While dismissing an appeal filed by Principal Commissioner of Income Tax against the order of Income Tax Appellate Tribunal, Ahmedabad, the division bench of Gujarat High Court held that, Interest on non performing assets (NPS) is not taxable on accrual basis looking to the guidelines of the Reserve Bank of India.
The assessee Mahila Sewa Sahakari Bank filed return of income for assessment year 2010-11 on 30.09.2010 declaring total income of Rs.1,55,66,430/- wherein it did not show interest income on non-performing assets. The assessment was picked up for scrutiny and notice came to be issued to the assessee under section 142(2) of the Act inter alia calling upon the assessee to furnish details of interest accrued on non-performing assets.
The assessee furnished such details and stated that such interest was not charged as mandatorily stipulated under Income Recognition and Assets Classification Norms of the Reserve Bank of India. The assessee placed strong reliance upon the Master Circular issued by the RBI on income recognition, assets classification, provisioning and other related matters up to 30.06.2008 and stated that in compliance of the circular no interest had been charged by it on NPA.
The assessee also submitted that the interest if charged on NPA would further enhance the NPAs as recovery of the NPA amount is itself not certain. It was also stated that even under the Income Tax Act, 1961 such amount cannot be taxed since no interest has ever accrued nor has been charged.
The division bench comprising of Justice Harsha Devani and Justice A.G Uraizee observed that, while determining the tax liability of an assessee, two factors would come into play. Firstly, the recognition of income in terms of the recognised accounting principles and after such income is recognised, the computation thereof, in terms of the provisions of the Income Tax Act, 1961. Insofar as the computation of taxability is concerned, the same is solely governed by the provisions of the Income Tax Act and the accounting principles have no role to play. However, recognition of income stands on a different footing. Insofar as income recognition is concerned, it would be the RBI Directions which would prevail in view of the provisions of section 45Q of the RBI Act and section 145 would have no role to play. Hence, the Assessing Officer has to follow the RBI Directions.
The distinction drawn by the Delhi High Court in Commissioner of Income-tax v. Vasisth Chay Vyapar Ltd., is that, while the accounting policies of adopted by the NBFC cannot determine the taxable income. However, insofar as income recognition is concerned, the Assessing Officer has to follow the RBI Directions, 1998 in view of section 45Q of the RBI Act. That insofar as income recognition is concerned, section 145 of the Income Tax Act, 1961 has not role to play.
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