2013 (9) TMI 308 - AT - Income Tax

Interest on NPA - non accrual of income, - the outstanding balance was converted into equity capital in the investee- company - non-recognizing interest income on NPAs by the assessee-bank following RBI guidelines - Held that - a settlement was arrived at between the parties, whereby while the assessee waived the interest receivable to the extent of Rs. 17.37 lacs, the borrower issued it shares for the balance amount due, i.e., Rs.83 lacs. Any lender, for whom interest income is a primary source of income, would resort to such a measure only with a view to safeguard his capital, i.e., as a measure of last resort. This is as this would put a stop to its regular source of income; the dividend income on the shares being uncertain and, in any case, would arise only subject to adequate profits being earned by the borrower, and then, again, only at the discretion of the management. In fact, it needs to be appreciated that this amounts to conversion of a trading asset (interest bearing advance) to a capital asset, with an uncertain remunerative potential, which is neither an easy nor a desirable proposition for any business enterprises. Further, on what basis does the Revenue state it to be a device (for tax avoidance) is not understood, and which allegation cannot be lightly made. In fact, the borrower also would not book the liability to this extent, so that until and unless the transaction is not genuine would not be entered into. In any case, such an allegation has to have its basis in fact/s and support of materials, while we find it to be de hors any basis. As such, we are unable to appreciate the Revenue s case. At the same time, there is no finding by either of the authorities below that the borrower has not booked this liability in its accounts. This is fundamental to the validity of the financial arrangement under reference. The assessee has also in fact neither claimed so, i.e., of the borrower having not booked the liability to interest, or of having after booking reversed it pursuant to this arrangement, nor placed the settlement agreement on record. As such, subject to the confirmation of the borrower having not booked this liability in its accounts, i.e., toward interest for Rs. 17.37 lacs, we confirm the non accrual of the same as income to the assessee for the year - Decided against assessee. Interest on assumed value of shares - Held that - accommodation provided is non-fund based. There is no charge of the assessee being entitled to any guarantee fee or commission, and which was also clarified by us during hearing from the ld. AR, and which, in any case, is not the Revenue s case. Under these circumstances, we are unable to comprehend or appreciate the Revenue s case in the least. All that has transpired is that, being a part of the RPJ group, the assessee has placed its investment by way of shareholding in the group concerns with the trustee as a part of the financial arrangement to enable funds being borrowed by its group concerns from the financial institutions. The assumption of interest under the circumstance is purely notional, without basis either in fact/s or in law - Decided in favour of assessee. Non accrual of interest on NPA as per RBI guidelines - Held that - So, however, the issue before us is not on the merits of the issue, but as to whether the decision by the apex court in Southern Technologies Ltd. (2010 (1) TMI 5 - SUPREME COURT OF INDIA) covers the issue qua recognition of income on NPA accounts in view of the RBI guidelines. The same, as aforesaid, is in our view a question of fact. The same being subject to two different, in fact, opposite, views by the orders by the coordinate benches of this tribunal, the matter was put across to the assessee. It admitted to, firstly, the matter being a question of fact and, two, of being subject to different, irreconcilable views. Strictly, per the procedure, the matter ought to be referred to a special bench of the tribunal. On this proposition being mooted, the ld. AR, after taking time for seeking instructions from his client, the assessee-appellant, confirmed that it was in a position to meet the case on the merits of the addition on quantum inasmuch as the interest under reference has not been received even by now, i.e., after a lapse of a number of years. The matter may, therefore, be proceeded with on the footing of the applicability of decision by the apex court in the case of Southern Technologies Ltd. (supra), i.e., on merits, and restored back to the file of the assessing authority for necessary determination. - matter remanded back. Addition in respect of interest in the sum of Rs.157.20 lacs assumed on the value of the shares (Rs.1309.94 lacs) pledged by the assessee-company to IDBI Trusteeship Services Ltd. - Held that - the accommodation provided is non-fund based. There is no charge of the assessee being entitled to any guarantee fee or commission, and which was also clarified by us during hearing from the ld. AR, and which, in any case, is not the Revenue s case. - All that has transpired is that, being a part of the RPJ group, the assessee has placed its investment by way of shareholding in the group concerns with the trustee as a part of the financial arrangement to enable funds being borrowed by its group concerns from the financial institutions. The assumption of interest under the circumstance is purely notional, without basis either in fact/s or in law. - Decided against the assessee. Disallowance of bad debts - Held that - write off by the assessee in its accounts of a debt as irrecoverable would itself deem or signify it as having become bad. No doubt, this would not preclude the Revenue from disallowing the claim where the write off is not genuine, but we are unable to come to any such finding. In fact, the amount has been written off, as clarified in the notes to the accounts, on the basis of the decision by the Board of Directors. Further, the interest arising on the said loans has remained unpaid and, as it would appear to us, for a period beyond the current year, i.e., when the two, the amount of interest and the amount of the principal, are compared (with each other). In any case, the onus to establish that the claim is not genuine is only on the Revenue, while its case rests solely on the non-discharge by the assessee of the onus on it to establish the debts under reference as having become bad - Decided in favour of assessee. Reversal of provisions for NPA - assessee had written back the provision against the NPA outstanding in its accounts for Rs.160 lacs - Held that - If no deduction, as claimed, had been claimed or allowed to the assessee for an earlier year qua the provision now written back, how we wonder the same, i.e., its write back, or to this extent, gives rise to any tax liability for the current year. There is surprisingly no clarity on this aspect of the matter in the orders of the Revenue authorities. This aspect having not been verified by the A.O. at the assessment stage, the matter is to be remitted to him for the purpose.

