2024 (5) TMI 541 - HC - Income Tax

NBFC wins on NPA interest recognition, section 43B deductions, and recurring deposit taxation

Principal Commissioner of Income Tax – 2, Kolkata, Commissioner of Income Tax, Kolkata – II Versus West Bengal Infrastructure Development Finance Corporation Limited

Calcutta HC ruled in favor of the assessee on three tax issues. First, regarding interest on non-performing assets (NPA), the court held that for NBFCs ... Income recognition - Interest on NPA - non-recognition of income is not permissible under the Income-tax Act, 1961 and the same should be added to the total income of the assessee for the year - ITAT deleted addition - HELD THAT:- As decided in Income Tax Appellate Tribunal [2015 (11) TMI 926 - ITAT KOLKATA] irrespective of the method of accounting following by the assessee, interest, expenses of the nature referred to section 43B (d) of the Act can be allowed as a deduction only in the year in which such interest are actually paid. The debit to the profit and loss account of an amount which is claimed as deduction u/s 43B of the Act is not a requirement and the decision of Associated Pigments Ltd. [1998 (9) TMI 78 - CALCUTTA HIGH COURT]supports the plea of the assessee in this regard - Decided in favour of the assessee and against the revenue. Interest on non-performing asses - HELD THAT:- As decided in Vasisth Chay Vyapar Ltd. [2010 (11) TMI 88 - DELHI HIGH COURT] held that the assessee-company being NBFC is governed by the provisions of the RBI Act. In such a case, interest income cannot be said to have accrued to the assessee having regard to the provisions of section 45Q of the RBI Act and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these norms, the ICD had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, it could not be treated to have been accrued in favour of the assessee. Decided in favour of the assessee. Accrual of interest on recurring deposit - Year of assessment - HELD THAT:- Accrual of interest on recurring deposit / sinking fund was only upon maturity, it is also an admitted fact of the case that the entire accrued interest was accounted for by the assessee and was offered to tax in the assessment year 2005-06. Thus, the interest on such deposit/fund which was subjected to tax by the assessing officer in assessment year 2001-02 and assessment year 2002-03 was offered for taxation by the assessee in the assessment year 2005-06 and was accordingly taxed.Under the circumstances, the impugned order of the ITAT cannot be said to suffer from any manifest error of law. Decided in favour of assessee. Issues Involved:1. Deduction of interest amount u/s 43B(d) of the Income Tax Act, 1961.2. Deletion of addition of interest from non-performing assets (NPA) u/s 43D of the Act.3. Deletion of interest on recurring deposits.Summary of the Judgment:Issue 1: Deduction of Interest Amount u/s 43B(d)The court considered whether the Income Tax Appellate Tribunal (ITAT) was correct in allowing a deduction of Rs. 1,40,77,397/- under Section 43B(d) of the Income Tax Act, 1961, despite the amount not being debited to the profit and loss account or claimed in the return. The ITAT found that the interest was indeed paid during the relevant assessment year and thus allowable under section 43B(d), irrespective of the method of accounting followed by the assessee. The court upheld the ITAT's decision, referencing the Supreme Court's ruling in Wipro Industries Limited v. Commissioner of Income Tax, which allows appellate authorities to entertain fresh claims not made in the original return. Thus, the substantial question of law was answered in favor of the assessee.Issue 2: Deletion of Addition of Interest from Non-Performing Assets (NPA)The court examined whether the ITAT properly construed the provisions of Section 43D of the Act in deleting the addition of Rs. 1,24,31,423/- as interest from non-performing assets. The ITAT's decision was supported by the Delhi High Court's judgment in Commissioner of Income Tax v. Vasisth Chay Vyapar Ltd., which was affirmed by the Supreme Court. The court agreed that interest on NPAs, which are not received and where recovery is uncertain, cannot be treated as accrued income. Therefore, the substantial question of law was answered in favor of the assessee.Issue 3: Deletion of Interest on Recurring DepositsThe court considered whether the ITAT erred in directing the deletion of interest on recurring deposits amounting to Rs. 11,74,79,000/-. The ITAT found that the interest on recurring deposits was not payable until maturity and thus, could not be taxed annually. The ITAT's findings were supported by the Kerala High Court's judgment in CIT v. Federal Bank Ltd., which held that interest on securities accrues only upon maturity. The court noted that the entire interest was accounted for and taxed in the assessment year 2005-06. Consequently, the substantial question of law was answered in favor of the assessee.Conclusion:The court dismissed both appeals filed by the revenue, answering all substantial questions of law in favor of the assessee and against the revenue.