2014 (7) TMI 139 - HC - Income Tax

Accrual of interest on Non-Performing Assets Held that - The assessee had credited only an amount as interest on loans - AO was of the view that the interest accrued on the entire loans should have been shown as income - The details as to how the interest income on accrual basis should have been disclosed are referred to by the Tribunal - The Tribunal held that the income was not realized - the assessee follows the mercantile system of accounting - the loan advanced by the assessee which was in NBFC had become nonperforming asset - Commissioner of Income tax Versus Vasisth Chay Vyapar Ltd. & others 2010 (11) TMI 88 - Delhi High Court - once there is no dispute that the interest considered as accrued was a non-performing asset as per Reserve Bank of India guidelines, then, the income from this interest did not accrue to the assessee the income was not and cannot be assessed on accrual basis - once the view taken by the Tribunal was possible the income has not been realized by the assessee, the addition was rightly deleted Decided against Revenue.

Summary

Issues:
1. Addition of accrued interest on Non Performing Assets (NPA) for assessment year 2003-04.

Analysis:
The appeal raised a substantial question of law concerning the addition of accrued interest on Non Performing Assets (NPA) for the assessment year 2003-04. The appellant contended that the interest accrued should have been disclosed as income when following the mercantile system of accounting. The Income Tax Act mandates that accruing interest must be treated as income, allowing for bad debt write-offs if the interest remains unrealized. The appellant argued that the Tribunal erred in holding that the interest accrual was not income, citing a judgment of the Delhi High Court. On the other hand, the respondent argued that banking institutions can treat unrealized interest income as doubtful under the mercantile system, aligning with the Supreme Court's decision in UCO Bank v. Commissioner of Income Tax. The respondent also referenced a judgment of the Calcutta High Court supporting this view.

The Tribunal considered the undisputed facts that the assessee company, a nonbanking financial company, declared a total loss but failed to show all accrued interest as income. The Assessing Officer believed all accrued interest should have been reported as income, but the Tribunal disagreed. It held that since the interest was not realized and the loans had become nonperforming assets, the income did not accrue to the assessee. Relying on Supreme Court and Delhi High Court judgments, the Tribunal concluded that the interest income was not assessable on an accrual basis due to being classified as a non-performing asset as per Reserve Bank of India guidelines.

The High Court found no misdirection in law by the Tribunal and upheld its decision. It noted that the Tribunal's view aligned with RBI guidelines and did not conflict with the Income Tax Act. Referring to the UCO Bank case, the High Court emphasized that unrealized interest income could be kept in a suspense account by nationalized banks. The High Court supported the Tribunal's decision, stating that the income need not be realized immediately and could be assessed in the year of recovery. As the Tribunal's decision was reasonable and in line with legal provisions, the appeal was dismissed without costs.