The Karnataka High Court while quashing the appeal of the revenue deleted interest accrued on non-performing assets from the computation of taxable income.
The assessee, M/s. Davangere District Central Co-operative Bank Limited is a co-operative bank. The co-operative Banks became taxable entities like the commercial banks from the Assessment Year 2007-08. The assessee, therefore, filed the return of income for the Assessment Year 2007-08.
The return of income was processed under Section 143(1) of the Act and the case of the assessee was selected for scrutiny and notice under Section 143(2) of the Act was issued. The Assessing Officer by an order made an addition of Rs.6,99,73,139 on account of interest income following the mercantile system of accounting, provision made for non-performing assets to the extent of Rs.1,50,00,000.
The Assessing Officer also made an addition of Rs.4,00,000 and Rs.17,38,222 on account of provision for audit cost and addition under Section 40(a)(ia) of the Act.
The assessee challenged the aforesaid order in an appeal before the Commissioner of Income Tax (Appeals) who by an order held that the effective rate of interest on the amount of advances was 7.5%, whereas, Assessing Officer has considered the same to be 9%, which is on the higher side.
It was further held that the Assessing Officer has to correctly work out the opening and closing balances after giving reasonable opportunity to the assessee and after verification of books of accounts and work out the correct income accruing from interest.
The issue urged in this case was whether on the facts and circumstances of the case, the Tribunal is right in law in deleting the interest accrued on non performing assets from the computation of taxable income for the assessment year under consideration.
The division bench of Justice Alok Aradhe and Justice H.T. Narendra Prasad held that once a particular asset is shown as a non-performing asset then the assumption that it is not yielding any revenue. When an asset is not yielding any revenue, the question of showing that revenue and paying tax would not arise.
“The concurrent findings have been recorded by the Commissioner of Income Tax (Appeals) as well as tribunal in this regard, which cannot be termed as perverse,” the court while dismissing the appeal of the revenue said.
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