2011 (8) TMI 178

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....ead "Business income" and deduction under section 36(1)(viii) of the Act should be allowed?    2.  Whether the Tribunal was right in holding that income from non-performing assets should be assessed on cash basis and not on mercantile basis despite the assessee maintaining mercantile system of accounting?" 2. Insofar as the first substantial question of law is concerned, this Court in the case of the very same assessee in ITA No. 3159/2005 decided on 5-7-2010 held that in respect of any special reserve created by any financial corporation which is engaged in providing long term finance for industrial or agricultural development or infrastructure facility in India, an amount not exceeding 40 per cent of the total income comp....

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....thod of accounting.-(1) Income chargeable under the head "Profits and gains of business or profession" or 'Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified, under sub-section (2), have not been regularly f....

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.... (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. Relying on this definition in the accounting standard, the revenue contends it is immaterial whether any revenue is actually received or not. If it is shown to accrued that is sufficient to charge the said income. In this context it is also necessary to take note of the guidelines dated 28-4-1995 issued by the National Housing Bank with reference to non-performing asset which is the subject-matter of these proceedings. It states the policy on income recognition to be objective should be based on record of recovery. Income from non-performing asset (NPA) may not be recognized merely on the basis of accrual. An asset becomes n....

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.... which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. Such circulars are meant for ensuring proper administration of the....