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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
AadoSa / O R D E R महावीर स ुंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:
These two appeals filed by the assessee are arising out of the orders of Commissioner of Income Tax (Appeals)-4, Mumbai [in short CIT(A)], in appeal No. CIT(A)-4/IT-216&58/DCIT 2(1)(1)/2016-17, dated 23.01.2018 & 04.01.2018. The Assessments were framed by the Dy.
ITAs No. 1490 & 1491/Mum/2018 Commissioner of Income Tax, Circle-2(1)(1), Mumbai (in short DCIT/ITO/ AO) for the A.Y. 2014-15 & 2013-14 vide orders dated Nil & 26.03.2016 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only common issue in these appeals of assessee is against the order of CIT(A) upholding the action of the AO in holding that the interest on non-performing assets (NPS) is taxable on accrual basis and not receipts/ cash basis under normal provisions of the Act as well as under MAT. For this assessee has raised identically worded grounds in both the years. The grounds as raised in AY 2014-15 are as under: - “1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the finding of the AO that interest on Non- Performing Assets (NPAs) of Rs1,59,75,703, be taxable on accrual basis and not receipt, cash basis, under normal provisions of the Act as well as under MAT.
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in stating that the revenue is measurable and ultimate collection is also reasonably certain without appreciating the fact that the account of such debtors were classified under the Non-Performing Assets (NPA) category.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has failed to appreciate that:
I) The Appellant being a NBFC. has to comply with NBFC Prudential Norms ITAs No. 1490 & 1491/Mum/2018 (Reserve Bank) Direction, 1998 ("RBI Directive") issued by Reserve Bank of India (RB!). As per RBI Directive, interest accrued on NPAs shall be recognized only on cash basis. ii) As per Accounting Standard - 9 issued by the 1CM. income should be recognized only when there exist certainty of its ultimate collection. The recovery of interest on NPA is not certain and thus recognizing it as income on accrual basis would be against Accounting Standards - 9. iii) The NM parties have defaulted in paying the principal amount itself, the chances of recovery of interest will be negligible, more so when no security is given against such Interest. Thus, recognizing interest income on NPA's as its income would be a wrung commercial practice. iv) Interest on NPA (on the Appellant's facts), fails the Real Income theory as per the Hon'ble Supreme Court decision in the case of Southern Technologies Ltd. vs. JCIT [320 ITR 577 (SC)], hence cannot be treated as income to be taxed. v) As on the date of passing of order under section 143(3) of the Act, the Company ITAs No. 1490 & 1491/Mum/2018 Ltd. In that, the appellant company directly received interest from (he party in March 2017 amounting to only a sum of Rs. 81.82 lakhs, which has been appropriately taxed in the hands of the Company on receipt basis for AY 2017-18."
