2018 (5) TMI 151 - HC - Income Tax

Accrued interest on loans as classified as Non-performing Assets - accrual of income - Held that - When an asset becomes non-performing, it ceases to yield in come 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. Substantial question of law against the revenue.

Summary

Issues Involved:
Challenge to the order passed by the Income Tax Appellate Tribunal regarding the deletion of additions made by the assessing authority on account of accrued interest on loans classified as non-performing assets.

Analysis:
The High Court addressed the substantial question of law raised by the revenue regarding the deletion of additions made on account of accrued interest on loans classified as non-performing assets. The Court referred to previous decisions, including one involving Canfin Homes Limited, to establish that under the mercantile system of accounting, income shown as accruing must be taxed even if not realized immediately. However, if an asset is a non-performing asset and ceases to yield income, the income should only be recognized when actually received. The Court emphasized that the revenue's contention that tax must be paid on notionally accrued revenue from non-performing assets is unfounded. The judgment was made in favor of the assessee, upholding the Tribunal's decision to delete the additions.

In another case involving Shri Siddeshwar Co-Operative Bank Limited, the definition of non-performing assets was discussed, highlighting that such assets cease to generate income for the bank. The Court reiterated that once an asset is classified as non-performing, it does not yield revenue, and therefore, the question of paying tax on notionally accrued income does not arise. The Court dismissed the appeal, affirming that in the case of non-performing assets, tax should only be paid on income actually received.

In conclusion, the High Court dismissed the appeal filed by the revenue under Section 260A of the Income Tax Act, upholding the Tribunal's decision to delete the additions made on account of accrued interest on loans classified as non-performing assets. The judgments in previous cases were cited to establish that tax should only be paid on income actually received from non-performing assets, and not on notionally accrued income.