2019 (7) TMI 1740 - HC - Income Tax

High Court Emphasizes Real Income Theory for Assessments; Commercial Accounting Principles Override Prudential Norms

The High Court ruled in favor of the assessee, emphasizing the recognition of real income theory based on Prudential Norms, even if it deviates from the ... Accrual of income - Addition being interest accrued on non-performing assets, even though the assessee is following a mercantile system of accounting - Whether the assessee is entitled to follow a hybrid system of accounting by showing the interest on non-performing assets only on receipt basis, while otherwise following a mercantile system of accounting contrary to the provisions of Section 145 of the Income Tax Act? - HELD THAT:- Following the ratio laid down by the Hon'ble Supreme Court in Vasisth Chay Vyapar Ltd. [2018 (3) TMI 56 - SUPREME COURT] substantial questions of law are decided in favour of the appellant – assessee. Issues involved:1. Interpretation of provisions regarding interest accrued on non-performing assets under the Income Tax Act.2. Whether a hybrid system of accounting can be followed by the assessee.3. Impact of prudential norms issued by the RBI on income tax computation.Detailed Analysis:1. The appeals by the Revenue concerned the addition of interest accrued on non-performing assets, following a mercantile system of accounting for the assessment years 2001-02, 1999-2000, and 2000-2001. The questions revolved around whether the Tribunal was right in deleting the addition and if the assessee could follow a hybrid accounting system contrary to Section 145 of the Income Tax Act. The High Court referred to a Supreme Court judgment and held that the real income theory, as per Prudential Norms, should be recognized, even if it deviates from the mercantile system of accounting, emphasizing that profits for assessment must be computed on commercial accounting principles.2. The Court noted that the decision in Vasisth Chay Vyapar Ltd. was applicable to the case, emphasizing that the Prudential Norms did not override the provisions of the Income Tax Act but were crucial for 'Income Recognition.' The Court highlighted that the Accounting Policies of an entity cannot determine taxable income, and the RBI Directions 1998 and the Income Tax Act operate in different areas. It was clarified that the Directions do not impact the computation of taxable income and cannot override permissible deductions under the Income Tax Act.3. The High Court referenced specific paragraphs from the Vasisth Chay Vyapar Ltd. case, where the Supreme Court's observations were discussed in detail regarding the deduction of provisions for non-performing assets. The Court emphasized the importance of recognizing income based on Prudential Norms, even if it differs from the mercantile system of accounting. The judgment concluded that the Tribunal's decision was correct in law, dismissing the appeals and ruling in favor of the assessee based on the principles discussed in the Vasisth Chay Vyapar Ltd. case, which was affirmed by the Supreme Court.In conclusion, the judgment delved into the intricate details of accounting principles, the impact of Prudential Norms on income tax computation, and the precedence set by the Supreme Court in similar cases, ultimately deciding in favor of the assessee based on the principles of real income recognition and commercial accounting practices.