2013 (4) TMI 316 - AT - Income Tax

Addition on account of interest on Non Performing Assets not recognized by the appellant - Assessee submitted that in view of the RBI guidelines, Accounting Standards and guidance notes of ICAI etc. following the principles of income recognition, the assessee had followed these directions and accordingly not recognized the interest on NPA for the year - Held that - As decided in C.I.T. vs. M/s Vasisth Chay Vyapar Ltd. 2010 (11) TMI 88 - DELHI HIGH COURT the assessee herein had advanced certain Inter Corporate Deposits (ICD) to M/s Shaw Wallace Company. The interest thereupon could not be received by the assessee for more than six months. The assessee is a Non-Banking Financial Company (NBFC) and, therefore, is bound by the directions given by the Reserve Bank of India. These directions, inter alia, mandate a NBFC to declare such advances as Non Performing Assets (NPA) when the accrued interest therein is not paid by the debtor continuously for six months. The assessee company being NBFC is governed by the provisions of RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee. As DR could not controvert the submissions of the assessee that this issue is squarely covered in favour of the assessee by the decision of Vasisth Chay Vyapar Ltd.(Supra) the issue in favour of the assessee decided.

Summary

Issues involved:
1. Recognition of interest on Non-Performing Assets (NPA) as income.

Detailed Analysis:

Issue 1: Recognition of interest on Non-Performing Assets (NPA) as income

The appeal was against the Ld. Commissioner of Income Tax (Appeals)-X's order dated 05.10.2012 for the assessment year 2006-07. The ground raised was the addition of Rs. 1,04,204/- on account of interest on Non-Performing Assets not recognized by the appellant. The Assessing Officer noted that the assessee company did not recognize interest on NPA as income, amounting to Rs. 1,04,204/-. The assessee justified this by citing RBI guidelines, Accounting Standards, and ICAI guidance notes, stating they followed income recognition principles. However, the Assessing Officer disagreed and made the addition. The Ld. Commissioner of Income Tax (A) upheld this decision. The assessee appealed, arguing that the issue was favorably decided by the Hon'ble Jurisdictional High Court in a similar case involving Inter Corporate Deposits (ICD) and NPA classification. The High Court held that in such circumstances, where interest income was not received due to financial uncertainties, it could not be deemed to have accrued to the assessee. The Court also considered the RBI Act and Prudential Norms, concluding that interest income cannot be said to have accrued to the assessee in the case of NPAs with minimal recovery possibilities. The Tribunal, in line with the High Court decision, set aside the lower authorities' orders and ruled in favor of the assessee, allowing the appeal.

This detailed analysis provides a comprehensive overview of the legal judgment, focusing on the recognition of interest on Non-Performing Assets (NPA) as income and the subsequent decision by the Appellate Tribunal ITAT DELHI.