Tc/202/2003 Of Commissioner Of Income Tax v. M/S.elgi Finance Ltd., Coimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 04.06.2007 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.202 of 2003 Commissioner of Income Tax,Coimbatore...AppellantVsM/s.Elgi Finance Ltd.,Coimbatore. ..RespondentAppeal under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras Bench-B,Madras in I.T.A. No.361(Mds)/2002 dated 12.12.2002 for theassessment year 1998-99. against ITA.No.60,61, 62, 77, 28, 78/01-02 322/1998-99 & 28/2000 on the file of the Commissioner of IncomeTax (Appeals) I Coimbatore in PAN/GIR No.AAACE-4564/E dated30.3.2001 on the file of the Additional Commissioner of IncomeTax, Spl Range I, Coimbatore.For Appellant :Mr.T.Ravi Kumar,Standing Counsel forIncome-tax DepartmentFor Respondent : Mr.R.Venkatraman, Sr.Counselfor M/s.T.Ramesh Kutty JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.) This appeal is filed under Section 260A of the Income TaxAct, 1961 by the Revenue, against the order of the Income TaxAppellate Tribunal, Madras Bench-B, Madras in I.T.A. No.361(Mds)/2002 dated 12.12.2002. On 01.12.2003, this Court admitted theappeal and formulated the following substantial question of law:-"Whether in the facts and circumstances of thecase, the Tribunal was right in deleting theinterest accrued on "non-performing assets"? https://hcservices.ecourts.gov.in/hcservices/ JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.) This appeal is filed under Section 260A of the Income TaxAct, 1961 by the Revenue, against the order of the Income TaxAppellate Tribunal, Madras Bench-B, Madras in I.T.A. No.361(Mds)/2002 dated 12.12.2002. On 01.12.2003, this Court admitted theappeal and formulated the following substantial question of law:-"Whether in the facts and circumstances of thecase, the Tribunal was right in deleting theinterest accrued on "non-performing assets"? https://hcservices.ecourts.gov.in/hcservices/ 2.The facts leading to the above substantial question oflaw are as under:The assessee is a company engaged in the business of leasing,finance and hire purchase. The relevant assessment year is 1998-99 and the corresponding accounting year ended on 31.03.1998. Theassessee company filed its Return of loss for the said assessmentyear on 30.11.1998 admitting a loss of Rs.10,25,985/-. The Returnof loss was processed under Section 143(1)(a) of the Income-taxAct ("Act" in short) on 30.03.1999 determining a total income ofRs.6,28,470/-. The assessment was revised on 10.10.2000determining a loss of Rs.10,25,985/-. Later, the assessment wastaken up for scrutiny and the Assessing Officer issued noticeunder Section 143(2) of the Act. The Assessing Officer noticedthat in the profit and loss account for the previous year and inthe memo of the total income prepared for income-tax purpose forthe year ending thereof, the assessee had not admitted theinterest accrued on a transaction in respect of hire purchase,leasing, bill discounting, short term loan etc. So, the AssessingOfficer proposed to bring the accrued interest on those items totax as income of the assessee relating to the assessment year. Theassessee offered detailed explanation stating that treating ofinterest accrued on those items as income are not justifiedbecause according to the classification suggested by the ReserveBank, those assets are to be treated as Non-Performing Assets.The assessee company being a Non-Banking Finance Company, is boundto follow the mandatory guidelines issued by the Reserve Bank ofIndia regarding the classification of assets, recognition ofincome and norms for making provisions. The assessee submittedthat as per the guidelines issued by the Reserve Bank of India,the income pertaining to Non-Performing Assets should not beconsidered as income. But the Assessing Officer did not acceptthe submission. The Assessing Officer found that the assesseecompany is following mercantile system of accounting and thereforeboth the income as well as the expenditure should be accounted onaccrual basis. Further, the Assessing Officer was of the opinionthat the guidelines issued by the Reserve Bank of India was forthe purpose of financial discipline and investor production andnot for any change to be brought in the method of accounting.Finally, the Assessing Officer rejected the contention andcompleted the assessment under Section 143(3) of the Act anddetermined the total income at Rs.2,78,83,950/-. Aggrieved by theorder, the assessee filed an appeal to the Commissioner of Income-tax (Appeals). The C.I.T.(A) dismissed the appeal filed by theassessee and confirmed the order of the Assessing Officer.Aggrieved, the assessee filed an appeal to the Income-taxAppellate Tribunal ("Tribunal" in short). The Tribunal was of theview that the lower authorities have erred in treating theinterest on Non-Performing Assets as income of the assesseecompany for the assessment year 1998-99 and hence directed theAssessing Officer to delete the said interest from the computation https://hcservices.ecourts.gov.in/hcservices/ of the taxable income and allowed the appeal filed by theassessee. Hence the present tax case. https://hcservices.ecourts.gov.in/hcservices/ of the taxable income and allowed the appeal filed by theassessee. Hence the present tax case. 3.Learned Standing Counsel appearing for Revenue submittedthat the assessee is following mercantile system of accounting andtherefore both the income as well as the expenditure should beaccounted on accrual basis. The counsel further submitted thatthe Assessing Officer rightly included the income as total incomefor the said assessment year. It is his further submission thatthe guidelines issued by the Reserve Bank of India is only for thepurpose of financial discipline and to protect the investor andnot for any change to be brought in the method of accounting. 