2018 (5) TMI 264 - HC - Income Tax

Taxability on notional interest - Accrual of income - AO added interest as the assessee s income holding that it had accrued to it even if it was actually unpaid as the assessee followed the mercantile system of accounting - Held that - in the absence of any findings that the cross holdings of the debtor companies was the predominant or sole reasoning for the assessee s inability to recover its dues, is bound by the reasoning in Vishisht Chay Vyapar (2010 (11) TMI 88 - Delhi High Court ); more so, given that the Supreme Court has given its imprimatur on that ruling. The division bench had ruled that RBI s prudential banking norms, embodied in its directions to banking and non banking entities, were as binding as accounting standards under Section 145 of the Income Tax Act, and reflection of income on notional basis, did not reflect the realistic assessment of real income - Decided in favour of assessee

Summary

Issues:
1. Whether the Income Tax Appellate Tribunal (ITAT) erred in holding that the sum of ?2,53,15,466/- brought to tax on account of notional interest was not justified.

Analysis:
1. The appellant had advanced amounts to various concerns and interest accrued on these loans. The appellant, being a Non-Banking Financial Company (NBFC), treated the advances as Non Performing Assets (NPA) as per RBI directions when interest was not paid for more than six months. The Assessing Officer (AO) added interest as income, but the ITAT deleted it. The revenue argued that the ITAT erred in allowing the non-reflection of revenue recognition and treating interest payable as NPA, especially due to cross shareholding and financial health concerns of the debtor companies.

2. The appellant's counsel contested the revenue's arguments, citing a previous judgment (Vishisht Chay Vyapar) where it was ruled that RBI norms are as binding as accounting standards under the Income Tax Act. The Supreme Court upheld this judgment, indicating no infirmity in the tribunal's reasoning. The Division Bench emphasized that under RBI norms, interest income cannot be said to have accrued to the appellant, considering the NPA status and low possibility of recovery.

3. Referring to another case (Southern Technologies), it was highlighted that the IT Act taxes "real income" and provisions for NPA are notional expenses subject to add back in taxable income. The court clarified that RBI Directions 1998 do not impact the computation of taxable income under the IT Act, emphasizing that these directions do not overrule permissible deductions or exclusions under the IT Act. The court upheld the reasoning in Vishisht Chay Vyapar and dismissed the revenue's appeal due to lack of findings supporting the revenue's stance.

4. The court concluded that without evidence that cross holdings were the main reason for the appellant's inability to recover dues, the ruling in Vishisht Chay Vyapar stands. Given the Supreme Court's approval of that ruling, the revenue's appeal failed, and the question of law was answered against it, resulting in the dismissal of the appeal.