Worth Capital Finance Ltd, Nagpur V. Joint CIT Range 1, Nagpur

ITA 269/NAG/2015

• Counselvise Citation: [2014] 117 COUNSELVISE.COM (IT) 8883 (ITAT-NAGPUR)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 23-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 12-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K BARAL
• Keywords: Set aside
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH, NAGPUR BEFORE S HRI SHAMIM YAHYA (AM) AND SHRI RAM LAL NEGI (JM) ITA NO. 269 / NAG/2015 ASSESSMENT Y EAR: 2011 - 12 M/S WORTH CAPITAL FINANCE LTD., C/O. M/S LOYA BAGRI & CO., CHARTERED ACCOUNTANS, GANDHIBAG, NAGPUR 440002 PAN : AAACW1676K VS. THE JT. COMMISSIONER OF INCOME TAX - RANGE 1, MECL BUILDING, SEMINARY HILLS, NAGPUR - 440006 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJESH LOYA (A R) ) REVENUE BY : SHRI R.K. BARAL (D R ) DATE OF HEARING: 09 /05 /201 8 DATE OF PRONOUNCEMENT: 20 / 07 /201 8 O R D E R PER RAM LAL NEGI, JM THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAINST THE ORDER DATED 16.07.2015 PASSED BY THE COMMISSIONER OF INCOME T AX (APPEALS) - I , NAGPUR, WHEREBY THE LD. CIT (A ) HAS DISMISSED THE APPEAL FILED BY THE ASSESSEE AGAINST THE ASSESSMENT ORDER PASSED UNDER SECTION 143 (3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT). 2. B RIEF FACTS OF THE CASE ARE THAT THE ASSESSEE , A PRIVATE LTD. COMPANY ENGAGED IN THE HIRE PURCHASE FINANCE, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION DECLARING THE TOTAL INCOME OF RS. 1,35,64,566/ - . THE RETURN WAS PROCESSED U/S 143 (1). SINCE, THE CASE WAS S E LECTED FOR SCRU TINY, NOTICE U/S 142 (1) AND 143 (2) WERE ISSUED TO THE ASSESSEE. IN RESPONSE TO THE SAID NOTICES, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED BEFORE THE AO AND FURNISHED THE DETAILS CALLED FOR. THE 2 ITA NO. 269 / NAG /2015 ASSESSMENT YEAR: 2011 - 1 2 3. AO NOTICED THAT THE AUDITOR HA D GIVEN THE F OLLOWING OBSERVATIONS IN ITS REPORT: THE COMPANY FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND RECOGNIZES INCOME AND EXPENDITURE ON ACCRUAL BASIS EXCEPT ACCOUNTING FROM INCOME FROM NON PERFORMING ASSETS WHICH HAS BEEN ACCOUNTED FOR ON CASH BASIS AS DEFINED IN THE GUIDELINES OF RESERVE BANK OF INDIA ON PRUDENTIAL NORMS FOR INCOME RECOGNITION OF NON BANKING FINANCIAL COMPANIES. 4. ACCORDINGLY, THE AO ASKED THE ASSESSEE TO AS TO WHY THE ACCRUED INTEREST SHOULD NOT BE ACCOUNTED FOR AS PER THE METHOD OF ACC OUNTING FOLLOWED AND FURTHER TO EXPLAIN AS TO WHY THE HYBRID SYSTEM OF ACCOUNTING BEING FOLLOWED IS NOT CONSISTENT WITH SECTION 145 OF THE ACT. THE AR CONTENDED THAT THE ASSESSEE BEING NON - BANKING FINANCE COMPANY (NBFC ) HAS STRICTLY FOLLOWED THE RBI GUIDE LINES AND PRUDENTIAL NORMS IN RESPECT OF RECOGNITION OF NON - PERFORMING ASSETS. THE ASSESSEE ALSO PRODUCED THE DETAILS OF ACCOUNTS WHICH BECAME NPA DURING THE ASSESSMENT YEAR UNDER CONSIDERATION AND DETAILS OF INTEREST REVERSED ON SUCH ACCOUNTS. THE AR FUR THER CONTENDED THAT NBFC S ARE BOUND TO COMPLY WITH THE RESERVE BANK OF INDIA NORMS. AS PER THESE NORMS, IF THE INTEREST INCOME RECOGNIZED BY THE COMPANY REMAINS OVERDUE FOR A PERIOD OF SIX MONTHS OR MORE, THE LOAN BECOMES NPA AND AFTER THAT NO INTEREST CAN BE RECOGNIZED UNLESS ACTUALLY RECEIVED . HOWEVER, THE AO REJECTING THE CONTENTION OF THE ASSESSEE MADE ADDITION OF RS. 69,813/ - HOLDING THAT THE ASSESSEE HAS ACCRUED INTEREST DURING THE ASSESSMENT YEAR. THE ASSESSEE CHALLENGED THE ASSESSMENT ORDER BEFORE T HE LD. CIT (A). THE LD. CIT (A) AFTER HEARING THE ASSESSEE REJECTED THE APPEAL AND CONFIRMED THE ADDITION MADE BY THE AO. 3 ITA NO. 269 / NAG /2015 ASSESSMENT YEAR: 2011 - 1 2 5. THE ASSESSEE HAS CHALLENGED THE IMPUGNED ORDER PASSED BY THE LD.CIT (A) ON THE FOLLOWING EFFECTIVE GROUNDS : - 1. THAT THE ORDER OF THE LEARNED CIT (A) AND THE ASSESSING OFFICER IS BAD IN LAW AND ON FACTS. 2. THAT THE LEARNED CIT (A) ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS. 69,813/ - HOLDING THAT THE INTEREST INCOME HAS ACCRUED T O THE ASSESSEE ON NPA ACCOUNTS. