2007 (6) TMI 180 - HC - Income Tax

Interest on Non-Performing Assets Not Taxable Until Recognized as Income, Tribunal Rules in Favor of Company.

Commissioner of Income-Tax Versus Elgi Finance Limited.

The Tribunal ruled in favor of the appellant company, determining that interest on non-performing assets should not be taxed unless recognized as income. ... Method of accounting - Income recognition - Interest accrued on 'non-performing assets' - business of leasing, finance and hire purchase - classification of assets and the Accounting Standard-9 - HELD THAT:- It is clear that the Tribunal had given a factual finding that there is no accrual of income during the year. The issue is covered by the unreported judgment of this court in CIT vs India Equipment Leasing Ltd. [2004 (9) TMI 99 - MADRAS HIGH COURT] as well as the factual finding given by the Tribunal that there is no accrual of income during the year, we are of the view that the order of the Tribunal is in conformity with law. Learned standing counsel appearing for the Revenue is also unable to give any material or evidence or any compelling reason or brought to our notice any contra judgment, to take a different view. Therefore, we find no error or legal infirmity in the order of the Tribunal so as to warrant interference. Hence, we answer the question in favour of the assessee and against the Revenue. Accordingly, the tax case is dismissed. Issues Involved:Interpretation of Income-tax Act, 1961 regarding interest accrued on non-performing assets.Detailed Analysis:1. Issue: Interpretation of Income-tax Act, 1961 regarding interest accrued on non-performing assets.- Facts: The appellant, a company engaged in leasing and finance, filed its return of loss for the assessment year 1998-99 but the Assessing Officer proposed to tax the accrued interest on certain assets. The company argued that as per Reserve Bank guidelines, income from non-performing assets should not be considered.- Arguments: The Revenue contended that the company must follow accrual basis accounting and include the interest as income. The guidelines by the Reserve Bank were for financial discipline, not accounting changes.- Court's Decision: The Tribunal found in favor of the company, stating that if no income is recognized from non-performing assets, the principle of accrual does not apply. The Tribunal directed the Assessing Officer to delete the interest from taxable income and tax it based on actual receipt in future years.2. Judicial Precedent:- Reference: The senior counsel for the company cited a previous judgment by the court in a similar case, supporting the Tribunal's decision.- Court's Analysis: The court acknowledged the previous judgment and the Tribunal's factual finding that no income accrued during the year. The court found no legal error in the Tribunal's decision and dismissed the tax case in favor of the company.3. Conclusion:- The court upheld the Tribunal's decision to delete the interest accrued on non-performing assets from taxable income, based on the absence of recognized income from those assets. The court found the decision in line with legal principles and existing judicial precedents, leading to the dismissal of the tax case in favor of the company.