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TMI Blog2007 (10) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... in any other law, we find that there is no inconsistency between the provision of RBI Act or the Prudential Norms prescribed thereunder and the provisions of the IT Act. Therefore, it cannot be held that the provision made in the accounts of the assessee in respect of NPA shall be treated as sufficient compliance with the provisions of s. 36(1)(vii) of the IT Act so as to allow the provision for bad and doubtful debts as deduction permissible under the IT Act. The Act lays a general tax on the whole population and all the persons unless specifically exempt from the charge. Therefore, the presumption is of equality of the incidence of tax rather than of exemption for a few. The Act does not distinguish between a non-banking finance company accepting the public deposits which is governed by the Prudential Norms issued by RBI and other non-banking finance companies or even other persons charge-able to tax under the IT Act. We do not ascribe to the view that the intention of the legislature leads to discriminate between the different persons liable to be charged of IT u/s 4 of the IT Act. Its object was to give relief and confer benefit on all these units uniformly. We, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision for NPA itself, since the amount received is in respect of capital sum lent, it does not partake the character of income when subsequently such amount is realized. If on the first instance, the deduction is not allowed in respect of NPA, subsequent realization of such NPA is realizing its capital itself and hence, cannot be considered as income though treated as such under the RBI Act. The amount recovered is not an income u/s 41(4) unless in the first instance is allowed as deduction u/s 36(1)(vii). In the result, the question referred to the Special Bench is answered in favour of Revenue and the appeal of assessee is partly allowed. - Member(s) : P. M. JAGTAP., DEEPAK R. SHAH., P. N. PARASHAR. ORDER-DEEPAK R. SHAH, A.M.: Hon'ble President under the powers conferred on him under s. 255(3) of the IT Act, 1961 has constituted the Special Bench to dispose of this appeal as well as to decide the following question: "Whether, a provision for non-performing assets (in short 'NPA') debited to P L a/c and claimed as a deduction in accordance with the Prudential Norms issued by the RBI in exercise of powers conferred on it under s. 45JA of the RBI Act, 1934, call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en this amount is received and shown as income as per RBI's direction, while computing the income the same should be accordingly reduced." 6. At the time of hearing, the Division Bench of this Tribunal noted that there is an apparent conflict in the decision rendered by various Benches of the Tribunal. It was found that in the following judgments the Tribunal has held that provision for NPA made in accordance with Prudential Norms for NBFC issued by the RBI in exercise of its power under the RBI Act, 1934 are to be allowed as deduction while computing the income under the IT Act: 1. ITA No. 1912/Del/2002, Hindustan Commercial Investment Trust Ltd. vs. Dy. CIT (Tribunal, Delhi Benches); 2. TEDCO Investment Financial Services (P) Ltd. vs. Dy. CIT (2004) 82 TTJ (Del) 259 : (2003) 87 ITD 298 (Del); 3. Overseas Sanmar Financial Ltd. vs. Jt. CIT. However, in following cases a contrary view has been adopted: 1. Concepta Cables Ltd. vs. Addl. CIT (2006) 103 TTJ (Mumbai) 48 : (2006) 101 ITD 143 (Mumbai); 2. Jt. CIT vs. India Equipment Leasing Ltd. (cross-appeals) in ITA No. 1978/Mad/2000 and ITA No, 2021/Mad/2000 dt. 10th March, 2006 [reported at (2007) 111 TTJ (Chennai) 250 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of IT Act are inconsistent with the provisions of RBI Act. He further submitted that in exercise of the powers conferred by s. 45JA of RBI Act, the RBI has issued directions called Non-Banking Financial Companies Prudential Norms (RBI Directions 1998, dt. 31st Jan., 1998) (hereinafter referred to as Prudential Norms). He invited our attention to the relevant clauses of the Prudential Norms to suggest that the appellant being an NBFC is under legal obligation to follow the provisioning requirement contained in the Prudential Norms and no option is available except to make the provision for NPA as per the norms laid down therein. He submitted that this delegated legislation called Prudential Norms shall have equal force as that of a statute enacted by the Parliament. For this purpose, he relied upon the following decisions: 1. CIT vs. Ajanta Electricals (1995) 126 CTR (SC) 144 : (1995) 215 ITR 114 (SC); 2. S.K. Lukman Ali vs. Collector AIR 1989 Ori 191 NOC; 3. State of U.P. vs. Babu Ram Upadhya AIR 1961 SC 751; 4. Challa Ramkonda Reddy vs. State