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AUTHORITIES FAILED TO APPRECIATE THAT WHEN THE PRINCIPAL AMOUNT IS DOUBTFUL OF RECOVERY, THE INTEREST ON SUCH AMOUNT DOES NOT ACCRUE ALTHOUGH THE SYSTEM OF ACCOUNTING F OLLOWED IS MERCANTILE. THE ADDITION IS ARBITRARY AND UNJUSTIFIED. 3. THAT THE LEARNED CIT (A) ERRED IN HOLDING THAT THE RBI NORMS ARE ONLY DISCLOSURE NORMS AND HAS NOTHING TO DO WITH ACCOUNTING. ON THE FACTS OF THE CASE, THE RBI DIRECTIONS & NOTIFICATIONS ARE PRUDENTIAL NORMS FOR RECOGNITION OF INCOME IN PROFIT AND LOSS ACCOUNT. 4. THAT THE LEARNED CIT (A) ERRED ON FACTS IN HOLDING THAT THE ASSESSEE HAS SHOWN THE IMPUGNED INTEREST AS OVERDUE INTEREST RECEIVABLE ACCOUNT ON ASSET SIDE. 6. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LD. CIT (A) HAS ERRED IN CONFIRMING THE ADDITION IN QUESTION HOLDING THAT THE INTEREST INCOME HAS ACCRUED TO THE ASSESSEE ON NPA ACCOUNTS WITHOUT APPRECIATING THE FACT THAT WHEN THE RECOVERY OF PRINCIPAL AMOUNT BECOMES DOUBTFUL, THE QUESTION OF INTEREST ON SUCH AMOUNT DOES NOT ARISE . THE LD. COUNSEL FURTHER SUBMITTED THAT THE LD. CIT (A) HAS WRONGLY HELD THAT RBI 4 ITA NO. 269 / NAG /2015 ASSESSMENT YEAR: 2011 - 1 2 NORMS ARE ONLY DISCLOSURE NORMS AND HAS NOTHING TO DO WITH ACCOUNTING. RELYING ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT DELIVERED IN CIT VS. VASISTH CHAY VYAPAR LTD. ITA NO. 552 OF 2005 SUBMITTED THAT THE FINDINGS OF THE LD. CIT (A) ARE CONTRARY TO THE RATIO LAID DOWN BY THE HONBLE HIGH COURT AFORESAID, IN WHICH IT HAS BEEN HELD THAT NON - PE RFORMING ASSETS ARE DOUBTFUL OF RECOVERY AND IT IS LEGITIMATE TO INFER THAT INTEREST INCOME DOES NOT ACCRUE IN THE CASE OF NON - PERFORMING ASSETS. THE LD. COUNSEL FURTHER CONTENDED THAT IN THE LIGHT OF THE DECISION AFORESAID, THE SAID AMOUNT IS NOT EXIGIBLE TO TAX IRRESPECTIVE OF THE FACT THAT ASSESSEE HAS BEEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. 7. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESENTATIVE (DR) RELIED ON THE CONCURRENT FINDINGS OF THE AUTHORITIES BELOW . 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE MATERIAL ON RECORD. A S POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE, T HE HONBLE DELHI HIGH COURT HAS HELD IN THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD. ITA NO. 552 OF 2005 , THAT THE INTEREST ON NON - PERFORMING ASSETS I N TERMS OF PRUDENTIAL NORMS ISSUED BY THE RESERVE BANK OF INDIA, HAVING NOT ACCRUED WOULD NOT BE TAXABLE IN THE HANDS OF A NON - BANKING FINANCIAL COMPANY . THE REVENUE CHALLENGED THE SAID JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE HONBLE SUPREME COURT. WE FURTHER NOTICE THAT RECENTLY THE HONBLE SUPRME COURT HAS DISMISSED THE REVENUES APPEAL AND UPHELD THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE COMMISSIONER OF INCOME TAX VS. V ASISTH CHAY VYAPAR LTD. [2018] 90 TAXMAN.COM 365 (SC) . IN VIEW OF THE FACT THAT THE HONBLE SUPREME COURT HA S UPHELD THE JUDGMENT OF THE HON BLE HIGH COURT IN THE CASE OF VASISTH CHAY VYAPAR LTD.(SUPRA), WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE REVENUE. 5 ITA NO. 269 / NAG /2015 ASSESSMENT YEAR: 2011 - 1 2 9. SINCE, THE ORDER PASSED BY THE LD. CIT (A) IS CONTRARY TO THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD. (SUPRA), WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LD. CIT (A) AND ALLOW ALL THE GROUND S OF APPEAL OF THE ASSESSEE. ACCORDINGLY, WE DIRECT THE AO TO DEL ETE THE ADDITION. IN THE RESULT, APPEAL FILED BY THE ASSESSEE FOR A SSESSMENT YEAR 2011 - 2012 IS ALLOWED. ORDER PRONOUNCED IN TERMS OF RULE 3 4 OF THE ITAT RULES 1963. SD/ - SD/ - ( SHAMIM YAHYA ) ( RAM LAL NEGI ) ACCOUNTANT MEMBER JUDICIAL MEMBER NAGPUR, DATED: 20 / 0 7 /201 8 ALINDRA, PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CI T(A) 4. CIT 5. DR, ITAT, NAGPUR 6. GUARD FILE . BY ORDER, //TRUE COPY// ( SR. PS/PS ) ITAT, NAGPUR