2019 (4) TMI 378 - HC - Income Tax

Accrual of income - real income theory - Interest on NPAs to be taxed on accrual basis - HELD THAT - Delhi High Court in case of CIT Vs. Vasisth Chay Vyapar Ltd 2010 (11) TMI 88 - DELHI HIGH COURT held that interest on NPAs cannot be taxed on accrual basis. It was noted that NBFC would be governed by the directions issued by the Reserve Bank of India and RBI directives provided that under certain circumstances, a loan or advance would be treated as NPA. The Court on the real income theory held that such interest would not be taxable. We notice that the decision of the Delhi High Court in case of Vasisth Chay Vyapar Ltd (supra) was carried in the appeal by the Revenue before the Supreme Court. The Supreme Court in the judgment reported in 2018 (3) TMI 56 - SUPREME COURT OF INDIA approved the decision of the High Court and dismissed the appeal. Under these circumstances, this question is not entertained. Disallowance u/s 14A r.w.s 8D - HELD THAT - Sub-section (2) of Section 14A provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which is examined for tax if he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The satisfaction of the Assessing Officer about the correctness of the expenditure offered for disallowance by the assessee therefore is a pre-condition. In the present case, we have perused the order of assessment in which the Assessing Officer had called upon the assessee to justify the limited disallowances voluntarily offered. The assessee made detailed representation inter alia pointed out that the assessee had not made any expenditure in the nature of administrative expenses. However, to avoid proceedings, a suo motu disallowance was made. AO did not in any manner reject this explanation of the assessee but merely proceeded to make disallowance by invoking Section 14A and applied Rule 8D which the Tribunal correctly reversed.

Summary

Issues:
1. Interpretation of RBI Act and Income Tax Act regarding interest income on NPAs.
2. Disallowance under Section 14A of the Income Tax Act.

Interpretation of RBI Act and Income Tax Act regarding interest income on NPAs:
The case involved a Non-Banking Finance Company (NBFC) claiming deduction of interest on non-performing assets (NPAs) in their income tax return. The Assessing Officer disallowed the claim, stating that the interest income should be taxed on an accrual basis. The Tribunal allowed the assessee's claim, leading to an appeal by the Revenue. The Revenue argued that the special provision for taxing interest income on NPAs under Section 43D of the Income Tax Act does not apply to NBFCs. On the other hand, the assessee cited judgments from different High Courts supporting the real income theory, stating that interest on NPAs cannot be charged on an accrual basis. The High Court referred to various cases, including the decision of the Supreme Court in the case of Southern Technologies Ltd Vs. Joint CIT, to support the assessee's position. The Court concluded that the Tribunal's decision was in accordance with Reserve Bank of India guidelines and not in conflict with the Income Tax Act. Therefore, the appeal was dismissed as the Tribunal's view was deemed reasonable and in line with established principles.

Disallowance under Section 14A of the Income Tax Act:
The second issue pertained to a disallowance made by the Assessing Officer under Section 14A of the Income Tax Act read with Rule 8D. The Tribunal, however, deleted the disallowance as the Assessing Officer had not recorded the necessary satisfaction for rejecting the disallowance offered by the assessee. The Court noted that the Assessing Officer must determine the amount of expenditure incurred if not satisfied with the correctness of the claim made by the assessee. In this case, the Assessing Officer did not reject the explanation provided by the assessee but proceeded to make the disallowance. The Tribunal's decision to reverse the disallowance was upheld by the Court, stating that no question of law arose. Consequently, the Income Tax Appeals were dismissed.

In conclusion, the High Court's judgment addressed the interpretation of RBI Act and Income Tax Act regarding interest income on NPAs and the disallowance under Section 14A of the Income Tax Act, providing detailed analysis and legal reasoning for each issue involved.