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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ NEW DELHI
Before: SHRI N.K. SAINI & SHRI SUDHANSHU SRIVASTAVA
This appeal has been preferred by the assessee against order dated 28/06/2013 passed by the Ld. CIT (Appeals) – 19, New Delhi and pertains to assessment year 0102.
The brief facts of the case are that the assessee is a public limited company incorporated under the provisions of the Companies Act, 1956 and also registered as a Non-Banking Financial Company (NBFC) under the Reserve Bank of India Act.
Originally, the assessment in this case was completed under section 143 (3) of the Income Tax Act, 1961 (“the Act”) at a loss of Rs. 5,12,714/- as against the returned loss of Rs. 28,55,795/-.
The assessee preferred an appeal before the 1st appellate authority who vide order dated 11/01/2005 allowed the appeal of the assessee wherein an addition of Rs. 19,57,000/- on account of accrued interest on non-performing assets was challenged.
Aggrieved, the Department filed an appeal before the Income Tax Appellate Tribunal which was dismissed by the Tribunal vide Order dated 1st May 2008 in ITA No. 1722/DEL/2005. Still aggrieved, the Department preferred an appeal before the Hon’ble Delhi High Court. Vide order dated 15/10/2010 in the Hon’ble High Court set aside the orders of the authorities below and remanded the case back to the file of the AO to determine the issue afresh in light of the directions contained in the order. The operative part of the Hon’ble High Court’s order reads as under – “The question, in these circumstances which arises for consideration is as under – “Whether the ITAT was correct in law in deleting the addition of Rs. 19,57,000/- made by the AO on account of interest on non- performing assets, accrued to the assessee as per mercantile system of accounting?
In a recent judgement pronounced by the Supreme Court in the case of Southern Technologies Ltd versus JCIT, Coimbatore (320 ITR 577), this very aspect, viz. the effect of the 1998 directions issued by the RBI under the RBI Act vis-a-vis, the provisions of the Act, have been considered at length. It is not necessary to deal with the said case on detail because of the reason that following observations in the said judgement contained in paragraph 31 thereof, we are proposing to remit the case back to the AO to re- examine the case. Para 31 of the said judgement reads as under –
“31. Before concluding on this point, we need to emphasise that the 1998 directions has nothing to do with the accounting treatment or taxability of “income” under the IT act. The two, viz. IT Act and the 1998 under the mercantile system of accounting, interest/hire charges income accrues the time. In such cases, interest is charged and debited to the account of the borrower as “income” is recognised under accrual system. However, it is not so recognised under the 1998 directions and thereof, in the matter of its presentation under the said directions, there would be an added back but not under the IT Act necessarily. It is important to note that collective ability is different from accrual. Hence, in each case, the assessee has to prove, as has happened in this case with regard to the sum of Rs. 20,34,605/- that interest is not recognised or taken into account due to uncertainty in collection of the income. It is for the assessing officer to accept the claim of the assessee under the IT Act or not to accept in which case there will be added back even under real income theory as explained here in below.” As pointed out in the aforesaid case by the Supreme Court, in each case, the assessee has to prove that the interest is not recognised or taken into consideration due to uncertainty in collection of the income. It is for the AO to accept the claim of the assessee under the IT Act or not to accept it, in which case there will be added back even under “real income” theory. In the present case, however, simply on the basis that the assessee was following the Mercantile system of accounting, the AO added the interest income on accrual basis. The AO was supposed to examine as to whether the loan advanced by the assessee had become non-performing asset and there was likelihood of interest income accruing thereon. To put it otherwise, it was incumbent upon the AO to apply the theory of “real income” and to determine as to whether that was applicable in the facts of the present case or not. The applicability of the theory of “real income” in the context of aforesaid RBI guidelines, is also explained in detail by the Supreme Court in Southern Technologies Ltd (supra). In these circumstances, we set aside the orders passed by the authorities below and remit the case back to the AO to determine this aspect of the matter from the aforesaid perspective, keeping in view the dicta laid down by the Supreme Court in Southern Technologies Ltd. (Supra).”