of A.P. by District Collector AIR 1989 AP 235. He submitted that in all these cases it has been laid down that the ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t but it does not provide for the manner of write off. Thus even if the amount is written off by way of making a provision, it amounts to a sufficient compliance. The Explanation to s. 36(1)(vii) does not provide that the manner of write off should be by way of crediting the account of the debtor. Thus, even under the Explanation to s. 36(1)(vii), there is no material change in the situation from the one prevailing earlier. He, therefore, submitted that even if the amount is written off by way of provision for bad and doubtful debt, it amounts to write off and, hence, deduction is allowable. For this proposition, he relied upon following case laws: 1. CIT CEPT vs. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom); 2. Vithaldas H. Dhanjibhai Bardanwala vs. CIT (1981) 21 CTR (Guj) 190 : (1981) 130 ITR 95 (Guj); 3. Sarangpur Cotton Mfg. Co. Ltd. vs. CIT (1982) 31 CTR (Guj) 247 : (1983) 143 ITR 166 (Guj); 4. CIT vs. Union Carbide India Ltd. (1993) 70 Taxman 366 (Cal); 5. CIT vs. Srivinayaga Pictures (1986) 54 CTR (Mad) 182 : (1986) 161 ITR 65 (Mad); 6. Hongkong Shanghai Banking Corpn. vs. CIT (1955) 28 ITR 199 (Cal); 7. CIT vs. United Bank of India (1993) 115 CTR (Cal) 35 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02) was also on the basis of concession. The Court was not called upon to consider the provisions of RBI Act vis-a-vis IT Act and also to consider as to whether RBI Act shall have overriding effect over the general provision of IT Act. The decision of Tribunal, Chennai Bench in the India Equipment Leasing has followed jurisdictional High Court decision. Since the said decision of Hon'ble Madras High Court was based on concession and without discussing the overriding provision of RBI Act, the ruling of the Tribunal in India Equipment Leasing Ltd.'s case may not be followed. As regards the decision of Tribunal in the case of Concepta Cables, Shri Bajpai submitted that the conflict existing between the direction of RBI and the provisions of IT Act were not considered rather it was held that there is no conflict between the two. In the said case heavy reliance is placed on the Explanation inserted in s. 36(1)(vii) but the Explanation has not determined the method of write off and hence, the earlier decisions of the Court will apply so far as method of write off is concerned. To that extent, not following the various High Court decisions as to the method of the write off is incorrect an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to the decision of Hon'ble Madras High Court in the case of Thammayya vs. Rajah Tyada Pasupab AIR 1930 Mad 96. Shri Maheshwari further submitted that when the legislature intended to give the benefit of allowing provision for bad and doubtful debts to certain entities, specific provisions were made in cl. (viia) of sub s. (1) of s. 36 and also in s. 43D of the Act. Absence of such provision in s. 36(1)(vii) or absence of entities like NBFC in cl (viia) of s. 36(1) implies that the legislature never intended to give such benefit to certain class of assessees in which the assessee falls. This is not an unintentional omission The "causes omissus" cannot be supplied by the Courts but can be remedied only by the legislation. For this proposition, reliance was placed on following decisions: (a) Smt. Tarulata Shyam Ors. vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC); (b) CIT vs. K.S. Vaidyanathan (1985) 47 CTR (Mad)(FB) 101 : (1985) 153 ITR 11 (Mad)(FB); (c) Padmasundara Rao (Decd.) Ors. vs. State of Tamil Nadu Ors. (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC); (d) Asstt. CIT vs. Velliappa Textiles Ltd. Ors. (2003) 184 CTR (SC) 193 : (2003) 263 ITR 550 (SC), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., it is distinguished on following grounds: (i) IT Act was considered as a general Act even for the purpose of computation of income which is incorrect. (ii) In this case income on NPA was not recognized as income as per the guidelines issued by the RBI under s. 45JA while in the instant case provision for NPA was made as bad and doubtful debts and debited to P L a/c. The allowability of provision under s. 36(1)(vii) was not an issue before the Tribunal. (iii) The decision in the case of TEDCO Investment Financial Services (P) Ltd. pertained to asst. yr. 1998-99 when the Explanation to s. 36(1)(vii) was not there as it was brought by the Finance Act, 2001 w.e.f. 1st April, 1989. The decision of Tribunal in Overseas Sanmar Financial Ltd. is also distinguishable on following grounds: (i) This decision was delivered under the presumption that since IT Department and the RBI both are part of Finance Ministry, the guidelines issued by the RBI are binding on the IT