Summary

Issues Involved:
1. Waiver of accrued interest.
2. Interest on non-performing assets (NPAs).
3. Treatment of received amounts as interest or principal.
4. Notional interest on pledged shares.
5. Disallowance of bad debts.
6. Reversal of provision for NPAs.
7. Interest on income tax refund.
8. Adjustments to book profit under section 115JB.

Issue-wise Detailed Analysis:

1. Waiver of Accrued Interest:
The appeal contested the waiver of accrued interest amounting to Rs. 17.37 lacs. The assessee argued that the waiver was part of a settlement for the recovery of an outstanding amount, converting the balance into equity shares. The assessing authority considered the waiver as an artifice to defraud the Revenue, stating that the right of recovery had already vested in the assessee, and the income had already accrued. The CIT(A) upheld that income accrues when it becomes legally recoverable, and waiver after accrual is merely an application of income. The tribunal found that the Revenue's case lacked basis, and subject to confirmation that the borrower had not booked the liability, the non-accrual of income was confirmed.

2. Interest on Non-Performing Assets (NPAs):
The assessee did not recognize interest on NPAs following RBI guidelines, arguing that the interest had not accrued due to uncertainty in realization. The CIT(A) and AO added Rs. 133.99 lacs as accrued interest. The tribunal noted that the accrual of income is a factual matter and not determined solely by RBI guidelines. The tribunal restored the matter to the AO to decide based on the real income theory, requiring a factual determination of whether interest income had accrued.

3. Treatment of Received Amounts as Interest or Principal:
The AO treated Rs. 89 lacs received by the assessee as interest, while the assessee claimed it was on account of principal. The tribunal referred to its earlier decisions, stating that the Revenue cannot act contrary to the terms agreed between the lender and borrower without adverse material. The matter was remitted back to the AO to verify the assessee's claim with reference to the corresponding party's records.

4. Notional Interest on Pledged Shares:
The AO assumed notional interest on shares pledged by the assessee to IDBI Trusteeship Services Ltd. The CIT(A) confirmed the addition. The tribunal found the Revenue's case baseless, noting no charge of the assessee being entitled to any guarantee fee or commission. The tribunal directed the deletion of the notional interest addition.

5. Disallowance of Bad Debts:
The AO disallowed the claim for bad debts of Rs. 155 lacs, stating the debts had not been established as bad. The CIT(A) upheld the disallowance. The tribunal referred to the Supreme Court decision in T.R.F. Ltd., stating that the write-off by the assessee in its accounts signifies the debt as bad. The tribunal directed the deletion of the disallowance, noting the Revenue failed to prove the claim was not genuine.

6. Reversal of Provision for NPAs:
The AO disallowed Rs. 160 lacs claimed by the assessee on reversing the provision for NPAs. The CIT(A) confirmed the disallowance. The tribunal noted that if the provision had not been allowed in earlier years, no taxable event arises on its reversal. The matter was remitted to the AO to verify if the provision had been allowed in earlier years, directing that only the allowed portion on reversal be taxed.

7. Interest on Income Tax Refund:
The AO treated Rs. 1,09,539/- as income from other sources, while the assessee claimed it as business income. The tribunal upheld the AO's decision, noting that interest on tax refunds cannot be considered part of the assessee's business income.

8. Adjustments to Book Profit Under Section 115JB:
The AO made adjustments to the book profit for various additions. The tribunal directed that adjustments to the book profit should correspond with the assessed income, subject to the consistency between accounts and regular provisions.

Conclusion:
The tribunal partly allowed the assessee's appeal, remitting several issues back to the AO for fresh adjudication based on factual determinations and confirming other findings. The decision emphasized the importance of factual verification and alignment with legal provisions in determining tax liabilities.