2018 (4) TMI 93 - HC - Income Tax

High Court Rules in Favor of Co-operative Society, Rejects Tax on Non-Performing Assets

The Pr. Commissioner of Income-Tax, CIT (A), Versus M/s. City Co-Operative Bank Ltd.,

The High Court upheld the appeal under Section 260-A of the Income Tax Act against the Income Tax Appellate Tribunal's order for the Assessment Year ... Addition in respect of interest on non-performing assets (NPAs) - assessee is said to be a Co-operative Society, engaged in banking business - Held that:- We are satisfied that the suggested question of law does not arise in this case, as the matter stands concluded in this Court in view of the decision in Canfin Homes Ltd. (2011 (8) TMI 178 - KARNATAKA HIGH COURT), wherein, this Court has specifically held that income from NPA should be assessed on cash basis and not on mercantile bas is, despite the assessee following mercantile system of accounting. When a particular asset is shown to be NPA, the assumption is that it is not yielding any revenue; and there is no reason that the assessee be subjected to tax on the alleged notional income, even if it has adopted hybrid system of accounting. Tribunal cannot be said to have committed any error in approving the decision of the CIT (A), who had deleted the addition in respect of interest on NPAs. - Decided in favour of assessee Issues:1. Appeal under Section 260-A of the Income Tax Act against the order of the Income Tax Appellate Tribunal.2. Addition of interest on non-performing assets (NPAs) by the Assessing Officer.3. Deletion of the addition by the Commissioner of Income Tax (Appeals).4. Dismissal of the Revenue's appeal by the Tribunal.5. Interpretation of Section 145 of the Income Tax Act regarding computation of income under different accounting systems.6. Question of law regarding accrual of income on NPAs and the application of mercantile system of accounting.7. Applicability of the decision in Canfin Homes Ltd. to the present case.8. Conclusion and dismissal of the appeal.Analysis:1. The appeal before the High Court was maintained under Section 260-A of the Income Tax Act against the order of the Income Tax Appellate Tribunal pertaining to the Assessment Year 2010-2011.2. The Assessing Officer made an addition in respect of interest on non-performing assets (NPAs) for the respondent, a Co-operative Society engaged in banking business.3. The Commissioner of Income Tax (Appeals) deleted the addition based on the decision of the Court in the case of COMMISSIONER OF INCOME TAX AND ANOTHER v. CANFIN HOMES LTD., following the principle that income from NPA should be assessed on cash basis and not on mercantile basis.4. The Tribunal dismissed the Revenue's appeal, emphasizing that the Assessing Officer was not justified in bringing to tax the interest on NPAs on accrual basis, especially when the asset is a non-performing one and not yielding any revenue.5. The interpretation of Section 145 of the Income Tax Act was crucial in this case, as it pertains to the computation of income under different accounting systems, either cash or mercantile, subject to accounting standards notified by the Central Government.6. The question of law arose regarding the accrual of income on NPAs and the application of the mercantile system of accounting, with the Revenue arguing that non-accrual of income on NPAs following a mixed system of accounting was impermissible.7. The Court applied the decision in Canfin Homes Ltd., stating that when a particular asset is classified as an NPA, it is assumed not to yield any revenue, and the assessee should not be subjected to tax on alleged notional income, even with a hybrid accounting system.8. Consequently, the Court dismissed the appeal, affirming the decision of the Commissioner of Income Tax (Appeals) to delete the addition in respect of interest on NPAs, as the Tribunal did not commit any error in approving the decision.