2018 (2) TMI 1348 - 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 decision of the Co-ordinate Bench of this Court in the case of Commissioner of Income-Tax and another Vs. Canfin Homes Limited (2011 (8) TMI 178 - KARNATAKA HIGH COURT) as that when an asset becomes non-performing, it ceases to yield income and once a particular asset is shown to be a non performing asset, then it is nothing but no revenue is yielded. In such cases, paying tax would not arise. Hence, we answer the substantial question of law against the revenue.

Summary

Issues:
Challenge to judgment and order passed by ITAT regarding accrued interest on loans classified as Non-performing Assets under section 260A of the Income Tax Act, 1961.

Analysis:
The appeal filed by the revenue challenges the ITAT's decision on accrued interest on loans classified as Non-performing Assets for the assessment year 2011-12. The substantial question of law raised questions the deletion of additions made by the assessing authority, considering the provisions of section 43D of the Income Tax Act, 1961. The issue has been addressed in previous judgments, such as Commissioner of Income-Tax and another Vs. Canfin Homes Limited and The Commissioner of Income Tax and another Vs. Shri Siddeshwar Co-Operative Bank Limited. The Canfin Homes Limited case emphasized the importance of reflecting true income in the accounts and clarified that non-performing assets do not yield income, hence not taxable. Similarly, the Shri Siddeshwar Co-Operative Bank Limited case defined non-performing assets and highlighted that once an asset becomes non-performing, it stops generating income. This understanding led to the conclusion that in such cases, tax liability does not arise.

Therefore, the Court emphasized that when an asset becomes non-performing, it ceases to yield income, leading to no revenue being generated. Consequently, the Court ruled against the revenue's appeal, affirming that tax liability does not arise in the case of non-performing assets. The judgment was based on the principles outlined in previous cases and the nature of non-performing assets as assets that do not generate income. As a result, the appeal was dismissed, upholding the decision of the ITAT regarding the treatment of accrued interest on loans classified as Non-performing Assets.