2.1 In view of the directions of the Hon’ble High Court, notice under section 143 (2) of the act was issued to the assessee along with the questionnaire. In reply, the assessee reiterated its stand as had been taken in the original assessment proceedings. The main thrust of the assessee was that it was a nonbanking financial Corporation duly approved by the RBI. It was contended that RBI had issued guidelines as to the treatment of accrued interest on non-performing assets in the case of non-banking financial companies. It was further contended that the power to issue these norms, known as prudential norms, is derived by the RBI from the RBI Act but the RBI was not empowered to issue any directions which would be binding on the AO. It was further submitted before the AO that the provisions of section 4 read with section 145 were very clear that in case of a company it has to follow mercantile system of accounting and hence any income accrued but not received is assessable in its hands in the year in which it accrues and it has nothing to do with the fact as to whether it has been recognised as its income under the RBI Act or not. The assessee submitted, before the AO, that the Hon’ble Supreme Court in the case of Southern Technologies Ltd (supra) has opined that the Income Tax Act and the RBI Act operated in different fields and were for different purposes. However, the AO noted that on perusual of various schedules of the balance sheet revealed that the amount of debtors (older than 6 months) had decreased as compared to the preceding year. The AO also noted that the amount of claims receivable had also reduced. The AO proceeded to conclude that it was not possible to comprehend that the assessee company was not likely to get interest income in future even from non-performing assets, as termed by it for the time being. The AO further observed that the entire exercise of not recognising accrued interest and declaring it as income was a calculated attempt to reduce the burden of tax. The AO proceeded to treat Rs. 19,57,000/- as income on account of accrued interest and the assessment was completed at a loss of Rs. 5,12,714/- as originally assessed.
2.2 Aggrieved the assessee preferred an appeal before the Ld. CIT (Appeals) who dismissed the appeal. Now the assessee has approached the ITAT against the said order and has raised the following grounds of appeal – “1. That on the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeal) has erred in not considering the application u/r 46A filed by the counsel of the assessee during the course of appeal and confirming the additions made by the A.O. of Rs.19,57,000/-.
2. That the Honorable High Court of Delhi vide its order dated 5/10/2010 had set aside the orders of the authorities below and remanded back the matter to the A.O. to verify the recoverability of the interest not accounted for/ written off by the appellant during the year under assessment.
That the appellant craves the right to add, amend, alter, withdraw or forgo any ground or grounds of appeal before or at the time of hearing.”
3. At the outset, the Ld. Authorised Representative submitted that the assessee had filed an application under Rule 46A of the Income Tax Rules before the Ld. Commissioner of Income Tax (Appeals) requesting admission of additional evidence which was however rejected by the Ld. CIT (Appeals). Our attention was drawn to Para 5 of the impugned order wherein the Ld. CIT (Appeals) has rejected the assessee’s application on the ground that the assessee had not given any satisfactory explanation or filed any evidence of any difficulty as to why these documents, which were being sought to be filed under Rule 46A, were not filed during the assessment proceedings. The Ld. AR is submitted that the issue may be sent back to the file of the AO with a direction for giving the assessee an opportunity to file the relevant documents in support of its claim.
The Ld. Departmental Representative opposed the plea of remand and submitted that it was already second-round before the ITAT and prayed that no further opportunities should be given to the assessee.
We have heard the rival submissions and have also perused the relevant documents on record. An issue arose before the Hon’ble Karnataka High Court in the case of Sh. Shanker 7 Khandsari Sugar Mills versus CIT reported in 193 ITR 669 wherein the AO had framed best judgement assessment under Section 144 of the Act by relying upon the material from the Commercial Tax Department relating to the turnover of the assessee. Before the CIT (Appeals), the assessee produced Sales Tax assessment order for the 1st time who refused to look into the same on the pretext of additional evidence. Holding the action of the CIT appeals to be unjustified, the court observed – “The appellate authority should have accepted the material produced by the assessee as clarificatory in nature and considered the same to test the fairness and propriety of the estimate of income made by the income tax officer. Though it was about belated production of very relevant material, no prejudice (in its legal sense) would have resulted to the revenue by considering the material produced by the assessee. In absence of any prejudice to the revenue, and the basis of the tax under the act being to levy tax, as far as possible, on the real income, the approach should be liberal in applying the procedural provisions of the Act. An appeal is but a continuation of the original proceedings and what the income tax officer could have done, the appellate authority also could do.”
5.1 Therefore, looking into the facts and circumstances of the case, we deem it fit to restore the issue to the file of the AO to decide the issue afresh after considering the relevant documents to be filed by the assessee and after giving due opportunity of being heard to the assessee. We also direct the assessee to produce the requisite evidences before the AO within 30 days of receiving the notice from the AO failing which the AO shall be at liberty to draw a negative inference and proceed ex parte.
In the result the appeal of the assessee stands allowed for statistical purposes.
Order pronounced in the open court on 11th April, 2017.