High Court rules notional revenue from non-performing assets not taxable under mercantile system.

The High Court ruled in favor of the assessee, stating that tax on notionally accrued revenue from non-performing assets is not warranted under a mercantile system. The Court upheld the Tribunal's decision and emphasized the importance of actual receipt of income for tax assessment purposes. The judgment highlighted that non-performing assets do not yield income and should only be recognized when actually received. The revenue's appeal was dismissed, but the Court noted the matter was under challenge before the Apex Court, directing compliance with the Apex Court's decision if reversed.

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Issues:
Appeal challenging Tribunal's order on tax payment for non-performing assets under mercantile system of accounting.

Analysis:
The High Court heard an appeal by the revenue challenging the Tribunal's decision exempting the assesse from paying tax on non-performing assets while following the mercantile system of accounting. The key issue was whether income from non-performing assets should be assessed on a cash basis rather than a mercantile basis. The Court referred to a previous judgment in the case of Commissioner of Income-Tax, Central Circle, Bangalore vs. Canfin Homes Limited, emphasizing that under the mercantile system, income shown as accruing must be taxed, unless it is clearly stated as unrecoverable. The judgment highlighted that non-performing assets, by definition, do not yield income, and income should only be recognized when actually received, as per National Housing Bank guidelines. Therefore, the Court ruled in favor of the assesse, stating that tax on notionally accrued revenue from non-performing assets is not warranted under a mercantile system.

The Court found no merit in the revenue's appeal and upheld the Tribunal's decision in favor of the assesse. However, it noted that the judgment was under challenge before the Apex Court. In case of a reversal by the Apex Court, the assessing authority was directed to comply with the Apex Court's decision. This comprehensive analysis clarifies the legal principles governing the taxation of income from non-performing assets under the mercantile system of accounting, emphasizing the importance of actual receipt of income for tax assessment purposes.

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