Itxa/221/2012 Of The Commissioner Of Income Tax - 8 v. M/S. Kec Holdings Ltd

sbw IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.221 OF 2012 The Commissioner of Income Tax-8-Versus-M/s. KEC Holdings Limited ..Appellant ..Respondent ........... Mr. Arvind Pinto for the Appellant.Mr. Nitesh Joshi i/b. Atul K. Jasani for the Respondent. ........... CORAM: S.C. DHARMADHIKARIAND B.P. COLABAWALLA, JJ. DATE :- 11[th] June, 2014 P.C.: 1]Heard Mr. Pinto, learned advocate appearing on behalf of the Revenue in support of this appeal and Mr. Joshi, learned advocate appearing for the Respondent. Mr. Pinto submits that the appeal raises a substantial question of law to the extent of the addition of accrued interest on Non-Performing Assets (NPA). 2]It is submitted by Shri Pinto that the Tribunal was considering a case of the assessee for the assessment year 2003-04. The assessee was in appeal against the order passed on 4[th] March, 2009 by the Commissioner of Income Tax (Appeals) Mumbai. The Tribunal by the impugned order dated 22[nd] July, 2011 allowed the assessee's appeal partly. The Tribunal has misdirected itself in law. Mr. Pinto submits that the interest which was accrued ought to have been disclosed when the assessee was following mercantile system of accounting. The Income Tax Act postulates that whatever interest is accruing ought to be treated as income and in the event, the same is not realized, there is a provision pertaining to writing off bad debts and a deduction, thus, can be claimed in relation to the interest accrued but could not be recovered or realized. However, the Tribunal has committed an error of law in holding that the assessee indicated the figure of the interest accruing on the loans and advances but did not show it as an income and in holding in favour of the assessee the Tribunal relied on the judgment of Delhi High Court in the case of Commissioner of Income Tax V/s. Vasisth Chay Vyapar Ltd. reported in (2011)330 ITR 440. 3]Mr. Pinto, therefore, submits that the appeal raises a substantial question of law, and therefore, deserves to be admitted on the questions formulated at para-4 page 5 of the paper book. 4]On the other hand, the learned counsel appearing on behalf of the *3* 1.itxa221.12 assessee submits that the view taken by the Tribunal is in accord with the settled principle. Even if, the interest income is shown on accruing basis, yet, after it is not realized, the banking institutions or non-banking functional institutions following mercantile system of accounting are permitted to treat the same income as doubtful. They are permitted to keep the same in suspense account and it is not necessary that it has to be brought to the Profit and Loss Account of the assessee. The Delhi High Court's view is thus, in accord with the judgment of the Hon'ble Supreme Court in the case of UCO Bank V/s. Commissioner of Income Tax reported in 1999 (237) ITR 889. 5]Mr. Joshi also brought to our notice the fact that the order was passed by the Hon'ble Supreme Court on 12[th] January, 2009 dismissing the Department's Special Leave Petition against the judgment dated 21[st] June, 2007 of the Calcutta High Court in Income Tax Appeal No.391 of 2007, wherein similar view has been taken. Learned counsel also relied on the judgments cited before the Tribunal namely that of the Delhi High Court in the case of Commissioner of Income Tax V/s. Vasisth Chay Vyapar Ltd. reported in (2011) 330 ITR 440 and in the case of Director of Income-Tax V/s. Brahamputra Capital Financial Services Ltd. reported in (2011)335 ITR 182. 6]The later decision in the case of Director of Income-Tax V/s. Brahamputra Capital Financial Services Ltd., though not brought to the notice of the Tribunal, according to the learned counsel, deals with the case of a Non- Banking Financial Company (NBFC). 6]The later decision in the case of Director of Income-Tax V/s. Brahamputra Capital Financial Services Ltd., though not brought to the notice of the Tribunal, according to the learned counsel, deals with the case of a Non- Banking Financial Company (NBFC). 7]In dealing with this claim, the Tribunal has referred to the undisputed and rather admitted facts. A return of income was filed by the assessee company on 6[th] November, 2003 declaring total loss of Rs.72,55,009/-. The assessee company claiming to be a non-banking financial company, engaged in the business of investment activities. The assessment was completed determining total income at Nil after setting-off of brought forward losses of earlier years to the extent of Rs.2,77,35,058/- under the head interest income. 8]The assessee had credited only an amount of Rs.38,57,933/- as interest on loans. The Assessing Officer was of the view that the interest accrued on the entire loans should have been shown as income. The details as to how the interest income on accrual basis should have been disclosed are, therefore, referred to by the Tribunal. The Tribunal held that the said income was not realized. It held that the assessee follows the mercantile system of accounting. The Tribunal held that the loan advanced by the assessee which was in NBFC had become non-performing asset. That is how following judgments rendered by the Hon'ble Supreme Court and the Delhi High Court, the Tribunal has eventually held that once there is no dispute that the interest considered as accrued was a non-performing asset as per Reserve Bank of India guidelines, then, the income from this interest did not accrue to the assessee. It is in such circumstances, that this income in question was not and cannot be assessed on accrual basis. 9]We do not find that the Tribunal has either misdirected itself in law or its order can be termed as perverse warranting interference in our appellate jurisdiction. We find that the view taken by the Tribunal accords with the Reserve Bank of India guidelines and which are not in any way in conflict with the Income Tax Act, 1961, the Hon'ble Supreme Court has held in the case of UCO Bank that the interest income would have been brought to the Profit and Loss Account provided it was actually realized, that in case of Nationalized Bank it treated something which is doubtful, and therefore, kept it in a suspense account, was held to be a permissible exercise. In respect of the loans which are advanced, recovery of some of them if considered doubtful, then, even the interest on the loans advanced may not be realized. That is how the amount is not brought to the profit and loss account because they are not likely to be realized by the bank or a NBFC as well. It is permissible therefore to disclose or to show them as income in assessment year in which either the interest amount or part of it is recovered. The Tribunal in this case, namely, of the assessee before us, has precisely followed this course. We do not find that the course permitted and upheld by the Tribunal is in any way in conflict with any legal provisions or the settled principles. Rather as held by us, it is in accordance with the same. Once the view taken by the Tribunal was possible and in the given facts and circumstances the income has not been realized by the assessee, the addition was rightly deleted. We, therefore, do not find that the appeal raises any substantial question of law. It is accordingly dismissed. No costs. (B. P. COLABAWALLA, J.) (S.C. DHARMADHIKARI, J.) wadhwa