2018 (1) TMI 1702 - AT - Income Tax

Accrual of income - Disallowance on account of derecognized interest - HELD THAT - As regards accrual of interest on sticky loans, the Hon'ble Supreme Court in the case of State Bank of Travancore Vs. CIT 1986 (1) TMI 1 - SUPREME COURT held that interest accruing on sticky loans is taxable to Income tax on accrual basis. Accordingly, the NBFC, as in the present case, has to follow the directions of the CBDT and as per the decision of various courts, NBFC including banks follow the cash basis of accounting for interest on sticky loans until they are recovered or the loan itself is written off. There is consistency in following the accounting principles by the assessee and therefore, derecognition of interest on NPAs is not something barred by the Income tax law. Thus we find no infirmity in the order of the ld. CIT(A) who has rightly deleted the addition so made by the Assessing Officer. Thus, the sole ground of appeal raised by the Revenue is dismissed.

Summary

Issues:
Disallowance of derecognized interest.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) relating to the assessment year 2010-11. The main issue raised was the disallowance of Rs. 1,39,95,558 on account of derecognized interest. The mistake in the registration of the assessee's name was rectified from "M/s Bhartiya Samruddhi Investment and Consulting Services Ltd." to "M/s Bhartiya Samruddhi Finance Ltd."

The Assessing Officer added the sum of Rs. 1,35,95,558 to the total income of the assessee due to derecognized interest. However, the ld. CIT(A) deleted this addition based on the assessee's explanation and previous rulings in the assessee's favor for assessment years 2004-05 to 2008-09. The ITAT Delhi Bench had allowed the derecognized income in the assessee's favor in earlier years.

The Hon'ble Supreme Court's decision in the case of State Bank of Travancore Vs. CIT held that interest accruing on sticky loans is taxable on an accrual basis. The CBDT's circular also provided directions regarding the change in the method of accounting of interest. The assessee, being an NBFC, followed the cash basis of accounting for interest on sticky loans, as directed by the CBDT.

The ITAT upheld the ld. CIT(A)'s decision to delete the addition made by the Assessing Officer, citing consistency in following accounting principles and previous favorable rulings in the assessee's own case. Therefore, the sole ground of appeal raised by the Revenue was dismissed, and the appeal of the Revenue was dismissed accordingly.