2023 (7) TMI 370 - AT - Income Tax

Interest on NPAs not taxable on accrual basis, tribunal rules in favor of assessee.

Bajaj Finance Limited, Versus The PCIT-3, Pune

The tribunal found in favor of the assessee, holding that interest on Non-Performing Assets (NPAs) is not taxable on an accrual basis. It was determined ... Revision u/s 263 by CIT - assessment of assessee’s notional interest income on non-performing assets “NPAs” on accrual basis as per provisions of the Act vis-à-vis applicability of the newly introduced ICDS-IV read with CBDT’s circular no. 10/2017 dated 23.03.2017 - PCIT’s revision directions holding the National e-Assessment Centre, Delhi’s assessment dated 15.03.2021 to have been completed without making the necessary enquiries and verifications thereby rendering the same as an erroneous one causing prejudice to interest of the revenue - HELD THAT:- We find no merit in the Revenue’s stand supporting the PCIT’s revision directions under challenge in light of the tribunal’s decision in assessee own case [2023 (7) TMI 292 - ITAT PUNE] DR could hardly dispute that all these standards uniformly contain this uniform clause thereby paving way for applicability of the provisions of the Act wherein the assessee has already succeeded on the instant issue of accrual of interest on NPAs right up to hon’ble jurisdictional high court having attained finality [2019 (4) TMI 378 - BOMBAY HIGH COURT]. That being the case, we hold that the CBDT’s circular issued in tune with the foregoing Income Computation and Disclosure Standards “ICDS” also would not apply once the assessee is not required to recognize its accrued interest on NPAs as income on accrual basis. PCIT has erred in law and on facts in terming the Assessing Officer’s sec. 143(3) regular assessment as an erroneous one causing prejudice to interest of the Revenue Thus we reverse the PCIT’s impugned revision directions once the assessee’s interest income on NPAs is not assessable to tax on accrual basis. Decided in favour of assessee. Issues Involved:1. Validity of revision proceedings under section 263 of the Income Tax Act.2. Taxability of interest on Non-Performing Assets (NPAs).Summary:Issue 1: Validity of Revision Proceedings under Section 263 of the ActThe assessee contended that the assessment order passed by the Assistant Commissioner of Income Tax under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. Therefore, the order under section 263 was without jurisdiction and bad-in-law. The assessee argued that the proceedings under section 263 cannot be initiated on interpretational issues based on mere differences in opinion from the position adopted by the Assessing Officer.Issue 2: Taxability of Interest on NPAsThe learned PCIT held that interest on NPAs is taxable on an accrual basis, disregarding the well-settled principle of real income theory upheld in the appellant's own case by the appellate authorities in earlier years. The PCIT did not appreciate that the contentions raised to hold that interest on NPAs is taxable had been dealt with in detail in preceding years, and the issue had been settled as the Department had not filed further appeals against favorable orders. The PCIT also erred in holding that the decision of the Hon'ble Bombay High Court in the appellant's case and the decision of the Hon'ble Supreme Court in the case of Vashisth Chay Vyapar Ltd. is not applicable post-introduction of ICDS-IV. The PCIT ignored the Department's position before the Hon'ble Delhi High Court, where it was accepted that interest on NPAs cannot be taxed based on the real income theory, even after the introduction of ICDS-IV.Judgment:The tribunal found no merit in the Revenue's stand supporting the learned PCIT's revision directions. It was noted that the sole issue of taxability of the assessee's interest income on NPAs on an accrual basis was no longer res integra, as the matter had been settled by the jurisdictional high court in the assessee's favor. The tribunal referred to several decisions, including those of the Hon'ble Bombay High Court and the Supreme Court, which held that interest on NPAs cannot be taxed on an accrual basis.The tribunal observed that the Assessing Officer had indeed issued notices and received responses from the assessee regarding ICDS compliance, indicating that necessary enquiries were made. The tribunal held that the provisions of the Act prevail over ICDS in case of conflict, and since the assessee had already succeeded on the issue of accrual of interest on NPAs up to the jurisdictional high court, the CBDT's circular in tune with ICDS would not apply.Consequently, the tribunal concluded that the PCIT erred in law and on facts in terming the Assessing Officer's assessment as erroneous and prejudicial to the interest of the Revenue. The assessee's appeal was allowed, and the PCIT's revision directions were reversed. The order was pronounced in the Open Court on 23.05.2023.