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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
Both the appeals of the assessee are directed against the respective orders of the Commissioner of Income Tax (Appeals)– 8, Chennai, dated 29.03.2016, pertaining to assessment years 2004- 05 and 2005-06. Since common issue arises for consideration in both the appeals, we heard both the appeals together and disposing of the same by this common order.
Shri G. Baskar, the Ld.counsel for the assessee, submitted that the assessee is a non-banking finance company. The assessee has not recognized the income being the interest on non- performing asset. According to the Ld. counsel, the Assessing Officer rejected the claim of the assessee on the ground that the assessee was following mercantile system of accounting. Placing reliance on the judgment of Madras High Court in CIT v. Sakthi Finance Ltd. (2013) 352 ITR 102, the Ld.counsel submitted that the accrual of interest is a matter of fact to be decided separately for each case based on the examination of the facts. When there was uncertainty of recovery of principal amount, it is also uncertainty for recovery of interest. When there was uncertainty for recovery of interest, it cannot be included in the total income. In view of this judgment of Madras High Court, according to the Ld. counsel, the CIT(Appeals) is not justified in confirming the order of the Assessing Officer.
On the contrary, Shri Murali Mohan, the Ld. Departmental Representative, submitted that the assessee claimed before the Assessing Officer that it was preparing the books of account as per the guidelines of Reserve Bank of India. The guidelines of Reserve Bank of India cannot override the Income-tax Act. The RBI guidelines are only disclosure norms and they are nothing to do with taxable income. Therefore, the CIT(Appeals), by applying the judgment of Apex Court in Southern Technologies Ltd. v JCIT (2010) 320 ITR 577, found that when the assessee was following mercantile system of accounting, the income/interest on the loan has to be recognized.
We have considered the rival submissions on either side and perused the relevant material available on record. The Assessing Officer rejected the claim of the assessee on the ground that the Reserve Bank of India’s guidelines or directives cannot override the Income-tax Act. It is a well settled principle of law that the Income- tax Act being a special enactment, it will prevail over the other legislations, therefore, either the Reserve Bank of India Act or regulations framed thereunder cannot override the provisions of Income-tax Act. Here, the question arises for consideration is accrual of interest income and loan advance. The Madras High Court in Sakthi Finance Limited (supra), after considering the provisions of Section 145 of the Act and judgment of Apex Court in Southern Technologies Ltd. (supra), found that mere characterization of an account as a non-performing asset itself is not sufficient. There is uncertainty as regards realizability of loan or interest thereon. Accrual of interest is a matter of fact to be decided separately for each case on the basis of examination of the facts and circumstances. The authority could arrive at a decision whether there is uncertainty of recovery of interest or not, only after examining the facts of each case. The Madras High Court further observed that when there is uncertainty of realizability of income or interest, then it is not chargeable to tax. In fact, the Madras High Court observed at para 18 of its order as follows:-
“18. Mere characterization of an account as a NPA would not by itself be sufficient to say that there is uncertainty as regards realizability of income or interest income thereon. Accrual of interest is a matter of fact to be decided separately for each case on the basis of examination of the facts and circumstances. The same would require an assessment of the relevant facts and circumstances of each case. Only by assessment of facts and circumstances, the Authority could arrive at a decision whether there is uncertainty of the interest accrued on NPA. Only when there is uncertainty of realizabilty of income or interest income then it is not chargeable to tax. The system of accounting followed only recognizes it bringing the income to books. The adopted accounting policy i.e., recognising income on NPA accounts only subject to realization does not serve as a standard category.”
In view of the above, it has to be examined whether there is uncertainty in the facts and circumstances for recovery of interest income. The characterisation of account as a non-performing asset may not by itself be sufficient to say that there was uncertainty for realization of interest income. In view of the above, this Tribunal is of the considered opinion that the matter needs to be reconsidered.
Accordingly, the orders of the lower authorities are set aside and the disallowance of interest income is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter and find out whether there was any uncertainty of recovery of interest income and thereafter decide the claim of the assessee in accordance with law in the light of the judgment of Madras High Court in Sakthi Finance Limited (supra).
In the result, both the appeals filed by the assessee are allowed for statistical purposes.
Order pronounced on 27th December, 2016 at Chennai.