2014 (10) TMI 740 - HC - Income Tax

Accrual of interest on NPAs Mercantile system of accounting followed - Whether the Tribuanl was right in holding that the income from non-performing assets should be assessed on cash basis and not on mercantile basis despite the assesee maintain mercantile system of accounting Held that - Following the decision in Commissioner of Income-tax, Central Circle, Bangalore Versus Canfin Homes Ltd. 2011 (8) TMI 178 - KARNATAKA HIGH COURT - if an assessee adopts mercantile system of accounting and in his account he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the income to tax - As the definition of non-performing asset shows an asset becomes non-performing when it ceases to yield income - once a particular asset is shown to be a non-performing asset, then the assumption is it is not yielding any revenue - when it is not yielding any revenue the question of showing that revenue and paying tax would not arise - the contention of the revenue that in respect of non-performing assets even though it does not yield any income as the assesse has adopted a mercantile system of accounting, he as to pay tax on the revenue which has accrued notionally is without any basis thus, there was no merit in the appeal Decided against revenue.

Summary

Issues:
Appeal challenging Tribunal's order on tax payment for non-performing assets under mercantile system of accounting.

Analysis:
The High Court heard an appeal by the revenue challenging the Tribunal's decision exempting the assesse from paying tax on non-performing assets while following the mercantile system of accounting. The key issue was whether income from non-performing assets should be assessed on a cash basis rather than a mercantile basis. The Court referred to a previous judgment in the case of Commissioner of Income-Tax, Central Circle, Bangalore vs. Canfin Homes Limited, emphasizing that under the mercantile system, income shown as accruing must be taxed, unless it is clearly stated as unrecoverable. The judgment highlighted that non-performing assets, by definition, do not yield income, and income should only be recognized when actually received, as per National Housing Bank guidelines. Therefore, the Court ruled in favor of the assesse, stating that tax on notionally accrued revenue from non-performing assets is not warranted under a mercantile system.

The Court found no merit in the revenue's appeal and upheld the Tribunal's decision in favor of the assesse. However, it noted that the judgment was under challenge before the Apex Court. In case of a reversal by the Apex Court, the assessing authority was directed to comply with the Apex Court's decision. This comprehensive analysis clarifies the legal principles governing the taxation of income from non-performing assets under the mercantile system of accounting, emphasizing the importance of actual receipt of income for tax assessment purposes.