2019 (3) TMI 1551 - HC - Income Tax

High Court Upholds Tribunal's Decision on Taxability of Interest Income

The High Court dismissed the appeals, upholding the Tribunal's decisions on all issues. The Tribunal's decision regarding the taxability of interest ... Method of accounting - recognition of income - interest on non-performing assets - Taxability of Apportionment of Income on Sum of Digits (SOD) Method or Internal Rate of Return (IRR) Method - HELD THAT:- Appeals were admitted, are now covered by a decision of this Court in the case of Assessee itself in Sundaram Finance Limited [2012 (9) TMI 373 - SUPREME COURT] assessee has classified its assets on the basis of the notification issued by the RBI and found that certain assets are coming under the category of non-performing assets. From such non-performing assets, the assessee has not recognised any income in consonance with the notification issued by the RBI and AS-9 issued by the ICAI. Therefore, the assessee is justified in not recognising the income as such. Once that is the case, there is no occasion to consider whether the principle of accrual would arise or not. In view of the matter, we are of the considered view that the lower authorities have erred in treating the interest on non-performing assets as income of the assessee company for the asst. yr. 1998-99. We direct the AO to delete the said interest from the computation of taxable income. The interest from such non-performing assets. As will be taxed in the appropriate assessment years on the basis of actual receipt. The issue of interest from non-performing assets is therefore decided in favour of the assessee Issues Involved:1. Taxability of interest income on Non-Performing Assets (NPA).2. Applicability of RBI guidelines and Accounting Standards for determining real income.3. Deductibility of provisions made for NPAs.4. Change in apportionment of income from Sum of Digits (SOD) method to Internal Rate of Return (IRR) method.5. Treatment of software cost given on lease as capital in nature.6. Treatment of contingent deposits as income.Detailed Analysis:1. Taxability of Interest Income on Non-Performing Assets (NPA):The Tribunal held that since the appellant follows the Mercantile System of Accounting, interest income on NPAs should be assessed on an accrual basis. The appellant argued that due to the uncertainty of realization, income should not be accounted for, referencing the Supreme Court's decision in Godhra Electric Supply Co. vs. C.I.T. (225 ITR 746). However, the Tribunal's decision was upheld, aligning with the Division Bench's prior decision in T.C.No.107 of 2002.2. Applicability of RBI Guidelines and Accounting Standards:The appellant contended that RBI guidelines and Accounting Standards issued by the CBDT should determine the real income, which would support non-recognition of income on NPAs. However, the Tribunal did not accept this argument, referencing the Supreme Court's ruling in Godhra Electric Supply Co. vs. C.I.T. (225 ITR 746).3. Deductibility of Provisions Made for NPAs:The Tribunal held that the appellant is not entitled to a deduction for provisions made for NPAs considered irrecoverable. This decision was consistent with the Division Bench's ruling in T.C.No.107 of 2002, which stated that such provisions are not allowable as bad debts or business losses.4. Change in Apportionment of Income from SOD to IRR Method:The Tribunal ruled that the change in the apportionment of income from the SOD method to the IRR method was not for bona fide reasons. The appellant argued that IRR is a more defined and accepted accounting method than SOD. However, the Tribunal's decision was upheld, as the consistent use of the EMI method for tax purposes was previously approved by the Court in similar cases like Commissioner of Income Tax v. M/s.Ashok Leyland Finance Ltd.5. Treatment of Software Cost Given on Lease as Capital in Nature:The Tribunal held that the cost of software given on lease is capital in nature and hence not allowable as a deduction. This issue was not pressed by the appellant's counsel during the appeal.6. Treatment of Contingent Deposits as Income:The Tribunal treated the amount of Rs. 2,70,675/- collected as a contingent deposit as income of the appellant. This decision was aligned with the Court's prior rulings in similar cases, such as CIT vs. Sakthi Finance Ltd., where it was held that such receipts associated with a liability to refund should not be characterized as income.Conclusion:In summary, the High Court dismissed the appeals, upholding the Tribunal's decisions on all issues. The questions of law regarding the apportionment of income on SOD or IRR methods were answered in favor of the appellant, while the issues related to the taxability of interest on NPAs, the deductibility of provisions for NPAs, and the treatment of contingent deposits were decided against the appellant. The issue of the software cost given on lease as capital in nature was not pressed by the appellant's counsel.