Department. However, the instructions issued by the CBDT in consultation with the RBI dt. 21st May, 2007 have clarified that the RBI guidelines do not involve any IT angle. (ii) It never went into the crucial issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Bench does not arise. If that is not done then the doctrine of hierarchical obedience in judicial matters would be frustrated. Larger Bench reference is only required when no High Court decision is available or conflicting decisions on same point are given. In Patil Vijaykumar vs. Union of India (1985) 48 CTR (Kar) 41 : (1985) 151 ITR 48 (Kar), it was held that although a decision of any High Court is not binding on another High Court but there is no reason why with respectful caution if any help that can be given in the judgment should not be taken. Similar view has also been taken in the case of Dalmia Dadri Cement Ltd. vs. CIT (1980) 125 ITR 425 (Del). He further submitted that the decision of Tribunal in TEDCO Investment Financial Services (P) Ltd. favours the case of Revenue rather than that of assessee. In the said case, there were two issues before the Tribunal. One was with reference to recognition of interest income on advances which were required to be classified as NPA. The another issue was regarding allowability of bad debts. The Tribunal in paras 9.1 to 9.8 has held that the claim of bad debt is not allowable. He accordingly pleaded that the decision of Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. ............................ (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). .............................. 36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its P L a/c for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier." In the RBI Act, 1934, Chapter III-B contains provisions relating to non-banking institutions receiving deposits and financial institutions. Sec. 45J of the RBI Act: Power of Bank to determine policy and issue directions.-(1) If the bank is satisfied that, in the public interest or to regulate the financial systems of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the non-banking financial company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition, accounting standards, making a proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion facto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing public deposit; (b) a residuary non-banking company as defined in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 (referred to in these directions as 'RNBC'). (ii) The provisions of paras 10 and 12 of these directions shall not apply to- (a) a loan company; (b) an investment company; (c) a hire purchase finance company; and (d) an equipment leasing company, which is having NOF of rupees twenty-five lakhs and above but not accepting/holding public deposit. (iii) These directions shall not apply to an NBFC being an investment company: Provided that, it is: (a) holding investments in the securities of its group/holding/subsidiary companies and book value of such holding is not less than ninety per cent of its total assets and it is not trading in such securities; and (b) not accepting/holding public deposit. (iv) These directions shall not apply to an NBFC being a Government company as defined under s. 617 of the Companies Act, 1956 (1 of 1956). Definitions : (1) For the purpose of these directions, unless the context otherwise requires: (iv) 'doubtful assets' means- (a) a term loan, or (b) a lease asset, or (c) a hire purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be recognized only when hire charges are actually received. Any such income taken to the credit of P L a/c before the asset became non-performing and remaining unrealized shall be reversed. (4) In respect of lease assets, where lease rentals are overdue for more than 12 months, the income shall be recognized only when lease rentals are actually received. The net lease rentals taken to the credit of P L a/c before the asset became non-performing and remaining unrealized shall be reversed. 8. Provisioning Requirements.-Every NBFC, shall, after taking into account the time between an account becoming non-performing, its recognition as such, the realization of the security and the erosion over time in the value of security charged, make provision against sub-standard assets, doubtful assets and loss assets. 