2017 (2) TMI 399 - AT - Income Tax

Assessment of income on the non-performing assets - accrual of income - Held that - The assessee was systematically following the accounting method with regard to the non-performing asset. When the advances are classified as non-performing assets, the assessee was continuously following a practice of recognising the interest on receipt basis. This method of accounting continuously followed by the assessee is not in dispute. When the advances were classified as non-performing assets and the assessee shifting to the cash system of accounting in respect of such advances which are classified as non-performing assets, this Tribunal is of the considered opinion that when the recovery of principal amount itself was doubtful, it cannot be said that the interest on such amount accrued to the assessee. Therefore, as per the system of accounting continuously followed by the assessee, the interest income on non-performing assets cannot be taken as income of the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. - Decided against revenue

Summary

Issues: Assessment of income on non-performing assets

Analysis:
The judgment by the Appellate Tribunal ITAT Chennai involved appeals against the common order of the Commissioner of Income-tax for the assessment years 2009-10 and 2010-11. The primary issue in both appeals was the assessment of income on non-performing assets. The Departmental representative argued that the interest on overdue amounts should be recognized as income, as per the Income-tax Act. The representative contended that even if the interest was not recognized by the assessee, it should still be treated as income. However, the assessee, a cooperative bank, followed the practice of recognizing interest income on a receipt basis for non-performing assets, as the recovery of principal amounts was uncertain.

The Departmental representative emphasized that the interest on advanced loans should be recognized on an accrual basis, as the bank followed the mercantile system of accounting. They argued that the prudential norms by the Reserve Bank of India should not override the Income-tax Act. On the other hand, the representative for the assessee argued that since the principal amount was not recoverable and classified as a non-performing asset, the interest should not be accrued. They maintained that income would be recognized only upon recovery of the principal amount along with interest.

The Tribunal analyzed the submissions and found that the bank consistently followed the practice of recognizing interest on non-performing assets on a receipt basis. It was noted that when the recovery of the principal amount was uncertain, the interest could not be considered as accrued income. The Tribunal held that the Income-tax Act prevails over regulations by the Reserve Bank of India. Therefore, based on the accounting method consistently followed by the assessee, the interest income on non-performing assets was not deemed as income. Consequently, the Tribunal confirmed the order of the lower authority, dismissing the appeals of the Revenue.

In conclusion, the judgment clarified the treatment of income on non-performing assets, emphasizing the importance of consistent accounting practices and the primacy of the Income-tax Act in such assessments.