2015 (4) TMI 142 - AT - Income Tax

Accrual of interest - receivable or not actually received - CIT(A) deleted the addition - Held that - It is an admitted position that the loans were advanced based on Promissory Note. Interest can be considered as overdue only when there is an agreement between the parties wherein a stipulation is there with regard to the date of payment of interest. In the absence of any such stipulation, we can never say that interest has fallen due on a particular date or was overdue. There is nothing on record to show that possibility of realising the interest was nil. Ld. Counsel of the assessee had admitted that the said companies were having substantial assets with them. Hence we cannot say that interest income was illusory or not real. In such circumstances, we are of the considered opinion that the assessee cannot take of refuge under the Prudential Norms issued by the Reserve Bank of India and say that principles of accrual of income, when mercantile basis of accountancy is followed would not apply to it. No doubt, Section 45Q of the R.B.I. Act is overriding in nature and has to be given primacy. However unless and until an assessee shows that a loan or advance had become a non-performing asset, there can be no question of applying the norms set out for such non-performing asset. We are, therefore, of the opinion that ld. CIT(Appeals) fell in error in deleting the addition made by the Assessing Officer. We, therefore, set aside the order of ld. CIT(Appeal) and the addition made by the Assessing Officer is restored. - Decided against assessee.

Summary

Issues Involved:
1. Recognition of interest income on loans by a non-banking financial company.
2. Application of Reserve Bank of India's prudential norms for income recognition.
3. Interpretation of mercantile system of accounting and accrual of income.
4. Dispute regarding addition of interest income not actually received by the assessee.

Analysis:

Issue 1 & 2:
The appeal raised concerns about the recognition of interest income by a non-banking financial company (assessee) on loans given to two companies. The Assessing Officer contended that interest had accrued on these loans based on the interest charged by the borrowing companies, even though the assessee claimed it had not received any interest income. The assessee argued that as per Reserve Bank of India's prudential norms, interest income cannot be recognized on loans overdue for more than six months. The ld. CIT(Appeals) agreed with the assessee, stating that under the prudential norms, interest income cannot accrue on non-performing assets, thereby deleting the addition made by the Assessing Officer.

Issue 3:
The dispute centered around the application of the mercantile system of accounting and the accrual of income. The Assessing Officer maintained that the interest income had accrued to the assessee as the borrowing companies had recorded interest in their accounts and remitted tax to the government. The Revenue argued that the Reserve Bank of India's norms should not override the Income Tax Act, emphasizing the accrual principle. The Tribunal held that the loans did not fall under the definition of non-performing assets, and interest income had accrued to the assessee as per the mercantile system of accounting, reinstating the addition.

Issue 4:
The final issue revolved around the addition of interest income not actually received by the assessee. The Tribunal noted that despite no interest being received, the assessee had not taken legal steps to recover the amounts from the borrowing companies. The Tribunal concluded that the assessee could not rely on the Reserve Bank of India's norms to avoid recognizing accrued interest income, reinstating the addition made by the Assessing Officer and allowing the appeal of the Revenue.

In conclusion, the Tribunal upheld the addition of interest income, emphasizing the application of the mercantile system of accounting and the accrual principle, overriding the Reserve Bank of India's prudential norms in this specific case.