Briefly stated facts are that the assessee company is a Non- Banking Finance Company (NBFC), duly registered with Reserve Bank of India (RBI). During the year the assessee company had identified certain loans as non-performing assets (NPAs). The assessee, in the notes to accounts forming part of financial statements, has provided a disclosure on revenue recognition of interest income on accrual basis and its treatment whenever the loan is considered as NPA. The assessee was asked to submit details of interest on such NPAs which was accordingly submitted before the AO. The issue was discussed with the assessee by the AO and a chart was submitted which represented the year in which a loan was considered as NPA. The AO considered such submission of the assessee and observed that the assessee has submitted the same facts which were submitted in the last year and nothing contrary was brought on record. He further observed that case laws relied upon are distinguishable on facts therefore, the issue was discussed giving the same finding that were in previous year. The AO thereafter referred to and reproduced relevant portion of decision of Hon’ble Supreme Court in the case of Southern Technologies Ltd (2010) 320 ITR 577 and of Hon’ble Madras High Court in the case of CIT Vs. Sakhti Finance Ltd. The assessee had provided the details of interest accrued on NPA amounting to ₹ 16,49,84,276/- which was not recognized in the books of accounts as under:-
ITAs No. 1490 & 1491/Mum/2018 Name Amount (in ₹) Praval Investrade Pvt. Ltd 159,75,703 Divvyani Sarnaik 154,99,999 Adilakshmi Exports Pvt. Ltd 101,25,000 Micro Technologies India Ltd. 21,62,176 ICSA India Ltd. 5,65,068 Swaws Credit Corporation 12,62,950 Duplex Industries Ltd. 30,59,485 Opc Asset Solutions Pvt. Ltd. 170,41,300 PSL Limited 396,49,178 Coastal Projects Limited 596,43,417 The learned Counsel for the assessee, in support of the claim also submitted factual explanation of all loans which was recognized as NBAs and also the position as on 30.11.2016. Considering the factual position of loans characterized as NPA, the AO observed that during the year there is a party namely Prabal Investrade Pvt. Ltd which was in previous year also from whom interest was realized subsequently. Therefore, after requiring the assessee to show cause and their response, the AO noted that this addition is to be required to be made as done in the last year. The AO added an amount of interest due at ₹ 1,59,75,703/-. Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) following the earlier years dismiss this appeal of Assessee. Aggrieved, assessee came in appeal before Tribunal.
At the outset, the learned Counsel for the assessee stated that the issue is fully covered by the Tribunal decision in assessee’s own case for AY 2012-13 in vide order dated 31.12.2018, wherein Tribunal exactly on identical facts considered this issue and directed the AO that this interest could not be treated as accrued income of the assessee, in view of the above decision of Hon’ble Delhi High Court in the case of CIT vs. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440(Delhi) vide Para 7 as under: - ITAs No. 1490 & 1491/Mum/2018 “7. We have heard the rival contentions, perused the material on record, including the impugned order and various decisions cited by the Ld. AR as stated herein above and observe that the ratio laid down in the decisions as in favour of assessee that interest income on NPAs by NBFC should be recognized on the basis of Cash System of Accounting and not Mercantile System of Accounting. The decision of the Hon'ble High Court of Delhi in the case of CIT Vs. Vasisth Chay Vyapar Ltd., [330 ITR 440] (Delhi), wherein the Hon'ble Delhi High Court has held that where the amount advanced by assessee has become NPA due to precarious financial position of the loanee when the principal amount thus has become doubtful to recover, the assessee was correct to infer that interest income thereon would not accrue. The Hon'ble High Court has further held that since as per the Prudential Norms issued by the RBI, the said loan/deposits became NPAs, on. which no interest was received and possibility of recovery was almost NIL, then it could not be treated as accrued income of assessee. The said decision of the Delhi High Court was also affirmed by the Hon'ble Supreme Court. In view of the ratio laid down by the Hon'ble Supreme Court, upholding the decision of the Hon'ble Delhi High Court, we are of the view that the order of CIT(A) cannot be sustained and we accordingly set aside the same and direct the AO to delete the addition of Rs. 1,55,36,707/-. "
ITAs No. 1490 & 1491/Mum/2018 Even this addition was directed to be deleted by the Tribunal for the purposes of computation of book of profit under section 115JB of the Act vide para 7.1 as under: - “7.1. Similarly, while computing book profits u/s. 115JB of the Act, no addition is required to be made to the book profits. Once the book profits are certified by the auditors of the company, to be prepared in accordance with Companies Act then except to the extent as provided in the Explanation to Section 115JB of the Act the AO is not empowered to make any adjustment. The case of assessee is supported by the ratio laid down by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd., Vs. CIT [255 ITR 273] (SC), wherein the Hon'ble Apex Court has held that - Once the book profits of the assessee are certified by the auditors, AO has no authority to interfere in the same, except to the extent as provided in Section 115JB. Therefore, respectfully following the decision of the Hon'ble Apex Court, we direct the AO to delete the addition made u/s. 115JB of the Act.."