Case Law Details
Bajaj Finance Limited Vs PCIT-3 (ITAT Pune)
ITAT Pune held that it is settled legal position that interest on (Non-Performing Assets) NPAs cannot be taxed on accrual basis.
Facts- Assessee mainly contested that the learned PCIT erred in holding that interest on NPA is taxable on accrual basis disregarding the well-settled principle of real income theory as has consistently been upheld in the Appellant’s own case by the Appellate Authorities in the earlier years.
Conclusion- Delhi High Court in case of CIT Vs. Vasisth Chay Vyapar Ltd. held that interest on NPAs cannot be taxed on accrual basis.
Learned DR could hardly pinpoint any distinction on facts or law, as the case may be, in the assessment year under consideration. Faced with this situation, we adopt judicial consistency to affirm the CIT(A)’s detailed discussion relating to the impugned sole disallowance of accrued interest income on NPAs. Ordered accordingly.
FULL TEXT OF THE ORDER OF ITAT PUNE
This assessee’s appeal for assessment year 2017- 2018, arises against the PCIT, Pune-3, Pune’s Din and Order No. ITBA/REV/F/REV5/2021-22/1042100179(1), dated 30.03.2022, involving proceedings u/s. 143(3) of the Income Tax Act, 1961 (in short “the Act”).
Heard both the parties. Case file perused.
2. The assessee pleads the following substantive ground in the instant appeal :
”1. Ground I: Challenging the validity of revision proceedings under section 263 of the Act
1.1 The learned PCIT failed to appreciate that the assessment order passed by the Assistant Commissioner of Income Tax, Circle 8, Pune (hereinafter referred to as learned AO) under section 143(3) of the Act was neither erroneous nor prejudicial to the interest of the revenue and thus, the order under section 263 of the Act is without jurisdiction and bad-in-law.
1.2 The learned PCIT erred in initiating the proceedings under section 263 of the Act without appreciating that the learned AO during the course of original assessment proceedings had made necessary enquiry and verification, before allowing the claim in relation to both the issues under consideration viz. interest on non-performing asset (‘NPA’) and claim of deduction under section 36(1 )(viii) of the Act.
1.3 The learned PCIT ought to have appreciated that the proceedings under section 263 of the Act cannot be initiated on interpretational issues based on mere difference in opinion from the position adopted by the learned AO.
2. Ground 2: Challenging taxability of Interest on NPA:
2.1. The learned PCIT erred in holding that interest on NPA is taxable on accrual basis disregarding the well-settled principle of real income theory as has consistently been upheld in the Appellant’s own case by the Appellate Authorities in the earlier years.
2.2 The learned PCIT erred in not appreciating that the contentions raised to hold that interest on NPA is taxable viz non-applicability of section 43D and accrual/mercantile method of accounting has been dealt in detail in the preceding years by the Appellate Authorities in the Appellant’s own case and the issue has been put to rest since the Department has elected not to file further appeal against the favourable orders of the Appellate Authorities.
2.3 The learned PCIT erred in holding that the decision of the Hon’ble Bombay High Court in the Appellant’s own case (ITA No. 237 and 485 of 2017) and the decision of the Hon’ble Supreme Court in the case of Vashisth Chay Vyapar Ltd (410 ITR 244) is not applicable post introduction of ICDS-IV.
2.4 The learned PCIT ought to have appreciated that the principle laid down by the Hon’ble Courts in the aforesaid decisions is based on the interpretation of the provisions of the Act and it is explicitly stated in the preamble to ICDS-IV that in case of any conflict, the provisions of the Act shall prevail.
2.5 The learned PCIT erred in ignoring the Department’s position before the Hon’ble Delhi High Court in the case of Chamber of Tax Consultants v. Union of India [W.P.(C) 5595/2017 & CM APL 23467/2017], in relation to the Interest on NPA vis-a-vis ICDS IV, wherein the Department has accepted that interest on NPA cannot be taxed basis the well-established principles of real income theory, even after introduction of ICDS IV.
2.6 Without prejudice to the above, if the interest on NPA is held to be taxable, the learned PCIT erred in not directing the learned AO to correspondingly allow deduction for the interest so taxed as bad debts under the proviso to section 36(1)(vii) in accordance with the amendments brought in light of ICDS-IV in the said provision.
3. Ground 3: Challenging re-verification of claim of deduction under section 36(1)(viii)
3.1 The learned PCIT erred in directing the learned AO to re-verify the claim of deduction under section 36(1)(viii) in relation to long-term infrastructure finance without appreciating that the learned AO specifically inquired into such claim and sought the basis as well as computation for arriving at the amount of deduction under the said provision.
3.2 The learned PCIT ought to have appreciated that the learned AO enhanced the amount of deduction under section 36(1)(viii) in the original assessment order in light of the income assessed at a higher amount and hence, the question of the learned AO having not applied his mind does not arise.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide this appeal according to law.”
