Madras H.C : Whether interest arising on non-performing assets cannot be recognized as income and fixed on accrual basis

High Court Of Madras

CIT Vs. Coimbatore Lakshmi Inv. & Finance Co. Ltd.

Assessment Year : 1995-96 and 1997-98 to 2000-01

Section : 5

Raviraja Pandian And M.M. Sundresh, Jj.

Tax Case Appeal Nos. 1292 To 1296 Of 2009

M.P. No. 1 (4 Counts) Of 200

November  30, 2009 

JUDGMENT

K. Raviraja Pandian, J. – These appeals are filed, at the instance of the Revenue against the order of the Tribunal, dated September 24, 2007 made in I.T.A. Nos. 905 to 909/Mad./2004 relating to the assessment years 1995-96, 1997-98, 1998-99, 1999-2000 and 2000-01.

2. The facts

(i) The assessee is a non-banking finance company. The Assessing Officer, while completing the assessment/reassessment proceedings, found that the assessee was following the mercantile system of accounting, but failed to return the interest accrued on non-performing assets. The Assessing Officer brought to tax the said interest, since the assessee had, while arriving at the profits, set off the expenses relating to performing as well as non-performing assets which led to distorted figure of the profit and loss account of the assessee’s income. The Assessing Officer thus rejecting the contention of the assessee, brought the income to tax.

(ii) The Commissioner of Income-tax (Appeals) following the decision of the Supreme Court in Kerala State Industrial Development Corpn. Ltd. v. CIT [2003] 259 ITR 51 / 128 Taxman 29, and the decision of our High Court, allowed the appeal in favour of the assessee and the Revenue not satisfied with the matter, carried on further appeal by challenging the said order. Confirming the order of the Commissioner (Appeals) the Tribunal rejected the appeal filed by the Revenue. The correctness of the same is now canvassed before us by filing these appeals and formulated the question of law is as under :

“Whether, in the facts and circumstances of the case, the Tribunal was right in holding that interest for non-performing assets cannot be fixed on accrual basis ?”

3. We have heard the learned counsel appearing for the Revenue and perused the materials on record.

4. The Tribunal in its order had relied on the two decisions of the Division Bench of this Court in CIT v. Elgi Finance Ltd. [2007] 293 ITR 357 and in CIT v. India Equipment Leasing Ltd. [2007] 293 ITR 350 (Mad.). In the latter decision, in which one of us is a party, has considered the case of the assessee in respect of hire-purchase transactions and leasing of plant and machinery, has held that interest on ‘sticky’ loans not being brought into the profit and loss account, but being taken to the suspense account was an accepted mode of treatment of notional income in accounting practice. The fact that the assessee, although generally using the mercantile system of accounting, kept such interest amount in a suspense account and did not bring those amounts to the profit and loss account, showed that the assessee was following a mixed system of accounting by which such interest was included in its income only when it was actually received. The Central Board of Direct Taxes circular permitted such interest to be excluded from income, if for three years such interest was not actually received. On that basis it granted the relief in favour of the assessee. The said judgment has been subsequently referred to by another Division Bench. If no income was recognised at all from such asset, there was no question of applying the principle of accrual. The principle of “accrual of income” comes into play only when the income was recognised. In the present case, the assessee has classified its assets on the basis of the notification issued by the Reserve Bank of India and found that the appellant under the category of non-performing assets. From such non-performing assets, the assessee had not recognised any income in concealing the notification issued by the Reserve Bank of India. Therefore, the assessee was justified in not recognising the income as such. Once that was the case, there was no occasion to consider whether the principle of “accrual” would arise or not. In that view of the matter, the Tribunal reversed the finding of the lower authority and the issue has been held against the Revenue.

5. In view of the above said Division Bench judgment, we are of the view that the subject-matter of these appeals requires no interference by entertaining the appeals. The issue is answered against the Revenue. Hence, the tax case appeals are dismissed. Consequently, connected miscellaneous petitions are also dismissed.

[Citation : 331 ITR 229]

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