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2016 Supreme(Guj) 1449
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
K.S. Jhaveri, G.R. Udhwani, JJ.
Motrix Investment Private Limited - Appellant
Vs.
Deputy Commissioner of Income Tax - Respondent
Tax Appeal Nos. 871, 872, 873 of 2009, 589 of 2010, 794, 795 & 796 of 2011
Decided On : 29-07-2016
Advocate Appeared:
For the Appellant : S.N. Soparkar, Swati Soparkar
For the Respondent: K.M. Parikh
Interest income on Non Performing Assets is not taxable if recovery is doubtful due to adverse financial circumstances of the borrower.
Headnote:
Interest Income - Tax Appeals - 871 of 2009, 872 of 2009, 873 of 2009, 589 of 2010, 794 of 2011, 795 of 2011, 796 of 2011 - A.Y. 2000-01, 2003-04, 2004-05, 2006-07, 2001-02, 2002-03, 2005-06 - The court discussed the addition of notional interest income and the application of the mercantile system of accounting. It referenced the UCO Bank vs. Commissioner of Income Tax, West Bengal and Director of Income - tax vs. Brahamputra Capital Financial Services Ltd. cases to support the argument that interest income on Non Performing Assets was not taxable if recovery was doubtful due to adverse financial circumstances of the borrower.
Fact of the Case:
The appeals concerned the addition of notional interest income on loans advanced by the assessee. The main ground of appeal was the addition of notional interest on loan advanced. The lead matter, Tax Appeal No. 871 of 2009, involved the return of income filed by the assessee, the reopening of assessment, and the non-taxation of accrued interest on a loan advanced to M/s. Chandan Metal Products P. Ltd.
Finding of the Court:
The court found that the interest income on Non Performing Assets was not taxable if recovery was doubtful due to adverse financial circumstances of the borrower. It held that the evidence justified the stand of the assessee that interest income had not accrued and therefore, the same could not have been added merely on the basis that in the past the same was brought to tax on accrual basis.
Issues: The issues revolved around the taxation of notional interest income, the application of the mercantile system of accounting, and the doubt of recovery of the principal amount.
Ratio Decidendi: The court's decision was influenced by the interpretation of the mercantile system of accounting and the legal principles established in the UCO Bank vs. Commissioner of Income Tax, West Bengal and Director of Income - tax vs. Brahamputra Capital Financial Services Ltd. cases, which supported the non-taxation of interest income on Non Performing Assets if recovery was doubtful due to adverse financial circumstances of the borrower.
Final Decision: The court quashed and set aside the order passed by the Tribunal and restored the order passed by CIT(A), allowing the appeals in favor of the assessee.
K.S. Jhaveri, J.
1. As the questions referred to this Court in all these appeals are common, at the request of learned advocates, the appeals are heard together and are disposed of by this common judgment.
2. Being aggrieved and dissatisfied with the impugned judgment and order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'D' (hereinafter referred to as 'the Tribunal'), the revenue has preferred the present Tax Appeals assailing the following orders:
Tax Appeal No.
Date of Tribunal’s Order
IT(SS)A No.
Assessment Year
871 of 2009
25/09/08
597/Ahd/2007
2000-01
872 of 2009
25/09/08
598/Ahd/2007
2003-04
873 of 2009
25/09/08
599/Ahd/2007
2004-05
589 of 2010
09/10/09
1766/Ahd/2009
2006-07
794 of 2011
04/03/11
1311/Ahd/2008
2001-02
795 of 2011
04/03/11
1312/Ahd/2008
2002-03
796 of 2011
04/03/11
1313/Ahd/2008
2005-06
3. The following questions of law were raised for consideration by this Court:
TAX APPEAL NO. 871 OF 2009
"(A) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the addition of the notional interest income of Rs. 7,16,056/-?
(B) Whether on the facts and in the circumstances of the case, the finding arrived at by the Income Tax Appellate Tribunal that there was no evidence on record that the principal amount was doubtful of recovery, is perverse?"
TAX APPEAL NO. 872 OF 2009
"(A) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the addition of the notional interest income of Rs. 11,01,363/-?
(B) Whether on the facts and in the circumstances of the case, the finding arrived at by the Income Tax Appellate Tribunal that there was no evidence on record that the principal amount was doubtful of recovery, is perverse?"
TAX APPEAL NO. 873 OF 2009
"(A) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the addition of the notional interest income of Rs. 11,01,363/-?
(B) Whether on the facts and in the circumstances of the case, the finding arrived at by the Income Tax Appellate Tribunal that there was no evidence on record that the principal amount was doubtful of recovery, is perverse?"
TAX APPEAL NO. 589 OF 2010
"(A) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the addition of the notional interest income of Rs. 7,16,056/-?
(B) Whether, in the facts and in the circumstances of the case, the interest be compulsorily charged on the loans granted by an assessee so as to tax it on that notional interest income?"
TAX APPEAL NO. 794 OF 2011
"(A) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the addition of the notional interest income of Rs. 7,81,152/-?
(B) Whether on the facts and in the circumstances of the case, the finding arrived at by the Income Tax Appellate Tribunal that there was no evidence on record that the principal amount was doubtful of recovery, is perverse?"
TAX APPEAL NO. 795 OF 2011
"(A) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the addition of the notional interest income of Rs. 9,01,152/-?
(B) Whether on the facts and in the circumstances of the case, the finding arrived at by the Income Tax Appellate Tribunal that there was no evidence on record that the principal amount was doubtful of recovery, is perverse?"
TAX APPEAL NO. 796 OF 2011
"(A) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the addition of the notional interest income o
