2013 (3) TMI 266 - HC - Income Tax

Accrued interest on non-performing assets(NPA) - whether assessable to income-tax or not? - assessee is a Non-Banking Financial Company - Whether ITAT was right in deleting the interest accrued on non performing assets from the computation of the taxable income? - Held that - Mere characterisation of an account as a NPA would not by itself be sufficient to say that there is uncertainty as regards realizability of income or interest income thereon. Accrual of interest is a matter of fact to be decided separately for each case on the basis of examination of the facts and circumstances. The same would require an assessment of the relevant facts and circumstances of each case. Only by assessment of facts and circumstances, the Authority could arrive at a decision whether there is uncertainity of the interest accrued on NPA. Only when there is uncertainity of realizability of income or interest income then it is not chargeable to tax. The system of accounting followed only recognises it bringing the income to books. The adopted accounting policy i.e., recognising income on NPA accounts only subject to realisation does not serve as a standard category. As in the present case, Assessing Officer has not recorded findings whether there is any uncertainty in collection of income. There is nothing to indicate that the interest income is non-recoverable. Individual ledger accounts of the borrower are to be examined. CIT (A) and the Tribunal had not considered the matter in the light of the decision of Southern Technologies Limited(2010 (1) TMI 5 - SUPREME COURT OF INDIA) where liability of income-tax is concerned, the same was governed by the Income-tax Act and merely because for accounting purpose, the assessee was to follow RBI guidelines it would not mean that the assessee was not liable to show the accrued interest income when it had accrued to the assessee under the mercantile system and exigible to tax under the Act. RBI Directions 1998 has nothing to do with the computation or taxability of the provisions for accrued interest for NPA under the Income-tax Act. Thus the Orders of the Tribunal are set aside and the matters are remitted back to the Assessing Officer for consideration of the matter afresh in the light of law laid down by the Southern Technologies(supra) and above observation and pass orders.

Issues Involved:
1. Whether the accrued interest on non-performing assets (NPA) is assessable to income-tax for the assessment years 1999-2000 and 2000-2001.
2. Whether the Tribunal was correct in not considering the accrued interest on NPAs under the Interest Tax Act for the assessment years 1999-2000 and 2000-2001.

Issue-wise Detailed Analysis:

1. Assessability of Accrued Interest on NPAs:
The core issue was whether the accrued interest on NPAs should be included in the taxable income of the assessee, a Non-Banking Financial Company (NBFC), for the assessment years 1999-2000 and 2000-2001. The Assessing Officer had added the accrued interest on NPAs to the taxable income, which was contested by the assessee. The assessee argued that as per the RBI guidelines, interest on NPAs should not be recognized as income until actually received. The CIT (Appeals) and the Tribunal, relying on the precedent set by the Madras High Court in Commissioner of Income-tax Vs. Elgi Finance Limited, (2007) 293 ITR 357, ruled in favor of the assessee, stating that no interest could be said to have accrued on loans classified as NPAs.

2. Applicability of Supreme Court's Decision in Southern Technologies Ltd.:
The Revenue contended that the Supreme Court's decision in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, (2010) 320 ITR 577, should govern the case. The Supreme Court in Southern Technologies emphasized that the Income-tax Act and RBI Directions operate in different fields and that for tax purposes, the mercantile system of accounting should be followed. The Supreme Court also highlighted that the RBI guidelines do not override the provisions of the Income-tax Act concerning the computation of taxable income.

3. Real Income Theory:
The assessee's counsel argued that the Supreme Court in Southern Technologies recognized the "real income" theory, which implies that income should only be taxed when it is actually received or there is certainty of its receipt. This argument was supported by the Delhi High Court's decision in COMMISSIONER OF INCOME TAX VS. VASISTH CHAY VYAPAR LTD., (2011) 330 ITR 440, which held that interest on NPAs should not be treated as accrued income if it is not received.

4. Examination of Individual Cases:
The judgment emphasized that the mere classification of an account as NPA does not automatically imply uncertainty in the realization of interest income. The Assessing Officer must examine individual cases to determine whether there is actual uncertainty in the collection of interest. The Supreme Court in Southern Technologies mandated that the assessee must prove that the non-recognition of interest was due to uncertainty in collection, and it is for the Assessing Officer to accept or reject this claim based on the facts of each case.

5. Remand for Fresh Consideration:
The High Court concluded that the CIT (Appeals) and the Tribunal did not consider the matter in light of the Supreme Court's decision in Southern Technologies. Therefore, the High Court set aside the Tribunal's orders and remitted the matter back to the Assessing Officer for fresh consideration, directing that the assessment should be done in accordance with the principles laid down by the Supreme Court in Southern Technologies and the observations made in this judgment.

Conclusion:
The judgment underscores the necessity of examining the facts of each case to determine the assessability of accrued interest on NPAs. It reaffirms that while RBI guidelines influence accounting practices, they do not override the provisions of the Income-tax Act concerning the computation of taxable income. The matter was remitted back to the Assessing Officer for a fresh assessment in line with the Supreme Court's decision in Southern Technologies.

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