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2017 (2) TMI 734 - HC - Income TaxAddition u/s 41 - Demand Drafts and Pay Orders payable as on the last date of the Financial Year, which were not so far encashed by the concerned customers - Held that - Addition cannot be made under Section 41(1) of the Act, since the liability of the assessee Bank to pay back the amounts to the customers in respect of such stale Demand Drafts and Pay Orders does not cease in law. See The Commissioner of Income Tax, Asst. Commissioner of Income Tax Versus Karnataka Vikas Grameen Bank 2015 (12) TMI 1420 - KARNATAKA HIGH COURT - Decided in favour of assessee
Issues Involved:
1. Addition under Section 41(1) of the Income Tax Act, 1961. 2. Taxability of accrued interest on non-performing assets. Issue-wise Detailed Analysis: 1. Addition under Section 41(1) of the Income Tax Act, 1961: The Revenue filed appeals against the orders of the Income Tax Appellate Tribunal (ITAT), which deleted the addition of ?73,58,708 made under Section 41(1) of the Income Tax Act, 1961, in the hands of the petitioner-assessee, a Co-operative Bank. The Assessing Authority had added this amount, representing unencashed Demand Drafts and Pay Orders as of the last date of the Financial Year, treating it as a cessation of liability under Section 41(1). The Tribunal's findings, as recorded in para 8.5.1, stated that for Section 41(1) to apply, it must be established that the assessee obtained some benefit in respect of a trading liability allowed as a deduction in past assessments, which later ceased or was remitted by the creditor. The Tribunal referenced the Supreme Court's decision in Sugauli Sugar Works (P) Ltd, which held that a unilateral action cannot bring about a cessation or remission of liability. The Tribunal found that the liability of ?73,58,708 still reflected in the books of accounts as on 31.3.2007, indicating that the liability subsisted. Further, as per an RBI Circular, such stale drafts/pay orders must be kept as a liability in the books for ten years before transferring to the RBI, indicating no cessation of liability in favor of the bank. The Tribunal also noted that the amount was not credited to the profit and loss account but appeared as an outstanding liability in the Balance Sheet, supported by previous Tribunal decisions in the cases of Canara Bank and Vijay Bank. Consequently, the Tribunal deleted the addition made by the Assessing Officer under Section 41(1). The High Court agreed with the Tribunal's findings and referenced a Division Bench decision in The Commissioner of Income Tax Vs. Karnataka Vikas Grameen Bank, which followed the Supreme Court's ruling in T.V. Sundaram Iyengar and Sons Limited, holding that such an addition under Section 41(1) cannot be made since the liability to pay back the amounts does not cease in law. The High Court found no substantial question of law arising in this matter and upheld the Tribunal's decision. 2. Taxability of Accrued Interest on Non-Performing Assets: The Revenue also raised the issue of the taxability of accrued interest on non-performing assets (NPAs). The High Court referenced its previous decision in The Commissioner of Income Tax Vs. Shri. Siddeshwar Co-operative Bank Limited, which followed the decision in Commissioner of Income Tax and another Vs. Canfin Homes Ltd., holding that accrued interest on NPAs cannot be brought to tax. The Court noted that if an asset is classified as non-performing, it ceases to yield income, and therefore, the question of showing that revenue and paying tax does not arise. The Tribunal had held that income from NPAs should be recognized only when actually received, as per RBI guidelines. The High Court found that the Revenue's contention that tax should be paid on notional revenue from NPAs was without basis. The Court further clarified that NPAs include substandard assets, doubtful assets, and loss assets, all of which fall under the purview of NPAs. Hence, the decision in Canfin Homes applied to all such classifications. Conclusion: The High Court concluded that no substantial question of law arose for further consideration, as the issues were covered by previous decisions of the Court. Consequently, the appeals filed by the Revenue were dismissed with no costs.
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