2021 (8) TMI 225 - HC - Income Tax

Deduction u/s 36(1)(viii) - profits derived from eligible business - as argued interest pertaining to Non-Performing Assets (NPA) cannot be recognized as income till it is actually received - HELD THAT - The assessee is a specified entity as provided in sub clause (iv) of clause (a) to Explanation to Section 36(1)(viii) of the Act and development of housing in India is an eligible business by virtue of sub clause c of clause (b) to Explanation to Section 36(1)(viii) - in case of an assessee the assessee is required to fulfill the condition of having engaged in the business of providing long term finance for construction or purchase of houses in India for residential purpose. The aforesaid aspect of the matter has not been examined by the tribunal while dealing with the claim of the assessee for deduction under Section 36(1)(viii) of the Act. The assessee had classified certain advances as Non Performing Asset in accordance with the directives issued by the Reserve Bank of India. The income by way of interest in respect of the said account is not recognized as income till it is actually accrued to the assessee. The tribunal while deciding the aforesaid issue failed to take into account the law laid down by this court in Canfin Homes Ltd supra, which is binding on it. The tribunal has also not dealt with the grounds raised by the assessee in memo of appeal in ground Nos.16 to 20. Order passed by the tribunal cannot be sustained in the eye of law, the same is quashed. It is made clear that the tribunal shall decide the claim of the assessee with regard to deduction under Section 36(1)(viii) of the Act afresh

Summary

Issues:
1. Deduction under section 36(1)(viii) of the Income Tax Act.
2. Recognition of interest income on non-performing assets.
3. Adherence to binding decisions of the Jurisdictional high court.
4. Adjudication of issues not before the tribunal.

Analysis:

Issue 1: Deduction under section 36(1)(viii) of the Income Tax Act
The appellant challenged the denial of deduction under section 36(1)(viii) of the Act. The appellant contended that as a specified entity engaged in providing long-term finance for housing development in India, they were entitled to the deduction. The argument emphasized the liberal construction of the provision and the eligibility criteria outlined in the Act. The court noted that the tribunal failed to consider whether the appellant met the conditions of providing long-term finance for housing, a crucial aspect for claiming the deduction. Citing relevant case law, the court highlighted the need for a fresh assessment of the appellant's eligibility for the deduction.

Issue 2: Recognition of interest income on non-performing assets
The appellant disputed the treatment of interest income on non-performing assets, asserting that such income should not be recognized until actually received. The court observed that the tribunal overlooked the legal precedent set by the Jurisdictional high court, which was binding. The failure to address the grounds raised by the appellant in the appeal further weakened the tribunal's decision. Consequently, the court deemed the tribunal's order unsustainable in law and directed a reevaluation of the appellant's claim regarding the interest income on non-performing assets.

Issue 3: Adherence to binding decisions of the Jurisdictional high court
The appellant raised concerns about the tribunal not following the binding decisions of the Jurisdictional high court, specifically referencing cases involving similar issues. The court acknowledged the importance of precedent and criticized the tribunal for not applying the established legal principles in its decision-making process. By highlighting the tribunal's oversight in this regard, the court emphasized the necessity of consistency and adherence to authoritative judgments.

Issue 4: Adjudication of issues not before the tribunal
The appellant highlighted the tribunal's failure to address certain grounds raised in the appeal, leading to prejudice against the appellant. The court noted that the tribunal did not adequately consider all relevant issues presented, which impacted the fairness of the decision. By pointing out the tribunal's omission in adjudicating specific grounds, the court underscored the importance of a comprehensive review of all arguments raised by the parties involved. Consequently, the court set aside the tribunal's order and instructed a fresh consideration of the unresolved issues.

In conclusion, the court quashed the tribunal's order and remitted the matter for a fresh decision, emphasizing the need for a thorough evaluation of the appellant's claims regarding deductions and interest income. The judgment underscored the significance of legal precedent, proper consideration of all relevant issues, and adherence to established legal principles in tax matters.