COMMISSIONER OF INCOME TAX V. THE URBAN CO-OPERATIVE BANK LTD

ITA/471/2013

AI Insights

The case involves the Commissioner of Income-Tax and the Income Tax Officer as appellants, against The Urban Co-Operative Bank Limited as the respondent. The core issue was whether income from non-performing assets should be taxed on a cash basis or a mercantile basis, given that the assessee adopted a mercantile system of accounting. The Tribunal had previously ruled in favor of the assessee, leading to this appeal by the revenue. The High Court's decision affirmed the Tribunal's ruling, citing a precedent that income from non-performing assets should only be recognized when actually received, not merely accrued.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 701005 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 30-06-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax, Central Circle, Bangalore vs. Canfin Homes Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR AND M LAVA
• Assessee Lawyers: JEEVAN NEERALGI
• Keywords: Cash Basis; Mercantile system of accounting; Non-performing assets; Tax assessment
• Section: 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 30th DAY OF JUNE 2014 PRESENT THE HON'BLE MR. JUSTICE N. KUMAR AND THE HON’BLE MRS. JUSTICE B MANOHAR ITA No.471 OF 2013 BETWEEN; 1. Commissioner of Income-Tax, Davanagere. 2.Income Tax Officer, Ward-2, Shimoga. ...APPELLANTS (By Sri. Jeevan.J. Neeralgi, Advocate) AND: The Urban Co-Operative Bank Limited Rajatha Bhavan, Shikaripura, Shimoga District. ...RESPONDENT (By Sriyuths. A. Shankar and M. Lava, Advocates) -0-0-0-0- This ITA is filed under Section 260-A of I.T. Act, 1961 arising out of Order dated 30.04.2013 passed in ITA.No.258/BANG/2012, for the Assessment Year 2008-09 praying to formulate the substantial questions of law stated therein and to allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA 2 No.258/BANG/2012 dated 30.04.2013 and the order of the Commissioner of Income Tax(Appeals), Hubli, dated 28.11.2011 in Appeal ITA.CIT(A)363/HBL/2010-11. This appeal coming on for admission this day, N. KUMAR, J. delivered the following:- JUDGMENT The revenue has preferred this appeal challenging the order passed by the Tribunal holding that the assessee need not pay tax in respect of non-performing assets though the assessee is adopting mercantile system of accounting. 2. The substantial question of law which is raised in this appeal is:- “Whether the Tribunal was right in holding that the income from non- performing assets should be assessed on cash basis and not on mercantile basis despite the assesee maintaining mercantile system of accounting?” 3. The said question has been answered by this Court in the case of Commissioner of Income-Tax, Central Circle, Bangalore .vs. Canfin Homes Limited 3 [(2011)201 TAXMAN 273/13 taxmann.Com 43(Karnataka)] at paragraph 8, which reads as under:- “8.Therefore, it is clear, if an assessee adopts mercantile system of accounting and in his accounts he shows a particular income as accruing, whether that amount is really accrued or not is liable to bring the said income to tax. His accounts should reflect true and correct statement of affairs. Merely because the said amount accrued was not realized immediately cannot be a ground to avoid payment of tax. But, if in his account it is clearly stated though a particular income is due to him but it is not possible to recover the same, then it cannot said to have been accrued and the said amount cannot be brought to tax. In the Instant case we are concerned with a non-performing asset. As the definition of non-performing asset shows an asset becomes non- performing when it ceases to yield income. Non-performing asset is an asset in respect of which interest has 4 remained unpaid and has become past due. Once a particular asset is shown to be a non-performing asset, then the assumption is it is not yielding any revenue. When it is not yielding any revenue, the question of showing that revenue and paying tax would not arise. As is clear from the policy guidelines issued by the National Housing Bank, the income from non-performing asset should be recognized only when it is actually received. That is what, the Tribunal held in the instant case. Therefore, the contention of the revenue that in respect of non-performing assets even though it does not yield any income as the assessee has adopted a mercantile system of accounting, he has to pay tax on the revenue which has accrued notionally is without any basis. In that view of the matter, the second substantial question framed is answered against, the revenue and in favour of the assessee.” 4. In that view of the matter, we do not see any merit in this appeal. The said question of law is 5 answered in favour of the assessee and against the revenue. 5. However, it is submitted that the said judgment of this Court is under challenge before the Apex Court. Therefore, in the event of Apex Court reversing the said judgment, the assessing authority shall give effect to the judgment of the Apex Court. Sd/- JUDGE. Sd/- JUDGE. *alb/-. "