2011 (5) TMI 321 - HC - Income Tax

Addition - interest accrued to the assessee as per the mercantile system of accounting - It was also asked to file copies of loan agreements and to explain and show cause as to why the accrued interest on such loan should not be taken as its income for the year under concern as it was maintaining its accounts on the mercantile/accrual basis - since the recoverability of the principal amount of loan itself was doubtful, a decision was taken as a prudent businessman and interest income was not accounted for in the books of account - In the case of CIT v. Vasisth Chay Vyapar Ltd. (2010 -TMI - 202354 - Delhi High Court)and this theory of real income was discussed in detail. That was also a case of NBFC where loan/advance given by the said assessee had become NPA and keeping in view the guidelines of the RBI interest was not treated as accrued - Decided in favour of the assessee

Summary

Issues:
Interpretation of income accrual in the context of non-performing assets (NPA) for a non-banking financial company (NBFC) under the Income-tax Act.

Analysis:
1. The primary issue in this judgment revolves around the treatment of interest income accrued on loans given by a NBFC to group concerns that turned into non-performing assets (NPA) as per Reserve Bank of India guidelines. The Assessing Officer contended that even if interest was not received, it had accrued to the assessee as per the mercantile system of accounting. However, the Income-tax Appellate Tribunal overturned this decision, leading to the Revenue appealing against the deletion of the interest accrued by the Assessing Officer.

2. The assessee argued that due to the loans becoming NPAs, the recoverability of both principal and interest was doubtful, justifying the non-recognition of interest income in its accounts. The assessee cited RBI guidelines, accounting standards, and the concept of real income to support its position that no real accrual of interest had taken place. The Tribunal accepted these arguments, emphasizing that the financial position of the borrower did not guarantee interest payment to the assessee.

3. Referring to a previous case involving a NBFC, the judgment reiterated the principle of "real income" and the impact of RBI guidelines on the accrual of interest income. It highlighted that in cases where interest was not received due to NPAs and low recovery possibilities, it could not be considered as accrued income for the assessee. This legal position was applied to the current case, leading to the dismissal of the appeals as no substantial question of law arose.

In conclusion, the judgment clarifies the treatment of interest income accrual for a NBFC when loans become NPAs, emphasizing the impact of RBI guidelines and the concept of real income on income recognition under the Income-tax Act.