3. Learned senior counsel places on record the Assessing Officer’s sec. 143(3) r.w.s.263 consequential assessment dated 31.03.2023 not disallowing / adding its corresponding claim of sec.36(1)(viii) deduction. He therefore sought not to press the above latter issue subject to all just exceptions. Ordered accordingly.
4. Both the learned representatives next invited our attention to the PCIT’s revision directions qua the instant former issue of accrual of income on assessee’s non-performing assets “NPAs” as under :
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5. We find from a perusal of the case file that the instant sole issue of taxability of assessee’s interest income regarding it’s NPAs advances on accrual basis is no more res integra since the matter appears to have travelled up to hon’ble jurisdictional high court. Learned senior counsel invited our attention to pages 171 to 226 in assessee’s paper book inter alia comprising of hon’ble jurisdictional high court’s decision in it’s case dated 02.04.20 19 for assessment years 2009-20 10 and 2011-12, and the tribunal’s common orders dated 30.06.2014 in assessment years 2007-2008 and 2008- 2009, dated 09. 12.2022 in assessment years 2012-2013 and 2013-2014 and dated 23.12.2022 in assessment year 2014- 15; respectively, wherein the Revenue’s identical stand has been rejected. We deem it appropriate at this stage to reproduce the detailed discussion in our last order dated 23.12.2022 taking note of the instant issue as under :
”7. This leaves us with the Revenue’s cross-appeal ITA.No. 1 722/PUN./2018 raising its sole substantive grievance of disallowance of interest income on Non Performing Assets (NPAs) on accrual basis involving Rs. 9,29,57,036/-. It emerges during the course of hearing that the same is also no more res integra in light of hon’ble jurisdictional high court’s recent common order involving assessment years 2009-10 to 2011-12 in assessee’s case(s) itself dated 02-04-2019 declining the Revenue’s Income Tax Appeal Nos.237 and 485/2017 as follows :
“2. The appeal is filed by the Revenue to challenge the judgment of the Income Tax Appellate Tribunal (“the Tribunal” for short) raising following questions for our consideration:-
“(i) Whether on the facts and circumstances of the case and in law, the Tribunal was correct in disregarding the judgment of the Hon’ble Supreme Court given in the case of Southern Technologies Ltd Vs. JCIT 320 ITR 577 (SC) which says that provisions of RBI Act cannot override the provision of Section 145 of the Income Tax Act, 1961, since both the Acts operate in different fields and therefore, assessee cannot recognize interest income on NPA and yet not offer it in Profit and Loss account?
(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in deleting the disallowance of Rs. 71,13,261/- made by AO u/s. 14A r/w Rule 8D after treating the disallowance of Rs. 57,600/- offered by assessee as insufficient on the ground that the AO has not recorded the error in the offer of the assessee before invoking Rule 8D, without any such explicit requirement of law?“
3. Question No. (i) arose in following background:-
3.1 Respondent assessee is a Non Banking Finance Company (“NBFC” for short). Respondent filed return of income for the assessment year 2009-10 in which the assessee had claimed deduction of interest on advances which had become non performing assets (“NPA” for short). The Assessing Officer disallowed the claim relying on such disallowance for the earlier assessment years which were on the ground that the assessee which was following the mercantile system of banking had to pay tax on interest on accrual basis.
3.2 The issue eventually reached the Tribunal. The Tribunal, by the impugned judgment, allowed the assessee’s claim, upon which, the Revenue has filed this appeal.
4. Learned counsel for the Revenue submitted that the assessee had to offer the interest income to tax on accrual basis. The special provision for taxing interest income on NPAs on the basis of receipt has been made under Section 43D of the Income Tax Act, 1961 (“the Act” for short) which does not apply to NBFC. By necessary implication, therefore, the legislature desired that such benefit would be restricted only to such of the entities as are referred to in Section 43D of the Act.
5. On the other hand, learned counsel for the assessee brought to our notice several judgments of the different High Courts holding that on the principle of real income theory, interest on NPAs cannot be charged on accrual basis.
6. Gujarat High Court in case of Principal CIT Vs. Mahila Sewa Sahakari Bank Ltd. had held that in case of a co-operative bank, the interest on NPAs would not be chargeable to tax on mere accrual. The Court referred to and relied upon the decision of the Supreme Court in the case of Southern Technologies Ltd vs. Joint CIT. We may note that the decision concerns the assessment year 2010- 11 when a co-operative bank was not included under Section 43D of the Act which was inserted by Finance Act, 2017 w.e.f 1.4.2018.
7. In case of CIT Vs. Deogiri Nagari Sahakari Bank Ltd & Ors., this Court had expressed a similar view. We may further clarify that in the said case, the Court was concerned with a similar claim raised by the co-operative bank and the Court did record that the assessee was a co-operative bank and not NBFC. However, this distinction may not have much significance now in view of the fact that this Court in case of CIT Vs. M/s. KEC Holdings Ltd (Income Tax Appeal No. 221 of 2012 decided on 11.6.2014) held and observed as under:-
”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 mis-directed 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.”
