TMI Blog2013 (3) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... ing income on NPA accounts only subject to realisation does not serve as a standard category. As in the present case, Assessing Officer has not recorded findings whether there is any uncertainty in collection of income. There is nothing to indicate that the "interest income" is non-recoverable. Individual ledger accounts of the borrower are to be examined. CIT (A) and the Tribunal had not considered the matter in the light of the decision of Southern Technologies Limited(2010 (1) TMI 5 - SUPREME COURT OF INDIA) where liability of income-tax is concerned, the same was governed by the Income-tax Act and merely because for accounting purpose, the assessee was to follow RBI guidelines it would not mean that the assessee was not liable to show the accrued interest income when it had accrued to the assessee under the mercantile system and exigible to tax under the Act. RBI Directions 1998 has nothing to do with the computation or taxability of the provisions for "accrued interest" for NPA under the Income-tax Act. Thus the Orders of the Tribunal are set aside and the matters are remitted back to the Assessing Officer for consideration of the matter afresh in the light of law la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax, (2010) 320 ITR 577, submitted that insofar as liability of income-tax is concerned, the same was governed by the Income-tax Act and merely because for accounting purpose, the respondent/assessee was to follow RBI guidelines it would not mean that the assessee was not liable to show the accrued interest income when it had accrued to the assessee under the mercantile system and exigible to tax under the Act. Drawing our attention to the assessment orders in which the method of accounting of the assessee is stated as "Mercantile", Mr.Balaji, the learned counsel for revenue submitted that when the assessee was following 'mercantile method' of accounting, the case of the assessee was to be dealt with for the purpose of taxability as per the provisions of the Act and not the RBI Act, which was the accounting method, which the assessee NBFC was required to follow. 4. In paragraph No.27 of the Southern Technologies Ltd., (2010) 320 ITR 577, the Hon'ble Supreme Court elaborated upon the three deviations between RBI Directions 1998 and Companies Act. Relying upon the decision of Southern Technologies Ltd., (2010) 320 ITR 577 and the deviations pointed out by the Hon'ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued interest on NPA is not assessable to income-tax and following the judgment of the Tribunal allowed the appeals for the assessment years 1999-2000 and 2000-2001. 9. In Commissioner of Income-tax Vs. Elgi Finance Limited, (2007) 293 ITR 357, almost identical controversy was considered. The Assessing Officer proposed to bring the accrued interest as income of assessee relating to the assessment year. The assessee explained that as it was a NBFC, those assets were to be treated as NPAs in terms of the guidelines issued by RBI and the income pertaining thereto was not to be considered as income. The Assessing Officer held that since the Assessee Company was following the mercantile system of accounting, the Assessing Officer held that both income as well as expenditure had to be accounted on accrual basis. The appeal of the assessee was dismissed by Commissioner of Income-tax (Appeals). On further appeal by the assessee, the Tribunal was of the view that the lower authorities erred in treating the interest on NPAs as income of assessee Company for the relevant assessment year and ordered to delete the said interest from the computation of the taxable income and allowed the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act allows an NBFC to adjust a provision for possible diminution in the value of assets or provision for doubtful debts against the assets and only the net figure is allowed to be shown in the balance sheet, as a matter of disclosure. However, the said RBI Directions, 1998 mandate all NBFCs to show the said provisions separately on the liability side of balance sheet i.e. under the head current liabilities and provisions. The purpose of the said deviation is to inform the user of the balance sheet the particulars concerning quantum and quality of the diminution in the value of investment and particulars of doubtful and sub-standard assets. Similarly, the 1998 Directions do not recognise the incomeunder the mercantile system and insist that NBFCs should follow cash system in regard to such incomes. 31. Before concluding on this point, we need to emphasise that the 1998 Directions have nothing to do with the accounting treatment or taxability of incomeunder the IT Act. The two viz. the IT Act and the 1998 Directions operate in different fields." 12. In COMMISSIONER OF INCOME TAX VS. VASISTH CHAY VYAPAR LTD., (2011) 330 ITR 440, the Delhi High Court considered the case of South ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealt with the income recognition norms as spelt out by the RBI as well and observed that the RBI's Directions and the Income-tax Act operate in different fields. We may demonstrate this by extracting the relevant paragraphs from the decision of Southern Technologies Limited, (2010) 320 ITR 577, which read as under: "31. Before concluding on this point, we need to emphasise that the 1998 Directions have nothing to do with the accounting treatment or taxability of income under the Income-tax Act. The two viz. the Income-tax Act and the 1998 Directions operate in different fields. As stated above, under the mercantile system of accounting, interest/hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as income is recognised under the accrual system. However, it is not so recognised under the 1998 Directions and, therefore, in the matter of its presentation under the said Directions, there would be an add back but not under the Income-tax Act necessarily. It is important to note that collectibility is different from accrual. Hence, in each case, the assessee has to prove, as has happened in this case with regard to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t liabilities. For example, there are companies which do not recognise mark-to-market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the profit and loss account in terms of Accounting Standards. Consequently, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest, they are merely disclosed as contingent liability in the notes to accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the Income-tax Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions, 1998 and the Income-tax Act operate in different fields. 34. The question still remains as to what is the nature of provision for NPAin terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would result in understatement of profits. However, here is the case where the Assessing Officer has to follow the RBI Directions, 1998 in view of Section 45-Q of the RBI Act. Hence, as far as income recognition is concerned, Section 145 of the Income-tax Act has no role to play in the present dispute." 16. In Paragraphs 31 and 34, the Hon'ble Supreme Court in no uncertain terms held that the collectibility of interest is different from accrual and in each and every case, the assessee has to prove that the income interest is not recognised or not taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept the claim of the assessee under the Income-tax Act or not to accept. In case of Southern Technologies Limited, (2010) 320 ITR 577, the Assessing Officer accepted the assessee's case towards non-recognition of interest for Rs.20.34 lakhs as would be apparent from a reading of Paragraph No.31 of the Judgment of the Hon'ble Supreme Court in case of Southern Technologies Limited, (2010) 320 ITR 577. By a careful reading of the case of Southern Technologies Limited, (2010) 320 ITR 577, we are of the view that the assessee has to prove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est income then it is not chargeable to tax. The system of accounting followed only recognises it bringing the income to books. The adopted accounting policy i.e., recognising income on NPA accounts only subject to realisation does not serve as a standard category. 19. In the present case, Assessing Officer has not recorded findings whether there is any uncertainty in collection of income. There is nothing to indicate that the "interest income" is non-recoverable. Individual ledger accounts of the borrower are to be examined. We are of the view that the Commissioner of Income-tax (Appeals) and the Tribunal had not considered the matter in the light of the decision of the Hon'ble Supreme Court in the case of Southern Technologies Limited, (2010) 320 ITR 577. We are of the view that the matter has to be considered in the light of the observations in case of Southern Technologies Limited, (2010) 320 ITR 577. 20. For the fore-going reasons, the Orders of the Tribunal are set aside and the matters are remitted back to the Assessing Officer for consideration of the matter afresh in the light of law laid down by the Supreme Court in Southern Technologies and above observation and pass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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