2013 (6) TMI 919 - AT - Income Tax

Summary

Issues Involved:
The judgment involves issues related to the non-recognition of interest income on non-performing assets (NPAs) by the assessee, the applicability of RBI guidelines and accounting standards, the authority of the Assessing Officer to add income on NPAs, and the justification for making such additions.

Issue 1: Non-recognition of Interest Income on NPAs
The Assessing Officer contended that interest accrued on NPAs should be added to the assessee's income, which the assessee had not done. The assessee argued that income was not recognized on NPAs in accordance with RBI guidelines and accounting standard 9. However, the Assessing Officer disagreed, stating that RBI guidelines cannot override Income Tax Authorities' provisions and that the assessee follows the 'mercantile system' of accounting, leading to the addition of income on NPAs.

Issue 2: Justification for Addition by Assessing Officer
The Assessing Officer added income on interest on NPAs to the assessee's account, citing that the loans had become bad debts and no real income had accrued to the assessee. The assessee relied on accounting standards to support their position, referencing various case laws to argue that no interest income should be recognized on doubtful recovery loans. The Ld. CIT(A) agreed with the assessee, stating that the notional interest income, not actually received by the assessee, should not be a basis for addition, leading to the deletion of the Assessing Officer's addition.

Issue 3: Applicability of RBI Guidelines and Accounting Standards
The ITAT Delhi, in its judgment, highlighted the RBI guideline that interest on NPAs should not be recognized and accounting standard 9's requirement for income recognition only with reasonable certainty of receipt. Citing precedents like CIT Vs. Elgi Finance Ltd., the ITAT upheld the Ld. CIT(A)'s decision to delete the addition made by the Assessing Officer, emphasizing the non-recognition of interest on NPAs in line with RBI notifications and accounting standards.

In conclusion, the ITAT upheld the decision of the Ld. CIT(A) to delete the addition of notional interest income on NPAs, emphasizing the adherence to RBI guidelines and accounting standards in income recognition, leading to the dismissal of the revenue's appeal.