The main legal point established in the judgment is the need for an assessment of facts and circumstances to determine the uncertainty of interest accrued on non-performing assets (NPA) and its taxability under the Income Tax Act.

R. Banumathi. J.

1. The question pertains to whether the accrued interest on non- performing assets (NPA) is assessable to income-tax. The Revenue has preferred these appeals as against the Orders dated 15.09.2006 made in INT.T.A.Nos.4/Mds/2006 and 5/Mds/2006 respectively in respect of the assessment years 1999-2000 and 2000-2001. The appeals were admitted on the following substantial questions of law:

"1. Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in deleting the interest accrued on non performing assets from the computation of the taxable income for the assessment year 1999-2000 and 2000-2001?

2. Whether on the facts and circumstances of the case, the Tribunal was right in law in not considering the accrued interest on non performing assets under the Interest Tax Act 1999-2000 and 2000-2001?"

2. The assessee-Sakthi Finance Limited is a Non-Banking Financial Company. For the assessment years 1999-2000 and 2000-2001, the Assessing Officer has added accrued interest on NPA accounting to Rs.1,80,34,379/- and Rs.56,09,260/ for the two years. The assessee preferred appeals before C.I.T. (Appeals). In the case of Commissioner of Income-tax Vs. Elgi Finance Limited, (2007) 293 ITR 357, the Madras High Court has held no interest could be said to have accrued on loans doubtful of recovery which were classified as NPA. Following the said decision in Elgi Finance, (2007) 293 ITR 357, CIT (Appeals) allowed the appeals holding that the accrued interest on NPA is not assessable to income-tax. In the appeal preferred by the revenue before the Tribunal, following its own decision in Elgi Finance, Ltd. Vs. Additional Commissioner of Income Tax, Special Range I, Coimbatore in I.T.A.No.358, 359, 360 and 361(Mds)/2002, Tribunal held that no addition could be made in the hands of the assessee – Non-Banking Financial Company (NBFC) in respect of unrealised accrued interest when the loan was classified as NPA.

3. Learned counsel for the revenue placing reliance upon the decision of the Supreme Court in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax, (2010) 320 ITR 577, submitted that insofar as liability of income-tax is concerned, the same was governed by the Income-tax Act and merely because for accounting purpose, the respondent/assessee was to follow RBI guidelines it would not mean that the assessee was not liable to show the accrued interest income when it had accrued to the assessee under the mercantile system and exigible to tax under the Act. Drawing our attention to the assessment orders in which the method of accounting of the assessee is stated as "Mercantile", Mr. Balaji, the learned counsel for revenue submitted that when the assessee was following 'mercantile method' of accounting, the case of the assessee was to be dealt with for the purpose of taxability as per the provisions of the Act and not the RBI Act, which was the accounting method, which the assessee – NBFC was required to follow.

4. In paragraph No.27 of the Southern Technologies Ltd., (2010) 320 ITR 577, the Hon'ble Supreme Court elaborated upon the three deviations between RBI Directions 1998 and Companies Act. Relying upon the decision of Southern Technologies Ltd., (2010) 320 ITR 577 and the deviations pointed out by the Hon'ble Supreme Court, the learned counsel for the revenue submitted that the Hon'ble Supreme Court emphasised that the RBI Directions 1998 has nothing to do with the accounting treatment or taxability of income under the Income-tax Act and the two viz., the Income-tax Act and RBI Directions 1988 operate in different fields. He would further submit that as per the decision in Southern Technologies, so far as the liability of income-tax is concerned, the same was governed by Income-tax Act and RBI Directions 1998 has nothing to do with the computation or taxability of the provisions for "accrued interest" for NPA under the Income-tax Act.

5. Per contra, Mr. Vikram Vijayar