2009 (11) TMI 560 - HC - Income Tax

Question of Law - Whether interest for non-performing assets cannot be fixed on accrual basis - The assessee is a non-banking finance company - The Central Board of Direct Taxes circular permitted such interest to be excluded from income, if for three years such interest was not actually received - In the present case, the assessee has classified its assets on the basis of the notification issued by the Reserve Bank of India and found that the appellant under the category of non-performing assets - The issue is answered against the Revenue - Appeal was dismissed

Summary

Issues:
Appeal against Tribunal's order regarding taxation of interest accrued on non-performing assets under mercantile system of accounting.

Analysis:
The case involved an appeal by the Revenue against the Tribunal's order related to the assessment years 1995-96 to 2000-01 concerning the taxation of interest accrued on non-performing assets by a non-banking finance company. The Assessing Officer had taxed the interest accrued on non-performing assets as the company had set off expenses related to both performing and non-performing assets, leading to a distorted profit and loss account. The Commissioner of Income-tax (Appeals) allowed the appeal in favor of the assessee based on relevant legal precedents. The Tribunal upheld the Commissioner's decision, prompting the Revenue to challenge the order.

The main question before the court was whether interest for non-performing assets could be fixed on an accrual basis. The Tribunal, relying on previous judgments, held that the company was following a mixed system of accounting where interest on non-performing assets was not recognized until actually received. The court referred to specific cases where income from non-performing assets was not recognized in the profit and loss account, justifying the company's treatment of such interest in a suspense account. The court emphasized that the principle of accrual of income only applies when income is recognized, and since the company had not recognized any income from non-performing assets as per RBI notifications, the question of accrual did not arise.

Based on the Division Bench judgments and the specific treatment of interest on non-performing assets, the court concluded that there was no need to interfere with the Tribunal's decision. The court dismissed the tax case appeals and connected miscellaneous petitions, upholding the decision in favor of the assessee.