4.Learned Senior Counsel appearing for the assesseesubmitted that the issue now stands covered against the Revenue bythis Court's unreported judgment in the case of Commissioner ofIncome-tax Vs. M/s.India Equipment Leasing Ltd., Madras in T.C.(A)Nos.744 and 349 of 2004 dated 24.09.2004. Hence the order of theTribunal is in accordance with law. 5.Heard the counsel. There is no dispute that the aboveissue has already been considered by this Court by the unreportedjudgment cited supra. Further, the Tribunal also considered theissue whether the income has in fact accrued at all or not andheld as follows:- "In the case of Non-Performing Assets, in thelight of the Notification issued by theReserve Bank on classification of assets andthe Accounting Standard-9 issued by theInstitute of Chartered Accountants of India inthe matter of recognising income, and also inthe light of the various circulars issued bythe CBDT, it is to be seen that the questionof accrual can be considered only afterrecognising income from such assets. If noincome is recognised at all from such assets,there is no question of applying the principleof accrual. The principle of accrual comesinto play only when income is recognised. Inthe present case, the assessee has classifiedits assets on the basis of the Notificationissued by the R.B.I. and found that certainassets are coming under the category of Non-Performing Assets. From such Non-PerformingAssets, the assessee has not recognised anyincome in consonance with the Notificationissued by the R.B.I. and AS-9 issued by theI.C.A.I. Therefore, the assessee is justifiedin not recognising the income as such. Oncethat is the case, there is no occasion toconsider whether the principal of accrual would arise or not. In view of the matter, weare of the considered view that the lowerauthorities have erred in treating theinterest on Non-Performing Assets as income ofthe assessee-company for the assessment year1998-99. We direct the assessing officer todelete the said interest from the computationof taxable income. The interest from suchN.P.As will be taxed in the appropriateassessment years on the basis of actualreceipt. The issue of interest from Non-Performing Assets is therefore decided infavour of the assessee and the relevantgrounds are allowed."From the above, it is clear that the Tribunal had given a factualfinding that there is no accrual of income during the year. 6.Under these circumstances, especially when the issue iscovered by the unreported judgment of this Court cited supra aswell as the factual finding given by the Tribunal that there is noaccrual of income during the year, we are of the view that theorder of the Tribunal is in confirmity with law. The learnedStanding Counsel appearing for the Revenue is also unable to giveany material or evidence or any compelling reason or brought toour notice any contra judgment, to take a different view.Therefore, we find no error or legal infirmity in the order of theTribunal so as to warrant interference. Hence, we answer thequestion in favour of the assessee and against the Revenue.Accordingly, the tax case is dismissed. No costs. km /true copy/ To Sub Asst.Registrar 6.Under these circumstances, especially when the issue iscovered by the unreported judgment of this Court cited supra aswell as the factual finding given by the Tribunal that there is noaccrual of income during the year, we are of the view that theorder of the Tribunal is in confirmity with law. The learnedStanding Counsel appearing for the Revenue is also unable to giveany material or evidence or any compelling reason or brought toour notice any contra judgment, to take a different view.Therefore, we find no error or legal infirmity in the order of theTribunal so as to warrant interference. Hence, we answer thequestion in favour of the assessee and against the Revenue.Accordingly, the tax case is dismissed. No costs. km /true copy/ To Sub Asst.Registrar 1. The Assistant Registrar, Income-tax Appellate Tribunal, Madras Bench-B, Madras. Income-tax Appellate Tribunal, Madras Bench-B, Madras. 2. The Secretary, Central Board of Direct Taxes, New Delhi.3. The Commissioner of Income-tax (Appeals)-I, Coimbatore. Central Board of Direct Taxes, New Delhi.3. The Commissioner of Income-tax (Appeals)-I, Coimbatore. 4. The Additional Commissioner of Income-tax, Special Range-I, Coimbatore. Special Range-I, Coimbatore. + 1 cc to Mr. N. Muralikumar, Advocate, SR No.32588 + 1 cc to Mr. R. V. Chitra & Associates SR No.31512MBS(CO)SR/18.6.2007 T.C.(A) No.202 of 2003MBS(CO)SR/18.6.2007 T.C.(A) No.202 of 2003