THE PR COMMISSIONER OF INCOME TAX V. SHRI VEER PULAKESHI

ITA/100039/2017

AI Insights

The case involves an appeal by the Income Tax Department against Shri Veer Pulakeshi Co-operative Bank Limited concerning the assessment year 2011-12. The core issue was whether the ITAT was correct in deleting the additions made by the assessing officer regarding accrued interest on loans classified as NPAs, despite the provisions of section 43D of the Income Tax Act, 1961. The revenue contended that the respondent bank, following the mercantile system of accounting, should have recognized the accrued interest as income. However, the ITAT and the High Court found that since the assets were non-performing, they ceased to yield income, and thus, the accrued interest should not be taxed until it was actually received.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 744893 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 29-01-2018
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax and another Vs. Canfin Homes Limited, The Commissioner of Income Tax and another Vs. Shri Siddeshwar Co-Operative Bank Limited and others
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: Y V RAVIRAJ
• Keywords: Accrued interest; Assessment Year 2011-12; Income Tax; Mercantile system of accounting; Non-performing assets
• Section: 260A; 43D

Judgement Text

"IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 29TH DAY OF JANUARY, 2018 PRESENT THE HON’BLE MRS. JUSTICE S. SUJATHA AND THE HON’BLE MR. JUSTICE JOHN MICHAEL CUNHA I.T.A. NO.100039/2017 BETWEEN : 1. THE PR COMMISSIONER OF INCOME TAX, DR.B.R.AMBEDKAR VEEDHI, OPP: CIVIL HOSPITAL, BELAGAVI-590 001. 2. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-, BENGALURU-560 001. … APPELLANTS (BY SRI.Y.V.RAVIRAJ, ADV.) AND : SHRI VEER PULAKESHI CO-OPERATIVE BANK LIMITED, 2318-A, BAZAR, BADAMI, DIST: BAGALKOT-587 101. … RESPONDENT THIS APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH, “A”, IN ITA NO.1746/BANG/2016, DATED 14.06.2017 AND CONFIRM THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-1, BAGALKOT. : 2 : THIS APPEAL COMING ON FOR ORDERS THIS DAY, S.SUJATHA J., DELIVERED THE FOLLOWING: JUDGMENT This appeal is filed by the revenue under Section 260A of the Income Tax Act, 1961 (for short the ‘Act’) challenging the judgment and order passed by the Income Tax Appellate Tribunal, Bangalore Bench ‘A’ (for short “ITAT”) in ITA No.1746/Bang/2016 relating to the assessment year 2011-12. 2. The substantial question of law raised by the revenue is as under: “1. Whether on the facts and in the circumstances of the case and in law the Tribunal is right in deleting the additions made by the assessing authority on account of accrued interest on loans which are classified as “Non-performing Assets” ignoring the provisions of section 43D of the Income Tax Act, 1961 amended w.e.f. 01.04.2000 which provides for certain benefit to the certain class of assessees but does not provide such benefit to the respondent bank and more particularly when the respondent is following mercantile system of accounting?” 3. The issue involved in this appeal is no more res integra in view of the decision of the Co-ordinate Bench of : 3 : this Court in the case of Commissioner of Income-Tax and another Vs. Canfin Homes Limited (2012) 347 ITR 382 (Karn), which has been followed by yet another Co- ordinate Bench of this Court in the case of The Commissioner of Income Tax and another Vs. Shri Siddeshwar Co-Operative Bank Limited and others in ITA No.200002/2015 and connected matters (DD 22nd June 2016). 4. This Court in Canfin Homes Limited (supra), has held as under: “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 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 be said to have been accrued and the said amount cannot be brought to tax. In the instant case, were are concerned with a non-performing asset. As the : 4 : 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-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.” 5. In the case of Shri Siddeshwar Co-Operative Bank Limited (supra), the definition of non-performing assets as defined in Volume I of ‘Tannan’s Banking Law and Practice in India’ has been extracted which reads as under: : 5 : “1. Non-performing assets: An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A “non-performing asset” (NPA) is a loan or an advance where: (i) the interest and / or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan; (ii) the account remains “out of order” for a period of more than 90 days as indicated below, in respect of an Overdraft/Cash Credit (OD/CC); (iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted; (iv) the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops; (v) the instalment of principal or interest thereon remains overdue for one crop seasons for long duration crops. Banks should, classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.” Further, asset classification which is separately dealt with reference to categories of non-performing assets are extracted which reads as follows: : 6 : “Banks are required to classify non- performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: (a) Sub-standard Assets (b) Doubtful Assets (c) Loss of Assets” 6. From the aforesaid, it is manifest that when an asset becomes non-performing, it ceases to yield income and once a particular asset is shown to be a non– performing asset, then it is nothing but no revenue is yielded. In such cases, paying tax would not arise. Hence, we answer the substantial question of law against the revenue. In the result, appeal stands dismissed. Sd/- JUDGE Sd/- JUDGE Sh "