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2020 (11) TMI 654 - HC - Income TaxComputation of taxable income - interest accrued on non performing assets - addition made under Section 40(a)(ia) - assessee maintaining mercantile system of accounting - Tribunal held that the provision for non performing assets made by assessee is proper as it is done as per RBI guidelines - whether RBI guidelines cannot override the mandatory provision of Section 145 of the I.T. Act? - HELD THAT - First substantial question of law has already been answered by a bench of this court vide judgment in The Urban Co-operative Bank Ltd 2014 (10) TMI 740 - KARNATAKA HIGH COURT and Special Leave Petition against the aforesaid order has been dismissed by Supreme Court keeping the question of law open. The aforesaid aspect of the matter could not be disputed by the learned counsel for the revenue. For the reasons assigned above the first substantial question of law is answered against the revenue and in favour of the assessee. Deduction for provision for bad and doubtful debt - Benefit under Section 36(1)(viia) - assessee has to first set off the bad debt written off against the provision made under Section 36(1)(viia) of the Act - HELD THAT - This court in Canfin Homes Ltd. 2011 (8) TMI 178 - KARNATAKA HIGH COURT after taking note of Section 145 of the Act has held that once a particular asset is shown as non performing asset then the assumption that it is not yielding any revenue. When an asset is not yielding any revenue, the question of showing that revenue and paying tax would not arise. The contentions, which are sought to be raised by learned counsel for the revenue do not arise for consideration in the context of substantial question of law, which has been framed by this court. The concurrent findings have been recorded by the Commissioner of Income Tax (Appeals) as well as tribunal in this regard, which cannot be termed as perverse. - Decided in favour of the assessee.
Issues:
1. Whether interest accrued on non-performing assets should be included in taxable income despite following the mercantile system of accounting. 2. Whether the provision for non-performing assets made by the assessee as per RBI guidelines should override the provisions of Section 145 of the Income Tax Act. Analysis: Issue 1: The appeal pertains to the Assessment Year 2007-08, where the revenue challenged the deletion of interest accrued on non-performing assets from taxable income. The Assessing Officer made additions based on the mercantile system of accounting, including provisions for non-performing assets. The Commissioner of Income Tax (Appeals) allowed the provision for non-performing assets following the Supreme Court decision in UCO Bank case. The tribunal affirmed this decision, stating that once an asset is classified as non-performing, it is assumed to yield no revenue, hence not taxable. The court upheld this reasoning, emphasizing that the revenue's contentions were not relevant to the framed substantial question of law. Issue 2: Regarding the second substantial question of law, the revenue argued that the provision under Section 36(1)(viia) should be set off against bad debts written off, and any excess write-off should be allowed under Section 36(1)(vii). The revenue cited a Supreme Court decision to support their argument. However, the tribunal's decision was based on the accounting treatment of interest income on non-performing assets and followed RBI guidelines. The court agreed with the tribunal's findings, stating that the revenue's arguments were not pertinent to the issue at hand. The court dismissed the appeal, upholding the decisions of the tribunal and Commissioner of Income Tax (Appeals). In conclusion, the court ruled in favor of the assessee, dismissing the revenue's appeal as they found no merit in the arguments presented.
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