Court rules interest on non-performing assets not taxable, upholding assessee's appeal

The court ruled in favor of the assessee, dismissing the revenue's appeal. The court upheld the exclusion of interest accrued on non-performing assets from taxable income, following the mercantile system of accounting and RBI guidelines. The court emphasized that once an asset is classified as non-performing, it is assumed to yield no revenue and hence not taxable. Additionally, the court affirmed that the revenue's arguments regarding the provisions of the Income Tax Act were not relevant to the issues at hand.

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Issues:
1. Whether interest accrued on non-performing assets should be included in taxable income despite following the mercantile system of accounting.
2. Whether the provision for non-performing assets made by the assessee as per RBI guidelines should override the provisions of Section 145 of the Income Tax Act.

Analysis:

Issue 1:
The appeal pertains to the Assessment Year 2007-08, where the revenue challenged the deletion of interest accrued on non-performing assets from taxable income. The Assessing Officer made additions based on the mercantile system of accounting, including provisions for non-performing assets. The Commissioner of Income Tax (Appeals) allowed the provision for non-performing assets following the Supreme Court decision in UCO Bank case. The tribunal affirmed this decision, stating that once an asset is classified as non-performing, it is assumed to yield no revenue, hence not taxable. The court upheld this reasoning, emphasizing that the revenue's contentions were not relevant to the framed substantial question of law.

Issue 2:
Regarding the second substantial question of law, the revenue argued that the provision under Section 36(1)(viia) should be set off against bad debts written off, and any excess write-off should be allowed under Section 36(1)(vii). The revenue cited a Supreme Court decision to support their argument. However, the tribunal's decision was based on the accounting treatment of interest income on non-performing assets and followed RBI guidelines. The court agreed with the tribunal's findings, stating that the revenue's arguments were not pertinent to the issue at hand. The court dismissed the appeal, upholding the decisions of the tribunal and Commissioner of Income Tax (Appeals).

In conclusion, the court ruled in favor of the assessee, dismissing the revenue's appeal as they found no merit in the arguments presented.

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