2018 (2) TMI 1462 - HC - Income Tax

Additions made by the assessing authority on account of accrued interest on loans which are classified as Non-performing Assets - applicability of provisions of section 43D - Held 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. See Commissioner of Income-Tax and another Vs. Canfin Homes Limited (2011 (8) TMI 178 - KARNATAKA HIGH COURT). In such cases paying tax would not arise. Hence we answer the substantial question of law against the revenue.

Summary

Issues:
Challenge to judgment under Section 260A of the Income Tax Act, 1961 regarding accrued interest on loans classified as Non-performing Assets.

Analysis:
The appeal filed by the revenue challenges the ITAT's order on accrued interest on loans classified as Non-performing Assets for the assessment year 2012-13. The substantial question of law raised pertains to the application of section 43D of the Income Tax Act, 1961 and whether the respondent bank should receive benefits under this provision. The issue has been settled in previous decisions of the Co-ordinate Bench of the High Court, notably in the cases of Canfin Homes Limited and Shri Siddeshwar Co-Operative Bank Limited. The judgment in Canfin Homes Limited emphasizes that under the mercantile system of accounting, income shown as accruing must be brought to tax, unless it is clearly stated that the amount cannot be recovered. In the context of non-performing assets, income should only be recognized when actually received, as per policy guidelines. The judgment in Shri Siddeshwar Co-Operative Bank Limited further clarifies the definition and classification of non-performing assets, highlighting that when an asset becomes non-performing, it ceases to yield income, and thus, tax payment on notionally accrued revenue is not required.

Therefore, the Court held that when an asset is classified as non-performing, it does not yield revenue, and hence, the obligation to pay tax does not arise. The judgment dismisses the appeal, upholding the principle that tax should only be paid on income actually received, especially in the case of non-performing assets.