IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 30.11.2009 CORAM THE HONOURABLE MR. JUSTICE K. RAVIRAJA PANDIAN AND THE HONOURABLE MR. JUSTICE M.M. SUNDRESH TAX CASE (APPEAL) NOS.1292 TO 1296 OF 2009 and M.P.Nos.1 (4 counts) of 2009 in TC(A)Nos.1293 to 1296 of 2009 Commissioner of Income Tax Coimbatore. ... Appellant in all the appeals. Vs. Coimbatore Lakshmi Inv. & Finance Co. Ltd., Krishna Towers, 1087, D.Avinashi Road Coimbatore – 641 037. ... Respondent in all the appeals. Tax Case Appeals filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras 'D' Bench, dated 24.9.2007 in ITA.Nos.905, 906, 907, 908 and 909/Mds/04, dated 24.9.2007 for the Assessment Years 1995-96, 1997- 98, 1998-99, 1999-2000 and 2000-01. against the order of the Commissioner of Income-Tax (Appeals)-1, Coimbatore dated 30.1.2004 in ITA.No.66/03-04, 22/02-03, 65/03-04, 350/2001-01 and 23/2002-03 for the Assessment year 1995-96, 1997-98, 1998-99, 1999-2000 and 2000-01 against the order of the Assistant Commissioner of Income-Tax Company Circle-IV (1), Coimbatore dated 28.2.2002 in PAN/GIRNo.AAACC8423A/Co.IV(1)/CBE for the Assessment year 2000-01 & 1999-2000 order of the Additional Commissioner of Income-Tax, Special Range-1, Coimbatore dated 2.2.2001 in PAN/GIR No.C2-1282 for the Assessment year 1998-99 order of the Joint Commissioner of Income- Tax, Special Range-1, Coimbatore dated 24.9.99 in PAN GIR NO.C2- 1282/SR-1/CBE for the Assessment year 1997-98 order of the Deputy Commissioner of Income-Tax Special Range-1, Coimbatore dated 4.3.98 in Pan/GIR No.C2-1282/SR-1/CBE for the assessment year 1995-96. For Appellant : Mr. J. Naresh Kumar https://hcservices.ecourts.gov.in/hcservices/ J U D G M E N T (Judgment of the Court was delivered by K. Raviraja Pandian, J.) These appeals are filed, at the instance of the Revenue against the order of the Tribunal, dated 24th September, 2007 made in ITA.Nos.905 to 909/Mds/2004 relating to the assessment years 1995-96, 1997-98, 1998-99, 1999-2000 and 2000-01. 2. The facts :- (i) The assessee is a non-banking finance company. The Assessing Officer, while completing the assessment/re- assessment proceedings, found that the assessee was following mercantile system of accounting, but failed to return the interest accrued on non-performing assets. The Assessing Officer brought to tax the said interest, since the assessee had, while arriving at the profits, set off the expenses relating to performing as well as non- performing assets which led to distorted figure of profit and loss account of the assessee's income. The Assessing Officer thus rejecting the contention of the assessee, brought the income to tax. (ii) The Commissioner of Income Tax (Appeals) following the decision of the Supreme Court in Kerala Industrial Development Corporation Limited vs. Commissioner of Income Tax, reported in (2003) 259 ITR 51, and the decision of our High Court, allowed the appeal in favour of the assessee and the Revenue not satisfied with the matter, carried on further appeal by challenging the said order. Confirming the order of Commissioner of Appeal the Tribunal rejected the appeal filed by the Revenue. The correctness of the same is now canvassed before us by filing these appeals and the formulated the question of law is as under :- " Whether, in the facts and circumstances of the case, the Tribunal was right in holding that interest for non-performing assets cannot be fixed on accrual basis ? " 2. We have heard the learned counsel appearing for the Revenue and perused the materials on record. 3. The Tribunal in its order had relied on the two decisions of the Division Bench of this Court in Commissioner of Income Tax vs. Elgi Finance Limited, reported in (2007) 293 ITR 357, and in Commissioner of Income Tax vs. India Equipment Leasing Ltd., reported in (2007) 293 ITR 350. In the latter decision, in which one of us is a party, has considered the case of the assessee in respect of hire purchase transactions and leasing of plant and machinery, has held that interest on "sticky" loans not being brought into the profit and loss account, but being taken to the suspense account was an https://hcservices.ecourts.gov.in/hcservices/ accepted mode of treatment of notional income in accounting practice. The fact that the assessee, although generally using a mercantile system of accounting, kept such interest amount in a suspense account and did not bring those amounts to the profit and loss account, showed that the assessee was following a mixed system of accounting by which such interest was included in its income only when it was actually received. The CBDT circular permitted such interest to be excluded from income, if for three years such interest was not actually received. On that basis granted the relief in favour of the assessee. The said judgement has been subsequently referred to by another Division Bench. If no income was recognised at all from such asset, there was no question of applying the principle of accrual. The principle of `accrual of income' comes into play only when the income was recognised. In the present case, the assessee has classified its assets on the basis of the Notification issued by the Reserve Bank of India and found that the appellant under the category of non-performing assets. From such non-performing assets, the assessee had not recognised any income in concealing the Notification issued by the Reserve Bank of India. Therefore, the assessee was justified in not recognising the income as such. Once that was the case, there was no occasion to consider whether the principle of `accrual' would arise or not. In that view of the matter, the Tribunal reversed the finding of the lower authority and the issue has been held against the Revenue. 4. In view of the above said Division Bench judgment, we are of the view that the subject matter of these appeals requires no interference by entertaining the appeals. The issue is answered against the Revenue. Hence, the tax case appeals are dismissed. Consequently, connected miscellaneous petitions are also dismissed. kb Sd/- Asst.Registrar /True Copy/ Sub.Asst.Registrar To 1. The Assistant Registrar, Incocme Tax Appellate Tribunal, IIIrd Floor, Rajaji Bhavan, B Besant Nagar, Chennai-90 2. The Commissioner of Income-Tax, (Appeals)-1, Coimbatore. https://hcservices.ecourts.gov.in/hcservices/ 3. The Assistant Commissioners of Income-Tax, Company Circle-IV(1), Coimbatore. 4. The Additional Commissioner of Income-Tax, Special Range I, Coimbatore. 5. The Joint Commissioner of Income-Tax, Special Range-I, Coimbatore. 6. The Deputy Commissioner of Income-Tax, Special Range-I, Coimbatore. 7. The Commissioner of Income Tax Coimbatore. + 1 cc to Mr. J. Naresh Kumar, Advocate SR.65238 T.C.(A)Nos.1292 to 1296 of 2009 CK(CO) EU 18.12.2009 https://hcservices.ecourts.gov.in/hcservices/