8. Delhi High Court in case of CIT Vs. Vasisth Chay Vyapar Ltd held that interest on NPAs cannot be taxed on accrual basis. It was noted that NBFC would be governed by the directions issued by the Reserve Bank of India and RBI directives provided that under certain circumstances, a loan or advance would be treated as NPA. The Court on the real income theory held that such interest would not be taxable. We notice that the decision of the Delhi High Court in case of Vasisth Chay Vyapar Ltd (supra) was carried in the appeal by the Revenue before the Supreme Court. The Supreme Court in the judgment reported in [2018] 253 Taxman 401 (SC) approved the decision of the High Court and dismissed the appeal. Under these circumstances, this question is not entertained.”
8. Learned DR could hardly pinpoint any distinction on facts or law, as the case may be, in the assessment year under consideration. Faced with this situation, we adopt judicial consistency to affirm the CIT(A)’s detailed discussion relating to the impugned sole disallowance of accrued interest income on NPAs. Ordered accordingly. This Revenue’s cross appeal ITA No.1 722/PUN./2018 fails therefore.”
6. Learned DR is fair enough in not disputing all the foregoing intervening developments. He has strongly supported the PCIT’s above extracted revision directions on two counts i.e., the Assessing Officer had failed to carry-out detailed enquiries for the purpose of assessing the assessee’s interest income on NPAs on accrual basis in light of the recently introduced Income Computation and Disclosure Standards [in short “ICDS”] applicable from the impugned assessment year onwards. He quoted sec.263 Explanation-2 (a) and (b) inserted in the Act vide Finance Act 2015 w.e.f. 01.06.2015 that the Assessing Officer’s impugned failure indeed attracts the prescribed authority(ies)’ exercise of sec.263 revision jurisdiction as are the facts in the instant case. He placed strong reliance on Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 (SC) and PCIT vs. Paville Projects Pvt. Ltd. [2023] 149 taxmann.com 115 (SC) that the PCIT has rightly invoked sec.263 revision jurisdiction in the facts and circumstances of the case.
7. Mr. Koteswara Rao further quoted the applicability of “ICDS” i.e., Income Computation and Disclosure Standards from the impugned assessment year onwards that the Assessing Officer had admittedly not examined the taxability of assessee’s interest income on NPAs advances on accrual basis not only in light thereof as well as going by CBDT’s circular no.10/20 17 dated 23.03.2017.
8. We have given our thoughtful consideration to the vehement rival stands and find no merit in the Revenue’s arguments. We first of all note from a perusal of the case file with the able assistance coming from the assessee’s side represented by the learned senior counsel that the Assessing Officer had indeed issued his sec. 143(2) notice dated 27.09.2019 as well as sec.142(1) notice dated 11.11.2019 specifically raising the issue of Income Computation and Disclosure Standards “ICDS” compliance. The assessee had duly replied the same highlighting the fact before the Assessing Officer that the interest income regarding the impugned NPA advances amounting to Rs.41,86,00,000/- could neither be assessed on accrual principle nor as per the recently introduced “ICDS”. All these show cause notices as well as the assessee’s response(s) duly form part of the case record before us. This certainly is not a case of “no enquiry” during scrutiny therefore. This is indeed coupled with the clinching fact that a perusal of Income Computation and Disclosure Standards “ICDS No.IV” dealing with “Revenue Recognition” itself makes it clear that “In case of conflict between the provisions of Income tax Act, 1961 [in short the “Act”] and this Income Computation and Disclosure Standards “ICDS”; the provisions of the Act shall prevail to that extent.” Learned DR could hardly dispute that all these standards uniformly contain this uniform clause thereby paving way for applicability of the provisions of the Act wherein the assessee has already succeeded on the instant issue of accrual of interest on NPAs right up to hon’ble jurisdictional high court having attained finality (supra). That being the case, we hold that the CBDT’s circular issued in tune with the foregoing Income Computation and Disclosure Standards “ICDS” also would not apply once the assessee is not required to recognize its accrued interest on NPAs as income on accrual basis. Faced with the situation, we conclude that the PCIT has erred in law and on facts in terming the Assessing Officer’s sec. 143(3) regular assessment dated 27.12.2019 as an erroneous one causing prejudice to interest of the Revenue. Ordered accordingly.
8.1 We make it clear before parting that both the learned representatives had thrown sufficient light on the issue of applicability of sec. 145(2) of the Act as well as The Chamber of Tax Consultants & Anr. vs., Union of India & Ors. [2018] 400 ITR 178 (Del.). We find that once the foregoing exclusion clause in the Income Computation and Disclosure Standards “ICDS” itself is clear enough yielding the space in favour of the provisions of the Act having overriding effect, there is hardly much a need for us to deal with the same at this stage.
9. This assessee’s appeal is allowed in above terms.
Order pronounced in the Open Court on 15.05.2023.
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