2012 (11) TMI 351 - AT - Income Tax

Non-charging of interest on non-performing advances on accrual basis - CIT(A) deleted the addition - assessee is a financial institution owned by the Government of Gujarat - Held that - The interest on sticky loan which has accrued on the NPA were not accounted for in the profit and loss account by the assessee and as per the guidelines of the RBI such interest was chargeable in the accounting year in which it is credited to the P&L account for that year or when it was actually received by that institution whichever is earlier, as the provisions of the Act. In this case, the assessee neither have credited the interest to the profit and loss account of the relevant accounting period nor has actually received the same, and therefore the said addition was rightly deleted by the CIT(A) - in favour of assessee. Rejection of books of accounts - Held that - Various observations of the statutory auditors were mainly in respect of system of accounting, procedural lapses and internal checks and controls. The management of the assessee has claimed that it had complied with all such observations of the statutory auditors and the same were reflected in the directors report in point no.III at page no.8 of the annual accounts of the assessee. On similar facts, the accounts books of the assessee were accepted by the department in the earlier years as well as in the subsequent assessment year 2006- 2007 - AO without bringing any material deficiencies in the books of the accounts to show as to how the appellant s profit for the relevant period cannot be ascertained correctly on the basis of the books of accounts maintained by wrongly invoking the provisions of section 145(3) - in favour of assessee. Disallowance of depreciation - leased assets - Held that - the Revenue have not gone into the terms and conditions of the lease agreements entered into by the assessee-company. There is no finding by the AO that these lease were only finance lease and not operating lease - set aside the issue to the file of the AO with direction to decide the issue afresh relying on Asea Brown Boveri Ltd. Versus AFCI 2004 (10) TMI 325 - SUPREME COURT OF INDIA wherein held that in case of finance lease, it is the lessee who, for all practical purposes, is the owner of the assets - in favour of assessee for statistical purposes. Disallowance of penal interest - Held that - Perusal of the Resolution no. JNV-1099-2023-A of the Govt. of Gujarat, Finance Department has prescribed rates of interest on loans for the public sector undertakings, which is clearly in the nature of penal interest and not in the nature of penalty. The assessee is in the business of finance and interest was paid by the assessee-company on account of late payment of amount payable to the State Government. There is no infringement of law and there is no act on the part of the assessee which can be said to be against the public policy. The penal interest in the nature of finance charges for late payment of instalment/amount could not be equated with penalty imposable due to some infringement of law. The use of the word penal interest as a nomenclature does not mean any penalty for infringement of law - in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of non-charging of interest on non-performing advances.
2. Rejection of books of account and disallowance of loss.
3. Disallowance of depreciation on leased assets.
4. Disallowance of penal interest for late payment.

Detailed Analysis:

1. Deletion of Addition on Account of Non-Charging of Interest on Non-Performing Advances:
The Revenue challenged the deletion of additions made by the AO for non-charging of interest on non-performing advances on an accrual basis for the assessment years 2002-2003 and 2003-2004. The CIT(A) had deleted the additions, and the ITAT upheld this decision. The Tribunal noted that the assessee, a government-owned financial institution, adhered to RBI guidelines which mandated that interest on non-performing assets (NPAs) should only be accounted for when actually received or credited to the profit and loss account. Since the interest was neither credited nor received, the addition was rightly deleted by the CIT(A). The Tribunal relied on its earlier decision in the assessee's own case for the assessment year 2001-2002, confirming the CIT(A)'s order and dismissing the Revenue's appeals.

2. Rejection of Books of Account and Disallowance of Loss:
The Revenue's appeal for the assessment year 2005-2006 involved the rejection of the assessee's books of account and disallowance of the claimed loss. The CIT(A) had reversed the AO's action, and the ITAT upheld this reversal. The Tribunal observed that the AO rejected the books based on auditors' remarks about procedural lapses and internal controls. However, similar objections had been raised in previous and subsequent years without leading to rejection of the books. The CIT(A) found that the AO did not provide sufficient material to justify the rejection under section 145(3) of the Act. The Tribunal agreed with the CIT(A), noting that the auditors' comments were routine and did not render the books unreliable. Thus, the CIT(A)'s order was confirmed, and the Revenue's appeal was dismissed.

3. Disallowance of Depreciation on Leased Assets:
The assessee's appeals for the assessment years 2002-2003 and 2003-2004 involved the disallowance of depreciation on leased assets. The CIT(A) had upheld the AO's view that the lessees were the actual owners of the assets. The ITAT noted that the Revenue had allowed depreciation in earlier and subsequent years, except for the two years under appeal. The Tribunal found no clear finding from the AO on whether the leases were finance or operating leases. Therefore, the Tribunal set aside the issue to the AO to re-examine the terms and conditions of the lease agreements and determine the nature of the leases, in light of the Supreme Court decision in Asea Brown Boveri Ltd. v. IFCI. The AO was directed to decide the issue afresh after allowing the assessee a reasonable opportunity of hearing.

4. Disallowance of Penal Interest for Late Payment:
The assessee's appeal for the assessment year 2006-2007 involved the disallowance of penal interest for late payment. The CIT(A) had upheld the AO's disallowance, considering it against public policy. The ITAT disagreed, noting that the interest was compensatory and not penal in nature. The Tribunal referred to a Government of Gujarat resolution prescribing interest rates for public sector undertakings, which indicated that the interest was not a penalty. The Tribunal concluded that the interest was a financial charge for delayed payment and not against public policy. Therefore, the disallowance was not justified, and the assessee's appeal was allowed.

Conclusion:
The ITAT dismissed the Revenue's appeals for the assessment years 2002-2003, 2003-2004, and 2005-2006, and allowed the assessee's appeals for the assessment years 2002-2003, 2003-2004 (for statistical purposes), and 2006-2007. The order was pronounced in open court.