TMI Blog2011 (2) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 2006-07. The Grounds of appeal raised by the assessee read as follows: 1. On the facts and circumstances of the case and in law, the Commissioner of Income Tax, Appeals IV, Mumbai has confirmed the additions made by the Addl. Commissioner of Income Tax, Range 2(1), Mumbai (hereinafter referred to as the AO) on account of interest accrued on non-performing assets of Rs. 23,77,390/- while completing the assessment under section 143(3) of the Income-tax Act, 1961. 2. The ld. Commissioner of Income Tax (Appeals-IV) has upheld the addition made to the returned income by the Assessing Officer being the interest accrued on Non-performing assets following the provisions of section 43D read with rule 6 EB of the Income-tax Act, 1961 and making the addition of interest income on such NPA s as per the NHB Guidelines issued on prudential norms of income recognition and for provisioning for bad and doubtful debts. The difference amount calculated which is as follows is brought to tax being the interest not covered by the provisions of section 43D of the Income-tax Rules. Sl.No. Interest on NPA s (As per section 43D r.w.r Rule 6EB) Interest on NPA s (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 months for recognizing a debt as a non-performing assets. The assessee based on the revised guidelines dated 1-1-2004 worked out the interest on non-performing assets and did not account such interest income in its books of account. The AO however worked out the interest income by applying the norm of 6 months for recognizing a debt as a non-performing asset as laid down in rule 6EB of the Rules. There was a difference in the interest income not recognized by the assessee in its books of account by not following the norms as laid down in rule 6EB of the rules. This was a sum of Rs. 23,77,390/-. This was added to the total income by the AO and the addition was confirmed by the CIT(A), giving rise to the appeal by the assessee before the Tribunal. 3. The learned counsel for the Assessee submitted that the expression having regard to used in section 43D means that the NHB guidelines should also be seen. In that case, the claim of the Assessee regarding the quantum of interest income which has not accrued, applying the norm of 90 days for considering an asset as non-performing asset as against the norm of 180 days laid down by rule 6-EB of the rules, should be accepted. In this r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d: CIT v. Bombay State Transport Corporation - 118 ITR 399 (Bom.) The question which was considered by the Hon ble Bombay High Court was as to when the main provisions of the Act provided for depreciation allowance to be given as deduction while computing business income, whether the rule making authority can prescribe nil depreciation for assets used for less than 30 days. It was held that such a rule cannot be regarded as one made for carrying out the purposes of the Act and therefore, had to be ignored. CIT v. Sirpur Paper Mills Etc. 237 ITR 41 (SC) Under section 36(1)(iv) of the Act any contribution as an employer by way of contribution to a recognized PF or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the PF or approved superannuation fund. The rules framed prescribes deduction of 80% of amount actually paid by employer was also to be allowed as deduction. The Rules was held to be travelling beyond the Act and held invalid. 5. It was submitted that the expression having regard to has to be given a meaning and every part of a section has to be given effect to. It was submitted that de hors the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Aztec Software Technology Services Ltd. v. ACIT 107 ITD 141 (SB)(Bang) and submitted that the expression having regard to had come up consideration in the context of section 92CA of the Act, and the Special Bench after referring to the decisions relied upon by the learned A.R. in the case of Delhi Farming and Construction (P) Ltd. (supra) and Rajesh Kumar others (supra) had held that while determining the Arms Length Price (ALP) in an international transaction, the AO has to determine the ALP having regard to the report of the Transfer Pricing Officer, but the report of the TPO is not conclusive and does not prevent the AO from looking at other materials in determining the ALP. Reliance was placed by her on the decision in the case of Juggilal Kamlalpat Brothers Another v. WTO others 145 ITR 485 (SC). In the said case, under section 7(2) of the WT Act, the WTO had a discretion to value the business as a whole having regard to the balance sheet of such business as on the valuation date. The Hon ble SC held that the expression having regard to found in section 7(2) of the WT Act, does not make the balance sheet conclusive or binding or decisive of the value of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... struction has to be placed on the provisions of section 43D of the Act. 13. In his rejoinder the learned counsel for the Assessee submitted that in any event two views were possible on the issue and the view favourable to the Assessee should be adopted. 14. We have considered the rival submissions. The provisions of section 43-D are as follows: 43-D: Special Provisions in case of income of Public Financial Institutions, Public companies etc. Notwithstanding anything to the contrary contained in any other provision of this Act, ( a ) ** ** ** (b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State Finance Corporation or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. 15. The Legislature having laid down the broad principles of its policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and others (supra), the expression having regard to was considered to have a broader meaning because of the discretion inherently necessary in discharge of the power. In fact the decisions seem to suggest that the rule making authority in the present case, need not be bound by the guidelines of NHB and can take into other considerations while prescribing, what are the criteria for determining what are bad and doubtful debts for the purpose of section 43D of the Act. The decision in the case Bombay State Transport Corporation (supra) is a case where there was conflict between the rules and the Act and as rightly submitted by the learned D.R. that decision is not of any assistance to the plea of the Assessee before us. 17. The next aspect which needs to be considered is as to whether on the facts and circumstances of the case even de hors section 43D can it be said that no income accrued to the Assessee and can it be said that by applying the real income theory the interest income in question cannot be brought to tax. In this regard at the outset we have to bear in mind that accrual under the mercantile system of accounting depends on the legal right to receive and the inability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not resulted or accrued to the assessee. After debiting the debtor s account and not reversing that entry-but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits. We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of income-tax as developed. 18. The Hon ble Supreme Court in its later judgment in the case of UCO Bank (supra) however did not agree with the aforesaid view because one of the Circular of CBDT had been overlooked while rendering the aforesaid decision. The question before the Hon ble Court was as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Board s earlier circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978. The new procedure under the circular of October 9, 1984, will be applicable for and from the assessment year 1979-80. The Hon ble Supreme Court held as follows: Section 119(1) of the Income-tax Act, 1961, provides that, the Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner ; or (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions . Under sub-section (2) of section 119, without prejudice to the generality of the Board s power set out in sub-section (1), a specific power is given to the Board fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. The circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered. 19. On the decision of the Hon ble Supreme Court in the case of State Bank of Travancore (supra), the Court held as follows : The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on sticky advances wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court involved a case where provision on account of Non-Performing assets was claimed as a deduction, which was held by the Court to be not allowable. The Hon ble Court found that a deduction claimed under the Act had to satisfy the conditions laid down under the Act and prudential norms of RBI will not override the provisions of the Act. But when it comes to income recognition prudential norms will be relevant. As rightly contended by the learned D.R. the issue before the Hon ble Delhi High Court was not in relation to provisions of section 43D and therefore the ratio laid down by the Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) would apply. The Hon ble Delhi High Court was dealing with a case where there was a conflict between theory of income recognition and prudential norms of the RBI. In the present case, we are concerned with the provisions of section 43D vis-a-vis the guidelines of NHB regarding bad and doubtful debts. The Hon ble Supreme Court in the case of Southern Technologies Ltd. (supra) had to deal with deduction on account of claim for deduction on account of provision for Non-Performing Assets in terms of RBI directions issued un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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