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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI A.K. GARODIA
Date of hearing : 07.11.2017 Date of Pronouncement : 10.11.2017 O R D E R
Per Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the revenue against the order of the CIT(Appeals) inter alia on the following grounds:-
“1. The order of the Commissioner of Income Tax(Appeals), Davangere, is opposed to the law and not on the facts and circumstances of the case. 2. The CIT (Appeal) is not right in granting relief to the assessee on the addition made on account of Interest accrued on Non-performing Assets (NPA). 3. The CIT (Appeal) erred in coming to the conclusion that the assessee can follow missed system of accounting.
4. The CIT (Appeal) failed to appreciate the rationale of decision in the case of Hon'ble Supreme Court of India in Southern Technologies Ltd., VS. JCIT (2010) 320 ITR 577. RBI Guidelines are only prudential norms and cannot overrule income recognition as per Income-tax Act.
5. For these and other grounds that may be urged upon, the order of the CIT(A) may be reversed and that assessment order be restored. 6. The appellant craves leave to add, alter, amend or delete any other grounds on or before hearing of the appeal.”
Though various grounds are raised, but they all relate to the addition made on account of interest accrued Non-performing Assets (NPA).
During the course of hearing, the ld. counsel for the assessee has invited our attention to the judgment of the Hon'ble jurisdictional High Court in the case of CIT & Anr. v. Canfin Homes Ltd. (2012) 347 ITR 382 (Kar) in which it has been held that income from NPA should be assessed on cash basis and not on mercantile basis, despite the assessee following the mercantile system of accounting.
The ld. DR did not dispute these facts. He, however, placed reliance upon the order of the AO.
Having carefully examined the orders of the lower authorities in the light of rival submissions, we find that the impugned issue is squarely covered by the judgment of the Hon'ble jurisdictional High Court in the case of Canfin Homes Ltd. (supra) in which it has been held that income from NPA accrues only when actually received. The relevant observations of the Hon’ble High Court are extracted hereunder for the sake of reference:-
“7. Again, the apex court in the case of UCO Bank v. CIT [1999] 237 ITR 889 (SC) held that, under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. Such circulars are meant for ensuring proper administration of the statute and, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation of the provision in question.
Therefore, it is clear, if an assessee adopts the mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realised immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the same, then it cannot said to have been accrued and the said amount cannot be brought to tax. In the instant case, we are concerned with a non-performing asset. As the definition of non-performing asset shows an asset becomes non-performing when it ceases to yield income. Non-performing asset is an asset in respect of which interest has remained unpaid and has become past due. Once a particular asset is shown to be a non-performing asset, then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the National Housing Bank, the income from non-performing asset should be recognised only when it is actually received. That is what the Tribunal held in the instant case. Therefore, the contention of the Revenue that in respect of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued
notionally is without any basis. In that view of the matter, the second substantial question framed is answered against, the Revenue and in favour of the assessee.” 6. Since the issue is squarely covered by the judgment of the Hon'ble jurisdictional High Court cited supra, we find no infirmity in the order of CIT(Appeals). Accordingly, we confirm the same.
In the result, the appeal of revenue stands dismissed.
Pronounced in the open court on this 10th day of November, 2017.