Tuesday, April 2, 2013

Mere classification of account as NPA doesn’t demonstrate uncertainty in collection of interest thereon

In the instant case, the assessee was a Non-Banking Financial Corporation. For the relevant assessment years, AO added interest accrued on non-performing assets (‘NPA’) to the assessee's taxable income. The CIT(A) allowed assessee's appeal holding that the interest accrued on NPA was not exigible to income tax. On revenue’s appeal, the Tribunal upheld the order of CIT(A), and held that no addition could be made in the hands of assessee in respect of unrealized accrued interest when the loan was classified as NPA. Aggrieved by the order of Tribunal, revenue preferred an appeal to the High Court.

The HC held in favour of revenue as under:

1) Mere characterization of an account as NPA wouldn’t by itself sufficient to say that there was uncertainty as regards realization of income or interest income thereon;

2) Accrual of interest is a matter of fact to be decided separately for each case on the basis of examination of the facts and circumstances. The same would require an assessment of the relevant facts and circumstances. Only by assessment of facts and circumstances, the authority could arrive at a decision whether there is uncertainty about accrual of interest income on NPA. Only when there is uncertainty of realization of income or interest income then it is not chargeable to tax;

3) AO hadn’t recorded any finding whether there was any uncertainty in collection of income and, moreover, there was nothing to indicate that the 'interest income' was non-recoverable. The CIT(A) and the Tribunal hadn’t considered the matter in the light of the decision of the Supreme Court in the case of Southern Technologies Ltd. v. Jt. CIT [2010] 187 Taxman 346.

4) Thus, the order of the Tribunal was set aside and the matter was remitted back to the AO for consideration afresh in the light of law laid down by the Supreme Court in Southern Technologies Ltd. (supra) – CIT v. Sakthi Finance Ltd [2013] 31 taxmann.com 305 (Madras)