2023 (7) TMI 292 - AT - Income Tax

Revision u/s 263 - Allowability of interest on non-performing asset ( NPA ) - HELD THAT - AO had issued sec.143(2) notice as well as sec.142(1) notice specifically raising the issue of Income Computation and Disclosure Standards ICDS compliance. The assessee had duly replied the same highlighting the fact before the AO that the interest income regarding the impugned NPA advances could neither be assessed on accrual principle nor as per the recently introduced ICDS . DR could hardly dispute that all these standards uniformly contain this uniform clause thereby paving way for applicability of the provisions of the Act wherein the assessee has already succeeded on the instant issue of accrual of interest on NPAs right up to hon ble jurisdictional high court having attained finality We hold that the CBDT s circular issued in tune with the foregoing Income Computation and Disclosure Standards ICDS also would not apply once the assessee is not required to recognize its accrued interest on NPAs as income on accrual basis. We conclude that the PCIT has erred in law and on facts in terming the AO s sec.143(3) regular assessment as an erroneous one causing prejudice to interest of the Revenue - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of revision proceedings under section 263 of the Income Tax Act.
2. Taxability of Interest on Non-Performing Assets (NPA).
3. Re-verification of claim of deduction under section 36(1)(viii).

Summary:

1. Validity of Revision Proceedings under Section 263:
The assessee argued that the Principal Commissioner of Income Tax (PCIT) failed to appreciate that the original assessment order passed under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The PCIT initiated proceedings under section 263 without recognizing that the Assessing Officer (AO) had already made necessary enquiries and verification regarding interest on NPA and the claim of deduction under section 36(1)(viii). The PCIT's initiation of proceedings based on mere differences in opinion was challenged as being without jurisdiction and bad in law.

2. Taxability of Interest on NPA:
The PCIT held that interest on NPA is taxable on an accrual basis, disregarding the real income theory upheld in the assessee's own case in earlier years. The PCIT did not appreciate that the issue had been settled by appellate authorities in previous years, and the department had not filed further appeals. The PCIT also erred in holding that the decisions of the Hon'ble Bombay High Court and the Supreme Court were not applicable post the introduction of ICDS-IV. The assessee contended that the principles laid down by the courts should prevail over the provisions of ICDS-IV. The PCIT ignored the department's position before the Delhi High Court, which accepted that interest on NPA cannot be taxed based on real income theory even after the introduction of ICDS-IV. The assessee also argued that if interest on NPA is taxable, the AO should allow a corresponding deduction for the interest taxed as bad debts under section 36(1)(vii).

3. Re-verification of Claim of Deduction under Section 36(1)(viii):
The PCIT directed the AO to reverify the claim of deduction under section 36(1)(viii) related to long-term infrastructure finance. The assessee argued that the AO had already inquired into the claim and sought the basis and computation for the deduction amount. The AO had enhanced the deduction amount in the original assessment order, indicating that the AO had applied his mind to the issue.

Judgment:
The tribunal found that the issue of taxability of interest income on NPAs was no longer res integra as it had been settled by the jurisdictional high court in the assessee's favor. The tribunal noted that the AO had conducted necessary enquiries regarding ICDS compliance and the interest income on NPAs. The tribunal held that the provisions of the Act would prevail over ICDS, and the assessee was not required to recognize accrued interest on NPAs as income on an accrual basis. Consequently, the tribunal concluded that the PCIT erred in terming the AO's assessment as erroneous and prejudicial to the revenue's interest. The tribunal allowed the assessee's appeal, setting aside the PCIT's revision order under section 263.