2018 (1) TMI 1346 - HC - Income Tax

Addition on account of accrued interest on loans which are classified as Non-performing Assets - Held that - The issue involved in this appeal is no more res-integra in view of the judgment of this Court in Commissioner of Income Tax and another V/s Canfin Homes Ltd. 2011 (8) TMI 178 - KARNATAKA HIGH COURT as held Non-performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non-performing asset, then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the National housing Bank, the income from non-performing asset should be recognised only when it is actually received. That is what the Tribunal held in the instant case. Therefore, the contention of the Revenue that in respect of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. Mere nomenclature adopted with reference to the bad loans and advances receivable, would refer to all non-performing assets of any nature, of whatever category it was placed as a non-performing asset and accordingly the substantial question of law is answered against the Revenue.- Decided in favour of the assessee

Summary

Issues:
- Challenge to order of Income Tax Appellate Tribunal regarding accrued interest on loans classified as Non-performing Assets under Section 43D of Income Tax Act, 1961.

Analysis:

The appeal before the Karnataka High Court involved a challenge by the Revenue under Section 260-A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal. The Tribunal's order in ITA No. 132/PNJ/2017 for the assessment year 2011-12 raised a substantial question of law regarding the treatment of accrued interest on loans classified as Non-performing Assets. The key issue was whether the Tribunal was correct in deleting the additions made by the assessing authority, considering the provisions of Section 43D of the Income Tax Act, 1961, and the respondent bank's adoption of the mercantile system of accounting.

In its judgment, the High Court referred to a previous decision in Commissioner of Income Tax and another V/s Canfin Homes Ltd. The court emphasized the importance of the mercantile system of accounting, stating that if an assessee adopts this system and shows income as accruing, it must be brought to tax regardless of immediate realization. However, if an amount accrued is not recoverable and the asset is a non-performing asset, where interest remains unpaid and past due, it is not considered to be yielding income. The court highlighted that income from non-performing assets should only be recognized when actually received, as per National Housing Bank guidelines. Therefore, the Revenue's contention that tax should be paid on notionally accrued revenue from non-performing assets was dismissed.

Moreover, in another case (ITA No. 200002/2015), the High Court, relying on Tannan's Banking Law and Practice in India and the Canfin Homes Ltd. judgment, clarified that the nomenclature used for bad loans and advances receivable encompasses all non-performing assets. Consequently, the substantial question of law was answered against the Revenue in that case as well.

Based on the precedents and legal principles discussed, the High Court concluded that the substantial question of law raised in the present appeal should be answered against the revenue. The court's decision was influenced by the interpretation of the mercantile system of accounting, the treatment of non-performing assets, and the guidelines regarding the recognition of income from such assets. As a result, the High Court upheld the Tribunal's decision and ruled in favor of the assessee in this matter.