TaxTMI 
TaxTMI 
2011 (5) TMI 321
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....estion, the assessee had not shown the interest in its profit and loss account on the ground that the said loan had become non-performing asset (NPA) in terms of the guidelines issued by the Reserve Bank of India and, therefore, it was unlikely to receive the interest thereupon and thus interest had not accrued to the assessee in the relevant assessment years. The Assessing Officer, however, was of the opinion that since the assessee was following the mercantile system of accounting, even if the interest was not actually received by the assessee on the aforesaid loan, it had accrued to the assessee in the relevant assessment years and was to be treated as income of the assessee within the meaning of section 5 of the Income-tax Act (hereinaf....
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....998, interest income on NPA shall be recognized only when it is as actually realised. It has been further stated that accordingly, interest income on loans given which have become NPA has not been accounted for and the same shall be offered for taxation as and when received. Since the assessee had given the abovementioned loans on interest and it was following the mercantile system of accounting, as per the Assessing Officer, it was required to declare interest income on the above loan on accrual basis only irrespective of the date of actual receipt of interest and this accrued interest for the year under consideration should have been declared by it as its income earned from interest in this year, which it has not done. Accordingly, it was....
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....came NPA as per the definition of the NBFC's Prudential Norms (RBI) Directions, 1998. It has further stated that it is a NBFC and has been granted certificate of registration by the RBI under section 45-IA of the RBI Act, 1934, and, therefore, it is bound to follow the directions/instructions/guidelines issued by the RBI from time to time including the NBFC's Prudential Norms (RBI) Directions, 1998, and in terms of the said directions/norms, advances on which interest remained outstanding for more than six months were required to be treated as NPA, as defined in paragraph 2 (xii) of the NBFC's Prudential Norms (RBI) Directions, 1998. It has been further stated that as per paragraph 3 of the said Directions interest/discount or any other cha....
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....tances, there was no real accrual of interest and interest was not taxable in the hands of the assessee having regard to the principles of real income. It was also submitted before the lower authorities that even in accordance with the accounting standard AS-9, issued by the Institute of Chartered Accountants of India dealing with the effect of uncertainty on revenue recognition, the Guidance Note on Accrual Basis of Accounting issued by the ICAI according to which where ultimate collection with reasonable certainty is lacking, the revenue recognition is to be postponed to the extent of uncertainty involved. For this purpose, reliance was placed upon the RBI Directives ; accounting standards issued by the ICAI (AS-9) and the guidelines of t....
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....f the Income-tax Act and was, therefore, exigible to tax. Our answer is in the negative and we give the following reasons in support : (1) First of all we would discuss the matter in the light of the provisions of the Income-tax Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee. It is stated at the cost of repetition that the admitted position is that the assessee had not received any interest on the said ICD placed with Shaw Wallace since the assessment year 1996-97 as it had become NPAs in accordance with the Prudential Norms which was entered in the books of account as well. The assessee has further successfully demonstrated that even in the succeeding assessment years, no interes....