2009 (5) TMI 507 - HC - Income Tax

Income- accrual of income- The assesese was a non-banking financial company registered with the Reserve bank of India and derived income from hire purchase business and leasing of transport vehicle and machinery. The Assessing Officer added the deposits of Rs. 1, 75, 000 and Rs. 13, 00, 012 of security deposit under section 68 of the Act. The Assessing Officer also noticed the assessee had not charged lease rental and hire charges on non-performing assets. The Commissioner (Appeals) deleted both the additions. This was confirmed by Tribunal. Held that- (1) the assessee was obliged not to provide for hire charges and lease rental on non-performing assets in view of the RBI guidelines according to which income relating to sub-standard assets/non performing assets which was outstanding for more than six months was not treated as income. (2) deposits for purchase of vehicle and was transferred to the hire purchase account that the security deposit was given by cheque and that both these amounts were genuine were based on appreciation of evidence and material on record.

Summary

Issues:
1. Whether the Income-tax Appellate Tribunal was justified in granting relief from the addition made by the Assessing Officer under section 68 of the Income-tax Act?
2. Whether the Income-tax Appellate Tribunal was correct in deleting the additions made by the Assessing Officer on account of hire charges and lease rentals?

Analysis:
1. The case involved an appeal under section 260A of the Income-tax Act, 1961, where the Commissioner of Income-tax-II raised substantial questions of law regarding the justification of the Income-tax Appellate Tribunal's decision to grant relief from additions made by the Assessing Officer under section 68 of the Act. The Tribunal had deleted additions relating to deposits from Smt. Sheela Rani and Sri Jagar Singh after finding the deposits genuine based on evidence and material on record. The Tribunal concluded that the amounts were legitimate, as the deposit from Smt. Sheela Rani was transferred to her hire purchase account, and the security deposit from Sri Jagar Singh was supported by an account payee cheque/draft, thus discharging the onus of proof. The High Court upheld the Tribunal's decision, emphasizing that the finding was not arbitrary or illegal.

2. Regarding the deletion of hire charges and lease rentals on non-performing assets, the Tribunal upheld the deletion made by the Commissioner of Income-tax (Appeals) based on the respondent-assessee's adherence to Reserve Bank of India (RBI) guidelines. The respondent, a non-banking financial company, excluded hire charges and lease rentals on non-performing assets in line with RBI guidelines, which stated that income from such assets outstanding for over six months should not be treated as profits. The High Court referenced precedents like United Commercial Bank v. CIT and Mercantile Bank Ltd. v. CIT, where the Supreme Court held that income on sticky advances and doubtful loans need not be included in profits until actually received. Applying this principle, the High Court concluded that the respondent-assessee was justified in excluding hire charges and rentals on non-performing assets to comply with RBI guidelines, ensuring continued registration with the RBI.

3. The High Court dismissed the appeal, stating that no substantial question of law was involved, given the Tribunal's reasoned findings and the respondent's adherence to RBI guidelines. The judgment highlighted the importance of following regulatory guidelines in determining income recognition, emphasizing the need for strict adherence to statutory provisions to maintain financial stability and regulatory compliance.