9. Disclosure in the balance sheet-(1) Every NBFC shall, separately disclose in this balance sheet the provisions made as per para 8 without netting them from the income or against the value of assets. (2) The provisions shall be distinctly indicated under separate heads of account asunder: (i) provisions for bad and doubtful debts; and (ii) provisions for depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrive at the capital adequacy and eligibility to accept deposits. However, under the IT Act, as per s. 36(1)(vii) only the bad debt or part thereof which is written off as irrecoverable in the accounts is allowable as deduction. The IT Act is an Act relating to charge of tax on the income of a person as computed under the provisions of the IT Act is concerned. Thus, both the Acts i.e., the RBI Act and the IT Act operate in altogether different fields. The RBI Act is a special Act in relation to computation of NOF of NBFC whereas IT Act is a special Act so far as computation of tax liability of a person in respect of its income computed under the provisions of the IT Act. Thus, it cannot be said that there is any inconsistency between the two Acts so as to hold that the provision of RBI Act shall have effect notwithstanding anything contained in the IT Act. Though s. 45Q of the RBI Act provides that provisions of Chapter. III-B of the RBI Act shall have effect notwithstanding anything inconsistent therewith contained in any other law, we find that there is no inconsistency between the provision of RBI Act or the Prudential Norms prescribed thereunder and the provisions of the IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, the same should also be complied with. This is in view of the proposition that so long as computation of income under the IT Act is concerned, IT Act is a special Act and the provisions contained therein need to be complied with if deduction permissible is to be claimed as allowable. Under the IT Act, the income is to be computed as per the provisions of the IT Act and not under the provisions of the RBI Act or any directions issued thereunder. 12. Under s. 36(1)(viia) even a provision for bad and doubtful debts made by scheduled bank, a non-scheduled bank, a co-operative bank, a foreign bank, a public financial institution, a State financial corporation, a State industrial investment corporation etc., are allowable as such within the limits prescribed therein. If the legislature intended to provide such benefit of allowing provision for bad and doubtful debts to a non-banking finance company also appropriate provision would have been made in respect thereof. However, the NBFC does not find any mention in s. 36(1)(viia). This implies that the benefit of deduction in respect of provision for bad and doubtful debts is not intended to the entities other than the entities pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten off as irrecoverable in the accounts is an allowable deduction. Explanation to s. 36(1)(vii) provides that any bad debt or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts. The said Explanation was inserted by Finance Act, 2001, with retrospective effect from 1st April, 1989, and hence applicable to asst. yr. 1989-90 onwards. Neither this section nor the Explanation provides the manner of write off in the accounts. Various decisions cited by the assessee in this regard i.e., CIT vs. Jwala Prasad Tiwari, Vithaldas H. Dhanjibhai Bardanwala vs. CIT, Sarangpur Cotton Mfg. Co. Ltd. vs. CIT still hold good as to the manner of write off in the accounts. Thus if the same is debited to the P L a/c and corresponding credit is made in the suspense account, it amounts to sufficient compliance of s. 36(1)(vii). The only restriction is that the bad debt and part thereof will not contain any provision for bad and doubtful debts. The provisions for NPA under the RBI directions is not only in respect of loss assets but also doubtful assets and sub-standard assets. Depending upon the period for which the asset has been considered as doubtful, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P L a/c. Thus, even ground No. 1 raised in this appeal is to be dismissed. 17. In ground No. 2, an alternate contention has been raised that if deduction claimed in respect of provision for NPA is not admissible, a proper direction be given that as and when this amount is received and shown as income as per RBI's directions in computing the income of subsequent years, the same should be accordingly reduced. We are in agreement with the submissions made in this regard. If the deduction is not allowed in respect of provision for NPA itself, since the amount received is in respect of capital sum lent, it does not partake the character of income when subsequently such amount is realized. If on the first instance, the deduction is not allowed in respect of NPA, subsequent realization of such NPA is realizing its capital itself and hence, cannot be considered as income though treated as such under the RBI Act. The amount recovered is not an income under s. 41(4) unless in the first instance is allowed as deduction under s. 36(1)(vii). 18. In the result, the question referred to the Special Bench is answered in favour of Revenue and the appeal of assessee is partly allowed. - - Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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