2013 (1) TMI 368 - AT - Income Tax

De-recognized interest on accrual basis on Non-Performing assets (NPA) - assessee company has been regularly maintaining its accounts on mercantile system - Held that - The assessee company is incorporated under the Companies Act, 1956 as a registered Non-Banking Finance Company secured a licence from the RBI u/s 45-I of the RBI Act, to carry on the business of non-banking finance, including micro-finance services. It was in accordance with directives of the RBI also in accordance with the Accounting Standards issued by the ICAI, that the assessee de-recognised the interest on NPAs. Apropos interest de-recognition of NPAs, in accordance with the RBI directions, once the NPAs are identified as such, interest recognition thereon is stopped. This is so, for when the principal is not likely to be recovered, where a default has occurred, the question of accounting interest is otiose. It is in accordance with this that the interest has been stopped. Then, as per the Accounting Standards, any income accruing on assets already matured, is to be stopped. Further, the RBI directions also state that income from NPAs will not be recognized merely on the basis of accrual and it should be recognized only when actually received, i.e., on cash basis. Where no income has resulted, no income can be said to have accrued, just because the mercantile system of accounting is being followed. Following decision of CIT v. Motor Credit Co. (P.) Ltd. 1980 (4) TMI 64 - MADRAS HIGH COURT CBDT Circular No. 491 dated 30.06.1987 it has been held that interest income from NPAs should be recognised only on actual receipt. Interest on sticky advances is to be allowed if the assessee is following the mercantile system of accounting and has changed the method of accounting to cash basis for recognizing the interest on sticky loans. Though this Circular is applicable to State Finance Corporations, it applies equally to NBFCs too - issue in favour of the assessee. Provision for doubtful debts - Held that - This matter stands concluded against the assessee and in favour of the department as decided in Southern Technologies Ltd. v. Jt. CIT 2010 (1) TMI 5 - SUPREME COURT OF INDIA holding that provision for non-performing assets debited to the Profit Loss Account by an NBFC, made under the RBI Prudential Norms, can be treated as income, and that it is not expense deductible u/s 36(1)(vii) or (viia)of the IT Act. No decision to the contrary has been relied on before us by the assessee - against assessee.

Summary

Issues Involved:
1. Deletion of addition on account of de-recognized interest on accrual basis on Non-Performing assets (NPA).
2. Deletion of addition on account of Provision for Doubtful debts for Non-Performing assets.

Deletion of Addition on Account of De-Recognized Interest on Accrual Basis on Non-Performing Assets (NPA):
The department appealed for Assessment Years 2004-05 to 2008-09, challenging the deletion of additions related to de-recognized interest on NPAs. The Assessing Officer added back de-recognized interest as income, stating that the RBI guidelines were not binding under the Income-tax Act. However, the Ld. CIT(A) deleted the additions, emphasizing that the assessee followed RBI directives and Accounting Standards. The department argued that the assessee should offer de-recognized interest as income under Section 145 of the IT Act. The assessee contended that RBI directives override other laws and interest on NPAs should be recognized only on actual receipt. The Tribunal upheld the Ld. CIT(A)'s decision, citing the mandatory nature of RBI directions and Accounting Standards.

Deletion of Addition on Account of Provision for Doubtful Debts for Non-Performing Assets:
The department contested the deletion of additions for Provision for Doubtful debts for NPAs, arguing that such provisions are unascertained liabilities. The Ld. CIT(A) had deleted the additions, but the department's grievance was upheld based on the Supreme Court ruling in Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577. The Court held that provisions for NPAs under RBI Prudential Norms can be treated as income, not as deductible expenses under the IT Act. Consequently, the department's grievance on this issue was accepted, and the Assessing Officer's decision was reinstated.

In conclusion, the Tribunal dismissed certain appeals, allowed one, and partly allowed another, based on the specific issues of de-recognized interest on NPAs and provision for doubtful debts for NPAs. The judgment highlighted the significance of adhering to RBI directives and Accounting Standards in determining income recognition for NPAs, while also emphasizing the legal treatment of provisions for NPAs as income as per established legal precedents.