPAs in its profit and loss account. The A.O. argued that since the assessee did not consider provision for NPAs as a liability, the accrued financial charges should be included as part of its income. The assessee, citing the jurisdictional High Court's decision in CIT v. Elgi Finance Ltd., contended that as an NBFC following Reserve Bank of India regulations, interest on NPAs should not be included in total income on accrual basis. The CIT(Appeals) upheld the assessee's position based on the NBFCs Prudential Norms (Reserve Bank) Directions, 1998 and relevant court decisions.

Issue 2: Judicial precedents

During the appeal, the Revenue argued that the decision in Southern Technologies case was limited to provisioning for NPAs and did not extend to interest accrued on NPAs. The Tribunal noted that the issue was settled by the jurisdictional High Court's decision in CIT v. Elgi Finance Ltd. and other Tribunal decisions for the assessment years 1995-96 to 1998-99. The Tribunal found that the interest on NPAs should only be considered after recognizing the income from such assets, in line with the High Court's ruling. Additionally, the Delhi High Court, referencing the Apex Court's decision in Southern Technologies and the jurisdictional High Court's decision in Elgi Finance Ltd., held that interest on NPAs could not be treated as income on accrual basis.

Conclusion:

The Appellate Tribunal dismissed the Revenue's appeals, as the issue of interest on non-performing assets had been settled in favor of the assessee by relevant court decisions. The orders were pronounced on 16th December 2010.