THE PR. COMMISSIONER OF INCOME TAX CIT (A) V. M/S. CITY CO OPERATIVE BANK LTD

ITA/560/2017

AI Insights

The case involves an appeal by the Revenue against the decision of the Income Tax Appellate Tribunal, Bengaluru, which had dismissed the Revenue's appeal concerning the assessment of interest on non-performing assets (NPAs) for the assessment year 2010-2011. The Tribunal's decision was influenced by the Karnataka High Court's earlier ruling in Canfin Homes Ltd., which established that income from NPAs should be recognized only when actually received, not when accrued, despite the adoption of a mercantile system of accounting. The Revenue contended that the question of law regarding the treatment of NPAs under the amended Section 145 of the Income Tax Act, 1961, should be reconsidered, but the court found the issue conclusively addressed in the Canfin Homes Ltd. case.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 756142 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 07-03-2018
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX AND ANOTHER v. CANFIN HOMES LTD., STATE BANK OF TRAVANCORE v. C.I.T., UCO BANK v. C.I.T.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: JINITA CHATTERJEE
• Assessee Lawyers: DILIP
• Keywords: Accrual basis; Cash Basis; Income Tax; Mercantile system of accounting; Non-performing assets
• Section: 145; 260-A

Judgement Text

"IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 07TH DAY OF MARCH, 2018 PRESENT HON’BLE MR.JUSTICE DINESH MAHESHWARI, CHIEF JUSTICE AND HON’BLE MR.JUSTICE S. SUNIL DUTT YADAY INCOME TAX APPEAL NO. 560 OF 2017 BETWEEN 1. THE PR.COMMISSIONER OF INCOME-TAX, CIT(A), “2ND FLOOR, SHREE TOWERS”, No.565/A, A1, OPPOSITE TO DRR HOSTEL, HADADI ROAD, DAVANGERE- 577 004. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, NO.70, 100 FEET ROAD, GOPALAGOWDA EXTENSION, SHIVAMOGA- 577 201. …APPELLANTS (BY SRI.DILIP M, ADVOCATE FOR SRI. K. V. ARAVIND, ADVOCATE) AND M/S. CITY CO-OPERATIVE BANK LTD., FORT ROAD, SHIVMOGA- 577 202. PAN : AADFC 8839J. …RESPONDENT (BY MS.JINITA CHATTEREJEE, ADVOCATE FOR SRI. S.PARTHASARATHI ADVOCATE) 2 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961, ARISING OUT OF ORDER DATED 17.03.2017 PASSED IN ITA NO.790/BANG/2016, FOR THE ASSESSMENT YEAR 2010- 2011 PRAYING THAT, (1) TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW, (2) TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.790/BANG/2016, DATED 17.03.2017 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, SHIVAMOGGA (3) TO PASS SUCH OTHER SUITABLE ORDERS. THIS INCOME TAX APPEAL COMING ON FOR ADMISSION THIS DAY, THE CHIEF JUSTICE DELIVERED THE FOLLOWING: JUDGMENT Ms. Jinita Chattarjee, learned counsel appearing for Shri S. Parthasarathi undertakes to file power for the respondent. The Revenue seeks to maintain this appeal under Section 260-A of the Income Tax Act, 1961 [‘the Act’] against the order dated 17.03.2017 as passed by the Income Tax 3 Appellate Tribunal, Bengaluru [‘the Tribunal’] in ITA. No.790/Bang/2016 (relating to the Assessment Year 2010- 2011) The relevant background aspects of the matter are that the respondent-assessee is said to be a Co-operative Society, engaged in banking business. For the assessment year in question, the Assessing Officer proceeded to make addition in respect of interest on non-performing assets (NPAs). However, in appeal by the assessee, the Commissioner of Income Tax (Appeals), Davangere [‘the CIT(A)’] deleted such addition by following the decision of this Court in the case of COMMISSIONER OF INCOME TAX AND ANOTHER v. CANFIN HOMES LTD. : [2012] 347 ITR 382 (Karnataka). Aggrieved, the Revenue preferred the appeal before the Tribunal. The Tribunal has dismissed the Revenue’s appeal while observing, inter alia, as under: “7. Thus, following the above citations and keeping in view the fact that the assessee is statutorily obliged to account for the interest on non-performing assets on actual receipt basis and that, it does not matter whether the interest is shown in the year of receipt or on accrual basis as the tax rate is one and the same on the income to be assessed, it is held that the Assessing Officer is not justified in 4 bringing to tax the interest on non-performing assets on accrual basis just because the assessee follows mercantile system of accounting and as such the addition made of Rs.89,01,972/- as reduced by Rs. 9,84,489/- is hereby deleted.” Aggrieved by the order so passed by the Tribunal, the Revenue seeks to maintain this appeal with the submissions that though the Hon’ble Supreme Court has dismissed the SLP preferred in the case of Canfin Homes Ltd. (supra), but while keeping open the question of law involved in the case and as such, the same ought to have been considered by the Tribunal. It is submitted that as per amended Section 145 of the Act, the income under the heads ‘profit’ and ‘gains of business or profession’ has to be computed either under cash or under mercantile system of accounting and subject to accounting standards notified by the Central Government; and, therefore, in the present case, non-accrual of income on NPAs following mixed system of accounting was not permissible. Having heard learned counsel for the appellants and having perused the material placed on record, we are satisfied that the suggested question of law does not arise in 5 this case, as the matter stands concluded in this Court in view of the decision in Canfin Homes Ltd. (supra). Therein, this Court has specifically held that income from NPA should be assessed on cash basis and not on mercantile basis, despite the assessee following mercantile system of accounting. This Court has, with reference to the decisions of the Hon’ble Supreme Court in STATE BANK OF TRAVANCORE v. C.I.T.: [1986] 158 ITR 102 (SC) and UCO BANK v. C.I.T.: [1999] 237 ITR 889 (SC), held as under: “8. Therefore, it is clear, if an assessee adopts the 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 realised 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 remained unpaid and has become past due. Once a particular asset is shown to be a non- 6 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 recognised 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.” (underlining supplied) Indisputably, there is no decision to the contrary by the Hon’ble Supreme Court on this question. Therefore, the decision aforesaid in Canfin Homes Ltd. stands concluded on the views of this Court that when a particular asset is shown to be NPA, the assumption is that it is not yielding any revenue; and there is no reason that the assessee be subjected to tax on the alleged notional income, even if it has adopted hybrid system of accounting. When the said decision in Canfin Homes Ltd. directly applies to the present case, the Tribunal cannot be said to 7 have committed any error in approving the decision of the CIT (A), who had deleted the addition in respect of interest on NPAs. In view of the aforesaid, this appeal fails and is, therefore, dismissed. Sd/- CHIEF JUSTICE Sd/- JUDGE Bkv/vgh* "