TMI Blog2011 (7) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... ment years, in any case it is permissible for the assessee to write off such an income in the concerned assessment years when it was found that the amount was not recoverable - Appeal is dismissed - ITA No.1572 of 2006 ITA No.660 of 2010 ITA No.1570 of 2006 ITA No.1493 of 2006 ITA No.1457 of 2006 ITA No.1445 of 2006 ITA No.1444 of 2006 - - - Dated:- 11-7-2011 - MR. JUSTICE A.K. SIKRI, MR. JUSTICE M.L. MEHTA, JJ. Counsel for the Revenue : Ms. Prem Lata Bansal, Sr. Advocate with Mr. Deepak Anand, Advocate. Counsel for the Assessee : Mr. Ajay Vohra, Advocate with Ms. Kavita Jha, Advocate and Mr. Somnath Shukla, Advocate. A.K. SIKRI, J. 1. In all these appeals, the assessee is common, viz., Industrial Finance Corporation Limited, a Government of India undertaking. These appeals pertain to the Assessment Years 1993-94 to 1998-99. With the consent of the parties, ITA No.1572 of 2006 was treated as lead case which concerns Assessment Year 1996-97. The main issue which is raised by the appellant/Revenue in this appeal relates to deduction under Section 36(1)(viii)/Section 41(4A) of the Income Tax Act (hereinafter referred to as the Act‟). In fact, this is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.12,906.18 lacs added by the assessee to special reserve has been debited by the assessee by way of appropriation of profit as per Profit Loss Account. In the computation of income chargeable to tax, this amount has been claimed as deduction under Section 36(1)(viii) of the Act. 6. As to the provision for bad and doubtful loans account to which the sum of Rs.50 Crores has been transferred by the assessee from special reserve account, the assessee had an opening balance of Rs.25,012.14 lacs. The assessee credited thereto not only the sum of Rs.50 Crores transferred from special reserve account, but also the sum of Rs.570 lacs provided for under the provisions of Section 36(1)(viia)(c) by way of an expenditure debited to Profit Loss Account. The aggregate sum of Rs.30,582.14 lacs as at the end of the year on 31.03.1996 has been reduced by the assessee from outstanding loans amounting to Rs.11,15,921.06 lacs and only the net amount of Rs.10,85,338.92 lacs has been shown as loans outstanding as per Schedule V of the balance-sheet. In addition to the sum of Rs.30,582.14 lacs adjusted to loans recoverable under the caption provision for bad and doubtful loans , the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. According to the CIT(A), if the deduction for bad debts was not to be reduced to the extent of the aforesaid amounts, the assessee would have enjoyed double deduction which, according to the CIT(A) is contrary to the provisions of law. The CIT(A), however, held that in absence of specific provisions enabling the AO in this regard, the benefits claimed or granted, even if erroneously as per the interpretation of Section 36(1)(vii) pertaining to the earlier years could not have been withdrawn during the current assessment year. Therefore, insofar as denying the benefit of writing off of the bad debts to the extent of reserves withdrawn in the earlier years and the deductions claimed under Section 36(1)(viia)(c), is not as per law and cannot be supported. Nothing, however, prevents the AO from considering such action as deemed fit in the earlier assessment years. The order of the CIT(A) was accepted by the Revenue and no appeal filed thereagainst. The assessee, however, challenged the order of the CIT(A) on the following grounds: (a) Reducing deduction of amount of bad debt written off by the amount of Rs.5,000 lacs transferred from special reserve to provision fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head "Profits and gains of business or profession" before making any deduction under this clause 590a ]) carried to such reserve account : Provided that the corporation or as the case may be the company is for the time being approved by the Central Government for the purposes of clause: Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and general reserves of the corporation or, as the case may be, the company, no allowance under this clause shall be made in respect of such excess; 12. The unamended provision allowed the deduction to a financial institution for an amount not exceeding 40% of the total income carried to a special reserve. For claiming this deduction, this clause requires that the reserve to the extent of 40% of the total income be credited by debit to profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(viii), deduction is allowable to the assessee for the amount of reserve created by it. In fact, the assessee had created a reserve only to the extent of Rs.79.0618 Crores and not Rs.129.0618 Crores as Rs.50 Crore was transferred to other account. 14. The learned counsel for the Revenue further argued that by inserting the phrase and maintained in the said sub-section, intention of the Legislature is made clear that the assessee has not only to create the reserve but has also to maintain the same in the account, which was otherwise clear from 2nd proviso. No other meaning can be attributed to the provisions of 2nd proviso. Insertion of Section 41(4A) is also a step towards the clarification. It was never intended by the Legislature to allow the deduction of entire amount, even if part of the same has been withdrawn by the assessee. Hence, the provisions of Section 41 (4A) are to be given retrospective effect as the same are clarificatory in nature. 15. The submission of the learned counsel for the assessee, on the other hand, is that prior to Assessment Year 1998-99, the only requirement for claiming deduction under Section 36(1)(viii) of the Act was creation of reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequence of withdrawing any such amount after deduction is made, is also made by fiction of law, deemed to be the profit and gains of business chargeable to tax as the income of the previous year in which amount is withdrawn. Going by the plain language of the section as it stood at the relevant point of time, it can be seen that reaction of a special reserve was sufficient to entitle the assessee to claim the benefit under section 36(1)(viii) of the Income-tax Act and that the work and maintained was inserted only with effect from 01.04.1998 and it is not given any retrospective effect either expressly or impliedly. The Circular issued by the Department as quoted above also clarifies the position that it was intended only to operate subsequent to assessment year in question, after the same was amended and not before. 17. The identical issue has been dealt with by the Authority for Advance Rulings as well in the case of Rural Electrification Corporation Ltd., in Re (Appeal No.AAR No.759 of 2007) referring to and relying upon the aforesaid judgments of the Kerala High Court. So much so, the Department itself has clarified the Legislative intent behind Section 41(4A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uidelines by reversing its income accounted for and offered for tax in earlier years. Such reversal of income resulted in reduction of total income which was not accepted by the AO on the ground that provisions of Section 43D of the Act, nowhere permits for reversal of income which has already been recognized on accrual basis and has been offered for tax in the earlier years. The AO further found that since the company was not following the RBI norms, the interest income on certain NPAs was rightly declared by the assessee in those years. 23. CIT(A) upheld this order, which has been reversed by the Tribunal in the following manner: 7. We have considered the rival contentions and gone through the records. The RBI guidelines in relation to income recognition, clearly provides that financial institutions should not charge and take to income account interest on any NPA. NPA is defined as a credit or loan facility in respect of which interest has remained past due‟ for a period of four quarters during the year ending 31st March 1994; three quarters during the year ending 31-3-1995; and two quarters during the year ending 31-3-1996 and onwards. In respect of all NPAs, inter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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